May 9, 2003 - R. R. Donnelley, & Sons Company (NYSE:DNY) Chicago, IL, a provider of printed related services to retailers, publishers, and financial services industries released their first quarter earnings today. R.R. Donnelley reported a net income of $6 million, or $.05 per diluted share, a 75% decrease from 2002 first quarter net income of $23 million, or $.20 per share. Revenues for the first quarter 2003 were $1.1 billion, down 2% when compared to the prior year. Pre-tax restructuring and impairment charges of $3 million are included in the first quarter results. Topics of this summary include: * Chairman's Comments * Strategic Growth Initiatives * Outlook for 2003 * Q & A CEO Comments Mr. Bill Davis, Chairman, President and CEO, started the call by stating that Donnelley has had a solid start in 2003 and is beginning to realize the impact of increased productivity and cost reductions. The company has gained momentum through customer wins and reported the printing of 40 new magazine titles in the first quarter 2003. For the year 2003, Donnelley anticipates total sales growth to include 180 new titles. Davis also reported a 70% success rate in catalog and retail sales wins and a 100% renewal rate of existing customers. Donnelley reported market wins in new niches with magazines, books, telecom, financial services, and packaging logistics. Strategic Growth Initiatives Strategies the company will pursue in 2003 include: World-class print business initiative -Donnelley's core competencies of an improved safety record, industry-leading environmental standards, proficient supply chain management operations, continuous improvement efforts, and solid IT infrastructures were cited as playing a major role in creating the business it is today. These competencies have resulted in significant improvement and in cost reductions that make the company competitive. Donnelley is also expanding two plants in Lancaster and Spartanburg. Upgrading capabilities will enable the renewal and expansion of contracts with major catalog operations. The company is also building a second Digital Solutions Center in Kentucky. This facility will focus on long-run magazine publishing. Growth business initiative - Donnelley expects growth to be in four areas for 2003: new markets, premedia, logistics, and technology. New markets include technical manuals for electronic devices such as cellular phones, PDA's, and electronic games. In pre-media services, Donnelley anticipates more business will come from customers that currently do not print with the company. In a contract with Dell computer, for instance, Donnelley will be responsible for content management for all Dell's consumer ad programs. The company has also seen strong increases in package volumes in its logistics business year over year. The acquisition of Florida-based Momentum Logistics in March 2003 has strengthened its logistic capabilities and has given the company access to hundreds of distribution locations in the South East. In the technology area, Donnelley has instituted the use of a smaller high-speed press which has enabled it to run lower production quantities for books, therefore lowering their warehousing costs. Outlook for 2003 Donnelley stated that they are still on-track for their 2003 guidance with a projection of $1.25-1.40 per share. Donnelly expects no more than $250 million is capital restructuring charges for 2003. Even though the company expects tough market conditions and a weak pricing environment, they predict they will maintain and increase market share in the current year. Q & A 1. Pricing pressures are not getting any worse at present but just cycling through. Over the past 2 years they have seen the pricing levels on contract renewals to be below expectations. Pricing has been about 2-3x below what they have previously experienced. 2. When asked about new customer wins and increased market share, Donnelley stressed that the wins were from several competitors and not just one competitor. 3. The impact of fuel prices has affected the Logistics business but the company passes them through as fuel surcharges to customers. Fuel prices have had some impact on the print platform in the first quarter however there have been minimal increases. This as mainly due to the advance purchase of energy. They do see some impact of higher energy costs for the remainder of the year but it has been factored into their 2003 guidance. 4. It was noted that the cost of materials has decreased by 11% in the first quarter. The decrease was due to: by-products to some extent, from a customer in the telecom industry who supplies their own paper, and from improvements in material yield. 5. Salary and administration costs were up 7% due to an incremental bad debt provision and an incentive plan that is accruing at a higher rate. The company is confident in hitting its' targets for reduction of SG & A expenses in the long-term. 6. Comments about the 2004 price environment are essentially unanswerable as prices depend on the economic outlook for 2004. Donnelley would like to see a return to a positive momentum but pricing will probably experience a lag effect due to contract lengths. Currently, prices have stabilized at a much lower level than 2-3 years ago. 7. Driving the package logistics business is consumers ordering through a catalog or over the Internet. That activity has been reasonably robust. Donnelley is gaining market share even though the industry is flat or slightly up. Donnelley serves a large number of customers and could not report customer concentration. 8. Driving increased market share on the printing side of the business was due to increased value-add to their customers which were the foundations of new wins including: media capability, delivery of mail in a timely fashion, investments in bindery equipment in specific sectors, and versioning. Also a contributing factor was the telecom and book business which showed on-time deliveries and quality that was unparalleled. 9. Donnelley did not build a forecast for 2003 improvement in the financial services sector. History showed in 2001 a collapse, then in 2002 a 25% drop in business, and first quarter 2003 has again shown a decline. There is a cost structure in place that they hope will deliver substantially improved earnings. "S" transactions have run as low as 150 transactions a month when they used to previously enjoy 450-500 transactions a month. 10. If there is increased growth in the financial services sector, Donnelley will be able to handle increased capacity through an enhanced ability to handle transactions electronically combined with their outsourced capabilities in India. Compliance and simpler filings are now done in India which offsets the burden of those transactions in the domestic market. If the economic conditions changed to the same level of service in 1998-1999, the company's capabilities in this sector would be strained. 11. The 6/21 release of the new Harry Potter book will have some impact on Donnelley, however, that is typically the time of year when there is fairly strong activity in the trade book business.