Quad/Graphics, Inc. (QUAD) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics Fourth Quarter and Full Year 2014 Conference Call. During today’s call, all participants will be in listen-only mode. [Operator Instructions] Following today’s presentation, the conference call will be opened for questions. [Operator Instructions] Please also note this event is being recorded. I will now turn the conference over to Kyle Egan, Quad/Graphics’ Manager of External Reporting and Investor Relations. Kyle, please go ahead.

Thank you, operator, and good morning, everyone. With me today are Joel Quadracci, our Chairman, President and Chief Executive Officer; and Dave Honan, Executive Vice President and Chief Financial Officer. Joel will lead off today’s call with highlights of our financial results along with an update on our strategic goals. Dave will follow with a more detailed review of our fourth quarter and full year 2014 financial results and a summary of our 2015 guidance 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. Our financial results are prepared in accordance with generally accepted accounting principles. However, this presentation also contains non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, free cash flow and debt leverage ratio. 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 the Investor Relations section of the Quad/Graphics' website under the events and presentations link in the left hand navigation bar. There are also instructions on how to access the slide presentation in our quarterly news release issued last evening. A replay of the call will be available on the Investor Relations section of our website after today's call. I'll now turn the call over to Joel.

Thanks, Kyle, and good morning everyone. I’m pleased to report that our fourth quarter and full year 2014 net sales, adjusted EBITDA, and free cash flow were in line with our expectations. We continued our journey to transform our company and the industry while maintaining a stringent focus on serving our clients well. We acquired commercial and specialty printer UniGraphic in February, followed by Brown Printing in May, and successfully completed the integration of Vertis. Throughout the year, we remain committed to our priorities to maintain a strong and flexible balance sheet, invest in our business, pursue profitable investment opportunities and create long-term value for our shareholders and clients. When we talk about our journey as a company, we like to refer to it in chapters. Chapter 1 began 44 years ago in 1971 when my father Harry decided there had to a better way to run a printing company and started Quad/Graphics. Chapter 1 was all about building a strong foundation, a 40-year period in which we established our company’s values and culture, grew rapidly through Greenfield growth, built a premier manufacturing and distribution platform equipped with the latest technology and established a reputation as one of the industry’s foremost innovators. During those years, we fastened our seat belts and we spent forward with fast and furious organic growth. When Chapter 1 culminated in 2010, Quad had grown from a tiny upstart into a $1.8 billion printer employing nearly 12,000 people across 11 domestic plants plus international locations in Poland, Argentina and Brazil. Chapter 2 of our company’s journey began in 2010 and continues today. This Chapter is about our role as a disciplined industry consolidator. We saw an opportunity to start participating in industry consolidation beginning with the great recession, which severely impacted volumes. At the same time, digital and mobile content delivery methods came off age as consumers rush to adopt new technologies creating confusion for marketers on a how-to-use print in combination with other channels as part of the multimedia campaign. This created an era of opportunity for companies like Quad with a strong balance sheet and access to capital markets and with manufacturing and distribution economies of scale. In recent years, we have completed a number of consolidating acquisitions. The July 2010 acquisition of Worldcolor was a transformative event in our company’s history. We significantly enhanced Quad size range of products, services and solutions and overall industry presence. In addition, we became a controlled publicly traded company using equity to finance a portion of the acquisition in order to preserve the strength of our balance sheet. Since 2010, other consolidating acquisitions have included Vertis and Brown, and the asset swap with Transcontinental. Through each of these transactions, we have been able to enhance or expand our product offering while we are moving inefficient in underutilized capacity, pulling out cost and transitioning work to the most efficient platform. This includes facilities that we built and maintained during Chapter 1 of our company’s history as well as plants we acquired in which we continue to make strategic investments. All along the way we have shown financial discipline maintaining a strong balance sheet while paying down the debt intention obligations from the Worldcolor acquisition. Prior to 2010 Worldcolor acquisition, our debt leverage ratio was 2.68 times. Today it is 2.6 times despite having completed multiple consolidating acquisitions over the past 4.5 years. In the past year, we started our migration into Chapter 3 which is about continued company transformation. In this Chapter, we will remain focused on serving our clients well while adding products and services that support their needs globally. This includes reinventing existing product line such as book platform which I’ll discuss a little later in the call. As always, we continue to look for ways to enhance our position in other core product lines too, while expanding into product lines with higher growth potential such as packaging, commercial and specialty print. For example in 2013, we entered the folded-carton market with the acquisition of Proteus Packaging and we look forward to growing this part of our business. As part of our focus on growth and opportunities in commercial and specialty print, we recently announced our acquisition of Marin’s International, a worldwide leader in point-of-sale display. The Paris based company has products in more than 100 countries. Its international patent portfolio features a variety of display systems including the popular LAMA that instantly pop open into position. Quad has been manufacturing display systems for Marin’s customers for more than 10 years from our facilities in Poland. In fact we are Marin’s single largest display manufacturer in Europe. With Marin’s, we enhance our existing in-store and large format marketing solutions and expand on our ability to help retailers and brand marketers promote their brands as part of a global campaign. While small the Marin’s acquisition enhances our position with major consumer packaged goods companies and retailers with which Marin does business all over the world. We will leverage our portfolio of products, services and solutions to enhance the conversations Marin’s already is having with its clients out today. In Chapter 3 of our company’s evolution, we are also looking at the continued expansion of our QuadMed subsidiary which specializes in employee sponsored health care solutions. Founded in 1990 to address our own employees needs for quality, cost effective primary care, QuadMed today provides workplace solutions on a national level to employers of all sizes including private and public sector companies. These services include on-site and near site primary care clinics, retail clinic management, telemedicine, and comprehensive health and wellness programs. As we move forward, we will continue to be focused on five strategic goals to transform our company and drive performance through innovation. We believe this focus will allow us to be successful despite ongoing industry challenges. Our first strategic goal is to strengthen the core print categories of retail inserts, publications, catalogs, books and directories as shown in the pie chart on slide 4. While these product lines have been under pressure in recent years, they’ve remained foundational to most marketers and publishers business strategies and represent a huge business opportunity for us. Further through these core product lines, we generate a significant amount of free cash flow to support other growth opportunities. As such, we are focused on strengthening these product lines to create additional value. Using a disciplined return on capital framework, we made significant ongoing investments in our core manufacturing and distribution platform. These investments which include equipment automation and continuous process improvements increase efficiencies and throughput while reducing labor. These investments directly benefit our clients too. An example of this is our co-mail platform in which we combined magazine or catalog titles or letter-sized direct mail into a single mail stream to earn USPS work sharing discounts for our clients. In 2014, Quad/Graphics co-mailed approximately 5.3 billion magazines, catalogs and direct marketing pieces and an organic growth rate increase of approximately 5% over 2013. This year, we will begin incorporating volumes from the May 2014 Brown acquisition further enhancing savings opportunities for our clients. Our expertise in co-mailing which includes our own proprietary software for analyzing clients incoming mail files and optimizing mail distribution plans is resonating with catalogers, direct marketers and magazine publishers. For example, FIRST Magazine, one of the world’s largest publishers of monthly magazines recently signed a contract with us to continue printing 20 of its 21 U.S. magazine titles through the year 2020. This multiyear contract valued at more than $500 million over six years speaks to First’s confidence in us as its print partner. First cited our co-mail expertise as a major reason for the renewal. Additionally, the publisher credit our commitment to quality, innovation and outstanding customer service as the other reasons for maintaining the relationship with us. Our second strategic goal is to grow the business profitably through ongoing innovation, organic growth and disciplined acquisitions. As far as acquisitions, we continue to pursue opportunities that expand our business into new product categories and geographies, transform an existing product line or create value driven industry consolidation as already discussed. Regardless of the type of acquisition, we continue to take a disciplined approach pursuing acquisitions that are a good strategic fit, make good economic sense, have integration plans that are executable in a timely fashion and without risk of significant client disruption, and lastly allow us to retain the financial strength and flexibility we had prior to the acquisition. We will continue to capitalize in growth opportunities through ongoing investments and innovations in our existing platform too. Case in point, our recently announced three-year plan to transform our book platform through our investment in 20 or more High Speed Color Digital Web Presses. Complementary front end workflow solutions for accepting orders and putting them immediately into production and back end integrated systems for finishing distribution and fulfillment. Our investment in digital printing technology will radically transform the supply chain for publishers by reducing the need to carry large inventories that may go unsold and become obsolete. According to a recent INTERQUEST study 90% of printed books in North America are currently produced on digital printing equipment and that amount is expected to grow to nearly 25% in the next four years. To date, we have installed three of the 20 high capacity Digital Web Presses and by mid-June we will have a total of five presses up and running. Of course our ability to innovate extends well beyond the platform. Today’s marketers and publishers are seeking a partner who can deliver their brand consistently across multiple media channels and we have the tools and talent to help them achieve their goals. Recently, we announced the strategic repositioning of our existing BlueSoho business for that purpose. BlueSoho combines three business units into a new integrated marketing and technology firm that helps retailers, publishers, and Fortune 500 companies with brand activation campaigns, digital and mobile solutions, local promotional strategy, planning and buying, and creative and production services. Existing business units now under BlueSoho include our New York City based digital art and imagery touching studio we launched in 2004 called BlueSoho, Nellymoser, the interactive mobile business that joined us through the Brown acquisition, which creates mobile companion apps and cross media channel. And our media planning and placement group, which came to us through our 2013 Vertis acquisition. Through BlueSoho Quad/Graphics will continue to provide existing clients with robust solutions for integrating prints with other channels to drive business results. However, the strategic repositioning of BlueSoho as an independent brand will enable Quad/Graphics to capture new business among publishers and marketers who may not have considered us for multi-channel execution in the past. Our third strategic goal is to walk in the shoes of our clients. We are focused on creating a client experience that cultivates raving fans. One way we do this is by partnering with them to fully understand the internal processes, marketing strategies, and challenges so we can better deliver the solutions that will help them achieve their business objectives. As a business solutions consultant we examine everything from their marketing strategy, including how they manage their customer data to production and marketing workflow processes. Our goal is to help our clients lower their operating cost improving productivity and decrease time to market, while providing revenue generating ideas and omnichannel strategies. This deep dive into our clients business reflects our consultative approach to doing business. Another way in which we are providing value to clients is through company sponsored thought leadership events including Camp/Quad, which addresses the challenges and multi-channel marketing and the Quad/Graphics postal conference, which covers ways to offset our clients single largest manufacturing related expense. Our fourth strategic goal is engaging employees through our company’s unique corporate culture, which encourages employees to take pride and ownership in their work. Take advantage of continuous learning and job advancement opportunities, share knowledge by mentoring others and innovate solutions. One key way we drive employee engagement is by acting on employee feedback gathered through daily conversations surveys, round-table discussion and open forms at company and departmental meetings. More recently, we rolled out a number of programs specifically targeted at improving employee engagement through events that fill camaraderie and recognize employee contributions. Our last goal, enhancing financial strength and creating shareholder value focuses on our disciplined approach to maximize free cash flow and adjusted EBITDA, maintain consistent financial policies to ensure a strong balance sheet and liquidity level, and retain the financial flexibility needed to strategically allocate and deploy capital as circumstances change. As always we adjust our capital allocation and deployment based on prevailing circumstances in what we think is best for shareholder value creation at any point in time. These priorities include making compelling investments that drive profitable organic growth and productivity in the company’s current business, execute on acquisitions into higher growth product categories or growing geographic markets, pursue value driven industry consolidation, deleveraging the balance sheet through debt and pension liability reduction and returning capital to the shareholders through dividends. With that I will turn over the call to Dave who will provide a more detailed review of our financial results along with our 2015 guidance.

Thank you Joel and good morning everyone. Slide 9 is a snapshot of our fourth quarter 2014 financial results as compared to 2013. The acquisition of Brown is included in our 2014 results since the date of that acquisition on May 30. Net sales were $1.4 billion in the quarter, representing a 5.5% increase from 2013, due to the Brown acquisition. Offset by ongoing volume and pricing pressures lower pass through paper sales and a negative impact from foreign exchange rates. Our adjusted EBITDA was $183 million, as compared to $198 million in 2013, and our adjusted EBITDA margin was 12.8%, as compared to 14.7%. These decreases reflect ongoing pricing and volume pressures, and the margin dilution impact of Brown’s historically lower margin profile, partially offset by productivity improvements. Slide 10 is a snapshot of our full-year 2014 financial results as compared to 2013. Net sales were $4.86 billion and were within our guidance range of $4.8 billion to $4.9 billion. Our 2014 net sales increased by 1% versus 2013 due to incremental net sales from the Brown acquisition. Our adjusted EBITDA was $543 million within the 2014 guidance range of $535 million to $560 million, a decrease from $577 million in 2013. Our adjusted EBITDA margin was 11.2% as compared to 12% in 2013, primarily due to the ongoing volume and pricing pressures in the margin dilution impact of Brown’s historically lower margin profile, partially offset by productivity improvement. We also achieved the remainder of our 2014 income statement guidance including depreciation and amortization of $336 million within the guidance range of $335 million to $345 million, restructuring, impairment and transaction-related charges of $67 million. These restructuring charges decreased $28 million from 2013. When excluding non-cash impairment charges of $14 million. Our 2014 cash restructuring charges were $53 million, which were within our guidance range of $45 million to $65 million for cash restructuring. Interest expense of $93 million was within our guidance range of $90 million to $95 million. Interest expense increased from $86 million in 2013, due to a higher weighted average interest rate, as well as additional borrowings to fund the Brown acquisition. On slide 11, we have a summary of free cash flow, which we define as net cash provided by operating activities, including pension contributions less purchases of property plans and equipment. Our 2014 free cash flow was in line with our expectations at $154 million, including $192 million of free cash flow during the fourth quarter, which is our strongest seasonal quarter of free cash flow generation. The $154 million of free cash flow was $1 million below our 2014 guidance range of $155 million to $165 million, primarily due to higher working capital levels, which were partially offset by reduced capital expenditures. As compared to 2013, free cash flow decreased from $292 million, primarily due to an estimated $90 million one-time benefit realized in 2013 from the restoration of working capital levels associated with the Vertis acquisition, which was acquired without normalized levels of accounts payable. Excluding this impact free cash flow declined $48 million, primarily due to lower adjusted EBITDA and increased working capital, including the working capital impact from the Brown acquisition, partially offset by lower capital expenditures. On slide 12 you will see that we ended the year with $1.4 billion in debt and capital leases, an increase of $19 million from 2013. And our year-end debt leverage ratio was 2.6 times versus 2.44 times in 2013. The increase in total debt and the debt leverage ratio is due primarily to increased debt to fund the Brown acquisition and lower adjusted EBITDA. During the fourth quarter of 2014, our debt leverage ratio decreased 21 basis points from 2.81 times at September 31 as we utilized the $192 million of fourth quarter free cash flow generation to reduce debt. We continue to believe that operating in the 2 time to 2.5 times leverage range is the appropriate target over the long term, but we may at times like now operate outside this range depending on the timing of compelling strategic investment opportunities like the Brown acquisition in 2014 and seasonal working capital needs. We continue to remain diligent in reducing debt and pension liabilities. Since the July 2, 2010 Worldcolor acquisition we have reduced debt by $369 million and reduced pension obligations by $325 million. As it relates to our pension obligations, the year-end liability was $222 million, an increase of $35 million from 2013. This increase is primarily due to a $95 million increase in the pension liability valuation, as a result of a 90 basis point decrease in the discount rate assumption used to value the pension liability. This was partially offset by $51 million in cash contributions in 2014. During the year, we also terminated the Worldcolor post retirement benefit plan, which removes further funding obligation for those benefits and resulted in a $5 million non-recurring gain during the fourth quarter, which was recorded in restructuring, impairment, and transaction related charges and excluded from our adjusted EBITDA. Slide 13 includes a summary of our debt capital structure. During 2014, we refinanced and extended maturities on $1.9 billion of our debt structure, including issuing our inaugural $300 million senior unsecured notes. Additionally, during the fourth quarter, we completed the repurchase of $109 million of fixed rate private notes under our master note and security agreement. We were able to repurchase these notes at essentially par value. The results of these transactions enabled us to extend and stagger our debt maturities, balance our fixed to floating rate debt closer to a 50% floating 50% fixed rate and provide more borrowing capacities to execute on our strategic goals. Availability under our $850 million revolver is $754 million at December 31, 2014. We have no significant maturities until April 2019. The weighted average duration under our debt capital structure is 5.4 years with a blended interest rate of 5%. Our fixed rate debt is at an average interest rate of 7.2% and our floating rate debt is at an average interest rate of 3.1%. Our debt to capital structure is 55% floating and 45% fixed. We believe this fixed versus floating rate debt structure provides us with the financial flexibility we need over the long time, including 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. One exceptional way in which we return value to our shareholders is through our quarterly dividend program. Our next quarterly dividend of $0.30 per share will be payable on March 20, 2015 to shareholders of record as of March 9, 2015. Slide 14 is a summary of our 2015 financial guidance. We anticipate our 2015 net sales will be in the range of $4.8 billion to $5 billion. Our net sales assumptions include continued downward pricing pressure of negative 1% to negative 1.5% of consolidated net sales. Organic volume, which excludes acquisitions are flat to down 3%, partially offset by volume contributions from 2014 acquisitions of approximately 3%. We expect 2015 adjusted EBITDA to be between $500 million and $540 million. Quad continues to be a significant free cash flow generator and as such expects our free cash flow to increase in 2015 to a range of $180 million to $200 million, due to reduced cash flow needs for pension, restructuring, and working capital. Primary assumptions in our free cash flow are as follows. Pension cash contributions will be approximately $30 million in 2015, as compared to $51 million in 2014. The $21 million reduction in pension contributions is driven primarily from changes in pension funding loss. Cash restricting charges are estimated to be between $25 million to $35 million in 2015, as compared to $53 million in 2014. These charges are net of a $10 million non-recurring cash payment received from Courier Corporation in February from the terminate acquisition of Courier by Quad. Capital expenditures will range between $145 million to $165 million, which includes approximately $20 million in carry over projects from 2014. This compares to a $39 million [ph] of capital expenditures in 2014. We ended 2014 with higher working capital then what we would have liked, primarily due to higher working capital needs for the Brown acquisition and higher accounts receivable. We anticipate we will be able to reduce working capital levels in 2015 to more than offset the impacts of the increased capital expenditures. The remainder of our 2015 guidance includes depreciation and amortization of $315 million to $325 million, interest expense of $85 million to $90 million, and cash taxes of $20 million to $35 million. As we move forward in this challenging industry environment, we continue to be disciplined in how we manage all aspects of our business. Our recent decisions do not pursue a higher bid on the Courier acquisition is evidence of this discipline. We believed our offer, the equivalent of a total purchase price to $20.50 per share, representing an approximate 40% premium for Courier would have provided significant value over the long term for all of Quad/Graphics and Courier stakeholders, including shareholders, employees, and customers in the book market. However, when Courier received an unsolicited offer for $23 per share, representing an approximate 60% premium, we declined to negotiate further as we felt the economics in the deal were less compelling and would not had created value for our shareholders. Further, what Courier would have helped accelerated our three year strategic plan to transform our book business it was and is not foundational to that strategy. When it comes to spending our capital, we will continue to maintain a disciplined approach. Our focus continues on maintaining a strong and flexible balance sheet to adjust to the changing industry conditions, while also investing in our business, including compelling acquisition opportunities and returning capital to our shareholders as evidenced by our quarterly dividend. I would now like to turn the call back to the operator who will facilitate taking your questions. Operator?

[Operator Instructions] Our first question comes from Jamie Clement of Macquarie. Please go ahead.

Gentlemen, good morning.

Good morning Jamie.

Joel, I don’t know if you want to handle this, it is in response to some of Dave’s prepared remarks, but, as I was looking at your revenue guidance for 2015, it certainly looked like the low end would be a little bit better than some of the volume and pricing ranges that you talked about historically and Dave I think you said, looking for pricing it rose about 1% to 1.5% and I think the high end of that range and what you said over the last couple of years has been more like 2%, I know you had a lot of contracts up a bit about a year or so ago, are we finally seeing some signs that capacity coming out of the industry is starting to help pricing firm up or is this more of a function of your call mailing services all of that sort of thing?

Well, yes I think it is very good question because as you know we’ve been dealing with the industry challenges for a while now and if you go back to 2009, the trough of capacity utilization was around 61%, you know using the government numbers today it’s closer to somewhere around 72%. So, directionally I think that’s happening. Volumes, again I think was always something we felt we could manage pretty well. I look at the catalogues sort of what they nailed of about as an industry maybe a decline of 2% in 2014 is a good sign and I can keep in mind that that was on top of a significant excel [ph] in postal increase that happened. We had predicted that volume would actually decline further than that and we didn’t see that which makes me believe that that significant hit to their largest cost weren’t there that actually volumes would have been even better. And I think the good news there is that the existing case is done in that and we are locked into some more reasonable postal increases over the long term here. The pricing I think when you think about what we’ve guided to in the past was the 1% to 2% and today we are saying 1% to 1.5%, you did catch that as a little bit of change for us. And I want to remind everyone too that when you look at the 2014 performance, that included the impact of a significantly higher number of contracts coming due in ‘13 that had to be mark-to-market in ’14. And so even when we told you last year that when you took the noise of that out, we actually saw pricing little less than the negative 1%. And so, yeah, we changed our thought but it is still negative and we are planning for that, but feeling a little bit better. The other story here, I’m not sure comes out in the strip but I think it’s important to note, we are a portfolio of a lot of different product lines. And when we talk about one of our main strategies of strengthening the core, the core is really the traditional print that we’ve always been in which is magazine, catalogs, retail inserts and to a lesser extent books and directories. We actually created more stability than I would have thought in 2014. And what we got pull back on was may be some of the other businesses, lesser businesses that we don’t – they are good businesses, they’re just not as we referenced the core. Things like Mexico and Latin America specifically Argentina, Brazil, we saw a worse performance in some of those than we would have expected and that pulled us back. So that masks I think some of the stabilization we saw in our core. So I’m actually feeling very good about that. Now, it’s not to say that everything is going to be perfect and easy this year, but it does mean that I think we’re building off a great foundation and that all the work that we’ve done and all the things we’ve said are indeed working. And so I don’t know if that helps, but I think that one area also to address is I think we saw ad magazine pages were not good this past year, being down a 11% - I’m sorry about 10%, 10.5% for the industry, for Quad may be off less than at about 8% to our portfolio mix. But circulation I think in magazine continues to hold up, I feel that they’re going to looking more towards their total performance as companies when they realize that in a multi channel world, it’s not necessarily just about selling the ad pages, it’s about use of the editorial content in print as a foundation to grow revenue on all the channels. And I do think that people are going to be – want to be reinvesting in the content creators as this world continues to evolve. So, yeah, go ahead.

No, Joel, just following up on that, in terms of looking at print as part of a multichannel world, there were couple of interesting articles about a month or two ago, one in The Wall Street Journal talking about JCP going back to focusing on the catalog a little bit more. Some of those articles made the point which I think is probably a correct one that some folks are going back to the catalog as being a feeder to their ecommerce business. So can you discuss those kind of trends a little bit.

We’ve said consistently through all of this media confusion that print drives traffic. We’ve lived it. We’ve lived it in [indiscernible] 1.01, catalogers got wild as new internet thing is really cool. We can get rid of the extensive catalog. And what happened those who tried and fail miserably because they saw that no traffic came. And so that’s why brand awareness and how the consumer react is a multi-faceted and you have to drive capacity. We lived it again when J.C. Penny went through their whole challenge and cut back the simplest of simple of retail inserts, then came back with their new strategy you don’t need to spend the money anymore. While after the first quarter of significant drop in same-store sale, they’ve rebuilt that program above and beyond as fast as they could because they realize yet to drive store traffic. Furthermore, you think about books. I think the big surprise for everyone is, Apple included, if you look at how they’re looking at their tablets now is books are actually growing. The total book industry grew at about 3.5% last year when you look at print only as oppose to this significant decline that people were expecting. And if you break that down further into like children and young adults which grew about 21% last year in printed books, K12 another 12% in higher Ed [ph], a little lesser at 3%. It goes to show you that people are still people and you need to use all the different mechanisms you can because that’s consumers. I’d also urge you to look at I think it was an article that came out in The Washington Post this week that talks about books and printed books, and talks about the Digital Natives. The young kids, the 20 somethings are the ones who are using a lot of computers and tablets in school actually prefer print, and a lot of the effectiveness of print is proving itself out. It’s a great article. I recommend you’re looking it up.

Okay. Thank you. Thanks very much. Dave, I’ll just get back in the queue but one thing just in terms of free cash flow guidance versus 2015, you help us kind of build the bridge there. Obviously it’s some projected EBITDA erosion, seems like cash tax is a little bit higher, looks like CapEx little bit higher, big reduction in cash restructuring expenses, what else am I missing in the positive column?

Yeah. It’s helpful to go back and look to, Jim, because we’ve been having this discussion over the past year with many who follow stock is that there were tailwind coming into our free cash flow as we were talking about 2014 guidance and those were primarily in the areas of pension contributions which are down significantly, restructuring as we get to a more normalized level of restructuring costs in our business that should range around $25 million a year to continually take cost out and then also at CapEx as we would guided a little bit higher last year in CapEx and that starts to come down to a more normalized level around 3% of our revenue, around $150 million mark. So those three things we knew coming into 2015 would provide a nice lift for the stock they did. I did mention in my prepared comments that we ended the year in 2014 with a little bit higher working capital than we would have liked, and we will take that – we’ll improve on that working capital in 2015 and that will help offset some of the things that we saw when we are guiding to a little bit of higher capital expenditures because we have some carryover programs coming into 2015, but I think you will see the additional elements to what you were referring to would be pension and would be working capital improvement as we look forward into 2015. I like where we are able to guide, the midpoint of our range is up 23% over our free cash flow generation from 2014. Now that does include a $10 million onetime item as I mentioned from the Courier termination fee. But even if you exclude that out, we are still up 17% and a lot of investors talk to us about the yield of free cash flow on our stock and from where we finished last year on $22 stock price which we enter today and I understand its higher today, but on a $22 stock price we were yielding about 15%. On this guidance we are yielding approximately 18%. So we really like the story that the free cash flow is providing, talked to you where we think there is some nice tailwind on our free cash flow and that’s evidenced in our guidance that we gave you for 2015.

Okay, very good. Thank you so much for your time as always.

Okay.

Thanks, Jim. Operator, next question.

Yes sir. Our next question comes from Greg Eisen of Singular Research. Please go ahead.

Good morning, Greg.

Thanks. Good morning. First, I could just follow-up, I had missed one number in the presentation, could you repeat your volume expectation for 2015. I got the pricing at negative 1 to 1.5.

Yeah. From an organic standpoint, it would be flat to down 3% and that would be offset by acquisition volume of roughly 3% in 2015.

Okay. Great, great. Can you talk about what you think – when you talk about that 3% acquisition contribution, is that strictly the remaining months of the Brown acquisition.

Yes, that’s the primary driver of it. We acquired Brown in end of May of 2014, so approximately five months coming proof of that plus some of the smaller acquisitions we did in 2014.

Okay. So you are not talking about any un-announced acquisition so far?

No, this is the carry over effect of acquisitions that were done in 2014.

Got it. And then I have a bigger picture thought when we talk about the volume expectations you have. As you continue to invest in your business, invest in technology and the services that you – and the skill set of distribution that you bring to your customers, and you are in the process of really creating some separation between yourselves and the rest of the industry. As I see it, it looks like the industry will devolve into kind of the winners and losers in terms of those that can really survive into the future and really be a 21st century business and those that are not going to really make it going forward. Is there a reason for me to expect that at some point you should be able to grow volumes organically as a result of this differentiation? And really just taking volume away from the competition organically as you create that separation, is that a reasonable expectation?

It’s still believe it or not a pretty fragmented marketplace and again we’ve done a lot of consolidating acquisitions which I think was the right thing to do and a lot of rationalizing of that volume. It’s hard to tell how fast the shakeout happens, but it certainly has been happening for a long time. I mean that’s always our goal is to get to the ability in the core business to grow as oppose to managing decline. But again I think the more important thing to us is watching the stability of pricing and that comes in a number of different ways. It comes from obviously the marketplace but it also comes from your value added services that you apply and your ability to help those customers offset significant cost that aren’t part of your invoice. And as we like to remind people that postage cost continues to be north of 50%, 60% of their total cost with paper and printing being the lesser amount and actually print being the smallest amount, typically under 20% but we are ones who can impact that the most. And when you look at the total client and how people think about the world, that’s really key to taking market share. In a tough business, a tough industry where people are trying to hang-on or people haven’t taken out capacity out of their infrastructure, you run into some pretty crazy things in their times when we make the decision not to pursue even though it may take away from our total volume because we don’t believe it’s the right thing for employees or our investors to fill up the most efficient platform with stuff that doesn’t recognize value added to the degree that may be it couldn’t offset pricing differentials. So it’s kind of a long game, print companies do create good cash flow which is why it takes a long time for the shakeout to happen, but we feel really good about our approach with our clients and we tend to not think as much about us versus all of these other companies that are – may get shaken out. We think primarily about how do we make sure our customers are really successful at managing these costs through all the things that we can do, but not just from a cost standpoint how can we help them use print to gain top line revenue. And I think that strategy will drive our investment to the future.

Hello?

Yeah, you there?

Yeah, I dropped out there for a second. I missed you. You there?

Yeah, we are here.

Okay, yeah. I can hear you now, I don’t know if it was you or me, the last I heard you say was, it takes time to shake out the competition because many companies create good cash flow.

Yeah, I guess my final main comment was, our strategy is about investing in our client to help them manage the cost that they have. But more than that about helping them use print as a part of creating top line growth no matter where it comes, whether it’s directly from print or from traffic that print drives to mobile or online. And so that will drive our strategy or investment process rather than necessarily what’s happening to the other set of competitors.

Got it. Got it. If I you could change tact to a different subject, when I look at your adjusted EBITDA margin, I understand the effect the Brown acquisition has on margins, but is it fair to state that your adjusted EBITDA margin is probably close to its bottom now as a result of the Brown effect?

I think you got to think also about the impact we had with the Vertis investment that happened in the last couple of years because that was $1 billion revenue company that had virtually no margin. So we’ve improved that but that is another part of a dilutive effect and understates the performance of the underlying I think core Quad assets, but we still feel good and we knew that coming in. And I think that further margin deterioration is our ability to continue to manage the business well. Again, pricing has been a challenge but we see that starting to correct it. Dave, if you have any other comments?

Yeah, I think from a pricing standpoint, that’s the main pressure on our margins. We did talk about the dilutive impact of acquisitions and quite frankly when you are going through a consolidation phase and you are one of the highest margins in the industry, every acquisition you do is going to have a dilutive impact on your margins. But coming back to the pricing side of it, historically there has always been pricing declines in the print industry although that trended prior to the recession to about 0.5 decline. I think print companies including ourselves I think we are very effective at offsetting about 0.5 of price decline as when you start to get above 1, closer to the 2 which we saw in some recent years that becomes very difficult to offset. So as you watch our pricing goes, I think you will see where the stability to the margin and the margin percentage will be as we move forward. It’s always our goal to be able to offset that. I think we’ve done a decent job of offsetting the volume impact. I think we partially offset some of the volume, it’s our job to go out there and find ways to offset the full impact of what’s going on with pricing in our industry.

Okay, okay. And I guess a corollary to my question, now that you’ve got some time and service with Vertis under your belt and had Brown already in-house for most of the first year already of its acquisition, do you think you can improve on your margins and improve the corporate wide margin now that you’ve got your hands around those two businesses? Is it kind of a room for upside improvement that we could target?

So in the core business, those assets where we’ve consolidated, we continue to make investments in those platforms. That’s part of that CapEx and it comes a lot within automation of the platform. We’ve got some very automotive plans and we got some that could be more automated. And then we have this phenomena where automation technology is changing very rapidly and allowing you to automate things you didn't think you could be for. And so we use that as well as the value add stuff that we can bring to our customers to try and offset that. That is the goal and something we have to prove.

Okay. Looking at your overhead side, the SG&A, where there any unusual one-time items that you haven’t mentioned that are worth calling out that were in this quarter or the year that you’d like to bring to our attention?

No. We previously disclosed some of the impacts on SG&A, nothing significant in the quarter on a year-over-year basis in fact there was about $11 million higher one-time charges in 2013 than they were in 2014 predominantly most of those coming through the SG&A line. Addressing the call other specifics in the quarter and nothing to recall in addition to what we’ve called out previously in our filings for the first nine months of the year too.

Understood, understood. And could you talk about the tax rate, I don’t know if you mentioned at your guidance, what are your expectations for your tax rate for 2015?

Yeah. Our normalized effective tax rate is around 39%. We finished this year higher than that predominantly because of valuation allowances on international earnings as particularly as Joe had referred to is declines in profit in Mexico and Argentina, and that’s what increased the tax rate above our long-term stated goal of 39% effective tax rate. So at more normalized rate, we would expect going forward would be around 39%.

Good, good. And let’s see, I think that was it. I’ll let someone else go. Thank you.

Okay.

Okay. See you later. Operator, next question.

Yes sir. Our next comes from Fred Krom of Goldman Sachs. Please go ahead.

Thanks for taking the questions. Can you just talk a minute about the potential to redeem additional high coupon private placement debt in 2015? I guess generally speaking in the past it seems like you’ve paid down the notes by revolving credit facility. I was just wondering if you have any intentions to issue additional unsecured bonds at some point in 2015 or in the near future?

We don’t have the intent to go back into our private placement notes to redeem those. We did those as a unique item in 2014 and that was primarily to – because we were paying down cash at a faster level than what we had in terms of revolver availability. We used some of that redemption to further pay down debt. It also allowed us to move more of our in the net basis more to a fixed and floating ratio of 50:50 after we had paid out the revolver that was used to do the repurchase of the private placement. So it was about $109 million we did in the fourth quarter essentially at par. Those were really long tenured portions of the private placement notes. But as I said before, we don’t have an intention to go back into that market to do that again.

Okay, great. Thanks. And then just I guess a further follow-up on your commitment to your 2 times to 2.5 times leverage ratio, anything from a capital allocation or maybe an M&A standpoint that would cause you to change that outlook over the next 12 months?

No, that’s still our long range outlook and as we move down to 2.6 times at the end of this year we will continue to look for pay down back into that. I think with us we will continue to look at the balance too of acquisitions of where to use equity and cash as a mix and how we do those acquisitions. In the Courier deal, we did initially put forth roughly a ratio of 40% equity in that and 60% cash in order to maintain our ability to glide that down to the 2 times to 2.5 times on a reasonable basis. So, you will continue to see us aim towards that and we will continue to de-lever back, especially as we get the integration savings of the Brown acquisition come through the next five months of 2015.

And just to add to that, an acquisition come along that brings us back up again, you know one of criteria’s we always look forward to does that and then allow us though to start migrating back down again. So, that goes into the decision process of how and when we are willing to do something like that.

Just on, sort of dovetailing of that comment, with respect to the cash portion of that hypothetical M&A scenario, I mean, I guess theoretically would you be open to issuing new unsecured bonds to fund future M&A or would you continue to use your revolver?

We will continue to use our revolver and it is really deal depended right, so we got $750 million of availability in the revolver. At the end of the year, we will obviously build, we will look at that scenario and unrecognizing that our seasonal peak need for borrowings under the revolver is in the third quarter when we hit our working capital peak. So, we will manage all that well. It’s going to really be dependent on size of the deals, but right now our intent is, with the deals, you know we are moving forward, we’ve got enough capacity on our revolver to execute on those at this point.

And with the buyback authorization outstanding, I think you have a 100 million from 2011, is that something that you would look to utilize at some point in the near future or over the next couple of years or is dividend sort of your main policy there?

I think debt pay down and dividends are our main use of cash at this point as we talked about getting back into the 2 times to 2.5 times leverage range, but we have it out there because we want to be balanced about our approach and using our capital. So it is always an alternative for us, but in the near term it will be debt reduction and continuous support of our dividend.

Okay great. And then thanks, just one last question on M&A and you probably won’t want to answer this, but I was just curious I mean I’d kind of love to hear your thoughts on potential regulatory push back or maybe lack thereof a tie-up between your company and your biggest competitor.

I can’t predict what the regulatory response will be. I think I assume you are referring to the carrier transaction. I think it is best to talk to Donnelley about that but you have to go through the process and you have to do the work to make a good case and I will tell you that that’s a – courier is a great platform, it is a really good company, great management team, but again I think that’s something that they are going through in process right now and they would be best to answer that.

I was actually referring to you and/or Donnelley but…

Oh! So me acquitting Donnelley?

You or vice versa.

Okay. I can’t speak to that. We haven’t done any work on that and that’s not in our plans.

Thanks for the questions.

Operator, next question.

That concludes our question-and-answer session. I’d like to turn the call back over to management for any final remarks.

Well great. Thank you all for joining us today. We are obviously pleased with where we came in, in 2014 and we look forward to updating you throughout the year. Take care.

Thank you. The conference is now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines.