Logo of jester cap with thought bubble.

Image source: The Motley Fool.

R.R. Donnelley & Sons (RRD)
Q2 2020 Earnings Call
Jul 29, 2020, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Welcome to the RRD second-quarter 2020 results conference call. My name is Chris and I will be your operator for today's call. [Operator instructions] Please note that this call is being recorded. I will now turn the call over to Johan Nystedt, RRD's senior vice president for finance.

Johan Nystedt -- Senior Vice President for Finance

Thank you, Chris, and thank you, everyone, for joining RRD's second-quarter 2020 results conference call. Joining me on today's call are Dan Knotts, RRD's president and chief executive officer; and Terry Peterson, our chief financial officer. At the conclusion of today's prepared remarks, Dan, Terry, and I will take questions. As a reminder, we have prepared supplemental slides for today's call which can be found on the investors section of our website at rrd.com.

As we review second-quarter results on today's call, I will be advancing the slides to get connected by webcast. Alternatively, we will reference page numbers from the supplemental slides for those participants who wish to follow along by advancing the slides themselves. The information that will be reviewed during this call is addressed in more detail in our second-quarter press release, a copy of which is posted on the investors section on our website at rrd.com. This information was also furnished to the SEC and the Form 8-K we filed yesterday.

10 stocks we like better than R.R. Donnelley & Sons
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* 

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and R.R. Donnelley & Sons wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of June 2, 2020

Throughout this call, we will also refer to forward-looking statements, including comments on our financial outlook and strategy, all of which involve risks and uncertainties. Therefore, our actual results could differ materially from our current expectations. For a complete discussion of the factors that could cause our actual results to differ materially, please refer to cautionary statement included in our earnings release and the risk factors included in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and other filings with the SEC. Further, we will discuss non-GAAP financial information.

We believe the presentation of non-GAAP results provide investors with useful supplementary information concerning the company's ongoing operations and is an appropriate way to evaluate the company's performance. These non-GAAP results are provided for information purposes only. Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the investors section of our website as part of our press release. I will now turn the call over to Dan.

Dan Knotts -- President and Chief Executive Officer

Great. Thanks, Johan. Good morning, everyone, and thank you for joining us today. On behalf of -- on behalf of all of us at R&D, I hope you're staying safe and healthy during this ongoing global pandemic.

In my comments today, I'm going to provide an update on how RRD is navigating the current business environment, while also staying focused on our long-term strategy, review our Q2 results, and then touch on what we expect to see going forward. The impact of the COVID-19 pandemic on world economies, global supply chains, consumer behaviors, and company business models has been sudden and severe. In response, we are taking decisive and aggressive actions, moving with a strong sense of urgency to guide RRD through this very challenging time. We initially experienced the tremendous disruption potential of COVID-19 in the first quarter as our China operations were shut down for nearly a month.

Based on that experience, we have been operating with three priorities: to protect the health and safety of our employees, to sustain operational continuity, and to effectively manage our business performance through this volatile and uncertain period. Let me expand upon each of these areas. Our single most priority is protecting the health and safety of our 35,000 global employees. With a number of new infections resurging around the world, we remain very diligent in our approach to safeguarding our teams everywhere we operate.

Our cross-functional COVID-19 Task Force continues to ensure that we are closely adhering to the latest available guidelines from the Centers for Disease Control and the World Health Organization, and we are utilizing rigid screening procedures in a robust case management process to lower the chances of spreading the virus. We are staggering shifts, reconfiguring operations to accommodate physical distancing, and requiring employees to wear masks or shields at all times. We have also posted instructional signage throughout our facilities as another layer of education and positive reinforcement of good hygiene, social distancing, and safe practices. Our second priority is -- is to sustain operational continuity in order to provide uninterrupted service delivery for our clients while we also onboard new business.

Due to the terrific work of our teams around the world, we remain fully operational across the 29 countries and 250-plus facilities we utilize to serve our more than 50,000 clients. As a key part of our operational continuity plan, we are also working very closely with our supply chain partners to prevent any product or service disruptions and ensure that we fulfill our client commitments. Our third priority is to prudently manage our business through the near-term challenges while further strengthening RRD for the long term. Our road map to accomplish this objective is very straightforward, to reduce cost amid a lower demand environment, to preserve liquidity, and to capture the emerging growth opportunities being created by the pandemic.

On the cost-reduction front, we have acted swiftly and aggressively to curtail capacity, drive productivity, and improve operating leverage by lowering our total cost infrastructure. The actions we've taken include furloughs, temporary facility shutdowns, permanent facility closures, suspension of all merit increases, and elimination of travel. Given that these plans are implemented throughout the quarter, we saw a partial benefit in the second quarter and expect to see additional benefit in future quarters. We have modeled multiple future demand scenarios and we will continue to make adjustments to our cost structure based on the pace and magnitude of the economic recovery.

We've also acted decisively to preserve liquidity, including the suspension of the dividend, a reduction in capital spending, and a proactive draw on our revolving credit facility to increase cash on our balance sheet. Further, as a key component of our long-term strategy to improve our financial flexibility, we executed multiple transactions during the quarter to significantly reduce our near-term debt maturities. These transactions included the successful execution of three debt exchanges, the opportunistic repurchase of additional 2021 debt, and the repayment of our 2020 senior notes upon their maturity using cash on hand. Since the beginning of the year, we have now reduced our senior notes and debentures that are coming due between 2000 and 2024 by $628 million.

Additionally, we reduced our total debt outstanding during the quarter by $133 million. Now, while a significant portion of our time and attention has been committed to cost reduction in liquidity actions, our sales teams remain highly focused on pursuing new market opportunities being created by the pandemic. Let me share a few examples of how we're leveraging our industry-leading capabilities to capture these opportunities across various industries. In healthcare, we are securing new revenue streams through our point-of-care in diagnostic test kit solutions.

COVID-19 has given rise to a significant increase in demand for virtual healthcare which has prompted an increased need for home diagnostic testing solutions. Our end-to-end supply chain solution integrates all stages of test kit development and execution from initial design to packaging and label production to product fulfillment and distribution. As an example, we're providing Everlywell, an at-home health testing company with the supply chain components, kitting, and fulfillment services required for many of the at-home test kits they provide to healthcare professionals and consumers. With the growing demand for these at-home test kits, one of Everlywell's health insurance customers ordered nearly 1 million testing kits and Everlywell turned to RRD to produce this highly regulated project.

Within the retail industry, companies are seeing significant increases in their e-commerce volumes which require an expansion of the current operating models. For The Gap, we are supporting their e-commerce offering which allows consumers to order closing online and then pick up their orders curbside at thousands of their stores by providing the millions of labels that are required to fulfill their online orders. After nearly a decade of working with The Gap, we are proud to support their expanding communication needs as they adapt to the rapidly changing dynamics in the retail industry. For hospitality and travel industries, we're leveraging our extensive capabilities to provide the communications those companies utilizing to enhance consumer confidence.

We're supporting a leading hotel chain in their efforts to ensure a safe environment for guests and employees at their more than 5,000 locations worldwide. In close collaboration with this plan, we developed branded floor details, remote wraps, and mirror claims to reinforce staff and guest safety, and design a customized door seal that's placed on each hotel room door once cleaning is completed. We're also helping a major airline reinforce critical safety measures as they welcome back travelers. Building on our long-standing relationship with this client, we are providing way finding signage, floor decals, and informational cards for their membership lounges, as well as, revamped seatback safety materials updating guests on new planes practices and social distancing guidelines.

We're executing similar programs with a number of other airlines as we leverage our marketing business communications capabilities to help support this industry during this unprecedented time. In automotive, we initially saw volume declines driven by shelter-in-place orders that impacted showrooms and other on-site purchasing options for consumers. Today, we're helping our automotive clients safely return to their offices, manufacturing locations, and dealerships across the country. Prior to their reopening, we supported a major U.S.

auto manufacturer with a rollout of internal signage for many of their offices and production locations. We developed a return-to-work kits, including educational procures, masks, temperature strips, and other essential items that they sent directly to their employees to prepare them for their return to work. And at their dealership locations, we provided masks, vehicle sanitizer kits, customized seat covers, sterile covers, and formats to help enhance the safety and comfort of both staff and consumers as they returned to their dealerships. To further align RRD with the evolving market opportunities, during the quarter, we announced the unification of our content and creative services and global outsourcing organizations under a new group called RRD Go Creative.

By aligning these capabilities, we will be better positioned to address client needs through a single, centralized global resource platform for creative design, managed services, transaction processing, and intelligent digital solutions. I'm very proud of how the RRD team has collectively aligned and responded to our near-term challenges, while at the same time, continuing to execute our strategic priorities for the long term. Let me next touch on our Q2 performance. Actual net sales for the quarter were $1.16 billion which was well within the range of our guidance despite the negative impact from changes in foreign exchange rates and lower fuel surcharges in our logistics business.

Organically, sales fell 17.1%, with marketing solutions experiencing a greater organic sales decline as our clients significantly curtailed their marketing spend. Within the quarter, the largest total company sales decline occurred in the month of May, with June showing sequential improvement from May as economies began to reopen. Adjusted income from operations was $25.1 million, down $14.1 million from the prior-year period. Despite the sizable revenue decline related to COVID-19, our adjusted operating margin declined 40 basis points from the prior year due to the deleveraging of our fixed depreciation and amortization expense.

Our adjusted gross margin actually increased by 10 basis points and our adjusted EBITDA margin improved by 20 basis points as compared to the 2019 period. Consistent with our strategic focus on lowering our cost to serve, we also reported a 20-basis point reduction in SG&A expense as a percent of sales versus the prior-year quarter. Operating cash flow improved $22.5 million from the prior-year period which represents our second consecutive quarter of improving cash flow versus the corresponding quarters in 2019. These results demonstrate the swift and aggressive approach we are taking to manage our business in this period of reduced client demand.

While we remain deeply immersed in executing our near-term operating plan, our long -- long-term strategic priorities and focus remains unchanged. Those priorities, to strengthen our core, drive revenue performance, and improve our financial flexibility, are firmly embedded in our culture and are serving us well as we navigate through this crisis. Together, our strategic priorities are leading RRD to a future state in which we have fundamentally reshaped our portfolio, shifted our business mix, reduced our total cost structure, and become an even more agile, market-driven company. The cost takeout actions we are executing are essential to protecting profitability in adjusting to the volatility we are seeing in the market.

As we continue to rationalize our operating footprint, we are working in close partnership with our clients to assess their evolving needs and future buying behaviors so that we can make these critical decisions with an eye toward the future, and be fully prepared to respond as client volumes recover. For marketing solutions, we expect to see a gradual return of client marketing spend as the economy reopens, and our clients adjust to working with smaller marketing budgets amid higher demands to restore growth. While their focus on increasing marketing ROI will make data analytics more vital, we anticipate large-scale Martek projects will continue to be delayed in the near term. We expect content and creative services to remain relatively stable as client needs for communications design continue even as the execution of those materials across channels may change.

We believe our direct mail offering will remain a critical avenue for marketers to utilize in combination with digital channels to enhance connections with their customers. And for retail solutions, we anticipate a rebound for our in-store marketing offering to align with the overall pace in which retail stores reopen. For business services. We anticipate the reopening of businesses will increase demand for print and related services across our commercial print and forms offerings.

These products and service categories have experienced more significant volume degradation as client businesses either shut down or significantly reduced spending. Importantly, we started to see early indications of improvement as we closed out the second quarter. For our packaging, labels, logistics, and supply chain offerings, we expect to see a rebound occur in line with increased consumer and business product spending. Additionally, we believe the impact of telehealth and the shift to alternate forms of diagnostic healthcare, as well as, continued growth in e-commerce will serve to improve market demand for these offerings.

Before turning the call over to Terry, I'd like to touch on a number of recent awards that we've received. First, we're pleased to be included as one of the Best Places to Work for Disability Inclusion on the 2020 Disability Equality Index, a national transparent benchmarking tools that offers -- that offers the opportunity to self-report disability inclusion policies and practices. Second, RRD is proud to take part in Apple's Supplier Clean Energy Program, through which we are committing to power all capital's production with 100% renewable energy. This agreement is consistent with RRD's long-standing commitment to protect the health and safety of employees, clients, and the public and to conduct activities in an environmentally friendly manner.

RRD pursues energy-efficient programs across all its plants and facilities worldwide, and we continually work with clients and suppliers to make environmentally sustainable packaging. Additionally, the company has extensive supply chain expertise that provides clients with recycled and responsibly sourced raw material options. Finally, we're excited that our marketing solutions group ranked as one of the top 10 U.S. agency companies in Ad Age's prestigious Annual Agency Report.

This is the second consecutive year that RRD has been named on the list, again, ranking among long-standing industry agencies such as WPP, Omnicom Group, Accenture, and Publicis Group. This recognition is a testament to the successful evolution of RRD Marketing Solutions as an industry leader in this space. And with that, I will turn the call over to Terry.

Terry Peterson -- Chief Financial Officer

Thank you, Dan. Please turn to Slide 13 as I begin my prepared remarks. Second quarter was a very challenging period as the pandemic began to affect our global operations in the first quarter, beginning with China, we quickly engaged in three critical finance-related activities, assessing the near-term impact on demand for our products and services, adjusting the cost structure accordingly, and preserving liquidity. Our clients provided us with candid feedback which served as the basis for our second-quarter sales guidance.

Our actual results were within that range despite $20 million of headwinds from changes in foreign exchange rates and lower fuel surcharges in our logistics business. As we plan for a smaller sales base, we accelerated many actions to reduce our operating costs on both a temporary and permanent basis. Included in these actions are 39 planned facility closures, including manufacturing operations and sales offices. While these cost-out actions were implemented as quickly as possible throughout the quarter, many only partially benefited the second quarter and will drive additional savings in future quarters.

In addition, we will continue to assess our cost structure based on updated client demand and we'll continue additional actions as necessary. Over the years, we have developed core competencies around optimizing our cost structure which we will continue to leverage as the pandemic unfolds. As I mentioned last quarter, we took -- we took swift actions to preserve our liquidity which included adding extra cash to our balance sheet following a proactive draw on our revolving credit facility. Throughout the second quarter, we have maintained strong liquidity while focusing on ongoing strategic actions to reduce debt and extend maturities.

Our total outstanding debt is down versus the first quarter and is also down from June of 2019. We took several actions to significantly reduce our near-term debt maturities during the second quarter, including completing three successful debt exchanges, opportunistically repurchasing additional 2021 debt, and repaying our 2020 senior notes when they matured using cash on hand. Since the beginning of the year, we have successfully reduced our senior notes and debentures coming due in 2020 to 2024 by $628 million. While none of us can accurately predict the impact and duration of the pandemic, we believe we are focused on the right actions that will make us a stronger company in a post COVID-19 economy.

On a reported basis, net sales were down 23% in the quarter which included a reduction of 5.2 percentage points associated with three previous business dispositions, including this year's closure of our China -- Chile operations and another 0.7-percentage point associated with the stronger U.S. dollar. On an organic basis, sales were down 17.1% which included a decline of 15.7% in business services and a decline of 22.9% in marketing solutions. Both segments were negatively impacted by lower volumes due to COVID-19 pandemic and modest price reductions.

In addition, the business services segment was negatively impacted by lower fuel surcharges in its logistics business. Across our 11 different product and service categories, we saw notable differences in how the pandemic impacted demand. In categories where the work is more transactional and clients can make quick decisions to reduce orders like in commercial print, digital print, and fulfillment and direct marketing, we saw a greater reduction in demand. By contrast, other categories like supply chain services, packaging, logistics, and labels, experienced less disruption, and in many cases, benefited from new products and additional COVID-19-related orders.

Our sales decline was also impacted by our continued reductions in unprofitable business, including the planned impact from closing facilities. And while we continue to believe that there are ongoing secular pressures in certain product categories like commercial print, we are unable to differentiate those declines from the impact of COVID-19. Within the quarter, May volumes were the hardest hit from the pandemic while June net sales performance was our strongest, as local economies began to reopen. As I've mentioned in previous calls, we wrapped up most of our Census work earlier this quarter.

Second-quarter Census volume was approximately one quarter of the volume delivered in each of the past three quarters. While we continue to be awarded additional Census-related work, we do not expect the volume to be significant during the third quarter. On Slide 14, adjusted income from operations of $25.1 million was $14.1 million lower versus the second quarter of 2019. Our corresponding operating margins decreased from 2.6% in 2019 to 2.2% this year due to a 60-basis point negative impact from deleveraging associated with depreciation and amortization expense.

The pandemic-related decline was partially offset by the company's aggressive actions taken to reduce its cost structure throughout the quarter. In addition, the 2020 quarter benefited from lower variable incentive compensation and employee healthcare expenses and the favorable impact from changes in foreign exchange rates. Adjusted SG&A expense of $151.4 million in the second quarter is down $47.7 million or 24% from the prior year, reflecting our aggressive efforts to reduce our cost structure and the impact from recent dispositions. Adjusted SG&A as a percentage of net sales improved 20 basis points from 13.2% in 2019 to 13% in the current quarter.

Adjusted loss per share was $0.09 in the second quarter, as compared to a $0.03 loss reported in the prior-year period. The reduction was attributable to lower adjusted income from operations and an unfavorable effective tax rate partially offset by lower interest expense. Our adjusted effective tax rate was negative 4.9% in the current quarter, driven by limitations on domestic interest deductions and tax on foreign earnings. Our interest expense benefited in the quarter from lower rates on our credit facility and term loans and a favorable mix shift to lower interest debt, partially offset by the impact from the recent debt exchanges.

Our GAAP results for the quarter included pre-tax restructuring and other charges of $28.5 million, including charges associated with our aggressive cost-out actions in response to COVID-19. In addition, the quarter included $8.8 million of other charges, primarily for the recently completed debt exchanges and ongoing investigation costs related to RRD Brazil. Turning now to the balance sheet and cash flow on Slide 15. As of June 30th, 2020, we had total cash on hand of $341.9 million and total debt outstanding of $2.0 billion, including $410 million drawn against the credit facility.

Remaining availability on the credit facility was $117.8 million at the end of the quarter and total available liquidity, including cash on hand, was $460 million. Net cash provided by operating activities in the quarter was $35.4 million which was an improvement of $22.5 million, as compared to the second quarter of 2019. This represents our second consecutive quarter of improvement. The increase is primarily driven by improvements in working capital, plus lower tax and interest payments, and cash deferrals from the CARES Act.

Capital expenditures of $20.4 million were $18.6 million lower, compared to the 2019 period. The decrease is primarily related to a reduced investment level during the COVID-19 pandemic and spending in 2019 for the Census project and the China facility relocation. Next, I would like to provide you with a reminder of our capital priorities. Throughout the COVID pandemic, preserving liquidity is a top priority for us.

As such, we are temporarily reducing our investments in our business while we continue to evaluate our portfolio for further opportunities to optimize stockholder value. In regards to the pending sale of our printing facility in Shenzhen, China, on Slide 16, the buyer continues to work with the government to obtain the necessary approvals so we can complete the sale. Based on the buyer's previous experience, they estimate the required approvals will be obtained in 2022, at which time, the transaction will close and we expect to record a significant gain on the sale. To date, we have collected $98 million in deposits and we are scheduled to collect our next deposit of approximately $24 million in the third quarter.

Our contract with the buyer requires them to pay the final installment in 2022 even if the government's approval is further delayed. If the buyer fails to comply with the terms of the agreement or terminates for any reason, RRD is entitled to retain sub -- 30% of the purchase price in liquidated damages. Slide 17 shows the various maturities of our outstanding debt as of December 31st and June 30th. Since the beginning of the year, we have successfully reduced the amount due on our senior notes and debentures maturing in 2020 to 2024 by $628 million.

In aggregate, these maturities now total $394 million which is down from over $1 billion at the beginning of the year. During the second quarter, we completed three debt exchanges, repaid our 2020 senior notes in full when they matured in June, and opportunistically repurchased $28 million of senior notes and debentures due in 2021. Our 2021 maturities have now been reduced to $150 million in aggregate and we expect to repay them using existing liquidity. The extent to which the pandemic will ultimately impact our business, results of operations, financial position, and cash flows cannot be fully predicted or estimated at this time.

As such, we are unable to provide our typical full-year guidance. With that said, I would like to conclude my prepared remarks on Slide 18 with perspectives on our third-quarter performance and our liquidity as we manage RRD through the pandemic. We continue to update our financial models for various recovery scenarios which guide us as we develop and execute both temporary and permanent cost-reduction actions. In addition, we have updated our third-quarter sales forecast, taking into consideration current demand projections for our products and services among other factors.

Based on this assessment, we expect third-quarter net sales to be unfavorable to a strong prior year between $325 million and $400 million, including a reduction of $92 million from recent business dispositions. Organically, this represents a range of down approximately 15% to 20% and takes into consideration further impact from the pandemic in Census work in the prior-year period that will not repeat. In addition, third-quarter results will benefit from additional cost reductions and lower interest expense. As I mentioned earlier, our liquidity consists of availability on the revolving credit facility and cash on hand.

At June 30th, RRD had total liquidity of $460 million. We expect to maintain higher cash balances and amounts outstanding on our credit facility for the foreseeable future as we preserve financial flexibility through the pandemic. In addition, we are preserving our liquidity through aggressive management of our cost structure and accounts receivable collections. We continue to pay our vendors on time as we believe our liquidity is sufficient to fund operations, as well as, our upcoming debt maturities in early 2021.

In addition, we continue to pursue opportunities to monetize assets, including certain investments and sales of real estate, and non-core businesses. Lastly, we are not currently subject to maintenance financial covenants in our debt agreements which reduces our financing risk. And now operator, let's open up the line for questions.

Questions & Answers:


[Operator instructions] Your first question comes from Charlie Strauzer of CJS. Your line is open.

Charlie Strauzer -- CJS Securities -- Analyst

Hi, good morning.

Dan Knotts -- President and Chief Executive Officer

Good morning, Charlie.

Terry Peterson -- Chief Financial Officer

Hi, Charlie.

Charlie Strauzer -- CJS Securities -- Analyst

Uh, I just want to start off with a little bit of our Q3 discussion and also just a little bit more kind of current trends. You look at, you know, the Q2 various business lines that you had in Slide 13, I think it was. You know, which areas are starting to see some pickup and which areas are still seeing the most impact? And looking into Q3, Q4, what are the discussions you had with clients in terms of potential future business?

Dan Knotts -- President and Chief Executive Officer

Hey, Charlie, it's Dan. I'll start in terms of the areas that we're seeing toward the end of the quarter and the June period as economies began to reopen. You know, I think what's -- how I would explain that is to ask people to think about demand for us at across three categories. The first one is around marketing demand and that is going to be driven by clients return to increasing their marketing spend.

So as we think about direct mail, we think about in-store marketing campaigns, etc. as businesses reopen, we expect to see a marketing spend increase. Feedback from clients in that space is they are absolutely ready to go. They're -- obviously -- they obviously need to restore growth for their businesses and their marketing efforts are a critical component of that.

The second category relates to consumer and business demand for products. So as I think about packaging and we think about labels and we think about logistics, that's all predicated on the movement of products which is all predicated on the purchase of products by either consumers or businesses. And as we start to see economies reopen, we're starting to see demand in that space, along with the new opportunities that we're capturing, begin to recover late in the -- late in the second quarter. And the third category is around regulatory and compliance portion of our business, and that demand is really predicated on healthcare requirements.

It's also based on, to some level, hospital visits and healthcare, and getting back to normal in that type of environment. So that's one that has been relatively stable throughout and really hasn't dramatically changed much as we look ahead here in the near term. So as I think about that and ask people to think about in this space of is marketing demand. And the other part of this as marketing demand recovers as products begin to flow again for consumers and businesses.

But the caveat to that and the reason that we are uncertain about what that looks like is just the start, stop, the volatile, the choppiness, the volatility, the choppiness of -- of the economy opening, shutting down, opening and shutting down, and clients sharing that information relative to, do we go, do we not go, relative to launching of marketing campaigns and projecting demand for their products as well. So I kind of break it down those three categories. We are seeing -- we did see June as a recovery from May. And early on in July, in line with our forecast, we expect to see that to continue a little bit.

Charlie Strauzer -- CJS Securities -- Analyst

Got it. And then, Terry, maybe you could talk a little bit, too, about your thoughts on margins in Q3. And then also your organic forecast of down 15% to 20%, does that exclude or include the Census work?

Terry Peterson -- Chief Financial Officer

Charlie, the 15% to 20% does include the Census work that will be, uh, -- that will be, uh, organic pressure for us beginning in third quarter. So that does reflect the absence of the Census work in the third quarter in the 15% to 20% range. You know, from a margin standpoint, we are -- and you saw evidence of it in the second-quarter results when you looked at our margin performance and how we held our margins and even increased our adjusted EBITDA margin a little bit. You know, we're working pretty hard to protect those, which means that the variable stuff comes out nice and easily when your demand comes down quite a bit.

The challenge is to offset the impact of fixed portions of your cost structure. So, you know, a lot of the aggressive actions that we're going after are really to get at kind of offsetting that fixed element to the cost structure so that we can do our best to at least hold on to the margins that we have had in the past. You know, as we kind of think ahead to the last part of the year, the last half of the year, I do think that -- from what we're hearing with our clients, we do expect that we will have seasonal increases in our -- in demand in our business as we go ahead. At this point, it's hard to say so much about fourth quarter, but, you know, we do see those increases coming into the third quarter.

Just probably not to the same extent that they have in past. I think the economy is reopening slowly, but we do expect to see some of that seasonal build coming up here. So one of the added pressures, I think, that we'll see on margins that that just presents an added challenge for us to continue to work hard on the cost takeout front is that in prior years, we've always enjoyed great leverage as that volume really picks up heavily in the third and fourth quarter. So that leverage on the fixed cost structure is really, really significant which is why you see the margins increasing so much in those quarters.

So you know, again, we expect to see some of that seasonal increase this year as well, probably not to the extent that in the past. So that -- because we won't peak as high as what we have in the past, that will create a little bit of extra pressure for us, too, as we think about those margins with a little bit less volume in the back half.

Charlie Strauzer -- CJS Securities -- Analyst

Got it. And when you're looking at Q3 versus Q2 sequentially, do you expect to see at least some improvement sequentially from Q3 to Q2 and to Q3?

Terry Peterson -- Chief Financial Officer

Yeah, especially when you adjust for Census, absolutely.

Charlie Strauzer -- CJS Securities -- Analyst

Got it. Great. And then just -- and Dan, maybe you can talk a little bit too about -- there's a lot of talk about this election year about mail-in ballots and other things where you potentially -- that could benefit you in terms of extra print work related to that? Are you starting to see some of that, you know, at the early stages here yet? Or do you think that will pick up more on Q4?

Dan Knotts -- President and Chief Executive Officer

Yeah. Charlie, it's Dan. The -- the election revenue -- that, you know, election season and the revenue that comes along with that. And we do expect to be a participant in that again this year and utilizing our commercial -- primarily our commercial print platform to support -- uh, to support those efforts.

We're seeing some of it flow through now. We expect to see more flow through in Q3. Relative to the mail-in ballot piece, we've connected with every state. And you know, given our work, leveraging our work on the Census and our performance on the Census, we're staying very close to that each of those individual states as they -- as they make those decisions.

So you know, much is unknown yet there, but we will participate that in some degree, as it unfolds.

Charlie Strauzer -- CJS Securities -- Analyst

Great. And then just lastly, Dan, maybe this is for you. The postal system has been having their fair share of issues. A lot of that is driven by a lot of e-commerce package delivery and stuff.

Are you seeing any impact on your customers from some of the slower delivery times at all?

Dan Knotts -- President and Chief Executive Officer

We are really not. Relative to our close connection with the post office folks, close working relationship. With the post office in many cases, you know, working alongside the post office, we are not really seeing any sort of deteriorating impact from postal delivery and they continue to support us very well.

Charlie Strauzer -- CJS Securities -- Analyst

Great. Thank you very much.

Dan Knotts -- President and Chief Executive Officer

Thanks, Charlie.


Jason Kim of Goldman Sachs is online with a question. Your line is open.

Jason Kim -- Goldman Sachs -- Analyst

Thank you and good morning. The first question is on working capital. It was a nice source of cash during the quarter which is not a typical event in terms of seasonality. So how should we think about working capital for the balance of the year?

Terry Peterson -- Chief Financial Officer

Well, this is Terry, I'll answer that one. You know, we -- we've had actions and initiatives in place to really see improvements in -- into work -- working capital extra hard even going into the pandemic. So, you know, we've just been able to put the accelerator down a little harder on that as the pandemic has come up. You know, we certainly have seen a little bit of degradation in something like DSO on the receivable side.

But it's been pretty manageable and it's really plateaued as we got through the month of June. So the negative impact from that wasn't too extreme for us. So that -- that's very good news for us as we are preserving liquidity here. So we will, uh, continue to work it hard.

Certainly, as the business has come down a little bit, you know, the need for working capital has also come down. So that's provided some help with the cash flow as well. So some of -- to really answer your question, some of it really depends on how aggressively and how fast the recovery happens in the back half and when does that recovery really kick in. Because you know, with a rapid -- a rapid recovery, we'll have to build up working capital a lot pretty quickly to support that.

So in that scenario, we're going to see -- you know, we're not going to -- I don't expect that we would see the same level of favorability coming through while we reestablished some of that working capital. If something is -- the recovery is more gradual and slower, you know, that replenishment of some working capital might get absorbed or almost hidden, if you will, with progress and more initiatives that would produce favorable results there, too. So there can be a bit of an offsetting impact there. So a lot of it -- a lot of, I think, what we'll see in the last half will just really depend on how sharp that recovery is.

Jason Kim -- Goldman Sachs -- Analyst

OK. Yeah, that makes sense. And then, you've been very active in pushing on maturities through debt exchanges. I would love to get your updated view on the capital structure strategy from here.

What are your priorities? What options are available to you at this point to continue to manage the balance sheet? And if you can share with us how much secured debt capacity you have now, that would be very helpful.

Terry Peterson -- Chief Financial Officer

Yeah, the secured debt capacity on the junior secured. Right now -- right now, there's not much capacity because there's a springing covenant on the new 2027 debt that's out there. There's a little bit of capacity on first lien debt. However, that is really just temporarily reduced right now because of the extra draw that we have on the credit facility.

So at the point in time when -- you know, when we're comfortable returning back to kind of normal treasury operations and we bring the draw back down and take some of the cash off the balance sheet, that will immediately free up first lien capacity there, literally dollar-for-dollar. So as we see that coming down, that will free up a secured debt capacity. That's probably the biggest source right now will be that first lien debt as we pay down the credit facility. And then in terms of actions and other sources of opportunities there, you know, we're really -- if you think of starting with what our current focus has really been on, which has been those near- and mid-term maturities to 2020s to the 2024s, we've really just taken every single one of those issuances now down to very bite-sized pieces.

There's just not a lot left to do with those maturities. So at most, there might be an opportunistic repurchase here and there, those -- I would expect will not be any large dollar amounts. It'd be more picking off small amounts as they became available in the marketplace. So not a lot of work left to be done on those items.

And I'm very thankful for us to to really have that really critical initiative behind us, which was to really kind of clear out that runway and make those stub maturities very, very manageable for us. I think the probably next step for us is probably the credit facility that's coming due. The current facility comes due at the end of September in 2022. So we will, at some point, turn our attention here to renewing that just to extend that out.

I see that just being a normal process on a normal timeline that we would do that. And we get out of a year or two, we'll start to focus on the -- whatever is left of the term loan Bs that still remain out there and we'll look at what we need to do with that. In terms of paying down debt, we are positively generating free cash flow right now. So that that helps to pay down debt or at least stockpiles cash so that when we do pay down the revolver, we can pay it down even further.

You know, we still look to real estate opportunities for liquidating and monetizing assets. We still look to monetize kind of non-core parts of the portfolio as well. So those sorts of opportunities are still out there, as well as, other investments and assets on the balance sheet that we are looking to monetize as well. So we've got a number of things that we're working on.

It will be different than what you saw us focus on in the second quarter. But our list of opportunities out there is certainly far from being incomplete.

Jason Kim -- Goldman Sachs -- Analyst

Thank you very much.


Your next question comes from John Park of North Capital. Your line is open.

Unknown speaker

Guys, thanks for taking my question. Just wanted to understand a little better why the recovery you're seeing in Q3 is not as strong sequentially given the decline rates are not that different from Q2. So, what are you guys seeing that out there?

Terry Peterson -- Chief Financial Officer

Yeah. Well, the rates -- again, remember, our third quarter and especially our third and fourth quarter, those are much stronger quarters. So you know, for -- sequentially, that's still showing an increase in levels of business from what we saw in the second quarter here. So it gets a little harder to see our results or to think about them because of the seasonality in the business.

While the rates are similar in decline, as Charlie was asking earlier, too, that that decline rate in third quarter now, and this will be true for the next few quarters, also has to absorb the absence of the Census work which benefited us for a full quarter in third, fourth, and then, first quarter of this year. So those three quarters will have that added headwind there. So even though the rates of decline are similar, the sales are actually forecast to go up because of the seasonality. And again, it's -- we're doing our best to read the tea leaves and to listen to what our clients are saying and to try to estimate.

And when we have estimates that our 15% to 20% decline, you know, that kind of guides how we think about what we need to do with the cost structure. So I would love nothing more than to sit here three months from now and say, hey, we kind of missed that and they were only down something much less than the 325 to 400. And our cost structure is down much stronger because we contemplated a lower base. So that's always a possibility.

We only know what we're hearing and kind of what we're seeing. And in this kind of volatile environment, you know, there's a little more risk that we could be off there. So I'd love to for that to be the case. But right now, with what we're seeing and what we're hearing from folks, we think the prudent expectation is that is the 325 to 400.

Unknown speaker

Great. And great job on the cost-cutting and margin enhancement. For Q3, should we be expecting margins to be flattish to last year?

Terry Peterson -- Chief Financial Officer

Well, you will see us continuing to cut costs. You will see actions that we took in the second quarter that will have a full-quarter impact in the third quarter. So that will be a benefit. So you will see continued improvement cost structure-wise.

The -- the one, uh, the one variable that also will be introduced in third and fourth quarter that we didn't see so much in the second quarter is the fact that in prior years, as our volume shoots up a lot in third and fourth quarter. We get a lot of leverage off of that -- from that fixed cost base because of all the extra volume that's seasonally related. So again, we are expecting some of that seasonal lift this year. Again, early reads right now is that it will be there, but not as -- not to the same positive extreme that it's been in the past.

So I think that will put a little bit of pressure on our margins, too, when we compare them to the prior year versus -- second quarter is usually our lightest and weakest quarter. So comparing COVID quarter and this quarter to last year is a little bit easier than it will be, you know, when we get to third and fourth quarter when they benefited from such sharp increases due to seasonal work. So -- so again, we are aware of that. We're watching that extremely closely and we are using the intel that we have to really guide our actions on that cost structure front because we know that the way to preserve the margins, which is our goal here, the way to preserve that margin is to be all over that cost structure right now.

And that's our focus when there are elements to the sales cycle that are beyond our control right now.

Unknown speaker

Thank you.


There are no further questions at this time. I will now return the call to Mr. Dan Knotts.

Dan Knotts -- President and Chief Executive Officer

Great. Thanks, Chris. Appreciate it. A summary of our key takeaways from the call can be found on Slide 20 of the presentation.

And in closing, I'd like to express my sincere appreciation and gratitude to all of my fellow RRD employees around the world. Though we would never ever wish for a crisis, especially one like this, it's in times of crisis that leaders emerge and the focus, cooperation, and teamwork we're seeing at all levels of RRD is really remarkable. I'm confident that the hard work we're doing today will set us up to be an even stronger RRD in the future. Thank you for everything you're doing.

We appreciate you. Johan, back to you.

Johan Nystedt -- Senior Vice President for Finance

Thanks, Dan. As a reminder, information to access the webcast replay of RRD's second-quarter 2020 results call can be found on the investors section of our website at rrd.com. Thank you for joining us, and that concludes the RRD second-quarter 2020 earnings call.


[Operator signoff]

Duration: 53 minutes

Call participants:

Johan Nystedt -- Senior Vice President for Finance

Dan Knotts -- President and Chief Executive Officer

Terry Peterson -- Chief Financial Officer

Charlie Strauzer -- CJS Securities -- Analyst

Jason Kim -- Goldman Sachs -- Analyst

Unknown speaker

More RRD analysis

All earnings call transcripts