R.R. Donnelley & Sons (RRD) Q4 2021 Earnings Call Transcript

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R.R. Donnelley & Sons (RRD)
Q4 2021 Earnings Call
Feb 18, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the RRD fourth quarter 2021 results conference call. My name is Emma, 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 of finance.

Johan Nystedt -- Senior Vice President of Finance

Thank you, Emma, and thank you, everyone, for joining RRD's fourth quarter and full year 2021 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. 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 our results on today's call, I will be advancing the slides if you are connected by webcast.

Alternatively, we will periodically reference page numbers from the supplemental slides for those participants who wish to follow along by advancing the slides themselves. The information reviewed during this call is addressed in more detail in our fourth quarter press release, a copy of which is posted on the investors section of our website at rrd.com. This information was also furnished to the SEC in the Form 8-K we filed earlier this morning. In addition, we will also refer to forward-looking statements, 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 the 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 informational 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. Lastly, due to the pending merger transaction between RRD and an affiliate of Chatham Asset Management, we will not be conducting a Q&A session following our prepared remarks today. And with that, I'll turn the call over to Dan.

Dan Knotts -- President and Chief Executive OFficer

Great. Thanks, Johan. Good morning, good afternoon, and good evening, everyone, and thank you for joining us today. First and foremost, I'm pleased to share that we finished a very strong 2021 with fourth quarter results that exceeded our expectations.

Before providing more color on our fourth quarter and full year performance, I want to first make a few comments regarding the merger agreement with Chatham Asset Management, a leading private investment firm. On December 14, 2021, we announced a definitive merger agreement with Chatham Asset Management. Our board of directors unanimously approved the transaction following a thorough review of alternatives to maximize value for our stockholders. We believe that this proposed transaction represents the best path forward for our company and our stockholders.

On February 23, five days from today, our stockholders will have an opportunity to vote on the merger agreement. If it is approved, we expect the closing to take place expeditiously, possibly even as soon as Friday, February 25th. Once the transaction closes, RRD will become a private company for the first time since 1956. Let's now turn to our financial results.

For the fourth quarter, we reported a 1.9% increase in organic sales, which marks our third consecutive quarter of organic growth. On a segment basis, business services grew 1.1% organically, driven by increased demand in commercial print, labels, and statements product categories. Marketing solutions achieved 4.9% organic growth for the quarter primarily due to stronger client demand in our direct marketing and digital print product categories. Through the combination of organic sales growth and our ongoing cost management efforts, we reported 96.4 million in adjusted income from operations in the quarter, which is an increase of 2% versus the prior year.

Similar to our third quarter results, our fourth quarter adjusted IFO in operating margin also exceeded our 2019 pre-pandemic performance. For the full year, we delivered very strong operational and financial performance, highlighted by a 3.2% increase in organic sales, a 6.9% increase in adjusted income from operations, and a 20-basis-point improvement in adjusted operating margin. To provide additional context on our full year earnings performance, our 2021 adjusted income from operations and operating margin marked our third consecutive year of improved performance. Additionally, they also represent our best annual performance for those metrics since 2016.

On the balance sheet, our total debt outstanding of 1.47 billion, gross leverage of 3.6 times, and net leverage of 2.9 times were all favorable to the prior year, and each of those metrics are also at their lowest levels since the spin in 2016. Our 2021 performance is a direct testament to the RRD's team's continued execution of our strategic priorities, to strengthen our core, drive revenue growth, and improve financial flexibility. Our sales and marketing teams are delivering improved client to customer connections, generating new client wins, and expanding existing client relationships. Our operating teams are providing superior products and services to our clients while continually assessing and improving our work processes to drive client satisfaction and improve efficiencies across all of our businesses.

Importantly, our operating teams also delivered another stellar year of safety performance. I'm especially proud of our 2021 results given the ongoing pandemic and supply chain-related disruptions we are facing. And the RRD team is aggressively managing through these challenges and is well positioned for continued success going forward. At the end of 2021, we also mitigated a ransomware cyberattack as a result of a systems intrusion.

We are making steady progress in recovering from the cyberattack due to the incredible efforts of all of the RRD employees who have worked tirelessly to manage this unprecedented event. I want to extend my sincerest appreciation to our clients and employees for their patience and support as we swiftly investigated and restored systems to minimize business disruption. Over the past few quarters, we have highlighted some of the many awards and recognitions our team has received. And we're especially proud of those acknowledging RRD as a workplace where each and every one of our employees feel they belong and have the opportunity to reach their full potential.

As a testament to our inclusive culture, we received a score of 95 out of 100 on the Human Rights Campaign Foundation's 2022 Corporate Equality Index, the nation's foremost benchmarking survey and report measuring corporate policies and practices related to LGBTQ+ workplace equality. With that, I'd like to turn the call over to Terry to provide more detail on our financial results for the fourth quarter. Terry, over to you.

Terry Peterson -- Chief Financial Officer

Thank you, Dan. Turning to Slide 6. We had a remarkable finish to a challenging 2021 as we overcame significant headwinds throughout the year and still managed to deliver organic sales growth and improved adjusted income from operations and adjusted operating margins. In fact, in 2021, we delivered our highest adjusted income from operations since 2016 despite a more than $750 million reduction in net sales since our peak in 2017.

Our results continue to reflect the benefits from many difficult decisions we've had to make over the last few years in order to improve the health of our business. 2021 also presented us with many challenges, from inflation, supply chain disruptions, labor availability, and lastly, unfavorable foreign exchange rates. Our team is resilient to tackle these issues head on while continuing to serve our clients and deliver results for our stockholders. Overall, we are very pleased to report adjusted diluted earnings per share from continuing operations for the full year of $1.29, which was up 6.6% over the prior year.

We delivered organic growth in the fourth quarter, even though last year's results benefited from large onetime COVID-related projects, and our domestic production was shut down for the last eight days of December due to the recent systems intrusion. Our adjusted operating income also improved as we continue to aggressively manage through inflation and supply chain challenges while taking more costs out of our infrastructure. Our operating cash flow ended strong despite significant transaction-related payments in the quarter, and we finished with total debt at its lowest level since the spin. With that, let me begin my more detailed review of fourth quarter's results, beginning with net sales on Slide 7.

Net sales of 1.38 billion were up $28.6 million or 2.1% in the quarter, which included $3 million of a benefit due to foreign exchange. Net sales were up 1.9% organically, marking our third consecutive quarter of organic growth. Within the commercial print product category, we continue to see strong sales growth in domestic trading cards as well as other printed products in China, principally children's books and religious materials. The decline in supply chain management was due to the large onetime COVID-related projects we produced in the prior year.

On Slide 8, our adjusted income from operations of $96.4 million was $1.9 million higher than the fourth quarter of 2020, making it the third consecutive quarter where our 2021 adjusted IFO exceeded pre-pandemic results in 2019. The increase was primarily due to aggressive actions taken to reduce the company's cost structure and lower depreciation and amortization expense and higher sales partially offset by the impact from higher inflation, including wages and material prices. A combination of material, energy, and wage inflation has challenged us to find alternatives and offer creative solutions to our clients, and we expect those increases to continue into 2022. We have experienced price increases from nearly all of our suppliers in 2021, and we expect pricing increases to continue into 2022 as well.

We have taken numerous actions to combat these forces. RRD has offered clients product alternatives, format changes, and other solutions to minimize the impact. We've also increased inventory levels to help ensure product availability and have adjusted prices for many of our products and services to recover inflationary increases. Once again, we focused on those matters within our control and have delivered results that demonstrate that our strategy is working during this uncertain and volatile time.

Adjusted SG&A expense of $144.4 million in the fourth quarter was down $16.5 million or 10.3% from the prior year, reflecting the ongoing execution of our strategic initiative to lower our cost to serve. Our GAAP results for income from operations for the fourth quarter were down $41 million from the prior year primarily driven by merger-related expenses and increased restructuring and other charges of $7.6 million. Adjusted earnings per share of $0.58 in the fourth quarter decreased $0.13 as compared to earnings per share of $0.71 in the prior year period. This decrease was due to a higher effective tax rate partially offset by lower interest expense and higher adjusted income from operations.

Our adjusted effective tax rate increased from 22.5% in 2020 to 40.6% in 2021 primarily due to the mix of earnings, interest expense deduction limitations, and nondeductible compensation expense. Turning now to the balance sheet and cash flow on Slide 9. As of December 31, 2021, we had total cash on hand of $280 million and total debt outstanding of $1.47 billion. Availability on the credit facility was $550.7 million at the end of the year, and total available liquidity, including cash on hand, was $830.9 million, up from $739.2 million at the beginning of the quarter.

As of December 31, 2021, there are no scheduled debt maturities prior to November of 2023. Our leverage at the end of the year improved on both a gross and net basis. Both our ending debt and leverage represent the lowest level since the 2016 spin. Also, the unfunded status of our pension and other postretirement plans also improved from the prior year.

At the end of 2021, our plans were overfunded by $42 million, which is a $146 million improvement from the $104 million they were underfunded by the end of 2020. The improvement is due primarily to updated actuarial assumptions, strong asset returns, and slightly higher discount rates. This is the first time since the spin that our plans have collectively been in an overfunded status. Full year net cash provided by operating activities of $92.1 million in 2021 was $57.7 million lower than 2020 due primarily to payments in excess of $100 million related to the planned merger, settlement of LSC bankruptcy-related claims, repayment of half the payroll taxes deferred in 2020, and payments made to terminate certain interest rate swap agreements.

2021 results also reflect investments in working capital and lower restructuring, tax and interest payments as compared to the prior year. Capital expenditures of $73.3 million in 2021 were $12.3 million lower than 2020. And with that, I will turn the call back to Dan for his closing remarks.

Dan Knotts -- President and Chief Executive OFficer

Thank you, Terry. Before we conclude the call, I'd like to take a moment to thank our 32,000 employees for their tremendous contributions, support, and teamwork to deliver the high level of business performance we have today. We're working hard to help clients optimally engage with their customers through their marketing and business communications and I'm excited about what the future holds for RRD. Thanks again for joining us today, and I hope all of you continue to stay safe and healthy.

Johan, over to you for closing instructions.

Johan Nystedt -- Senior Vice President of Finance

Thanks, Dan. As a reminder, information to access a telephonic replay of RRD's fourth quarter 2021 results can be found in our fourth quarter press release, a copy of which is posted on the investors section of our website at rrd.com. Thank you for joining us today, and that concludes the RRD fourth quarter 2021 earnings call.

Duration: 17 minutes

Call participants:

Johan Nystedt -- Senior Vice President of Finance

Dan Knotts -- President and Chief Executive OFficer

Terry Peterson -- Chief Financial Officer

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