R. R. Donnelley & Sons Company

Miles McHugh - Thomas Quinlan - Chief Executive Officer, President and Director Dave Gardella - Vice President of Investor Relations

Daniel Leben - Robert W. Baird & Co.

Incorporated Charles Strauzer - CJS Securities, Inc. Craig Huber - Edward Atorino - The Benchmark Company, LLC

Thank you, John. Good morning, everyone, and thank you for joining us for RR Donnelley's Fourth Quarter 2010 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'll 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 Investors section, a description as well as reconciliation of non GAAP measures to which we will refer on this call.

We are joined this morning by Tom Quinlan, Miles McHugh, and Drew Coxhead. I'll now turn the call over to Tom.

Thank you, Dave, and good morning, everyone. 2010 was a year that validated the decisions we made in 2009.

As you remember, 2009 was a year during which economies worldwide were in chaos and businesses and consumers were accelerating changes in how they communicated and preferred to be communicated to. We looked to the strategy that we, as a management team, embraced in 2004 and did not waver from it, even when no one would have blamed us if we had.

As a result of how we managed the business in 2009, 2010 became a year that we are very proud of. The strategic framework that we continue to pursue is built around four elements that we implement as One RR Donnelley.

These are: one, continuous improvement. This involves efforts to drive out costs and enhance productivity, not just in response to economic conditions but every working day.

Remember, we operate in a very competitive environment that requires us to manage pennies, nickels and dimes for a relentless focus on continuous improvement in order for us to be successful for our stakeholders. Two, creating integrated solutions for our customers that draw on multiple product and service offerings.

We have built and continued to expand upon an ability to move customers' projects and programs seamlessly across the breadth of our supply chain, all under one physical or virtual RR Donnelley roof. We believe that we already are the best at physical content distribution.

Our goal now is also to be the best at digital logistics, in management and distribution of information into a variety of media. And we feel we are already well down the road of being one of the best at digital logistics.

Three, maximizing the value of our geography product and service diversity. No customer relationship is static.

But when a customer changes its communication mix or pursues growth in a different part of the country or the world, RR Donnelley is there. And four, developing innovations.

Our comprehensive new product and service development efforts serve a single goal: to continue to distinguish RR Donnelley's offering from commodities and place them into a value-added position that uniquely help customers to achieve their goals. Our nearly 58,000 employees, which almost matches the number of customers we have, continue to embrace and execute this One RR Donnelley strategy during 2010, which enabled us to achieve three important outcomes.

First, we emerged from the economic downturn with positive momentum and the financial strength and flexibility to respond to the best opportunities and adapt to a fast changing business environment. Second, we widened our lead over our competition in terms of what we can do for our customers.

Our ability to deliver superb value to our customers across the breadth of the supply chain is a complex offering that we believe would take years and billions of dollars for any competitor to duplicate. And third, we continue to add to our portfolio resources, making RR Donnelley's offering even more comprehensive and attractive to our customers.

Let me address each of these outcomes individually. The value of continuing to execute our strategy in the face of a challenging economic environment and a shifting communications environment is reflected by our fourth quarter and full year results.

Please note, as you look at our results in our 10 K, which we'll file later today, that our income statement reporting has been expanded as a result of an important trigger. Our revenues from services have passed the 10% of total revenue threshold.

We expect that business services will continue to provide an important source of opportunities for revenue growth. RR Donnelley is not just ink on paper.

In 2010, our top line grew 1.6% over 2009, and we saw significant increases in both our GAAP and non GAAP earnings per share. On a GAAP basis, 2010 EPS grew to $1.06 from a loss of $0.13 per share in 2009.

And on a non GAAP basis, EPS improved 10% or $0.16 over 2009. Miles will take you through the numbers in more detail shortly.

I've mentioned the growing percentage of our revenue that is contributed by business services. That was driven in part, during 2010, by our logistics operations, which experienced revenue increases of more than 20%, as compared with 2009; our financial print offering, which grew nearly 18%; and our premedia reporting unit, where revenues were almost up 9% year over year.

Our global reach also continues to be important, as we serve our customers' expanding international needs. During 2010, we saw a very strong growth in our Asia operations, where revenues increased nearly $150 million or more than 26%, as compared with the prior year.

Variable print revenues constitute another important growth area. Our variable printing operations, which utilize our proprietary and recently deployed ProteusJet digital printing units, experienced revenue growth of 5.2%, against the substantial base of nearly $1.15 billion in 2009.

I'll use our variable printing platform to illustrate the second result of our actions during 2010: widening our lead over our competition in terms of what we can do for our customers. This month, we began using our ProteusJet units to prepare process and distribute full color TransPromo statements for a client whose customer base includes more than 25 million households.

TransPromo refers to including promotional messages in a transactional document, such as statements, that recipients are most likely to open and read. You have probably seen that statements often include promotional materials that are on preprinted inserts.

But let me describe a new process made possible by RR Donnelley's high-speed proprietary ProteusJet presence. We received sophisticated data transmissions that convey the billing information that we translate into statements for printed distribution and Internet presentment.

Now, accompanying these transmissions are marketing files that we convert into digitally printed, full color inserts produced in a single pass with the statements themselves on our ProteusJet equipment, instead of inserts, call them printserts. For our customers, not only having to rely on preprinted inserts slashes cycle times, allowing them to tailor offers that are responsive to fast changing competitive conditions.

For us, it takes what were commodity insert products that could be produced by a variety of commercial printers and makes them part of a value-added integrated solution that runs on our assets. It also reduces the typical operating costs such as receiving, warehousing and materially handling, that are associated with preprinted inserts.

This is a good example of how RR Donnelley earns new business, in this case, the production of about 300 million printserts annually. These kinds of unique solutions are replicated across our platform, as we offer a fully realized capability to prepare, produce, deliver and process content for our customers.

While we do believe that we widened our strategic lead last year, we never take our competitive advantage for granted, which brings me to our third 2010 result. We continue to add to our portfolio of resources, making RR Donnelley's offering even more comprehensive and attractive to our customers.

During the fourth quarter, we closed three acquisitions that reflect the continuing expansion of our capabilities. First, we completed our acquisition of Bowne & Co.

and began the integration. Many people go to Bowne primarily as a very well respected international provider of financial printing, virtual data room and related services for clients in the capital markets and compliance sectors.

This acquisition added superb talent and capability in these areas, but also did more, and I want to underline this. The leading edge technology and capabilities developed to serve financial service clients can be applied to a much broader array of applications in a variety of vertical segments.

For example, Bowne brought with it important technology capabilities that are targeted towards marketing communications applications and particularly those dealing with variable digital printing. Integrating these technologies will enable us to even more quickly enhance our TransPromo capabilities.

We use an offering called PIVOT to enable customers to create and distribute messages for print and electronic delivery. For example through Internet presentment, where we host to make available more than 10 billion online images in the United States alone.

Bowne had developed a self-service capability that allowed its customers to interact directly with their statement designs without involving programmers. This will help our customers slash vital cycle time and tailor their messages even more precisely to their customers' buying patterns and customer relationship management triggers.

These triggers are events that are likely to create a specific up sell, renewal or other selling opportunity. Customer Relationship Management, or CRM, is vital to marketing people our sales representatives call on every day.

Our customers use CRM to increase their wallet share with their customers and to step those customers through as much of a lifetime relationship as their product or service warrants. The second acquisition during the fourth quarter, Nimblefish, expands our capabilities in this space with a portfolio of multi channel CRM capabilities, which have already been at work for leading retail, telecommunications, hospitality and technology customers.

Please note the important words multi channel. Nimblefish's technologies and expertise will help us to expand our offering of solutions that incorporate variable videos, social media and other one-to-one communication vehicles.

Again, RR Donnelley is much more than just ink on paper. Nimblefish is the organization that trademarked the term PURL, which stands for personalized URL.

PURLs are individual web pages that are proving to be extremely effective in driving better results in direct marketing and other applications. Adding Nimblefish accelerated our ability to present 360 degree solutions that use direct mail to drive traffic to interactive websites.

Nimblefish also brings an ability to incorporate what is called relevant video into direct marketing programs. For example, a consumer viewing a retail website may answer a series of questions to identify what they are looking for in a refrigerator, and then be presented with a video that addresses exactly those needs.

Nimblefish had assembled a very strong technology offering, but like many entrepreneurial organizations, it had a limited marketing reach. Our representatives, because of our design, photography, direct response, catalog merchandising and other relationships, are meeting with C level marketing contacts every day.

Independently, Nimblefish also couldn't offer seamless interface with sophisticated, broadly deployed digital printing and fulfillment resources, which is of course a core RR Donnelley strength. We believe that the Nimblefish offering will quickly move from our product and service incubator into a broad array of applications.

The third acquisition, 8touches, approaches marketing communication needs from another angle. It offers essentially self-serve templates to small and medium businesses with particular expertise in the real estate marketing.

Through its website, 8touches allows marketers to go online and build flyers, mailing and other materials that we digitally print, fulfill and distribute. 8touches was concentrating its marketing efforts primarily in Texas, and we have already reached an agreement that will accelerate its reach nationally.

This self-serve model, through which our customers access templates and use them to personalize, proof and order marketing literature online and on demand, is extremely attractive. It permits organizations to quickly adapt their offers to competitors' promotions, to ensure brand compliance throughout their distribution channel and to eliminate expensive inventory management issues.

We intend to expand this model into other vertical offerings and to accelerate the deployment of these features in our proprietary CustomPoint online system. During 2010, the number of self-service orders processed through CustomPoint grew by more than 7.6% against a 2000 base of more than 2 million transactions.

We welcome the employees from these three companies to the RR Donnelley platform. The outcomes we achieved during 2010 have positioned RR Donnelley exceptionally well to take advantage of the best opportunities and to confront the challenges that we will encounter during 2011.

And now, Miles over to you.

Thanks, Tom. As Tom noted earlier, 2010 was another good year for RR Donnelley.

Our top line grew 1.6% over 2009, and GAAP earnings per diluted share of $1.06 were $1.19 higher than the net loss per diluted share of $0.13 in 2009. And our non GAAP earnings per diluted share of $1.76 improved 10% or $0.16 over our non GAAP earnings per diluted share of $1.60 in 2009.

Our commitment to our customers, as reflected by our investments in new capabilities and technologies, our exceptional customer service and our ongoing efforts to find deficiencies in our operations, continue to improve our earnings. In the fourth quarter, our top line momentum continued with sales of $2.7 billion, up 4.8% from the same period last year.

On a pro forma basis, adjusting for the acquisitions of Bowne, Nimblefish and 8touches, all of which closed in the fourth quarter, our sales improved 2.1%. This growth includes an unfavorable impact of changes in foreign exchange rates and lower paper sales, which together negatively impact our revenue growth by 88 basis points.

Fourth quarter GAAP income from operations was $85.7 million, compared to $28.5 million for the fourth quarter of 2009, with essentially all of that improvement coming from the reduction in restructuring and impairment and acquisition related charges. Restructuring and impairment charges were $83 million, and acquisition related expenses were $5.6 million in the fourth quarter of 2010, compared to $148.6 million in restructuring and impairment charges and $0.1 million of acquisition related expenses in the fourth quarter of 2009.

A full reconciliation of our GAAP to nonage earnings is included in our earnings release. Non GAAP operating income in the fourth quarter of 2010 of $174.3 million was $2.9 million lower than the same period last year.

Both our U.S. Print and Related Services segment and our International segments showed significant improvement in non GAAP operating income and margin, which is more than offset by increases in unallocated corporate expenses.

Our non GAAP effective tax rate in the quarter was 10.0%, compared to 21.1% in the fourth quarter last year. This decrease was primarily due to the release of certain valuation allowances on deferred tax assets and a reduction of reserves related to a favorable resolution of state tax audits.

Non GAAP earnings per diluted share in the fourth quarter of 2010 improved to $0.51, compared to $0.46 in the fourth quarter of 2009. Included in 2010 results are higher pension and post retirement benefits expense and higher provisions for bad debt in LIFO inventory, which collectively had an unfavorable EPS impact of approximately $0.09, while the lower tax rate I just noted had a positive EPS impact for approximately $0.06 on our year over year EPS.

Now I will discuss our operating results by segment. Fourth quarter sales in our U.S.

Print and Related Services segment grew 5.3% over fourth quarter of 2009 to $2.0 billion. On a pro forma basis, sales grew by $40.0 billion or 1.9%, driven by volume growth in nearly all of our offerings, partially offset by continued price pressure.

In addition, lower pass-through paper sales negatively impacted our revenue growth by 58 basis points. Similar to the third quarter, we saw double-digit volume increases in our logistics, financial print and premedia offerings.

Sales in our International segment in the fourth quarter were $682 million, up 3.5% over fourth quarter of 2009. On a pro forma basis, sales grew by $19.0 million or 2.7%, primarily driven by volume growth in Asia, Latin America, Europe and Canada.

In addition, changes in foreign exchange rates negatively impacted revenue growth by approximately 176 basis points. As in the third quarter, we experienced volume declines in our Global Turnkey and Business Process Outsourcing units and continued price erosion in Asia and Europe.

In the fourth quarter of 2010, our non GAAP unallocated corporate expenses were $73.7 million, an increase of $36.9 million from the fourth quarter of 2009. We continued to experience higher pension and other benefits related expenses, as well as higher bad debt in LIFO inventory provisions compared to the same period in 2009.

The increase in our bad debt provision was primarily the result of a customer bankruptcy filing. We continue to maintain our favorable debt maturity profile.

As of December 31, 2010, our total debt was approximately 79% fixed at an average interest rate of 7.4%. And our next maturity of $159 million is not due until January of 2012.

In addition, we took steps in the quarter to further strengthen our liquidity. On December 17, we entered into a new three-year $1.75 billion committed revolving credit facility to replace our prior facility that was expiring in January of 2012.

Operating cash flow less CapEx was approximately $523 million and was lower than our previous guidance by approximately $77 million. Approximately $18 million of this variance was related to cash restructuring and other payments related to the Bowne acquisition, which was not included in our previous guidance.

The remaining variance was related to the working capital impact of fourth quarter revenue growth being more heavily weighted towards the last part of the quarter and the timing of certain tax payments and refunds. Before I turn the call back to Tom, I'll share with you some of our expectations for 2011.

We expect continued year over year revenue growth in the low single digits over our 2010 pro forma revenue of $10.7 billion. This assessment excludes any impacts from changes in foreign exchange rates or fluctuations in pass-through paper sales.

We expect our non GAAP operating margins to be in the range of 7.6% to 7.8%, a 30 to 50 basis point improvement over 2010 and inclusive of an increase in noncash pension expense of approximately $23 million. Depreciation and amortization expense is expected to be approximately $575 million.

Interest expense is estimated to be approximately $240 million. Full year capital expenditures are expected to be in the range of $250 million to $275 million.

Our non GAAP tax rate is expected to be in the range of 30% to 33%. We expect income attributable to non controlling interest to return to roughly 2009 levels.

We assume the fully diluted share base to approximately 211 million shares. And lastly, we expect operating cash flow less CapEx of approximately $600 million.

And while I don't get too specific about our quarterly projections, I would like to remind you a few items that will impact our year over year comparisons in the first quarter. First, from a revenue perspective, most of the revenue from last year's extensive U.S.

Census project was recognized in the first quarter of 2010 and won't be repeated this year. Our full year revenue guidance includes overcoming the absence of this project in 2011.

Second, with respect to the earnings impact of the Bowne acquisition, we expect a noncash inventory step-up charge of approximately $3.5 million in the first quarter. In addition, upon closing the acquisition, we immediately began to be hit with incremental purchase accounting related amortization expense, while the synergy benefits ramp up over time.

As we noted upon announcing the acquisition, it is expected to be accretive to earnings in the first full year after closing. And third, from a cash flow perspective, the first quarter of 2010 included only a portion of the variable compensation payments that were earned in 2009.

The first quarter of 2011 will include the second installment of the 2009 plan, as well as full payment for the 2010 plan. In addition as we continue our efforts to integrate Bowne, we expect higher restructuring charges in the first quarter of 2011 than we experienced in the first quarter of 2010.

Our full year guidance for operating cash flow less CapEx of approximately $600 million includes the impact of these items. And with that, I will return you to Tom.

Thank you, Miles, and thank you for all that good news and the detail that you provided. Before we open it up for questions, there are two more points I'd like to make.

First, we continue to build momentum in developing global solutions for customers. I use the word global not only to indicate that these customer relationships may draw on RR Donnelley's international resources but also to reflect the fact that they include a diverse mix of our products and services.

We are seeing this reflected in the upward trend of customers who buy a half dozen or more categories of products and services from RR Donnelley. This number has grown 26% since 2007.

During 2010, sales to these customers totaled nearly $4 billion and were up more than 6.5% versus 2009. This ability to sell more products and services creates many advantages.

It makes our relationships more durable as we become integrated with our customers’ processes in more ways. It enables us to structure broad contractual agreements that are attractive to customers and that drive more volume into our platform.

It increases the number of contacts we have in our accounts, which in turn makes it easier for us to introduce new products and services into our customer base. It reduces the number of vendor to vendor hand offs that customers have to manage, which is a tangible value-added benefit associated with the RR Donnelley offer.

And finally, it gets us involved earlier with the customers when we can work with them to develop specifications and processes that streamline their projects, reduce their costs and improve their return on their investment. We will continue to drive One RR Donnelley global relationships.

The second point I'd like to make is that we continue to see our employees respond, adapt and innovate and find ways to work through every challenge that is thrown at them. They do so while continuing to focus on working safely, which is the most important measure of operational excellence.

You hear just a few RR Donnelley voices on the phone during these conference calls, but we are speaking about the accomplishments of nearly 58,000 employees worldwide. We believe that they are the best in the business, and we thank them for their efforts.

And with this, operator, we'll open it up for questions.

Tom, just if you can expand a little bit more on your commentary about you're seeing a little bit better visibility in the business, and obviously, the trends continue to kind of pick up a little bit along the past couple of quarters. What are you seeing kind of going into this quarter here now that we're kind of more than half way through it?

And what does the visibility look like more longer term for the year?

I would tell you obviously today in the marketplace was kind of a crazy day, so I don't think this is a good example. But what I would tell you in spite of the high unemployment rate in the United States, the United States consumer to us is back.

The United States consumer spent as much in 2010 as they did in 2007. And they saved more in 2010 than they did in 2007.

And to us, this is significant because our customers will look to increase their brand awareness in the public eye, prospect for new customers and advertise more. Now I also think that the negatives that were out there 12 months ago are less negative.

New foreclosures are down. So that's going to start to work its way through the system, and that's going to have a positive impact on economy.

The Federal Reserve definitely wants to ring back inflation, which we might not like. But I don't think it's going to stunt the growth in the United States of whether it's expansion or recovery.

I'm not sure which one it is, but it's one of the two that's taking place. Corporations are starting to be looked at differently.

Corporations are starting to be, "Hey, how can you create jobs?" There's a difference of where the character was behind corporations over the last couple of years.

Now we've gone from a financial system that was focused on investments to a financial system focused on speculation. And now we're going back to a financial system focused on investment.

People are starting to value long-term prospects again. And so to us, that's great because we're positioned well to participate.

Whether it's a recovery or an expansion, we're there to participate. And I think we've proved to you in the 2008, 2009 that we can operate in any economic environment that exists out there.

I think we've proved that what we've built is working. We had organic growth of, as Miles went into, of 200 basis points, which again in our industry at our level at our scale, overcome the pricing pressures that we see in the long run business that our competitors are still out there with going to levels that we're surprised at.

But again given our breadth of products and services, we can overcome that because of all the things that we can offer, both domestically and internationally, I think we've transformed this thing finally into being from a printing company into a collaborative integrated communications provider. And I think that it's going to be the differentiator for us in the marketplace going forward.

Again, the multiple products that we have to offer for our customers allow for cost compression and increased return on their investment. And there's no one out there today that doesn't want to avail themselves to that.

We're making the supply chain more efficient for people, and I do believe this is still in a GDP business. And all indications, our GDP is going to be in the low single digits.

And we feel comfortable with what we're talking about here at the end of February to where we're showing top line growth. Again, we know, we sleep with one eye open.

We know that there's things can pop up. Petroleum prices can go through the roof.

There's going to be different things that are going to take place. But again I think we've got a platform that can adapt and is agile enough to handle anything that's going to be thrown at it.

And the great thing is we've got history behind us or on our side with what took place in 2009.

If you could talk a little bit too about how the economy improving has impacted or benefited the acquisition pipeline? I know it's always a lengthy conversation with targets that you've had over the years that people may or may not be keen to want to sell their companies in a downturn.

Are you seeing any pickup in activity or an increase in people coming to you looking to maybe come to the Donnelley platform?

I would tell you, Charlie, that it's been the same as it has been in the past. I mean there are obviously you know the sizes of the properties that are out there now.

We don't comment on that. But I would tell you there's no difference to where things where in the past, as far as what opportunities are being presented to us.

But the great thing that we've got going on for our customers and for our clients is that we're able to go to marketplace, not just in niches. We're able to take our whole platform, and let our customers leverage that platform.

So they get the ability by being with us, they get brand management and compliance. We are able to help them control their expenses by eliminating waste.

We reduce their processes and their obsolescence. Sometimes, you can save them costs on their employees and headcount costs that they may have.

We can standardize and optimize their design, of what their workflows are. And obviously we improve their cycle times, which allows them to focus on their business.

There is no player out there today that I can tell you that we need to bring on to this platform from that standpoint. You saw what we did with Nimblefish, Bowne and 8touches.

Those are great examples of what we were able to do from a technology innovation side to help us continue to add value for our customers and to be out there for them. Again, the two simple things that we live on: Reduce total costs and get a return for our customer.

Those types of transactions, those properties that we bring forward to us allow us to continue to innovate what our customers are looking for to get to their customers and also allow us to grow with inside our customers.

Could you talk a little bit about the growth in the U.S. business?

And some of your other large segments, mag/cat, retail books and directories, et cetera. Just give us a sense of what that looked like both from a volume and overall growth perspectives.

I'll let Miles go through the volume in a second from the numbers that will be filed in the [10]K. What I'll talk to you a little bit about is somewhat along the same lines.

But we talked a little bit this morning about services in nonprint revenues. That's something that we're excited about as well.

When you think about logistics, you think about premedia, you think about the BPO business. We really started to go ahead and have some good days there, which again have allowed our customers to reap the benefits of those as well.

Pricing is still tough. Pricing is, especially in the long run businesses, are tough.

But again, the product and services that we're able to offer help us offset that as we go through there. When you think about Donnelly, you think about how we've taken this aircraft carrier, and we sort of moved it just a little bit to the right.

As we've seen what's going to take place or we see what is taking place with printing, this has allowed us to go ahead and still have top line growth in, obviously, a very challenged industry which none of us ran away from. When you think about our initiatives, when you think about just one real good example, Dan, when we go to a large retail and we can go ahead and tell them all these products and services that we can offer to them.

Just to give you a little bit of a hint as far as what we can do for one particular customer, we can do their HR benefits information and kits, their new hire orientation kits, their benefit enrollments, all their benefit informations. We can do direct mail for them, the four-color variable print.

We can do forms. We can do store signage, catalogs, any employee training material, retail inserts.

They can come to us, and they don't have to go to anybody else. So again, we are fortunate.

I'm fortunate. We've got the best front line managers in the business.

We've got the best customer service people in the business. The experiences that those customers have with our people allows us to build further momentum with them as well.

And we love when one and one equals three, and then we keep going after it. So Miles will give you some more details on that.

Sure. For the fourth quarter, as I mentioned, we had about 5.3% revenue growth in our U.S.

Print and Related Services segment and about 3.5% in our International segment. In the U.S., about 58 basis points of that was related to lower pass-through paper sales.

So overall, good growth. When you break it out into the different categories: Magazine, Catalog and Retail was approximately flat; book and directory was a little over 1% down; Variable Print and Forms and Labels were just a little above flat; and as we mentioned, Commercial Prints, Logistics, Financial and Premedia all had double-digit growth.

So we've seen the shift from some of the longer run printing into the services and shorter run printing where we're seeing the growth. And our technology platform feeds pretty well into that changing dynamic.

On the International side too, just to share with you, we've seen significant growth because of the supply chain and packaging services. Whether it's related to e readers or mobile phones, we're participating in that.

It's not something we're running away from, it's something that we've got the ability to also play in as they continue to develop. So we're excited about that.

And then, Miles, you mentioned the other benefits related expenses in the press release in the corporate side. Can you just talk about whether there's kind of heading for 2010 bonus levels or is there something that's more recurring that we need to think about for 2011 ?

Well, the year over year comparison, the bigger driver is the one we've seen all year long, and that's the higher pension expense. That's the post retirement benefits expense.

It's a level amount of expense each quarter. So we've seen the same higher expenses in the fourth quarter versus fourth quarter '09 that we saw throughout earlier quarters in the year.

But the rest of the benefit related expenses, medical and some of the others, are up similarly to where we were seeing earlier in the quarter. The one item that is a little unusual is the customer bankruptcy filing that increased our bad debt expense.

It was about an $11 million expense in the fourth quarter. And that pushed us just under $7 million worse for the quarter than last year, because throughout 2010, we've been running favorably to 2009 on the bad debt expense.

So as luck would have it, the fourth quarter turned the other direction because of this particular customer bankruptcy filing. But otherwise, expenses at the corporate level are fairly in line with what we've been seeing in the past.

Just talk about how you view rising paper prices? Obviously, that can create some issues on the demand side for print.

But is this an opportunity for you to more move into the digital? Just tell us how historically it's worked with paper price and how you expect that to work going forward.

This continuing closing of capacity, it's raising operating rates, resulting in mills announcing, just last week, increases for April 1, I think, across most grades they're looking for. Don't forget, that was an attempt in January also to raise prices, and it didn't happen at that time or stick.

I would tell you that our scale of what from a paper-purchasing standpoint obviously helps us with our customers. And again when I talk about pennies, nickels and dimes, that's where we got to continue to bring value to our customers.

I think the mills have done a great job of getting their platform sort of right sized. And I think we've got to continue to do a good job for our customers, to go ahead and mitigate the cost increases that they're going to see.

When you think about the USPS to go off of that a little bit, when you think about what could have occurred in 2010 and what didn't occur from a rate increase, any rate increase isn't good. But one that is known and is more manageable, like that was put into place or will be put into place hopefully not on April 17, which is tax day, but I think they're looking for sometime around the middle of April for that to go into play, and then it'll back at the ball again in May.

We do think even with all the issues that are surrounding the USPS, Pat Donahoe's on board, 30 years of experience looking to go ahead and try to make the post office continue to make distribution of physical content in this country viable. And we think some of the cost initiatives that he does have under way will help us and help obviously the 600,000 plus employees that the USPS has.

Let me add one more to kind of follow-up to your question on corporate expenses and the pension and particularly the bad debt expense. If you put in the context for the whole quarter, the International segment and the U.S.

Print and Related services segment, both had increased operating margins, had really good performance in the quarter. At the corporate level, we had the bad debt expense increase from the one the customer bankruptcy, which added or took was a drag of about $0.04.

And the Bowne acquisition costs through the quarter hurt us by about $0.01. So that's about a $0.05 drag on the quarter.

And then the lower tax rate increased $0.09 to $0.10. So when you kind of offset all of those, the underlying performance of the business really showed through.

Both operating segments did very well, top line revenue growth, as we talked about. And all the momentum behind the customer initiatives and the growth dynamics that we've been talking about are coming through to higher operating margins, which were not only shown in the quarter but in our guidance for next year.

We're also expecting further improvements in our margins. So we see not only a good quarter but a good carry through into 2011.

You said that bad debt was $0.04?

It was $11 million, approximately $0.04, a little below that.

It looks like Bowne if I'm looking at the numbers; Bowne had a down quarter year over year?

I don't think that's right. We don't have...

I'm looking at the addition of Bowne. Maybe I'm reading the numbers wrong.

It's mixed in with the acquisition related costs and the inventory step-up and a lot of the purchase accounting changes that you see. So it really makes it tough compare quarter to quarter.

And we're seeing, as far as the Bowne transaction goes, we're off to a real, real good start from an integration standpoint. Dan Knotts has done a terrific job in getting us off to a good start.

We're looking at the manufacturing, the composition, customer service, purchasing. Again, our scale should bring benefits there.

Distribution costs, our scale should bring benefits there. Real estate, we've probably impacted 20 sites already within a short period of time.

So we feel good as far as about that property.

Since Quad bought World Color, they've closed kind of four, five plants, is that having any impact? Or is it just a lot of stuff just going away?

I won't speak to what they've got going on in their house. But again, I will tell you what I say, the number of companies that participate in our space are going to continue to be challenged because these companies do not have the product depth or breadth that we have.

So it's going to be a challenge when you can only respond with price. And it just leaves you on a tough trail going in one direction because price alone is not going to be sustainable.

Again, as I talked about during the speech, in order for someone to try to duplicate what we've got it's going to take years and a lot of money. We've been able to adapt RR Donnelley, before we got here, it's obviously been our culture that's been able to adapt to times.

TV was going to eliminate the value that RR Donnelley brought to our customers. The Internet was going to knock out us.

The electronic devices that are out there that have emerged are all going to do away with what we're doing. But instead, we have embraced the technology enhancements and continue to add value to our customers in the supply chain.

And we expect things to change, and we need to continue to change with them. And as I said, I think us being not inward looking about looking for customers and finding out where our customers are looking to go, how we can be consultative with them, is paying dividends for us.

Your low single digit forecast, I know I'm splitting hairs. Sounds like that's better than the one two that you had talked about before.

I still think splitting hairs is probably a good definition. First quarter 2010, we were fortunate enough to be the recipients to do the United States Census.

And that's a pretty good headwind we're going at after 2011. So if you think about what you're building, just please take that into account.

Again though, we're very optimistic, probably the most optimistic that I've been, sitting in this chair, since we started doing this. And it's the value that we're able to bring to customers.

It's our global print management strategy. It's the efforts of our people in Asia, in Europe, in Latin America, Canada that are really trying to find solutions for customers and bring those solutions forward to them.

Are the European economic problems impacting you at all or are your businesses is managing to do better despite Europe's problems?

I would tell you whenever there's a problem in the world, we are impacted by it, no matter what. But I think we are doing very well in Europe.

Again, as I might have said before, we were full in capacity in certain parts of Europe last year. We're hoping for that again to take place.

In Europe, for those of you not familiar with it, in our vertical, it is 10x worse than what you see here. So we're having some good days over there too and hope that to continue in 2011.

You said that there's some restructuring related to Bowne across the year?

Yes.

Yes, and just given the timing of closing, just before the end of the year, a lot higher percentage, I guess I should say, of that restructuring is going to occur in the first quarter or first part of the year. And then the synergies ramp up over time.

So we still think it's got great opportunity. As I mentioned we still expect it to be accretive in the first full year after it closed.

But we are going to hit the first quarter with more restructuring charges because of it.

My first question is some clarification please. Incentive compensation that you booked in the quarter, how was it in 4Q '10 versus the year ago quarter?

Total incentive for the fourth quarter was $36 million, almost $37 million in the fourth quarter of this year. And it was about $51 million last year, so about $14 million less than the prior year.

And that's just given overall that's quarter by quarter. For the full year, it's not so much different because in 2009, higher percentage of full year's expense was in the fourth quarter, whereas it was more evenly spread in 2010.

Tom, can you speak, if you would, about the pricing pressure out there? I assume you would say that the fourth quarter here was pricing down on average roughly 1% to 3%.

Is that a fair range to think about on year-over-year basis? And also can you talk about the categories that were materially better than that number and what was worse?

What I would tell you Craig is pricing, as it has been for a number of years, is still challenged. It is still aggressive.

I would tell you that, as I mentioned, I think, a little bit earlier in the call, the long run products: Book, directories magazines, catalogs, retail inserts it's very, very challenging out there, and I think as you look at our platform we are glad that we have the other product and services that are helping offset that, as we go forward. So again what value can you bring to the customer?

Can you bring premedia? Can you bring logistics to those long run businesses to help them reduce cost?

Because obviously as you know, it's all about content and it's going to continue to be about content. Those with good content are going to survive and are going to use the multi channel approach to get that content out.

We believe we are with those right customers that are doing that, so that will help us. But I would say the environment is what we see, what we have seen for the last couple of years continues to be that way.

If the economy does get tough I think some of our competitors that are out there by product are going to have a tougher time. Credits a lot better than what it was in 2009, so that's a good thing for them.

Some of the equipment manufacturers are going back to the old days of giving equipment away on financing terms that, I believe, hurt our industry. But that will be interesting to see how that goes.

So again, we know each and every year, we're walking into a spot to where on average 1% at least price decline. How are we going to overcome that, overcome wage increases, overcome benefits, health care costs, still deliver to our stakeholders what we have to deliver to our stakeholders?

And I think the plan that we have set up for 2011 is a good plan that will enable us to do that.

Miles, if I could ask on the corporate expenses. As you know for 2010, I think you booked out $206 million there, up from $99 million in 2009.

It was more like $180 million in 2007, 2008 on a full year basis. What should investors expect here for 2011 especially as you can see it right now for corporate?

I think we're still going to expect increasing corporate expenses in 2011. The combination of the higher pension expense, which is a noncash expense along with other benefits expense, is going to continue.

I mentioned pension expense being $23 million higher in 2011, than what we saw in 2010. So that's, given the way the accounting works, a fairly predictable number.

We'll probably have a little bit more IT spending also in 2011, just as a lot of the technology driven initiatives and other customer focus kicks in throughout the year. So pension may be all in with OPEB being more in the $30 million increase range.

What was your funding status for your pension for the year end?

From a funding status benefit on the pension plans, we ended the year about $515 million underfunded, which is a little more underfunded than the $514 million we were underfunded for the end of last year or the end of 2009. The post retirement benefit plans are primarily unfunded.

Although we have some funding for those, but those normally are unfunded. So underfunding of the pension plan increased a little bit, but now the asset returns were significantly better, as you would expect, because of the way the equity and debt markets work this year.

But the discount rate, which drives the liability measurement side of the equation, fell year over year so you had more than offsetting reduction of increase in your discounted liability than you saw in the asset returns.

Craig in this year 2011, as Miles touched on; we do not have a significant cash contribution that's required to be made to the U.S. retirement plan.

We've talked about that as if things don't change, we expect in 2012 to have a higher contribution requirement. But right now we don't see any sort of significant increase in 2011.

As you guys break out and talk about your services component of your business, Bowne wasn't putting much ink on paper over the last couple of years. Is the majority of Bowne's incoming revenue, would you consider that services?

I would say a good portion of Bowne's revenues is services. And frankly, our historical financial print business was very similar to Bowne so the combination of the two have very much similar spread of services versus non services, so they're more heavily services weighted than some of the other traditional parts of our business.

But as the year you guys are now going to be sort of breaking those services numbers out separately because of the 10% threshold, right? Is that what said earlier the call?

Right. Having the acquisition of Bowne of course, more heavily weights the financial print part of our business, which was in itself more heavily weighted toward services, so that in part leads to why we're growing over the 10% services threshold.

'' Just to close on that point I think when you think about again, the properties that we acquired last year, some of the other properties that are out there, you're going to see us more and more having bigger number take place as the year goes on, and we think that is definitely the right strategy and definitely a strategy that's going to help our customers. So appreciate the question.

Appreciate everybody joining the call today, taking the time out to be with us. Hopefully, some of the takeaways from this, we believe, are the organic growth for 2010.

We are very excited about what we achieved in 2010. Hats off to our employees that made it happen.

We also think, from an innovation technology standpoint, the global print management, the budget that we built for 2011. Again we're up and running almost two months into the year, and we're going to try to go ahead and meet those objectives and goals that we mentioned to you this morning.

Look forward to talking to everybody in about another 90 days, and hope everyone has a good day. Thank you.