R.R.Donnelley & Sons Co RRD
Q4 2012 Earnings Call Transcript
Transcript Call Date 02/26/2013

Operator: Welcome to the R.R. Donnelley Fourth Quarter 2012 Results Conference Call. My name is Don and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Dave Gardella. Mr. Gardella, you may begin.

Dave Gardella - SVP, IR: Thank you, Don. Good morning, everyone, and thank you for joining us for R.R. Donnelley's fourth quarter 2012 results conference call. Earlier this morning we released our earnings report, a copy of which can be found in the Investors section of our website at rrdonnelley.com.

During this call, we will refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statement included in our earnings release and further detailed in our Annual Report on Form 10-K and other filings with the SEC.

Further, we will discuss non-GAAP and pro forma financial information. We believe the presentation of non-GAAP and pro forma results provides you with useful supplementary information concerning the Company's ongoing operations and is an appropriate way for you to evaluate the Company's performance. They are, however, provided for informational purposes only.

Please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our website in the Investor's section a description, as well as reconciliations of non-GAAP measures to which we will refer on this call. We are joined this morning by Tom Quinlan, Dan Leib, and Drew Coxhead.

I'll now turn the call over to Tom.

Thomas J. Quinlan III - President and CEO: Thank you, Dave, and good morning everyone. I will briefly highlight two measures of our performance and also provide guidance about our plan gross leverage moving forward. Then I will turn it over to Dan who will take you through the quarter in detail, when Dan is finished I will share some comments regarding how our strategy is reflected in our revolving go-to-market approach and how it will continue to position R.R. Donnelley to be the profitable leader of our industry.

We have said before that one of the pillars of our strategy is to drive free cash flow and margin through aggressive cost compression. Two performance measures illustrate how we achieved that. But first performance measure is free cash flow or operating cash flow less capital expenditures which was $486 million for the full-year 2012. Our fourth quarter free cash flow came in better than expected reflecting improved underlying business performance and our aggressive working capital and cost management. They key to this enhanced Q4 business performance was an improvement in our revenue and margin trends as Dan will detail in a few moments.

The second performance measure is operating income. For the full-year we generated $747.5 million in non-GAAP operating income better than 2011 by $35.7 million or 5%. Additionally, our non-GAAP operating margin of 7.3% improved 60 basis points from 2011. Dan will also take you through both the drivers there in more detail shortly.

In May 2011, we revised our targeted gross leverage to be in the range of 2.5 to 3 times and ended that quarter at 3.2 times. Since then through strong free cash flow generation and debt repayment we have delevered, reducing debt by almost $640 million and ending 2012 at 2.8 times. Given our continued focus on strengthening and de-risking our balance sheet, we are reducing our long-term targeted gross leverage to be in the range of 2.25 to 2.75 times.

Now I'll ask Dan to provide more detail as he takes you through the numbers. Dan?

Daniel N. Leib - EVP and CFO: Thank you, Tom. We are pleased that our fourth quarter performance resulted in delivering at the high-end or above our full year 2012 guidance for revenue, non-GAAP operating margin, and free cash flow. On a GAAP basis, our fourth quarter operating results included a number of items that impacted year-over-year comparability. First associated with our annual impairment testing performed in October of each year, the fourth quarter included non-cash charges related to the impairment of goodwill and other intangible assets in four of our reporting units. These charges totaled approximately $1 billion in the fourth quarter of 2012.

Second, we recognized a non-cash gain on curtailment of our frozen U.K. and United States pension plans in both 2012 and 2011, respectively. The gain in 2011 was $35 million higher than in 2012. For the remainder of my comments I will refer to our non-GAAP results. A reconciliation of GAAP to non-GAAP results for the fourth quarter and full-year is included in the support schedules of our earnings release.

Our revenue of $2.7 billion in the fourth quarter of 2012 when adjusted for the impact of acquisitions, favorable changes in foreign exchange rates, and the impact of lower paper sales was down 2.1% from the fourth quarter of 2011. This compares to a similarly calculated year-over-year decline of 5.2% in the third quarter. In the fourth quarter of 2012 strong revenue growth in Asia, logistics, Latin America, premedia, and office products was more than that by volume declines and pricing pressure across several of our U.S. and international offerings. Each of Asia, logistics, Latin America, premedia and office product as well as magazine, catalog, retail inserts, variable print and commercial print performed better in the fourth quarter than in the third quarter on a year-over-year basis.

Fourth quarter non-GAAP gross margin was 21.9%, 20 basis points higher than the fourth quarter of 2011. Driving the margin increase were an improved product mix and productivity gains, partially offset by continued price erosion and unfavorable pricing on byproducts.

SG&A expense in the quarter as a percent of revenue was 10.9% or 10 basis points higher than the fourth of 2011. For the year we reduced SG&A expense by almost 80 basis points from 2011 or $124.8 million.

Fourth quarter non-GAAP adjusted EBITDA of $292.2 million and 11% margin was 10 basis points better than the fourth quarter in 2011. Driving the margin improvement were lower pension and post-retirement expense and savings from productivity initiatives which more than offset the impact of price erosion and unfavorable pricing on byproducts.

Changes in foreign exchange rates did not have a material impact on the quarter-over-quarter margin comparison. Additionally reduced depreciation and amortization contributed to fourth quarter non-GAAP operating income and margin improvement. Fourth quarter non-GAAP operating margin of 6.6% grew 50 basis points over the fourth quarter of 2011, while the full-year margin of 7.3% grew by 60 basis points over 2011. Our non-GAAP effective tax rate in the quarter was 33% compared to the very low rate of 18.8% that we realized in the fourth quarter of 2011. The fourth quarter of 2011 benefited from several state tax matters, as well as the recognition of previously unrecognized tax benefits.

From a segment perspective, revenue in our U.S. Print and Related Services segment of $1.9 billion declined 3.7% from the fourth quarter of last year or 2.9% after adjusting for acquisitions and a 110 basis point impact of reduced pass-through paper sales. This is a marked improvement over the year-over-year decline of 6% in the third quarter, primarily driven by improving trends in variable print, commercial print, magazine, catalog and retail inserts and logistics. Ongoing price erosion across the U.S. segment continues to negatively impact the year-over-year comparison.

Our logistics product offering has shown organic growth for the past 12 consecutive quarters and premedia grew organically each quarter of 2012. Double-digit declines continued in our books and directories offering. Our economically sensitive offerings, commercial print and forms and labels, also continue to experience volume declines. Non-GAAP operating margin for the segment of 9.5% improved 60 basis points from the fourth quarter of 2011 as productivity improvements and lower depreciation and amortization expense more than offset continued price erosion, volume declines and unfavorable product mix and unfavorable pricing on by-products.

Fourth quarter 2012 revenue in our international segment of $729.3 million grew 1.9% or $13.6 million from the fourth quarter of 2011. Organic growth in the quarter was 0.4% after adjusting for the favorable 150 basis point impact from changes in foreign exchange rates and increased pass-through paper sales. Driving the remaining 40 basis points of year-over-year growth was double-digit volume growth in Asia and as we mentioned last quarter, a customer order in Latin America that occurred in the third quarter in 2011 but in the fourth quarter in 2012. Ongoing price pressure also impacted the quarter. Both Europe and Canada continued to experience top line challenges due to volume declines.

Non-GAAP operating margin for the segment improved 80 basis points to 7% from 6.2% in the fourth quarter of 2011 inclusive of an unfavorable 50 basis point impact from changes in foreign exchange rates. The margin improvement resulted from higher volume in the quarter and a favorable product mix as well as lower bad debt provision due to a customer bankruptcy in 2011. This was partially offset by price pressure, wage, and other inflationary increases, higher pension expense, and the unfavorable change in foreign exchange rates. Our fourth quarter 2012 non-GAAP unallocated corporate expenses were $58.8 million, $3.3 million higher than the fourth quarter of 2011, higher employee benefits related expense, and increased spending on information technology-related initiatives were only partially offset by lower pension and postretirement benefits expense and the benefit of productivity initiatives.

Free cash flow or operating cash flow less capital expenditures in the quarter was $476.5 million compared to $417.4 million in the fourth quarter of 2011, and the $59 million increase was driven by improved working capital performance. On a trailing three-month basis, controllable working capital, which we define as accounts receivable plus inventory less accounts payable, as a percentage of net sales, was 12.9% at December 31, 2012, or 40 basis points better than at the end of 2011. Full-year free cash flow of $486 million exceeded our prior guidance of approximately $450 million by $36 million, primarily resulting from the strong working capital performance in December.

Total debt as of December 31, 2012 was $3.4 billion. In 2012 we repaid or paid down $222 million in debt. As of December 31, 2012, we had no borrowings outstanding under our new $1.15 billion secured revolving credit agreement. Our net available liquidity as of December 31, 2012, was $1.5 billion, an improvement of over $200 million from September 30, 2012. Our term debt is 80% fixed at an average interest rate of approximately 7.5% and our next scheduled term debt maturity of $258 million is due April 2014.

Our defined benefit plans are now frozen and closed in the United States, Canada and the U.K. Our strong return on pension plan assets of approximately 15.5% in 2012 nearly offsets the impact of a 70 basis point decrease in the discount rate utilized to calculate the accounting based pension funded status. At yearend 2012, our accounting based underfunding of pension is approximately $1.2 billion, an increase of roughly $80 million from the end of 2011. Each 100 basis point change in the discount rate would result in a change in the funded status of our pension of approximately $642 million.

As of the end of January the discount rate had increased approximately 20 basis points from year-end 2012.

In light of the continued historically low interest rate environment, pension funding relief was passed by Congress in July 2012. As such, we expect to make contributions to our defined benefit and other postretirement plans of approximately $23 million in 2013 compared to the $149 million we contributed in 2012.

On our last earnings call, we mentioned that we expect to end the year within our targeted gross leverage range of 2.5 to 3 times. Gross leverage at the end of 2012 was 2.8 times representing an improvement from the 3.1 times at September 30, 2012.

As Tom noted earlier, we are revising our targeted gross leverage to be in the range of 2.25 times to 2.75 times on a long-term sustainable basis as we continue to work on strengthening our balance sheet.

Before I turn it back to Tom, let me share our full-year guidance for 2013. We expect revenue in the range of $10.1 billion to $10.3 billion on an organic basis, excluding the impact of acquisitions, FX and paper, this equates to a decline in revenue in the range of 0.5% to 2.5%. Included in this guidance is an expected approximate $100 million negative impact from changes in foreign exchange rates and lower paper sales. Our non-GAAP adjusted EBITDA margin is projected to be in the range of 11.2% to 11.4% compared to the 2012 margin of 12%.

There are three items that impact the year-over-year comparability by a total of 60 basis points. First, lower pension income in 2013 will negatively impact our margin by approximately 20 basis points or $24 million for the year. Second, the customer rebate reversal adjustment in 2012 favorably impacted the 2012 margin by approximately 20 basis points. Third, a significant portion of the revenue associated with our 2012 acquisition of Presort Solutions is related to pass-through posted revenue. Although the operations of this acquisition are profitable, the pass-through nature of its postage revenue will have the effect of reducing our overall margins by approximately 20 basis points in 2013.

Depreciation and amortization expense is expected to be in the range of $455 million to $465 million. Interest expense is estimated to be in the range of $245 million to $250 million. Our full-year non-GAAP tax rate is expected to be in the range of 33% to 35%. We project the full-year fully diluted weighted average share count to be in the range of 183 million to 185 million shares. We expect capital expenditures in the range of $200 million to $225 million and free cash flow in the range of $400 million to $500 million, inclusive of approximately $23 million in cash contributions for our pension post-retirement plan.

In terms of timing of free cash flow during the year, we expect to see the normal seasonality, with most of the free cash flow generated in the second half of the year, given the lower pension funding requirements, the majority of which impacted the third quarter of 2012, we would expect less fourth quarter seasonality than we experienced in 2012. We've made great strides in working capital management over the past two years, reducing our trailing three-month working capital percent of sales from 14.6% at December 31, 2010 to 12.9% at December 31, 2012.

We believe that the current working capital rate is sustainable on a long-term basis and do not expect significant additional rate reduction in 2013. In 2013, we expect our cash tax payment to be higher than they were in 2012. As mentioned earlier, we're revising our long-term gross leverage ratio to be in the range of 2.25 times to 2.75 times.

One last comment regarding the first quarter of 2013. As I just mentioned, in addition to $6 million of lower pension income each quarter in 2013, in the first quarter of 2012 we realized the benefit of roughly $20 million due to the customer rebate reversal adjustment in our office products offering that will not recur in the first quarter 2013. We also expect the Q1 tax rate to be at the high end of our full-year guidance or 35%, nearly 600 basis points higher than the first quarter of 2012.

And with that I will turn it back to Tom.

Thomas J. Quinlan III - President and CEO: Thank you, Dan. Before we take questions, I want to highlight how the strategic pillars that we have been describing to you are reflected in two particular areas. We strongly believe that our ongoing focus on these initiatives positions us to achieve our goal of being the profitable leader of our industry.

As we have shared our strategy, we've discussed these five pillars. One of them is to internally develop and acquire technologies and capabilities that serve important communication and supply chain needs for our customers, and that continue to diversify our product and service mix. In pursuit of this strategy we look for the best opportunities to add capabilities in a way that creates meaningful synergies.

We have demonstrated an ability to quickly and aggressively integrate new technologies and capabilities in accord with our One R.R. Donnelley strategy. This enables us to match our cost with our revenues as we leverage our scale to drive procurement, operating and selling synergies.

For example, since 2009 our logistics revenues have grown at a compound annual rate of 16%. During the fourth quarter we further expanded our logistics capabilities with the addition of Presort Solutions, a Midwest based comingled mail provider. Commingling is a service that helps us to optimize postage rates by combining mail pieces from different customers and sorting them into common zip codes. For many customers, postage can represent 50% or more of the total delivery cost of a marketing or other communication. This makes integrated services that help to reduce postage cost very valuable to our customers. The operations that we added are ideally suited geographically to support all of our domestic direct-mail facilities, as well as many of our other critical mail production operations in other locations. This addition will enable us to immediately bring work that previously left our platform into an R.R. Donnelley facility. We will also provide commingling services for third-party mailers.

This year, the retail segment is positioned to become the largest vertical that we serve. This trend is reflected in another addition that we made during the quarter; (Mizel), a highly respected provider of innovated merchandising materials used for in-store marketing solutions. It employs a digital production platform to a variety of broad range of retail display products. Our ability to offer a broad range of in-store marketing resources illustrates the unique, multifaceted nature of the solutions that we can offer to our customers.

For example, as retail suppliers are preparing their in-store communication strategies, we can provide an integrated portfolio of products and services as diverse as designed services for digital sign boards or graphics, product labeling, packaging design and production, planogram management, shelf labels, shelf talkers, aisle interrupters, freestanding displays and much more, all distributed to stores in precisely the right quantities, configured digitally to communicate just the right message and delivered at just the right time for our proprietary Internet-based rollout management system.

With both of these additions, we are moving swiftly to optimize procurement and other synergies. Again, we remain focused on expanding the breadth of our capabilities to support our customer's communication needs. R.R. Donnelley is well positioned to take advantage of the best opportunities within our industry.

Another element of our strategy that we have consistently discussed involves winning share by using a comprehensive range of our integrated offerings as a key value added differentiator. To implement this strategy, we continue to evolve our unique multifaceted go-to market approach. It comprises of four distinct ways that our selling organization approaches customers.

The first look for is to target and win transactional selling opportunities all day every day. Our geographic reach, broad product and service offerings, scale and the consumable nature of what we sell keeps us in front of the customers regularly and in many cases daily. This ongoing interaction makes R.R. Donnelley top of mind for customers as they look to place their orders. Our geographic reach is especially important as the customers continued to build out their global supply chains. This is reflected by our Asian operation performance where revenues have grown by compound annual rate of more than 16% since 2009. Key drivers for this growth have been the expansion of our global supply chain management offering and our growth in packaging and label capabilities.

In Asia, since 2010, our packaging related revenues have grown by over 20 percentage here to over $300 million in 2012.

The second of the four is our enterprise selling approach. Here we have identified a select number of the logic customers that are characterized by having the highest demand for our product and services. Enterprise accounts also typically have communication needs nationwide and internationally. To maximize our position within these accounts, we approached them with our complete portfolio of products and services under the direction of a senior relationship manager. Our services offering plays a vital role in growing relationships with enterprise accounts. This is reflected by our services revenue, which since 2009 has been growing at a compound annual rate of 14%. Let me give you an example. Multichannel merchants are reaching customers via variety of media, two of which are printed and online catalogs. You were certainly used to hearing that R.R. Donnelley prints dialogs. However, you might be surprised to learn that our content creation services are employed to help write the copies that is used in both printed and online media.

For instance, for one enterprise relationship, we provided a full suite of print and logistic services to help them produce and deliver their catalog offering. We also manage a team of 50 contract copywriters to develop descriptions for nearly 6,000 products. Merchandising copy is optimized according to the venue in which it will be read, so our team generated content for both print and online.

The third of our go-to-market approaches involves providing our customers with comprehensive communication solutions for targeted vertical segments. For example, I've already described some of the in-store marketing products that we provide to retailers. To create and offer specialized solutions, we develop a deep understanding of the customers' goals and the challenges that they face. Then we bring our products together, layering our Information Technology and other services' resources and present solutions that are specifically adapted to address that segment's objectives.

For example, retailers are wrestling with issues such as driving more traffic into their stores and converting more of that traffic to increased sales per square foot. Our approach is to offer integrated solutions to those specific challenges rather than to just ask if we can bid on a particular product. R.R. Donnelley has a unique ability to develop solutions for targeted segments such as retail, financial services, health care, mobile communications, publishing and others because we can bring together the broadest range of resources plus, and this is an important plus factor, we have the ability to provide proprietary solutions across the breadth of the supply chain. For instance, through our R&D efforts, this year, we will be introducing a new product for retailers, consumer packaged goods producers and other marketers. It offers an innovative new way to engage with consumers. This involves near-field communications, or NFC, which requires the use of NFC antennas that are incorporated into what are called NFC tags. As part of our offerings, we will be putting these antennas and creating a tag.

Please note that I said printing antennas. Printed electronics is a far cry from conventional ink on paper and as I will describe in a moment, a leap forward in terms of manufacturing NFC tags. How does NFC work? Imagine that you're shopping for new appliance. You're in a store, you look at the unit, and then you take out your smartphone and tap it lightly on the display that invites you to do just that. Suddenly, your phone activates a video that shows the appliance's features in action or it brings up a special today-only offer or suggests a companion item and offers an interesting coupon if you purchase both. That ability to engage a consumer is part of what makes NFC so attractive. The other part is that when you engage with the NFC tag, you are beginning a conversation with the retailer or brand that can provide them with valuable data about you, your preferences and more. This potential for a two-way exchange with the consumer is exceptionally valuable to our customers. It is enabled through a complete suite of creative services, data analytics, innovative manufacturing and mobile solutions.

Now I said that R.R. Donnelley's ability to provide printed NFC tags represents a leap forward. This is for two reasons. First, we believe that printing will deliver a shorter cycle time for designing and manufacturing tags that will be used in a variety of applications. This will give marketers more flexibility and a significant speed-to-market advantage. Second, we have the ability to integrate NFC tags with the label, signage, displays and other merchandising materials that will put the tags in front of consumers. We can also design and fulfill those merchandising materials, develop and host the mobile consumer experience and provide response analytics about the program's effectiveness. Our ability to integrate all of these activities under one virtual roof offers our customers a single source solution. We see this as a benefit that outstrips the complex supply chain that would be required if the customer sourced all of these elements independently.

As I said before, we have a robust R&D pipeline. NFC is not the only new product that we'll be introducing this year. Note that we were recently named again to the Ocean Tomo 300 Patent Index, which recognizes the value of company's intellectual property.

The fourth way that we approach our customers is through our supply chain management capabilities. The solutions that we build for our customers reach far beyond the walls of our own manufacturing facilities. Our global strategic sourcing scale, our IT systems, our process management expertise and our leading logistic resources allow us to develop and execute complex supply chain programs for our customers.

Let me share a quick example to illustrate this approach. For one customer, we provide on-site and offshore digital workflow, imaging retouching and digital asset specialists who enhance and manage 135,000 images for print and online applications. We provide paper and print procurement services for 9 million catalogs, as well as for millions of flyers and other marketing communications annually. We coordinate international logistics and we handle printed and electronic statement preparation and distribution, as well as the same service for warranties and other relationship communications.

We believe that we bring a scale advantage to this approach. In our supply chain management offering, we handle more than $13 billion worth of customer products as we put them into packages that we design and produce or source. We source approximately $1 billion worth of outside services, including printing materials on behalf of our customers, and we use sophisticated sourcing software that is integrated with our proprietary CustomPoint system to provide our customers with transparency and control. Again, we pursue and expand this four-pronged multifaceted sales approach as we continue to evolve our go-to-market strategy.

Before we turn to questions, I want to congratulate our employees around the world for the many safety milestones that they continue to achieve. We regard employees' safety as the first and most important measure of operational excellence.

Don, if you could, we will open it up for questions now.

Transcript Call Date 02/26/2013

Operator: Charles Strauzer, CJS.

Charles Strauzer - CJS: Tom, if you could, let's talk a little bit about the cost reduction efforts going into this year. And obviously, in the past few years or so, you've taken a significant amount of cost out, but a lot of that was driven by some fairly large acquisitions. Now absent those acquisitions, what gives you confidence you can find additional costs to take out and keep – kind of offsetting those revenue declines?

Thomas J. Quinlan III - President and CEO: Fair question. Let me go back a little bit to give you sort of a foundation from which why we think we can still do what we've continue to do since we've gotten here in 2004. There's a number of reasons to be optimistic about 2013. U.S. economy's recovery seems to be getting stronger. The overall financial health of corporates continue to stabilize. There's a little bit more certainty in D.C. The housing market recovery is continuing. There's a low interest rate environment, and funds our available. Banks are lending. And the energy sector seems to be improving. But for us, the most optimistic reason for '13 is our plan on how we're continuing to transform R.R. Donnelley. We're selling more of the products and services in our portfolio to our customers, but we also are creating sound solutions to our customers that draw in more of the products and services in our portfolio. Along this communications management supply chain, there's content origination, content management and content delivery. We play a role in content origination with the capabilities that Helium brings to the platform, and we excel at content management and content delivery. We have the capabilities, credibility and capacity to be the primary player in the communication management services chain. We are continuing to go-to-market, as I said, to be multifaceted with the approach that we talked about the four approach. We're focused on selling individual products services across all verticals. We're leveraging the existing R.R. Donnelley platform to provide bundled solutions for current customers and prospects. We're delivering integrated solutions to target industry verticals, and the supply chain management opportunities that we talked about, I don't want anybody to lose focus on that. For both our existing and as well as new prospects, we will compete with external market players. We have grown the supply chain management significantly since the year in 2010. Existing players in this area are facing challenges with the current business model, so there's a lot of opportunities there for us. All of this leads us to not to be solely dependent upon our long-run print products and gives us the ability to assist customers in their communication needs while we're lowering their overall cost and improving their customers return on the spend. No question some long-run products are eroding, but at the same time, Charlie, these products and services, they're not going to go away. And we are participating in some of the things what we talked about that are asset light. That wasn't the case a couple years ago. What I talked about on the supply chain management side what we're doing. Those electronic devices didn't exist a couple years ago and we are doing about $1.5 billion in that area. So, I think the long-run products are eroding, but they are not going away. That's going to help us. From an overall platform cost standpoint, what does this mean? We still have the ability to match costs to revenues. The transformation/evolution of the business allows us to continue to take out cost to match revenues. What's interesting for me to see in the marketplace when other companies are talking about their cost saving targets that they've achieved, they have achieved those targets, but they've seen those costs eaten up by declining their base business? Our platform is far from reaching that point. So, I want to make sure that's emphasized today – thank you for the question – emphasize today that we've still got the ability to match costs to revenues in this platform as we continue to evolve.

Charles Strauzer - CJS: So, what you're saying basically in a nutshell is you've got some additional capacity that could come offline if you needed to pull that lever.

Thomas J. Quinlan III - President and CEO: You said it in two seconds. I said it about in 10 minutes.

Charles Strauzer - CJS: Shifting gears a little bit, if we look at the performance in Q4, it's definitely better than, I think, myself and industry were expecting there in terms of the revenue and profitability. As the quarter progressed, what were the areas that kind of stood out for you in terms of the outperformers versus where you thought they might be?

Daniel N. Leib - EVP and CFO: Yeah, sure. Particularly, if we look at what performed better in Q4 to Q3, magazine, catalog retail was up in Q4 and all these figures were going to exclude any impact of M&A, FX or paper, and variable print offering, which includes our direct mail and our short-run fulfillment and our statement printing, was also up in Q4 after being down in Q3. So that was up about 20 basis points. Magazine, catalog retail up about 110. You look at logistics, which was better in Q4 than Q3. Office products continued growth in Q4 of about 5%, which is consistent with what they did in Q3. Premedia showed about 3% growth. And then on the international side, we did see very strong performance in China, up about 13%, which was off of a Q3, which was up about 1% or so, and Latin America, which is a bit of a timing influence but was much stronger in Q4 as well. I think as it relates to the financial offering, the number of IPOs priced were flat in Q4 but certainly saw some progress coming towards the tail end of Q4 and also obviously into the first quarter of 2013.

Thomas J. Quinlan III - President and CEO: And Charlie, just staying with financial because that's one of the points that we've harped on for the last couple of quarters even into 2011, we've seen – I think the numbers say that I have in front of me that from 2010 to 2012 the number of IPOs over this period averaged 136 per year. That compares to 2004 to 2007 where they averaged 205 per year. Now we're sitting here as we get through January and January, obviously, as everybody has seen, was a pretty good month in the marketplace for that. IPOs were strong in January. M&A activity was led by some monster-size deals. It's also a good sign. The low interest rate environment, private equities need to put their cash to work, and the fact that we're seeing strategic are looking to go ahead and have combinations that are going to give them cost savings that all bodes well for our business. Couple that with what global translation services business and the four major verticals that they're playing in is also in a good position for '13, and the products that we've pulled together for the mutual fund and annuity providers, we think those are being well received in the business. So one of the things that's sort of been a headwind for us is this particular area, which we think, in 2013, has the capabilities to be a tailwind for us.

Charles Strauzer - CJS: Excellent. And then just one final question for you, Tom. Just when you look at the sort of speculation over the last few months about the dividend, can you give us any comments about that?

Thomas J. Quinlan III - President and CEO: Yes, there's been a lot of speculation about the dividend for a while now. I'll let Dan start that one, then I'll jump in.

Daniel N. Leib - EVP and CFO: Yes, so clearly, capital deployment is a key area of focus here. I have frequent discussions internally, talk to the Board about it quarterly. We have paid the $1 for a share dividend going back since 2003 and our guidance in taking down our leverage target, the gross target from – down to $2.25 to $2.75. If you run through the midpoint of our guidance, the ability to delever also coupled with the intercompany loan that we described on the last call, towards the end of the year get to that range and that even allows for a bit of M&A in there.

Thomas J. Quinlan III - President and CEO: Yes. Look, our debts has been greatly exaggerated as a company, to steal Mark Twain's line. We still got a capital deployment that's a disciplined approach to M&A. We're still going to consider conventional print opportunities, that where they post synergies, they'll be delevering due to the quick synergy payback that we can get. The target opportunities that positively impact future growth profile and continue to offer higher return, we're going to look at, and we're going to pursue divestitures. We continue – the other thing that Dan and his team have done, they've done a great job of continue to managing favorable maturity profile as the market conditions exist, and we're going to be out there taking advantage of that when the market conditions are there. We talked today about CapEx. CapEx for our business is becoming less capital intensive. It's not like it was a number of years ago. We've said on a number of times we're going to between 2.25% and 2.5% and we see that right now for the foreseeable future. We don't see that changing. If it does change, it's going to be for a good reason that means that we're getting returns as a result of that capital. If you go back to the 2012 number that we showed you today $486 million of free cash flow that – you now have to go back to 2003 to see a year where we did not exceed that number. So, I mean – and that's with the $140 million – $150 million pension payment in 2012. This business generates cash. How we deploy it. We look at it on every day basis, we will continue to look at it that way, but we feel pretty good as far as we are sitting here today as we talk to you about as Dan went through what we look at for our guidance for '13.

Operator: Kannan Venkateshwar, Barclays.

Kannan Venkateshwar - Barclays: A couple of questions, first, on some of the events this quarter. I mean, first was the Meredith transaction. It would be great if you could tell us how that impacts you and secondly, a news about USPS stopping the Saturday delivery. I mean, does that have a big impact on you at all and if you could give us some color on that?

Thomas J. Quinlan III - President and CEO: Yes. We could. On the Meredith transaction, look, I think as you go – as everyone goes through today, you continue to see as I talked about earlier strategic looking to combine to take advantage of scale and take advantage of synergies. I think we're at that phase of the recovery. So, we are – as we sit here today, as you look at our platform, we are able to serve customers that are in that way. I think the bigger news here is what you said on your second question when you want to go ahead and talk about postal, and just to frame that question a little bit to see why we're excited about our logistics business. If you think about what the USPS has gone through since 2006, they basically reduced 200,000 employees, they've consolidated 200 mailing centers, and they've reduced hours at 13,000 post offices. Any of these actions that we, as business leaders in the world, if we would have took them, we would have seen great results of taking such restructuring. But it hasn't occurred, and not to put blame on the post office, not to put blame on the United States government, but society has evolved in how we communicate with each other, but now is the time to address it. None of us can simply ignore the problem that the post office is faced with. The industry accounts for 8 million jobs and is roughly 7% of our GDP. It has a significant impact on our economy. All of us can look at the post office as pre-funding of the retirement benefits, and I think it's $5.5 million annually they have to pay to the Treasury, you can point to the United States Postal Service overpaying its obligation to the Civil Service Retirement System by $50 billion, while the $7 billion is overfunded to the Federal Employees Retirement System back. All these three are valid areas impacting the financial health of the United States Postal Service. But what can get done about it? I mean, the USPS is by far the best delivery mechanism, most cost-effective to the last mile. USPS touches every household business and institution on a daily basis, and it is a trusted brand. So with that sort of as a backdrop, where there's challenges, there's opportunities, and for us we're uniquely positioned to assist customers to deliver their communications from both the physical and electronic standpoint. R.R. Donnelley handles the sorting, transportation, and we've got an unparalleled logistics network. We already touch more than half of the standard mail in this country. So the answer is not whether or not we fix the overpayments that the post office has made or whether we go 6 to 5 days. It's going to be how can USPS have a step change and even operate more efficiently than it does today, and that is where we think R.R. Donnelley's opportunity is. Our logistics is, when you consider the actions that's going to be taken over the next two years by the USPS, coupled with all the communication material and packaging we have running through our facilities, our logistics business even becomes more important to R.R. Donnelley and our investors. We are well positioned to assist the USPS in their transformation and at the same time, help our customers. The acquisition that we did that we talked to you about, the commingling facility those acquisitions that's what we're going to continue to look for, because we've got to continue to look to mitigate the cost increases or our customers. If the USPS gives all of our industry time to go ahead and figure out 6 to 5 days, we're all going to figure it out. But if not, then we think our platform is better situated if it does come upon us quicker than people might expect, which our competitors might not be in the same spot.

Kannan Venkateshwar - Barclays: I guess overall, I guess, you don't expect any material revenue impact on either of these fronts.

Thomas J. Quinlan III - President and CEO: No. Not at all.

Kannan Venkateshwar - Barclays: And beyond that, in terms of the debt maturities, given the strength of the high yield markets right now, is there any plan to term out the debt that's coming due next year, or what's the plan for the debt ladder as it exists today?

Thomas J. Quinlan III - President and CEO: Well, I think you've seen us over the last couple of years and as I just mentioned, I think Dan and his team have done a tremendous job of making sure that we've got a nice runway here with this company to make sure that we're able to operate and that we've got no big tower that's going to come and choke us. So again, we look at it every day. We see what's out there. If the market conditions exist, we will entertain it.

Daniel N. Leib - EVP and CFO: Yes, we certainly have witnessed, over the past couple of years, have extended maturities through issuance and simultaneous tender. So as Tom said, continue to monitor the markets for opportunistic opportunity.

Operator: Scott Wipperman, Goldman Sachs.

Scott Wipperman - Goldman Sachs: Just a couple here. The first is, Dan with the $80 million payment that you're going to get from the international subsidiaries. I think that's down from $150 million you talked about last quarter. So, I guess I was just trying to understand the difference. Also, if you could just let us know the timing of that and has the total amount changed that you guys expect to get and I got a couple of follow-ups.

Daniel N. Leib - EVP and CFO: Yeah. Sure. So the short answer, the total amount has not changed. The $80 million versus the $150 million is just reflective of where the cash was at the end of the year, so we actually had that $70 million loan back to the U.S. at the end of the year and – or I should say had $70 million. So, it's just an incremental $80 million on top of that. So, the $150 million is the $150 million and the overall amount remains the near $500 million.

Scott Wipperman - Goldman Sachs: Then did you make any changes to your discount rate or return assumptions for the pension?

Daniel N. Leib - EVP and CFO: Yeah. So, return assumptions, we dropped to 8% and the discount rate, the blended discount rate was down 70 basis points and so as mentioned on pension alone a 100 basis point increase would increase our funding by $640 million on pension alone and an additional $50 million or so on the postretirement plans.

Scott Wipperman - Goldman Sachs: Then I guess Tom can you just discuss the rationale for the lower leverage target I mean I obviously heard the comments earlier, so I appreciate that. But if you could maybe just kind of provide a little bit more color on the move. And then I know in the past, the leverage target has had a little bit of flexibility with the statement you could be above or below that target at any one time. I guess if you could just provide how we should be thinking about the new one of 2 to 2.25, 2.75, and then I just have one follow-up as well.

Thomas J. Quinlan III - President and CEO: Sure, I think some of the things that we talked about this morning, our business is not as capital-intensive as it used to be, and I think that's the same for all of our competitors. So I think there's one place where you're not going to see our CapEx go beyond where it is today. Asset-light is becoming more and more – we've got $1 billion that we outsource today that, quite frankly, we don't believe we get credit from investors on the equity side for what we're doing there from a sourcing standpoint that we provide to our customers within our bundled approach. So we feel pretty good as far as what our outflows are going to be as it relates to capital expenditures. I think the deals that are out there today or that could be out there today in our marketplace from where we sit, from our position of strength, we believe they'd be delevering deals at this point, as we've provided again that the property that we're looking at is someone that has the characteristics that we look for, whether it's cost, capacity or customers. We think right now that those transactions that would be there would not result in long term going past the (indiscernible) that we've proposed to you today. So in the past, I've told you we've said, hey, it could go up or it could go down. Yeah, that always could be the case, but this is where – we never want to be a group that tells you that we're doing something that we can't do. A number of you had criticized me for not saying why aren't you going to be a 2 to 2.5 (going in). We will eventually, at some point in time in our lifetime, we'll get there. But right now, I think that the best way to operate this particular platform is that we gradually bring it down, and I think we've demonstrated to you again like we've demonstrated to you other things that we said we'd do. We follow through on that. So as we sit here today, we think that will be – that's the right target for us and where we're headed.

Scott Wipperman - Goldman Sachs: Great. And then maybe just the last one is for the guidance for the year. I mean, if we just assume the economy range the same, which I know is a big assumption, but if you could just maybe walk through, like, which of your segments or end markets or regions, which in your mind is the biggest swing factor this year either beating or missing that guidance? What should we be focused on? What are you focused on?

Thomas J. Quinlan III - President and CEO: Dan will take you through that, but the one thing I want to also emphasize, as you think about the economy and what Dan Knotts, George Zengo, the rest of the team. Look, a tough economy should be a good day for R.R. Donnelley because our customers are going to continue to look to get costs out of their platform. We don't change the way we run the business no matter what's going on with the economy, but hopefully, our customers will be able to show them the impact that we can bring to their platform as a result of the cost savings we can give to them, how we can improve their return on their investments and how we can make their market communications more powerful in what they're doing.

Daniel N. Leib - EVP and CFO: Yes, I’ll add a couple of comments. I mean, the first is if you look at the guidance and to the question of taking down the pension return, which has impact of $24 million or so, the rebate adjustments that we had in 2012 and those two items, ex those items, it's essentially a flat level of performance. We look at – and it's interesting we talk a lot about the product groups that we talked about. Tom spent a fair amount of time talking about the benefit that we get outside of just a product focus than more of a solution sale. We feel very comfortable how we do head-to-head on a product sale, but really, this is all about doubling the broader set of solutions that draw in the products, but having said that, going back to the product description, in the beginning of the year financial obviously off to a nice start given the capital markets. From a full year perspective, I would, from a modeling view, would look at things performing similarly to how they performed in 2012. We're not banking on a drastic recovery in any one of the product lines. This is really consistent performance with what we saw in 2012.

Operator: Dan Leben, Robert W. Baird.

Patrick Wang - Robert W. Baird: This is (Patrick Wang) for Dan Leben this morning. So, most of my questions have been addressed already, but going back to the topic of margins, could you just talk a little about how you view the balance between margin improvement, but at the same time investing in innovation and IT spend as you touched on earlier relating to NFC and the digital initiatives as you look to replace some of print revenues?

Thomas J. Quinlan III - President and CEO: Yeah, sure. I mean, we, as you know and those of you who have been around this for a while, we've got a group up in Grand Island, New York that does a tremendous job as it relates to R&D and innovation in our industry. We've talked to you in the past about how we have developed the ProteusJet press, which, again, we're not going to manufacture those presses. We've got people that will manufacture for us, but we've got that type of jewels that are out there that allow us to go ahead and make our productivity that much better. From an IT standpoint, again, as you look at our CapEx number, we are significantly investing in IT. Ken O'Brien and his team are going ahead and looking for and making sure that we can go ahead and serve our customers' needs as it relates to their Information Technology. Everything is about data; how can you get the data, how can you make it more efficient? We'll build where we have to build. We'll buy where it makes more sense to buy. All of those things together allow us to go ahead and have the productivity to improve our margins.

Operator: Edward Atorino, Benchmark.

Edward Atorino - Benchmark: Do you see any new competitive pressures anywhere from QUAD, for example, which is much bigger than it used to be in some of your businesses?

Thomas J. Quinlan III - President and CEO: As you know, we don't talk about competitors here, but what I would tell you is without talking about anybody, there is no one that has the capabilities that we talked about today. There is no one that can go ahead and serve people along the communication supply chain like we can. We've got the integrated communication products and services that's going to make our customers more efficient, more powerful, and enable them to target their customers more. There is nobody else out there that can do that. It's not about ink on paper like it was a number of years ago. It's about how are you going to allow me to reach my customer on a daily basis at the right time, with the right information, in the right medium. It could be physical, it could be electronic. That's what we're excited about, what we've built, which we as I sit here today, again, I don't believe anybody else has that capability to close the circle to say how do you want to go ahead and reach out to your customer. If you want to reach out physical, you go to one person. You want to reach out electronic, you go to another person. If you want to do it underneath one roof, you come to R.R. Donnelley.

Edward Atorino - Benchmark: In the magazine catalog, book catalog, book carrier, could you isolate were they all up, two out of three up, one out of three up?

Daniel N. Leib - EVP and CFO: Yes. So magazine catalog retail was up. The book directory continues to be a bit challenged, expectations on '13 is that we will not see a large adoption rolling into '13. So we'd expect a pretty similar performance. We obviously know the successes that we've had on the sales side and what will be coming onto the platform in '13, and so we feel good about that.

Thomas J. Quinlan III - President and CEO: And then just staying on books for a second, we had 14 of the top 20 bestsellers in 2012 in our platform. As Dan mentioned, you know and everyone else knows the states are still struggling from a financial standpoint. A couple of states are turning their deficit around to have a small surplus. We think that they will put some money back into curriculum as it relates it's not going to be electronic devices at this stage as far as I believe. Over the next couple of years, at some point, it will, but don't I think, I think K12 will still be physical. And then what we've done on the supply chain for book with warehousing. We have more and more conversations with publishers as far as how we can make their distribution network better. They have to take out costs. So I think the platform that we have, again, bodes well for physical distribution and content. I'd like to thank everybody for joining today's call. Appreciate your time and look forward to talking to you in about 90 days. Thank you.

Daniel N. Leib - EVP and CFO: Thank you.

Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.