Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics Third Quarter 2013 Conference Call. [Operator Instructions] I will now turn the conference 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, our Chairman, President and Chief Executive Officer; John Fowler, our Executive Vice President and Chief Financial Officer; and Dave Honan, our Vice President, Corporate Controller and Chief Accounting Officer. Joel will lead off today with key highlights for the quarter. John will follow with a more detailed review of our financial results, followed by Q&A. With the exception of certain debt ratios, prior year financial results do not include the acquisition of Vertis. All actual 2013 results include Vertis from the day of acquisition on January 16, 2013. 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. Our financial results are prepared in accordance with Generally Accepted Accounting Principles. However, in addition to financial measures prepared in accordance with GAAP, this presentation also contains non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin and recurring free cash flow. We have included in the slide presentation reconciliations of these non-GAAP financial measures to GAAP financial measures. The slide presentation can be accessed through a link on the Investor Relations section of the Quad/Graphics' website. There are also detailed instructions on how to access the 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 our website after the live call concludes today. I will now turn the call over to Joel.

Thank you, Kelly, and good morning, everyone. We are pleased to begin our call this morning by reaffirming 2013 annual guidance for recurring free cash flow in excess of $360 million. Our ability to generate significant recurring free cash flow is the foundation of our strong balance sheet and provides us with the ability to execute our disciplined capital deployment strategy. As always, we remain flexible and opportunistic in terms of our future plans for capital deployment, which includes balancing our key priorities to pay down debt and pension liabilities, invest in our business, pursue future growth opportunities and return value to our shareholders. While volumes in our U.S. platform were as expected, we did face challenges during the quarter that impacted our results, primarily related to ongoing industry pressures, economic and political challenges in Latin America and a slower-than-expected turnaround in the underlying Vertis business. That said, the Vertis integration process itself is going well. As far as the Vertis integration, we are 9 months into a multiyear process with many moving parts, and I am proud of the work our employees are doing to advance the integration and achieve our objectives. We hit the ground running in January, focusing on rebuilding and moving equipment, installing IT systems and training our newest employees, including providing sessions on our corporate culture and how we use our values to drive our business decisions. Our integration goal was to accomplish as much as possible in the first 6 months of the year before ramping up operations for the busier second half of the year, a critical time when we need all hands on deck to meet volume requirements. We made good progress. However, during the quarter, we faced challenges related to the slower-than-expected turnaround in the underlying Vertis business, which impacted top…

Thanks, Joel, and good morning, everyone. Slide 4 is a snapshot of our third quarter 2013 financial results, including Vertis, as compared to our third quarter 2012 results. As a reminder, our 2012 results do not include the acquisition of Vertis, which occurred on January 16, 2013. Net sales were $1.2 billion as compared to $1.0 billion, representing a 16% increase due to the Vertis acquisition. If we look at the Vertis business as if we acquired it at the beginning of 2012, our pro forma consolidated net sales declined approximately 7%, of which we estimate Vertis represented approximately 1/3 of this decrease. The remaining 2/3 of the decline, related to our core business and reflect top line challenges from ongoing industry pressures and economic and political challenges in Latin America. Overall, this variance is in line with our net sales expectations for both the quarter and the year, inherent in the lower end of our guidance range. Cost of sales was $950 million as compared to $798 million. SG&A expense was $102 million as compared to $87 million. Depreciation and amortization was $82 million as compared to $83 million. Restructuring, impairment and transaction-related charges were $28 million in 2013, which included $9 million of noncash impairment charges. In comparison, restructuring, impairment and transaction-related charges were $12 million in 2012 and included a $13 million noncash curtailment gain, resulting from an amendment to the postretirement medical benefit plan. Excluding the noncash amounts, restructuring, impairment and transaction-related charges for the third quarter decreased from $25 million in 2012 to $19 million in 2013. Interest expense was $21 million as compared to $22 million. Our adjusted EBITDA was $154 million as compared to $155 million and our adjusted EBITDA margin was 12.8% as compared to 14.9%. Our adjusted EBITDA margin reflects a…

[Operator Instructions] Our first question comes from the line of Haran Posner.

Just maybe starting with the volume picture in the U.S. segment. I guess, in your commentary you mentioned that the print volumes in the U.S. were actually as expected. You did point out that there's still industry pressures. I was just curious, should we read into that, that there's any change on the pricing dynamic at all this quarter?

Yes. I can give you some color just on, I think, what's happening in volumes by the different segments we're in. I'd say that from a magazine standpoint, overall industry ad pages were probably down about 1.8. I'd say, we probably saw actually a little bit of an increase. However, I think they're also managing their ad-edit ratio more tightly. So in other words, the ad page isn't the whole story, but it's a more stable story that we're seeing. From a catalog standpoint, we're probably seeing just a little bit under 1% decline for us; in the industry, maybe about 2%. So fairly stable as expected. And if you recall, we always talked about pricing declines of about 1% to 2%; and volume, about 2% to 3%. And so those trends are what we continue to see. However, I will say that on the pricing side, we're seeing the 1% to 2% creep higher in terms of -- towards the higher end of that level, not above 2% but not closer to 1%. And when you think about volumes here for the industry, that stuff is easier to deal with. I mean, for instance, as we've done the various acquisitions that we've done, whether it's Vertis or Worldcolor, we've shored up the most efficient platforms and taken out excess capacity, when we closed over 19 facilities or 6.7 million square feet. And actually if you take into account the assets we didn't take in Vertis, which through the asset bankruptcy, it was almost 23 facilities. So that part, I think that the industry can manage, if they have the discipline to take the capacity out. The pricing is the part that's harder for the industry to offset. That's where you really have to focus on best-in-class cost takeout. And 1% to 2% doesn't sound like a big number, but it actually is. And again, we focus a lot of efforts through lean manufacturing, through changing the platform, through all the things we do with distribution to try and offset that impact. But again, we continue to see both things in the range that we've talked about, with pricing just edging up a little bit.

Okay. That's terrific color there, Joel. When I look into 2014, I guess, correct me if I'm wrong, but I believe you have the expanded contract that you signed with Time -- with the magazines there. That should be a bit of a tailwind on the revenue front. I'm just wondering first if you can confirm that, and then if there's any other renewals that are sort of major that we should be thinking about looking out to next year.

Well, we're in the middle of our planning for 2014, and some of that is really predicated on our customers feeding us their plans for 2014. So that process is really kind of happening, as we speak. It's true, yes, we have a good contract coming on board with Time Inc. We have quite a few renewals. We don't tell everything that we do, and there's ebb and flow in the portfolio, which is pretty normal. So until we can get through our 2014 planning, it's hard to give color on where we see it. It's a great win. I mean, the Time Inc. thing, we were very pleased that they basically opted to single source with us, which is a company that had never done that before. But we have a huge portfolio of customers, and we're renewing a lot of things and it's a challenging market out there.

Absolutely. And then maybe shifting to John. Just in terms of working capital, obviously, a big draw in Q3, seasonally high. But just curious, I mean, for me to square off your free cash flow guidance for the year, I kind of have to assume that there's a big reversal of that in Q4. Just wondering if you can help us at all with modeling that line for the year.

Well, I think that through the 3 quarters, Haran, we had working capital consumption of $4 million, which was the combination of $81 million of working capital consumed against $77 million of the restoration of normalized accounts payable as a result of the Vertis acquisition. So we had a lot of noise. Historically, our working capital peaks between September 15 and the end of -- and the middle of November, and then starts moving down. So yes, we would expect to be generating free cash flow from working capital during the fourth quarter by the end of the year. And that's the assumption that's inherent in our affirmation of the guidance on the -- in excess of $360 million on the recurring free cash flow. And that's historically what we've seen. So we haven't seen any -- the only thing that we've seen unusual in 2013 is this restoration of the normalized accounts payable result of Vertis.

Okay, that's perfect. And then maybe just one last one with respect to CapEx. John, you guided to the lower end of the range. I think in your earlier comments with respect to productivity at Vertis, it sounds like maybe they under-invested in their platform before. Is that something that we should think about with respect to your CapEx outlook? Or is it not overly material?

I don't think -- Haran, I don't think it's going to impact our CapEx. But what we have seen based upon the challenges in the turnaround and, frankly, the challenges in the platform is really around the deferred maintenance. And originally, our expectation of the acquisition was that we were going to generate synergies in excess of $50 million. We still feel comfortable with that. Our original anticipation was that we would have about $1 of cost to achieve for every $1 of synergy. We think that number is going to be more in the range of $1.25 to $1.50 per $1 of synergy that's generated. So that's where we're going to see it, not in the CapEx but in the onetime restructuring and impairment. Having said that, even with the challenges in the turnaround of the underlying business and some of the challenges in the platform, we continue to feel really good about the acquisition in the sense that the strategic fit is working out as we expected it to. As Joel indicated, the integration process itself is going well. And from an economic point of view, even taking the cost to achieve up into the $1.25 to $1.50, our cost of the acquisition, post integration is still going to be less than 3x as far as the purchase price.

And Haran, this is Joel. Let me add a little bit of color on what we've talked about, the platform turnaround. Remember, we closed the deal, what, the second week of January. And so we had a period of time where we had to move quickly to do what we call baselining of equipment. And so in an environment where people have under-invested in, it's not the big heavy equipment in terms of building more, it's actually just in terms of the daily maintenance that they pulled back on, and these are complicated pieces of equipment with lots of gears and things like that. And so to baseline a printing press, you're literally somewhat tearing it apart and then rebuilding it back up, and that takes time out of the production schedule. So we can only do so much until we get to the busy season, where we need everything running, whether or not it's been baselined. And so when you're in the busy season, everything is running hard and it's not -- under-invested in equipment from a maintenance standpoint is not the problem. The problem is not in the light season, it's in the heavy season, because things break when you don't want them to and it's costly to move work around to make up for that. And so that's what we're experiencing, it will take a little bit more time here to continue to do those baselines because we can do it only in open windows where we're not expecting the higher volumes like you do in the third and fourth quarter for retail. Does that help?

Our next question comes from the line of Charlie Strauzer.

Joel, if we could just talk a little bit about some of the issues you're having with the integration of Vertis, and maybe you can expand a little bit more as to what steps are being taken to kind of fix those and what are the kind of stumbling blocks you kind of incurred to date.

Yes, I mean, so when you think about Vertis, you got to think about there's the integration and there's the underlying business. So the integration, which you kind of think about of merging IT systems, rolling out culture, which in our case is things like the uniforms but also helping our new partners understand how our culture works, so they can get things done, the HR policies. All this stuff from an integration standpoint is going well. I mean, we're pleased with where that's going. But when you acquire a business that's gone through bankruptcy, which turned out to be 3x, it is a turnaround by definition. And so the underlying business is what we talk about, has been a challenge. And that's where I referred to making up for deferred maintenance. And then when you think about the top line part -- so it's the platform and the top line that you think about when there's a company that's gone through financial challenges. And you remember that Vertis has 2 product lines primarily, which is the retail insert and transactional direct mail. On the retail side, it's about as expected from a top line standpoint. I mean, you had some ebbs and flows with some customers wanting to -- if they had a 100% position before, looking at the bankruptcy thing, maybe we should pull a little bit out. But generally speaking, the top line is where we expected it. On the transactional side, which is the direct mail side, you have to remember these are not longer-term contracts, they're usually sort of seasonal and even drop-in. That's where we saw more of the pressure on the top line because people could pull the work. And we had some significant customers that started pulling the work before the transaction was even done, which we knew that, that was going to happen. But then it takes time to win them back because they award it sometimes at a season at a time. We are starting to see some of those long-term clients who did reduce their work, start giving us work back. But that takes time and it takes effort. And so we've done a lot of work on the sales front in terms of merging the 2 groups, opening up the opportunity for direct mail to our other verticals. And again, some of that stuff is not a light switch but takes time. So to summarize, it's really you got to think about the integration itself is going well, the underlying turnaround of a challenged business is just taking longer than we would have liked, but we're putting out all stops to continue to do what we're doing.

And Joel, when you talk to those direct mail customers, some of the larger ones, is it more of just a -- they're pulling back because there's uncertainty maybe with the political environment that -- what happened with Congress? Or is it just they're not sure where the economy is going or they -- you're getting a little more comfortable now and saying, "Okay. You know what, we're going to dip our toe back in the water again and start giving you back some volumes."

Actually, from an industry standpoint, the direct mail story is more of a growth story. So we're not seeing kind of an impact because of the political environment. I mean, the fact of the matter is direct mail works. Where we've seen some strong vertical performance in the industry now is in things like mortgage credit cards, banking. Those are areas that got hit pretty hard in the past, but they realize that it works. And what's really growing in direct mail is the heavily personalized, in-line finished product line, and that's really the strength of what our platform does. And some of that, when it got pulled away out of concern about more just the Vertis bankruptcy, we replaced a lot of that volume, but it was with the more generic direct mail volume that doesn't require all the bells and whistles, and therefore, has a different price mix and not as much value add. And so as we continue to push on the sales front and making sure that we have all the right things -- the platform is looking beautiful, by the way, on the direct mail side, but the sales efforts to now bring back that higher complex direct mail stuff is really the focus of what we have going on here.

And then just switching gears a little bit to some of the other parts of the business, where maybe you saw some organic growth in the quarter, maybe you can highlight a little bit more about those items and what you're seeing kind of visibility-wise there.

Yes. I think I sort of went through some of that in the last question, just talking about we continue to always say that there's about a 2% to 3% degradation in the industry volume, if you look at it across the whole system here. We've seen a little bit less in that depending on the category you're in. I mean, ad pages for magazine were actually up in our mix. Catalog was slightly down. Again, we're down in direct mail, but the industry is actually up, and retail is -- we experienced as expected volumes. So I think it really depends on the category, but it's -- we're not -- I think there's always a lot of concern in this industry about where is volume going to go and is it going to accelerate, and I think on the good news category is we're not seeing that. We're seeing stabilization in some of the categories. But I'll point you back to the challenge the industry will continue to have is the pricing, and that is where we've seen it within the range of the 1% to 2%, but it's actually edged up a little bit towards the higher end of that range, and that's where the industry needs to figure out how to offset those costs.

And Joel, and how much do you think the Postal Service turmoil has impacted some of the pricing as well?

I'm not sure it impacts the pricing. I think it more is going to impact how people think about volumes. It's not the only factor. I think as people like catalog or in direct mail see their businesses improving, they're going to continue to use the mail because that's where they drive a lot of the transactions. But when you talk about this exigent case, again, if you go back in time here, the last postal reform capped any kind of increase the Post Office could do at the change in CPI per year. But they had an underlying clause in there that said if they couldn't offset their costs and it was an extreme situation, which, by the way, the current exigent case is claiming that the extreme situation is the recession back in 2008 and why they want to increase rates in 2014, and so they're being challenged on the legitimacy of that. But we're talking about a 5-plus percent potential increase in our customer's largest cost. To me, that's probably the bigger factor in terms of what the Post Office is going to have an impact on rather than pricing. Pricing is, clearly, just the industry not having the discipline to pull capacity out that we have as we've consolidated. And so I think you'll continue to see that play out. And our focus is to be the best in class and make the disciplined decisions on whether it's market share because market share at any cost does not make sense. We believe in a disciplined approach to pricing that allows me to look at my investors, my employees and say that the work you're doing is sustainable at these pricing levels. And I think you're seeing in the industry, there's some fallout happening, where people are going beyond that, and it's just not sustainable. And so we've got to balance defending market share with market share at any cost, and we'll continue to be very disciplined about how we approach that.

There are no further questions at this time.

Okay. Well, thank you all for joining us. We continue to be very disciplined in our approach in running this company. I'm absolutely pleased with our employees and how they're facing the headwinds. But the headwinds do exist, and we will continue to manage hard to try and offset that. We'll see you again in February. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.