R.R. Donnelley & Sons Company

remarks from company representatives, we will conduct a question and answer session by phone. To ask a question, you must be connected by phone as the webcast is a listen-only platform. Please press star 1 on your touchstone telephone. Please note that this call is being recorded. I will now turn the call over to Johan Nyset, RRD's Senior Vice President of Finance.

Thank you, Ashley, and thank you everyone for joining RRD's first quarter 2021 results conference call. Joining me on today's call are Dan Notz, 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 investor 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 first quarter press release, a copy of which is posted on the investor section of our website at RID.com. This information was also furnished to the SEC in the Form 8K we filed yesterday. In addition, we will also refer to forward-looking statements, including comments on our financial outlook and strategy, all of which... 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, including 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 campus ongoing operations, and it's an appropriate way to evaluate the campus 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 investor section of our website as part of our press release. I will now turn the call over to Dan.

Thanks, Johan. Good morning, everyone. It's great to be with you, and thank you for joining our call today. On behalf of all of us at ORD, I hope that you and your families continue to stay healthy and safe. On today's call, I'm going to recap our first quarter results and provide an overview of how we are deploying our extensive capabilities to win new opportunities in what remains a dynamic market. And then before turning the call over to Terry, I will share a couple of recent awards that reinforce the strength of our brand and the high-level performance we are delivering for our clients. Our first quarter results represented a strong start to the new year, reflecting the scale and breadth of our business model, very solid operating performance, and our unwavering commitment to successfully navigate through this challenging pandemic environment. I'm especially proud of the RD team for continuing to perform at a high level for our clients while protecting the health and safety of our global colleagues. When the COVID-19 crisis emerged a little more than a year ago, we developed an aggressive game plan to strengthen our businesses amidst a rapidly changing economic environment and very uncertain outlook. Guided by our strategic priorities to strengthen our core, drive revenue performance, and improve financial flexibility, over the last 12 months, the RRD team has been relentlessly executing our game plan, and our results for the last three quarters reflect the positive impact of those actions. Highlighted by continued improvement in our organic sales decline trend, solid adjusted IPO performance against 2020 strong results, and a significant improvement in our operating cash flow versus the prior year, I am pleased with our Q1 operating and financial performance. As aligned with our strategic priority to improve our balance sheet flexibility, we recently announced the extension of the maturity date for our ABO credit facility and the refinancing of a significant portion of our 2024 term loans with new senior secured notes. Let me provide a little bit more color on our financials for the quarter. Despite the ongoing impact of the pandemic, our first quarter sales exceeded our expectations. Back in February, we said that we expected net sales in the first quarter to be between $1.09 billion and $1.15 billion, reflecting lower pandemic-driven client demand, the conclusion of the census project in 2020, and an exceptionally strong pre-pandemic first quarter of last year. Our net sales in the first quarter were $1.17 billion, which surpassed the high end of our guidance. Organic sales declined 4.3%, further building on the sequential improvement we reported in the third and fourth quarters of last year and represented our lowest year-over-year decline since the global pandemic emerged. Our improving organic sales trend reflects both strengthening client demand and our commercial team's success in leveraging our industry-leading portfolio of marketing and business communications capabilities to win new clients and expand existing client relationships. Turning to the segments, I'm encouraged by the performance of business services, which delivered overall organic sales growth of 2.4%. Importantly, we are capitalizing on emerging client opportunities and strengthening end markets to achieve organic increases in packaging, labels, and supply chain services, three of our strategic growth product categories. Marketing solutions reported a 22.5% organic sales decline, largely related to clients deferring marketing spend amidst an uncertain business environment, as well as last year's census project, which wrapped up mid-2020. We do expect to see clients increase their marketing spend as economic conditions continue to improve. We delivered $37.4 million in adjusted income from operations, $13 million lower than a year ago, largely due to $11 million of unfavorable foreign exchange primarily associated with our China operations. The benefit of our ongoing action is to reduce our cost structure, nearly offset the full impact from lower sales, including the census not repeating, and higher incentive compensation reported in the quarter. Through working capital improvements, we reduced the cash used in operating activities by $61 million, and as you've seen with our recent announcements, we continue to rework our debt to give us the flexibility needed to further expand our capabilities across our print and digital channels. I'm also encouraged by how our sales teams are winning new opportunities emerging from the pandemic, as well as those being created as a result of our clients' digital transformation initiatives. As organizations rethink their approach to their marketing and business communication strategies, we are deploying the full scale and breadth of our digital and print capabilities to support their evolving communication requirements. For example... We have a robust pipeline of opportunities across health care providers, health insurance companies, and life science organizations that's being driven by the scale and breadth of our regulated supply chain, kitting, and fulfillment services capabilities. Recently, the state health department looked to R&D to rapidly create and distribute personal protective equipment kits to home health care workers. We sourced all the materials, including masks, face shields, gloves, protective gowns, and safety goggles, through our expansive vendor and partner network. We also handled the packaging, print materials, kitting, fulfillment, reporting, and delivery of these time-sensitive PPE kits in just four weeks. Building on our supply chain packaging and kitting capabilities, we've rolled out a branded solution for health and wellness kits called Care Kits by R&D. Our end-to-end solution encompasses kit ideation, design, item procurement, packaging, fulfillment, and communications both inside and outside the box. Additionally, as direct-to-consumer sales channels continues to grow in the retail world, we are working with a number of online retailers who are marketing directly to consumers with subscription services that send boxes Subscription boxes and meal kits took off during the pandemic as consumers in lockdown had more time to cook and try new hobbies. Now, brick-and-mortar retailers, restaurants, and consumer packaged goods companies are investing in home subscription services to support and sustain the growing direct-to-consumer trend, and R&D is well-positioned to support our clients' needs in this area. Rick has also brought about a number of changes in consumer behaviors, with one of the most significant being a shift to e-commerce. As product sales shift online, we are innovating to further expand our creative and technical capabilities to help brands and retailers create rich user experiences and accelerate their go-to-market speed. Last month, we announced a suite of 3D solutions that features modeling, animation, rendering, and interactive experiences to enable simulations and digital prototyping. One use case that's gaining traction is simulating the in-store shopping experience to create highly engaging and immersive experiences for online shoppers. As the spatial web evolves, we are positioning R&D to support our clients in this emerging area through our suite of 3D solutions. Earning the right to grow with our existing clients through service quality and operational excellence is paramount to driving our revenue performance. Our being expert in filtration highlights our powerful packaging solutions, service, and operational performance. R&D manufactures folding cartons for May & Hummel and is one of their highest rating folding carton vendors in their supply chain. Based on our performance in geographic reach, May & Hummel has selected R&D to be their folding carton supplier for their Mexico operations that we will support through our facility in Reynosa, Mexico. A large nonprofit organization also recently awarded the three-year contract for acquisition campaign services, including print management, direct mail, creative design, campaign production, and fulfillment. As part of this contract, R&D maintains an on-site presence to enable better collaboration with key stakeholders and ensure smooth coordination and execution. For each campaign, we manage hundreds of orders that require the proper production and assembly of multiple components to meet their mailing requirements. Over this long-standing relationship, we are delivering cost-effective solutions while providing this client with maximum marketing flexibility. Before I turn the call over to Terry, I'd like to highlight some recent notable recognition that reaffirms the strength of our marketing capabilities and operational performance. At the beginning of the year, Forrester Research, a leading independent research firm, ranked R&D as a strong performer among the top customer database and engagement agencies. Data management and analytics are critical for customer experience marketers, and Forrester found that advanced analytics and reporting are where RRD shines. We also received higher marks for collaboration than any agency in the study. The recognition in the Forrester Wave Q1 2021 report is another feather in the cap of our marketing solutions team, reflecting our best-in-class approach to data, creative services, and marketing technology. We're also excited to announce that our exceptional packaging work with the Pokemon trading card games Zation and Zamazenabox has garnered some important industry recognition. Our packaging solutions team won three Best of Category awards, including the Sun Chemical Best Packaging Award from the Printing Industries of the Carolinas. The PICA Awards competition is one of the largest printing contests in the nation, and the Pokemon TCG Premium Collector's Box includes special gold versions of the two characters, as well as dice, metal coins, and booster packs. Finally, our global outsourcing and creative team was recently recognized by the Business Continuity Institute, a global organization of business recovery experts. Awards in India and South Asia for the most effective recovery and continuity and resilience team. Looking ahead, we're seeing solid progress in vaccination rates, consumer competence, and economic conditions, but we also know that challenges remain on the path to a full economic recovery. As such, the RRD team continues to be intensely focused on executing our strategic priorities, and we remain confident that we are building a stronger RRD for the future. With that, I'll turn the call over to Terri.