Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics First (sic) [Second] Quarter 2012 Conference Call. [Operator Instructions] I would now like to turn the conference call over to Mr. Kelly Vanderboom, Vice President and Treasurer for Quad/Graphics. Kelly, please go ahead.

Thank you, operator, and good morning, everyone. With me today are Joel Quadracci, Chairman, President and Chief Executive Officer; John Fowler, Executive Vice President and Chief Financial Officer; and Dave Honan, Vice President, Corporate Controller and Chief Accounting Officer. Joel will lead off today with a high-level review of our top achievements for the second quarter and provide an update on our key strategic focus areas. John will follow with a more detailed review of our financial results, which will then be followed by Q&A. I would like to remind everyone that this call is being webcast, and forward-looking statements are subject to Safe Harbor provisions as outlined in our quarterly news release and in today's slide presentation. The slide presentation can be accessed through a link on the Investor Relations section of the Quad/Graphics website at www.qg.com. There are also detailed instructions on how to access the slide presentation in our second quarter earnings press release issued last evening. A replay of the call will also be posted on the Investor Relations section of the Quad website after the live call concludes. I will now turn the call over to Joel.

Thanks, Kelly, and good morning, everyone, and thank you for joining our call today. I would like to begin our second quarter performance review by highlighting 3 areas where we continue to show progress. First, our trend of generating strong recurring free cash flow continued into the second quarter where we generated $60 million. On a year-to-date basis, we generated $167 million of recurring free cash flow compared to $102 million for the same period in 2011. We are proud of our consistent track record, and as we look forward, we remain confident in the cash-generating power of our company. Second, I would like to note the continued progress we are making to strengthen our balance sheet and maintain strong credit metrics. During the second quarter, a period that most of you know is impacted by lower seasonal volumes, we paid down $42 million in debt. For the year, we have paid off more than $132 million in debt, and our leverage ratio of 2.2x remains within our targeted range of 2 to 2.5x. We continued with our conservative view towards the use of cash and during the quarter, chose not to buy back shares, but instead, focused on paying down debt and pension liabilities. We will continue to remain flexible and opportunistic in terms of our future plans for capital deployment. As always, the priorities for our capital will be adjusted based on prevailing circumstances and what we think is best for shareholder value creation at any particular point in time. The third area of progress that I would like to highlight this morning is that on July 2, the company marked the 2-year anniversary of the Worldcolor acquisition. I am proud to say that during the second quarter, we officially and successfully completed the largest integration ever undertaken…

Thanks, Joel, and welcome, everyone. Slide 6 is a snapshot of our second quarter 2012 financial results as compared to our second quarter in 2011. Net sales were $934 million, which compares to second quarter 2011 revenue of $977 million. This 4% decline reflects the expected volume and pricing pressures. Cost of sales of $741 million was lower than second quarter 2011 cost of sales of $757 million. SG&A expense was $81 million as compared to $105 million in 2011. Depreciation and amortization was $85 million compared to $84 million in the second quarter of 2011. Interest expense at $21 million was 29% lower than the second quarter of 2011 interest expense of $29 million due to our focus on debt reduction, as well as the refinancing we successfully completed in July 2011. Our adjusted EBITDA was $112 million versus $116 million for the second quarter of 2011. Our adjusted EBITDA margin for the quarter was 12% as compared to 11.9% in the second quarter of 2011. We have once again included an adjusted EBITDA bridge in our slide deck to better explain the impact of adjusted EBITDA in the quarter. There are 3 major positive impacts for the quarter. First, our incremental synergies of $21 million. Second, a reduction in selling, general and administrative expense of $13 million. This reduction was due to our focused effort to create sustainable cost reductions that are over and above the Worldcolor integration synergies and connect to our goal of converting the majority of our cost to variable, including components of fixed cost and SG&A. And finally, a reduction to bad debt expense of $6 million. This was primarily related to a favorable contract renegotiation of payment terms that resulted in a reduction to our bad debt reserve. These positive impacts were offset…

[Operator Instructions] Your first question comes from Scott Cuthbertson with TD Securities.

A couple of things. Just wondered with respect to the EBITDA bridge, John, the synergy realizations you had there, I'm just trying to add it all up to $275 million. From your preamble, I take it you're not really including the $13 million in SG&A as part of sort of $275 million that you now will realize from the integration of Quad. So I guess, there's another sort of $33 million left to go. Is that correct?

Dave, why don't you take that?

Sure. The $13 million is not included in that synergy number. The $275 million is an annualized run rate. To date -- you'll see that, when we file our Q later today, there's $242 million that's been realized through the P&L or the synergies. The remainder -- the difference between that $275 million and $242 million will come through mostly throughout the rest of the year, and some of that will trickle on in to 2013 on an annualized basis as those come through our P&L.

Okay, great. And I'm just sort of thinking ahead to 2013. I mean, if we just, for the sake of simplicity, assume all the synergies from the acquisition will be realized in 2012. I mean, you basically in the quarter you had between the $21 million in incremental synergies from the acquisition integration and the $13 million in SG&A. That was pretty much flat in terms of offsetting the volume and price headwind that you had of, I think, it was $36 million. So I mean, if we take out the incremental synergies of $21 million, it's going to be a tougher sort of headwind going into 2013. Can you sort of speak to how the EBITDA momentum or dynamics will change once you've finished the integration and as you move forward into 2013?

Yes, Scott, this is John. I think we've been indicating over the last 2 or 3 calls that our focus has really changed away from just focusing on the integration and the synergies that are coming from the integration recognizing that we're in an industry that does have the volume headwinds, and therefore, it's really about continuous cost reduction. And so, I think, we've been demonstrating that we're able to continuously take cost out whether it's on the manufacturing floor, whether it's in SG&A and things like travel or professional expenses, and we continue -- I think, we're doing a really good job of applying the continuous improvement techniques throughout manufacturing and especially now into the whole selling and administrative area.

Scott, this is Joel. Just to add on to that, I mean, Quad has been doing lean manufacturing throughout our process or close to it coming up on a decade, I guess. And it's a process that you don't do overnight. And so as you think about the expanded platform we have, we're spending a lot of effort in implementing lean manufacturing throughout. And so to John's point, we're geared in sort of the Quad world of continuous improvement and know how to do it, but there's lots of opportunity as we continue to push that throughout the rest of the platform. So while the integration may be finished, we still have opportunity in terms of what we do with that improvement.

Okay. That's helpful. And I mean, I know it's always difficult to quantify that, but is the $13 million that you realized this quarter a reasonable example of what you think you may be able to do going forward in that respect?

You're talking about in the SG&A, Scott?

Yes, that's right.

Yes, it is.

Okay, good. And the other thing, John, I just wondered, and forgive me, I should refresh myself on the terms and conditions of your private bonds. But you've done a great job on debt reduction and obviously, those bonds have a higher coupon than some of the other parts of your capital structure. But what is your ability to repay those bonds early if you saw fit to allocate your capital in that way?

We have the ability. The nature of the private placement notes is there, they make whole[ph] . So you have to go through the economic analysis. But I think, as we look at it, Scott, to us, it's really managing the risk of the overall balance sheet. So I think, it is important to have a component that is fixed. I think, it's really important to have the private placement notes with that 10-year final life and the amortization that's a ratable amortization. I think, a lot of times, it's not just the interest rate of your debt or the amount of your debt, but it's frankly, how you have the debt structured. So we found that to be a good strong anchor to have, and I think we'll always want to continue to have longer-term maturity-type notes and notes with a fixed interest rate as opposed to just relying on 5- to 7-year debt and floating rate.

That makes sense. And the other thing I wondered there's a couple of moving pieces obviously in the -- if you look at the different divisions. Is it possible to quantify the impact of the asset swap with Transcontinental on your numbers this quarter, obviously, in the international division that had a bit of an impact?

Well, as you know, we treated Canada as discontinued so it's out of the comparison. So that's not creating any noise. And as it relates to the assets acquired in Mexico, the incremental revenues in the quarter were $18 million and $36 million in the first 6 months.

Great. Very helpful. And the last thing I wanted to ask, Joel, just a bigger picture question. As we roll through the Q3 results from the broadcast fiscal year here in Canada and some Q2 results from some other media companies up here as well. Up here, we had like basically a strike on advertising in April where everybody was -- didn't spend much money. And then things have gradually improved through May, June and July, and the outlook for the fall is much more optimistic than it was in the spring looking at the summer. I just wondered sort of what the tone is down there with respect to your view of advertising demand as we head into your more busy season.

I'd probably characterize it as visibility is still really tough. I'm not sure that we have gotten a lot of indications maybe that far out like you have, but it's interesting. And we certainly saw advertising come down in the first half by about 8%. And again, advertising is one of those things that people can cut quickly when they see sort of stormy clouds ahead and we certainly have seen stormy clouds. But if I look at this month's Vogue magazine or InStyle, I mean, Vogue alone had 650 pages of advertising and over 900 pages. It felt like a phonebook. But on the other hand, you'll see some other publications that probably aren't faring as well. So it's a little bit of a mixed bag, and I think that we'll continue to be cautious about it because of, obviously, all these sort of economic turmoil that's been happening down here and the related, I guess, visibility issues it causes amongst businesses. So we continue to be cautious about where things go, but you see some moments of light. But again, I think, until people feel confident about the future, the visibility thing is going to be an issue.

Your next question comes from Dan Liebman with Robert W. Baird.

This is Tom Jackson filling in for Dan. Just looking at sequential change in gross margin here, I was hoping you could help us isolate the key factors that are impacting it. How those factors maybe trended through June, and how you see that dynamic playing out maybe in the back half of the year?

Well, some of the -- Tom, this is John. I mean, clearly some of the impact that we're seeing is from the reduced volumes and the pricing pressure that we've been talking about for the past year. In the quarter and in the half, we had more paper pass through sales than what we had in 2011. So that represented some of the negative impact because those are on a pass-through basis. I guess, over all, the way we look at the business, we know we're going to have kind of moving pieces on mix, we're going to have times where we're getting more cost out of cost in sales and there are times that we had a very good quarter on the management of SG&A. And I think at the end of the day, the way we're trying to manage the business is looking at how are we doing at continuing to take cost out to be the low-cost producer? How are we doing at creating absolute EBITDA and how are we doing at converting our income statement into cash flow of absolute cash generated free cash flow from the business that could be used for growth or debt paydown, which obviously the last 3 quarters, we focused on the debt and the pension paydown.

Okay. And then I think -- would you be able to kind of quantify the difference between pricing and volume, the impact of the quarter?

As we've talked about before, Tom, it's really difficult to try to break out that difference because you make a decision that says "here's a piece of business that you choose to not take the last pricing step for", and so therefore, it shows up in lower volume. Another piece of business you retain, and you have to be more aggressive on the price given the excess capacity that shows up in pricing. So we look at it on a combined basis.

And also as books come into the schedule -- this is Joel. It depends on the mix of pages per book and things like that. So the makeup kind of comes as it comes as, and that can have an impact on sort of the "pricing."

Okay. And then just going off what you mentioned on remaining firms and kinds of competitors, you've talked about in the past that some competitors have been a little bit more aggressive in pricing and sometimes you guys just have to stay intact [ph] and not take the bait. How has that dynamic changed in the past 6 months? Have you guys relented a little bit more, and then how do you see that playing out?

Well, I think we see it as kind of being consistent with what we've been talking about. Pricing is tough, and I think as long as there's excess capacity in the industry, you're going to have companies that are just trying to keep their lights on and trying to take market share. But at the end of the day, we have chose in the past not to follow or take the bait, as you say. And other times, we say, "look we've got a great cost structure", and we'll take it because it makes sense for us. But again, we do go through a pretty disciplined process of making sure it makes sense. We can protect ourselves on any piece of business if we so choose, but that doesn't necessarily always make it a value-creating move. And so it's kind of a balancing act that we go through and an important one. But yes, the industry continues to be tough. I don't know that it's tougher than what we've said, but pricing is certainly there and as long as there's overcapacity, you'll continue to kind of see that. So everything will continue to evolve, and I think we're seeing a lot of companies kind of start to exit when you go into the smaller printer market because they're not able to sustain it. But again, it continues to be tough out there.

Okay. And then I was wondering if you could kind of help us break down a little bit the different segments, how mag cat retailers compare to other segments. Maybe also talk about new revenue opportunities going forward. I mean, this morning, you mentioned the Actable interactive print solution. Do you have other digital issues lined up down the pipeline or can you help us understand that?

Yes, sure. I mean, some of the smaller parts of our business such as directory, we know that that's in a decline per year and we manage it before that. So it doesn't take a lot of CapEx. We've got an excellent team that can manage down as the volume goes, and it creates good cash flow while we have it. On the books side, I'd say that books has obviously been impacted a little bit by the digital conversion with things like the Kindle but also by budgets of the state governments and that's in North America. The reality is actually if you look at our business in Mexico and in parts of Latin America or South America, actually the book demand is pretty strong. So there's, I think, a North American story and then a South American story. But again, books is a pretty small part of the business. We mentioned magazines. The advertising climate continues to be tough, and visibility is still limited. But again, I mentioned that there's some really big books going to be hitting the newsstands for the September issues, and catalogers, I'd say, are holding their own. I think, I can say that their customers are still buying albeit maybe smaller order sizes, and prospecting is a little bit tougher than before, and that really speaks to consumer confidence. And as we think about retail insert, it's kind of interesting because we saw this past year, a large retailer decided to cut way back on it and have had since reversed that plan because when you stop marketing your brand, you stop store traffic. And the reality is even though the retail insert is not sexy, it's still very powerful. And then when you talk about the media solutions group and what we…

Great. And then I just have one last one. The SG&A specifically decreased a little bit more than we expected. I know you mentioned synergies and bad debt. I was just hoping you could provide a little bit more color on what all went into that, was it mainly sales force reduction? And then do you see more declines for the remainder of the year? Do you see that stabilizing, kind of that 80 -- 80,000 or that $80 million quarterly rate? And then yes, just what you expect for the rest of the year.

Well, you're trying to get an overall color, Tom, on the SG&A?

Yes, just what all is in that? Is that mainly S? Is there a lot -- is it mainly the sales force? Is there other...

It's going to be more of the G&A. I mean, we broke out the reduction in the bad debt reserve that drove approximately $6 million of debt reduction. That now was obviously discrete to a contract renegotiation. There's like about $4 million in reduced employee costs. There's $2 million in professional fees. There's about $6 million in synergies related to Worldcolor. There's about $2 million that relates to legal and environmental reserves related to facilities that were sold, reserves that weren't needed. And then about $4 million of other miscellaneous spending reductions. So it's really an across-the-board approach.

And then the back half of the year, I mean, is there a lot more you can take out? Is it kind of...

Tom, it's going to be continuous as we answer another question, this is an industry where it's about maintaining or trying to enhance your position as the low-cost producer. And that means it's all about continuous improvement and continuous cost reduction within the plant and within the office.

Your last question comes from Haran Posner with RBC Capital.

First, just a clarification, I'm sorry if I missed that, but in terms of your 2012 guidance, are you still sticking with that in terms of the key items on revenue margin and cash flow?

Yes, we're maintaining our guidance. I mean, as we've sort of talked on the call, as we've talked in the past, the first half of the year is the seasonal slower time of the year. Second half is the seasonally high period for profitability, but we have no reason to be making any changes to our guidance. [indiscernible] focused on cost.

Okay. That's great. And then In terms of integration costs just one clarification, I guess, you're now expecting $225 million. With respect to, I guess, first, how much of that has already been spent to date?

This is Dave. About $190 million of that has come through the P&L at this point.

Okay. That's great. And then, I guess, another question is does the $225 million guidance, does that include any sort of integration-related bonuses? And if not, if you can give us any kind of color on magnitude and timing of those.

Yes, that's included in the $190 million. The amount that's been accrued is in the $190 million, as well as in the $225 million that we're talking about includes our projection for that.

Okay. That's great. And then, John, a question on pension. I guess, just -- could you give us an update in terms of what you expect? I guess, to reiterate your guidance for '12, is there some kind of an early sign you can tell us in terms of your contributions in 2013, and then specifically with respect to the MEP, when do you expect to make those payments?

Dave, why don't you take that one?

Okay. The recent legislation change for funding really has a pretty minimal impact on us for 2012. We're expecting -- we've giving guidance before $56 million of pension contributions in '12. We expect that will come down by about $6 million once the final interest rates are given for that legislation. So $50 million in '12, and then we think going forward that legislation impact for '13 is going to reduce '13 contribution by $22 million going forward. As far as the MEPs payments, we continue to work with the trustees of both MEPs that we're negotiating an exit from those planned. And at this point in time, we don't have a better estimate of when we expect those cash flows to come out. We've got roughly $95 million accrued for those exits.

Okay. That's helpful. And then maybe one last question, if I may, for Joel. A big picture question. I guess, congrats on completing this integration, and I guess at this point going forward, we all know that additional or consolidation is inevitable on this industry. So I guess, my question is, are you now prepared to start or to start a new larger-sized deal domestically? And then what type of leverage would you willing to accept on the balance sheet in order to complete an acquisition like that?

Well, look, I mean, we switched gears just because we finished the integration this month, we actually switched gears a little while back in terms of moving the business forward. I think, that's evidenced by the transaction we did with Transcontinental exiting Canada, picking up the assets in Mexico, as well as our investment in India, which is, I think, an interesting opportunity. Look, we kind of look at our balance sheet as something we want to continue to be strong. It's proven to us in the past that having that strength is good for good times and in bad and being able to take advantage of opportunities whether they're good times or bad times. So we tend to remain pretty conservative on the balance sheet. And I think in this day and age, it's the right thing to do. In terms of the acquisitions or mergers, yes, I think there's going to continue to be consolidation. We really -- I mean, we've obviously created a muscle here to be able to do integration. I'm very proud of what we've done and how we've done it. But mergers and acquisitions for us are just another tool in the toolbox of what we're going to do with this company. So as we kind of think on it on a go-forward basis, strategically, it's about making sure that the core business is strong, that we're focused on not only creating good cash flow but continue to innovate so that our customers continue to want to be in this core space, but also looking for growing middle classes. I mean, that's the story behind India and Mexico. I heard a statistic recently that came out of the Aspen Institute that the middle class in the world is due to double by 2030, and…

Thank you. This concludes today's conference call. You may now disconnect.