Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics Third Quarter 2012 Conference Call. [Operator Instructions] I would now like to turn the conference over to David -- to Dave Honan, Vice President, Corporate Controller and Chief Accounting Officer for Quad/Graphics. Dave, please go ahead.

Thank you, operator, and good morning, everyone. With me today are Joel Quadracci, our Chairman, President and CEO; and John Fowler, our Executive Vice President and CFO. Joel will lead off today with a high-level review of our top achievements for the 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 session. 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 that slide presentation in our third 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 call concludes. With that, I will now turn the call over to Joel.

Thanks, Dave, and good morning, everyone. Thank you for joining our call today. I am pleased to report that our third quarter performance was in line with our expectations. We continued to make progress during the quarter on our key priorities to expand and renew multiple customer agreements, implement sustainable cost reductions, maximize recurring free cash flow and maintain balance sheet strength and flexibility. It is our belief that these priorities will provide us with the flexibility to manage through ongoing economic and industry challenges, pursue our strategic objectives and create shareholder value. This morning, I will begin by touching on a few key areas of achievement for the quarter. First, our trend of generating strong recurring free cash flow continued into the third quarter where we generated $53 million. On a year-to-date basis, we generated $220 million of recurring free cash flow compared to $143 million for the same period of 2011. Second, despite being in our peak season for working capital, we continued to strengthen our balance sheet through debt reduction and maintain strong credit metrics. We paid down $16 million of debt during the third quarter and $148 million of debt on a year-to-date basis. Our leverage ratio of 2.25x remain well within our targeted range of 2 to 2.5x. As we look forward, we remain confident in the strength of our balance sheet and the cash-generating power of our company. We believe that it is our success in these 2 areas that will allow us to be flexible and opportunistic in terms of our future plans for capital deployment. A perfect example of this is our recent announcement to acquire substantially all of the assets of Vertis Communications. To those unfamiliar with Vertis, they are a $1.1 billion provider of retail advertising inserts, direct marketing and…

Thanks, Joel, and welcome, everyone. Slide 6 is a snapshot of our third quarter 2012 financial results as compared to our third quarter in 2011. Net sales were $1.04 billion, which compares to revenue of $1.1 billion, reflecting a 6% decline due to expected volume declines and pricing pressures on print and byproduct revenue. Cost of sales at $798 million was lower by $42 million and SG&A expense of $87 million was also lower as compared to $96 million. Depreciation and the amortization was $83 million as compared to $85 million. Interest expense at $22 million was 15% lower than $25 million, primarily due to our focus on debt reduction. Our adjusted EBITDA was $155 million versus $174 million. And our adjusted EBITDA margin was 14.9% as compared to 15.6%. We have once again included an adjusted EBITDA bridge in our slide deck to better explain the impacts to adjusted EBITDA in the quarter. There are 2 major positive impacts for the quarter: First, our incremental synergies of $23 million; and second, a reduction in selling, general and administrative expenses of $9 million. This reduction was due to our focused effort to create sustainable cost reductions over and above the Worldcolor integration synergies. These positive impacts were offset by volume declines and pricing pressures on print and byproduct revenues that impacted adjusted EBITDA by $45 million during the quarter, and $6 million that was attributable to the book business which reflects both volume and productivity issues. As Joel mentioned, we are proud of our consistent recurring free cash flow and the work we are doing to maintain a strong and flexible balance sheet. Our recurring free cash flow, which we define as cash flow from operating activities, less capital spending and excluding nonrecurring items such as restructuring costs, was $53…

[Operator Instructions] Your first question comes from the line of Dan leben.

Joel, could you just talk about what you're seeing within the different segments of the business, specifically with kind of mag/cat retail within those 3 segments, just the demand -- underlying demand trends would be helpful.

Yes, sure. I mean, I'd say that, in general, in the quarter, our plants saw some pretty good volumes. I think that in second quarter, if you look at [indiscernible]for catalog, they talked about it being a negative 3.5% forecast, but they actually changed it to 2.2% growth in the second quarter. They continue to kind of think that there was a 3.3% decline in Q3, but I'd say that, in general, we've seen volumes kind of hold up there. Retail has been pretty strong. I think one of the things we saw this past year was a significant retailer tried to redefine themselves and decide that retail insert didn't make sense, and they significantly cut those volumes early in the year but have since rebuilt all those volumes when they discovered that, even though they're not sexy, retail inserts are a significant driving factor of traffic in the stores. And I'd say that on the magazine side, I think advertising in general out there has been weak. I think that a lot of companies and I talk to a lot of people in a lot of industries, people have been freezing up with what they're seeing in the economy and with the pending election that was happening. But I'd say that to date, there were about 8% decline in advertising as published. With our mix, we've seen less than that. In fact, I mean, actually better advertising pages. But still a decline. So in general, I'd say that right now we're not seeing kind of this aggressive fallback, but we remain very skeptical about what the economy is going to do in the future here.

Great. And then looking forward to the Vertis transaction, could you talk a little bit about the level of customer overlap that you already have with Vertis on the retail side?

Well, there's certainly -- there's definitely a customer overlap. We don't breakout sort of what it looks like. But as we said in the script, we are picking up other segments that we're not strong in. And when you think about grocery, that hasn't been one of our strong points or insurance or pharmaceuticals, so we're excited about adding some new verticals to the retail side.

And when you're looking forward to synergies, still early in that process, obviously. But just help us understand how much of the opportunity is kind of cost cutting on the Vertis side versus some additional volumes coming into Quad plans?

Dan, this is John. We're early in the process. As Joel indicated, this is a complicated process that has got to go through a bankruptcy auction process as opposed to a traditional acquisition. So until we get through that process and get to close, we felt it was inappropriate to be commenting on where we'd be finding the synergies.

Your next question comes from the line of Drew McReynolds.

Just a couple of follow-ups. Just first, just on one of the smaller segments of book printing. We cover a couple of publishers and they're just indicating that the migration to digital has somewhat slowed down, which is, all have been equal kind of reloaded the print side of the channel and we're just wondering if you're seeing any of that trend play out?

Yes. I think we've heard some of the same stuff. You saw this rapid increase last year in the growth of sort of digital editions. But then, in general, from what I've heard from customers anecdotally is, there's been a rapid leveling off or not a leveling off, but a rapid slowdown in that growth. One of the things that are affecting us, and I'd say the volumes haven't been the challenge, it's actually the -- with digital print and with sort of kind of looking at the supply chain and how the book companies have to manage inventories, is that we're seeing a big increase in shorter runs as people try and lower the batch size, so they're not carrying all those inventory. The good news is, is digital print allows you to do that. The bad news is it really changes your whole production flow within the plant. Even though you may be able to print 1,000 books instead of lots of 20,000 books, you still need on the admin resources to key up those jobs. And so we deal with a lot of just changing, I guess, a face of how the book flow works within a book plant. But yes, I mean, I've -- we've heard some of the same thing and I think you'll continue to sort of see this game play out.

Okay, that's helpful, Joel. Just shifting gears, just broadly, just in light of the Vertis proposed transaction. You went through your 4 criteria for M&A. Just wondering if you can kind of hone in on the economics. When you look at doing a deal like this, what are some of the financial criteria that must be met? Where is your focal point in terms of accretion? How do you measure or size up a transaction like this?

Let me start, and I'll let John kind of jump in as well. First and foremost, I think, when you're looking at this industry right now, we are going kind of a tipping point of consolidation. And it can be a challenged to kind of understand what the opportunity is, especially when you're dealing with a company that's been challenged. You have to understand what is the true value, not just today but tomorrow, because the world keeps changing. So I think we've been pretty disciplined about when we see opportunities of knowing when we think that is at the right price to be able to, along with synergies, et cetera, all the things we know how to do, to make a goal of it. We're certainly not quick to jump at opportunities because we think the world will continue to change. So I'd say that, that's really important because I think a lot of times you can overpay for an asset that really ultimately takes all the equation out of the game of why you did it in the first place. I think also the -- we talked about integration. What we've learned in Worldcolor is that true integration when you're in manufacturing -- and a lot of companies, they integrate but they don't end up truly operationally integrating. But that's key to everything, whether it's your IT resources, whether it's the sort of backbone from an accounting standpoint, but also truly calling cost out and making sure that you end up with the best platform, which includes making tough decisions, but you can't be scared of them. So our ability to really understand that and know that it is integratable in the way that will create value is awfully important. We spend a lot of time on that, probably more so than most companies when they're looking at acquisitions. So those to me are the 2 of the biggest drivers. John, you want to follow up here?

Yes, Drew, as you know, we are very free cash flow-oriented. So our focus is building the model over a 5-year period of time that is going to be oriented around the free cash flow generated. We frankly don't count revenue synergies. I think many companies do that and they always prove to be elusive. We try to be very realistic about what we see as trends, whether it is in that particular product line or, as Joel indicated, when a company has struggled financially, there are things that they have done that we know we have to restore, and whether it's in the benefits area or things similar to that or in the maintenance on the equipment and the performance of the platform. So it's a free cash flow discounted basis that we look at it and where we try to have the discipline is to really make sure we're very realistic about industry trends and the condition of what we're buying. And I think it served us well in the Worldcolor that, at the end of the day, we were able to do a little bit better than we had thought on our synergies, and we were able to come in at our cost-to-achieve. So that's the discipline that we look at there.

Okay, that's really helpful, actually. And just a follow-up here, just as it pertains big picture to, I guess, the margins -- the consolidated adjusted EBITDA margins that you're generating. Just kind of 2-part question here. One, when we look at your centralized printing facilities, obviously, state-of-the-art and some of the most impressive manufacturing plants that I've seen within the space, when you look at the pressure on volume, is there a point where you lose in terms of step-down efficiencies of the big centralized plant? Are you near kind of that volume threshold, if one exists? And maybe just a follow-up in terms of frictional costs. We obviously the Worldcolor integration in the rearview mirror, just wondering if you think you can still gain further efficiency in the current revenue environment from where you are today?

You've got about 2 or 3 questions there, Drew. Let me try it out. Test my memory and get this. Look, we understand the reality of our industry is the pricing pressure that we've talked about and the declining volumes that we're facing, so we understand that we have to look at our entire cost structure as variable. And we've got to be able to operate that, whether that's taking down an additional plant, whether that's consolidating a sell within a plant, whether that's installing some automation that is able to bring up the productivity dealing with indirect labor, et cetera. So I feel comfortable that we continue to see opportunities and our continuous improvement program will allow us to achieve those.

And John, while you're thinking of the other 2 questions, just to add to that, I think when you look at these big facilities and you look at the fact that we are very aggressive in terms of lean manufacturing as the basis of how we kind of look for cost as opposed to maybe just blindly kinking the hoses. It's amazing how process improvement is a never-ending sort of chore here. And I think that we continue to figure out further -- even though we've got the state-of-the-art platform, the interactions between the different processes always have opportunity, further automation, not to mention that your product is always changing over time, so you always have new opportunities. And I think as we brought this platform together, we've also diversified some of the product types within these mega plants. So suddenly our new big magazine catalog plant is not just doing magazine catalogs, we're able to fill some of the cracks with, call it, retail inserts that they didn't do before. And of course, that involves adding some equipment here and there on those existing presses. But it's really -- it's beyond just filling the platform. It's also looking for new opportunities to fill the cracks between the big chunks of business that we have going through them. So, John, go ahead.

And I think as you started out -- the start of question is, we look at the -- our adjusted EBITDA margin. I think one thing that we've seen that's a little bit different than our expectation in 2012 is related to product mix. We have seen some additional paper and outsourced services sales which is basically done on a pass-through basis. So as we sort of look at the year, we're a little bit higher than we would have expected at revenue line and a little bit lower than an adjusted EBITDA margin percentage as a result of that. But that's the only thing that's really changing there that I'd say is a little bit different. Did the combination of Joel and I answer the[indiscernible]

Yes, that's great. And just one final one for you Joel. Just -- what we see here in Canada and just wondering if it generally applies to the U.S. is, a lot of kind of the advertising mentality, particularly from a national advertising front, is kind of predicated on, if you see more than kind of 3% GDP growth, it just convinces a lot of folks out there to start spending. Here in Canada, we're stuck in the 2% to 3% GDP growth range. It looks like the U.S. is not that different from that. Do you guys view, from a cyclical perspective in your business, kind of that 3% GDP growth threshold as relevant and it's just a question of getting the economy up another gear?

Look, economic growth is the primary driver of value for everybody, and it's been incredibly frustrating to operate a big complicated business in a low-growth environment. If I look at -- in our past conference calls, we've been pretty clear that the visibility for business has been really tough. And so in a low-growth environment, you don't have that cushion of growth that makes up for being wrong or not understanding which way the world is going to go. So you have to be on your A game and assume the worst. And if growth comes back, then you're even better prepared. Before, I mean, the so what? of this is, before, when I was looking forward to try and understand what was happening, it was like looking through pea soup. Now with the election here and the country seeming to be okay with all the challenges that have happened with a divided government that has proven not to be able to kind of work together, now it's like looking at a bowl of oatmeal. And so as I think forward in 2013, I remain very concerned about our economy to weather some pretty serious issues that are coming. I mean, the fiscal cliff. You may say that, "Okay, they're all going to, sooner and later, get it together and they're going to come up with a solution." They may kick the can down the road little bit to give themselves more time, but what we learned last year is that the process of getting there is very damaging. And you may get to a solution, but if it's a messy process, business gets scared. And I'd say that advertising, to your point, I mean, if businesses are unsure about what the growth rate will be and that is ho-hum growth rate, advertising is the first thing that they can pull back on. If the consumer is not spending, why do you spend money on advertising when every business is looking for -- pulling cost out. And so I feel really confident about our position to deal with this storm, whichever way it takes. But I am concerned about our ability to deal with the big macroeconomic issues in a go-forward basis. I just think that the process is going to be rough, and running a business today is going to be about planning for the worst and managing your business really hard, there's not a lot of margin for error, and hope that we can get out of our own way. But I'd say you're right, we see the same thing. I'm going to tell you, without the meaningful growth, it could be difficult to create jobs and create confidence that ultimately allows the business to kind of say, "Okay. It's time to spend again." So that's the environment we're in down here, and I think it's here for a while.

I think we have one more question, operator.

Your next question comes from the line of Jamie Clement.

Just a -- most questions have been asked and answered, but, Joel, from a high level, obviously compared to Worldcolor, the integration of Vertis, it's still complicated by industry standards, but it's not as complicated as the one you just went through. Can you talk about the lessons learned from the Worldcolor integration and what may be applicable to Vertis that you know now that maybe you didn't know 3 years ago?

Yes. Yes, I can, absolutely. And let me start by saying that I don't care how big or small it is, every integration is difficult. You know I think we are very proud of what we learned and how we pulled off the Worldcolor integration for a company that hasn't done something of that size. But our team is geared up and understands that, just because you won one game, you've got to go right back to it and have that focus. What we've learned is that having a very good, disciplined process in place for all the different swim lanes involved in integration, whether it's on the sales front, the plant front, you name it, HR is key to everything. And I think that what they say is true. The trick is, go fast, go fast, go fast. And when you think you're going fast enough, go faster. And at the same front though, I think, some of the lessons learned is that, you can continue looking at your plan -- and you've got to be careful because you may find that you can end up spending more money at certain times that maybe you could have pulled back later. I'm proud of what we did with World Color. We ended up actually spending less than we expected. But I'd say that, as you look at equipment moves or things like that, you just got to be cautious about making sure that you've got the right answer because, again, the math in this economy is going to continue to change. You have to pay attention to the workload, you have to pay attention to what truly will make the best platform for our customers at the end of the day. And so I think that's one of the big…

Absolutely.So thank you, everybody, for joining us. We are very proud of how we continue to weather the storm. But I want to be clear that we are concerned about what is happening in our world with the economy and with, therefore, the industry. But again, I feel that our team is second to none, and what I've seen them do in dealing with this time in our economy is just impressive. And I thank all of our employees for continuing to help us through this. So thank you, and we'll see you next quarter.

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