Sales and Profits Continue to Grow for RR Donnelley: Summary of Q4 Earnings Call By Trevor Shackelford March 7, 2005 -- R.R. Donnelley & Sons (NYSE: RRD) today announced its year-end and fourth quarter 2004 earnings. Revenue for the fourth quarter 2004 was $2.1 billion, up $100 million from last quarter and up $900 million from the same period last year. Fourth quarter earnings were $148.8 million, or $0.66 per diluted share, compared to earnings of $114.4 million last quarter and $109.1 million a year ago. These results included $21.3 million in restructuring, integration, and impairment charges associated with the Moore Wallace acquisition. For the full year, the company reported earnings from continuing operations of $264.9 million, or $1.30 per dilute share, on net sales of $7.2 billion. Topics of this Summary Quarter and 2004 Highlights Segment Performance Guidance Raine Radar Q & A Quarter and 2004 Highlights R.R. Donnelley has announced its intentions to sell its Peak Technologies business unit. The unit lost $10 million pretax on $58.5 million in revenue in the fourth quarter. The company announced that current CEO Kevin J. Smith will be stepping down at the end of the first quarter 2005 to be replaced by Sears executive Glenn Richter. Net sales for the quarter of $2.1 billion were up 77% from the same period last year, primarily because of the Moore Wallace acquisition. Operating margins were down from 7% last year to 6.4% in 2004, primarily due to increased restructuring, impairment, and integration costs. Without these costs, the non-GAAP operating margin was up from 7.3% last year to 9% in 2004. Corporate operating expenses for the Q4 2004 were $32.9 million, over twice what it was in the same period of 2003. This increase came primarily from costs associated with Moore Wallace, Sarbanes-Oxley compliance, and increased employee incentives and benefits. Net Debt for the company is $1.1 billion. 2004 Capital spending was $265 million. Segment Performance Integrated Print Communications & Global Solutions This segment includes books, direct mail, financial print, business communications/services, short-run commercial print, and European and Asian businesses. Net sales more than doubled in the fourth quarter of 2004 to $835.3 million. $396.1 million came from the Moore Wallace acquisition. Donnelley credits the rest of the increase to increased sales in book, financial print, and the international businesses. Non-GAAP operating margin (not including restructuring, impairment, or integration charges) was 13.5%, up from 6.7% in the same period last year. Publishing and Retail Services This segment includes magazine, catalog and retail, directories, logistics, and pre-media businesses. Net sales increased 5.8%, again due to Moore Wallace, to $832.6 million. Volumes also increased in the magazine, catalog and retail, and logistics businesses. Non-GAAP operating margin (not including restructuring, impairment, or integration charges) was 15%, down from 15.3% 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 $443.9 million in the fourth quarter from $39.8 million from the same period in 2003. This dramatic increase was also due to the Moore Wallace acquisition. R.R. Donnelley points out that this segment is the most competitive in terms of price due to excess capacity in the market. The company was not happy with performance, and is expecting their ongoing cost reductions will restore an acceptable level of profitability. Non-GAAP operating margin (not including restructuring, impairment, or integration charges) was 7.6% in 2004 compared to a loss in 2003. Guidance R.R. Donnelley has provided 2005 guidance of $1.95 in earnings per diluted share. Raine Radar During the conference call, there was some heavy hinting at further acquisitions. Expect a lot of M&A activity from RRD in 2005. Although most of it will likely be on the buy side, there is certainly the possibility of further divestitures. Q & A Donnelley will use its available cash in 2005 to support its M&A activities first, and then to buy back shares. The company believes that cost savings measures and new management in the forms and labels business will lead to better profitability. Waste paper sales were down slightly in the fourth quarter due to reductions in scrap paper pricing. A large portion of R.R. Donnelley’s paper is customer provided, mitigating the effect of paper price increases on revenue.