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Commentary & Analysis

FREE: The “New” Face of RR Donnelley: The Work has just begun with another loss reported in Q1: Summary of Q1 Earnings Call

R.

By WhatTheyThink Staff
Published: May 12, 2004

R.R. Donnelley & Sons (NYSE: RRD) today reported first quarter net sales of $1.45 billion as compared to $1.07 billion for the same period last year. On a GAAP basis, net loss was $58.8 million with a net loss of $0.39 per share. Non-GAAP earnings were $17.6 million, a 140% increase over the same period last year or $0.11 per diluted share, up 83%.

Topics of this summary:

  • Overview
  • Segment Performance
  • Guidance
  • Q & A

Overview

The acquisition of Moore/Wallace closed on February 27, 2006 and first quarter results include the combined operations for just 34 days. In today's earnings call, Donnelley's CEO, Mark Angelson gave participants an overview of what he called the new Donnelley. Angelson stated the old Donnelly was overstaffed and had become internally focused. Under his leadership he has assembled the best team in the industry to turn the company around and achieve customer focus and company profits. Angelson and his team will use what was characterized as plain old-fashioned management, basic blocking and tackling, to achieve profits. Angelson expects employees to wear many hats, work hard, focus on customers, be accountable, work as part of a team and that will walk through walls to achieve goals. Angelson predicts his employees will be invigorated and reinvigorated under the new structure. Under Donnelley's new platform, Angelson recommitted to $100 million in cost savings in the next 12 months and reported the company is on track to deliver that savings.

Raine Analyst Take: The $100 million in cost savings promised by Angelson is a drop in the bucket for the size of this new organization. With over 600 less headcount in RRD Corporate, he has already made his number. We believe the real work has just begun and that cracks in the armor are already starting to show before the integration is complete. Two factors are at play. The first is the operating culture which has been a public display of poorly handled terminations. A recent Federal ruling about the civil rights violation means the class action suit is once again free to pursue their formerly stalled lawsuit which is not surprising given the negative momentum Angelson has created since he has taken the helm. The second factor is the business model. We are not convinced that a publishing print model can profitably co-exist with an enterprise print model AND go to scale to provide the appropriate return to shareholders on a sustainable basis. Case in point is Cadmus with their fifth consecutive quarter of positive growth via value-add services to discrete verticals; now in the position to purify their business model and aggressively streamline their old core of magazine publishing.

Segment Performance

Although Angelson indicated that the segment reporting is likely to change in the future, Donnelley continued to report financial results by the segments traditionally used during past earnings calls. Overall, net sales were up 35% due to the combination with Moore Wallace.

The print segment reported increased sales of 1.5% due to strength in the directories and premedia businesses offset lower book revenues. Revenues were flat in the magazine and catalog business on higher volume but lower pricing. Sales in the logistics business increased 4% due to organic growth and expedited services. The operating income in the logistics business was down after adjusting for impairment charges. To improve results, a new logistics team has been assembled and to streamline operations, improve transportation purchasing and implement new procedures all designed to reduce costs. The financial segment reported sales up 25% over the same period last year from increased activity in the global capital markets. The forms and labels segment recorded lower sales and volume declines. The outsourcing segment saw several significant contract wins and renewals during the quarter including IAC and JC Penny, Pan American Life and Unumprovident. These contracts will bring revenues of nearly $600 million. Donnelley considers these wins as votes of confidence. In the commercial segment, Donnelley expects continued opportunities for market expansion even through the short-run commercial market is challenging. This segment experienced increased demand in the direct mail and commercial print operations and heightened activity in the advertising, financial and health care sectors.

Guidance

Donnelley expects full year revenues in the range of $7.5-$8.0 billion with non-GAAP EPS at $1.50 per share. The guidance recognized 10 months of operation as a combined company with Moore/Wallace. During today's call the company stated it was not in a position to provide second quarter guidance.

Q & A

  1. Adding more granularity to the comments on the logistics group, Donnelley stated its goal it to make the group profitable and stable. Additional information will be provided in upcoming conference calls.
  2. Organic growth in the historical Donnelley segment has been in the print and financial segments. The Moore Wallace segments have been impacted by the acquisition of Wallace in 2003, the trend here is also revenue growth although the forms and labels business continues to be challenging as a result of conditions in the market place.
  3. With the acquisition of Moore Wallace, there has not been a loss of significant customers.
  4. Adjusted EBITDA for the quarter was $131-132 million.
  5. Donnelley expects cash flow from operations to be strong, however did not provide specifics during today's call. Officials indicated additional information will be provided in Monday's filing of the company's 10Q.
  6. Cost savings opportunities were outlined as falling into the following areas: 1) Donnelley invoked a hiring freeze except in direct labor, where business units presidents and Tom Quinlan must approve all new hiring, 2) a moratorium was placed on discretionary spending that does not increase sales or earnings, 3) realignment of sales, manufacturing and estimating to be more accountable 4) a realignment of manufacturing technology and placed in corporate cost centers and business units and, 5) an opportunity to accrue differently at facilities and give plant managers P& L responsibilities.
  7. Donnelley's increase in corporate expenses can be attributed to benefit plans, sales and use taxes and litigation. Corporate expenses are expected to be lower from this point out.
  8. The $100 million in cost savings will be back end weighted and Donnelley will not stop at $100 million and more guidance will be provided after the company hits 100.
  9. Donnelley has reduced headcount by 639 employees. With the merger with Moore Wallace, many facilities were closed as a result. Additional closings may be down the road but Donnelley has not identified if or when those may occur. Reductions in headcount have related to corporate overhead.
  10. Although Donnelley stated it makes sense to reorganize segment reporting, there was not information provided as to how that would occur in the future.
  11. Donnelley officials referred to the green shoots of spring in describing the economic outlook. Officials have seen economic changes that appear to indicate that the economy is improving. Significant parts of Donnelley's business will benefit from an improving economy and many parts will not be affected.
  12. Even if business were to pick up substantially, Donnelley has plenty of capacity in certain (unnamed areas) and would face a challenge in capacity in other (also unnamed). Donnelley stated its current mix is about right.
  13. The improvement in the directories business over the quarter was a result of a volume shift from one quarter to another in addition to an increased demand from current customers. Cross selling will provide additional benefits as the year progresses.
  14. Capital expenditures during the quarter were $26.8 million and are expected to be less that $300 million for the remainder of the year.
  15. In response to Quebecor's announcement of a $300 million expenditure on new presses, Donnelley only wished Quebecor luck.

 

 

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