Quad/Graphics, Inc. (QUAD) Q3 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics Third Quarter 2015 Conference Call. During today’s call, all participants will be in a listen-only mode. [Operator Instructions] A slide presentation accompanies today’s webcast and participants are invited to follow along, advancing the slides themselves. To access the webcast, follow the instructions posted in last night’s earnings release. Alternatively, you can access the slide presentation on the Investors section of Quad/Graphics website under the Events & Recent Presentations link in the left-hand navigation bar. Following today’s presentation, the conference call will be opened for questions. [Operator Instructions] Please also note that today’s event is being recorded. At this time, I would like to turn the conference call over to Kyle Egan, Quad Graphics Manager of Treasury and Investor Relations. Sir, 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, our Executive Vice President and Chief Financial Officer. Joel will lead off today’s call with key highlights for the quarter and Dave will follow with a more detailed review of the financial results 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 replay of the call will be available on the Investors section of our website shortly after we conclude. The slide presentation will remain posted on Quad/Graphics website for future reference. I will now hand the call over to Joel.

Thank you, Kyle. And good morning, everyone. As we communicated in our news release, our performance in the third quarter was challenging and well below our expectations. We attribute our performance to three main drivers. First, we saw a greater than expected pull-back in industry volumes during the third quarter. Publishers continued to experience sluggish ad sales with third quarter pages down 11.7% versus the same period in 2014. Retailers also cut back on current ad spending in the quarter because of the low growth economy and challenging retail environment. Additionally, we saw pricing pressures accelerate in the quarter, primarily in long-run print due to an increased competitive environment. Pricing is now down 1.5%, which is the high end of the range we originally anticipated for fiscal 2015. And finally, our manufacturing productivity was down in the quarter, primarily due to labor availability in our Wisconsin platform, higher training and on-boarding costs associated with hiring in that platform, especially as we ramped up for the busiest time of the year and increased manufacturing complexity in our product mix. As a result, we have reduced our full year 2015 guidance, and Dave will provide full details a little later in the call. We are confident in our ability to skillfully manage the challenges before us whether they are short-term productivity issues or long-term industry conditions. Through the dedication, determination and hard work of our employees, we will continue to transform our Company during this challenging time in the printing industry, serving our clients well while positioning ourselves to compete aggressively in the marketplace and achieve long-term stability and success. Accordingly, we are taking swift and decisive action to address our performance in the quarter and are announcing a $100 million cost reduction program for 2016, to bring our cost structure in line with revenues. We have a longstanding commitment to being industry’s low cost producer and this program is a continuation of that commitment. We will continue to focus on eliminating excess manufacturing capacity through additional plant closures and we’ll close four plants by the end of 2015, two of these plants, one is Colorado and Enfield Connecticut were both announced in August and ceased production in October. This morning, we also announced we will be closing our East Greenville, Pennsylvania and Augusta, Georgia plants by the end of this year. Our strategy has remained unchanged. We will consolidate work into facilities where we believe we can achieve the greatest manufacturing and distribution efficiencies. By the end of this year, we will have closed 31 plants since the July 2010 Worldcolor acquisition. For each closed facility, we take great care in wellbeing of our displaced employees, providing them with outplacement services or the opportunity to transfer to other plants where we are concentrating volume and are in need of additional skilled labor. In addition, we’re reducing SG&A cost by reviewing every function at the Company and thinking differently about how to run our business in a more streamlined way. Just last month, we announced new simplified organizational structure to better serve the evolving needs of marketers and publishers in today’s multimedia world and reduce our cost structure. If you look at what’s happening in our clients’ world today, they face critical challenges. Marketing and publishing have been completely offended with the exposure to media channels. Our clients are asking ourselves what channels should we use and in what combination, to engage our audience and drive desired results. We know print delivers results, specially used in combination with other media channels. Unfortunately many marketing approaches remain silo, which is created a crisis in measurement for our clients. They are challenged to measure the true return on our marketing investment across and between channels, both online and offline. Looking ahead, we believe our clients will migrate towards organizational structures that promote seamlessly connecting content across channels. The days of having separate teams focused on print, digital, e-commerce, social outreach, mobile initiative no longer make sense, and we’re no different. The next evolution of our organizational structure focuses on the unique value we bring to marketers and publishers while also helping us to realize improved efficiencies and cost savings. Eric Steinbach, who has 31 years of printing industry experience, is now President of Publishing Solutions. He is responsible for long-run consumer publications, special interest publications, books and directories. Eric is well-versed in the world of publishing and will lead Quad/Graphics in creating client value from integrated solutions that increase reader engagement, streamline production services and reduce costs. Tim Ohnmacht a 21-year veteran of the Company is now President of Marketing Solutions and is responsible for Retail Inserts, Catalog, Direct Mail and Commercial & Specialty. Tim who understands the challenges and opportunities facing marketers, will lead Quad/Graphics in creating client value from integrated solutions that help increase consumer engagement, revenue and cost savings opportunities in a variety of vertical industries including retail, automotive, healthcare, financial and insurance. Our streamlined organizational structure is a natural step in our journey to transform Quad/Graphics and will allows us to grow share of wallet by making it easier for clients to take advantage of our full continuum of integrated solutions, contribute to an overall better client experience and eliminating silos to make it easier for our clients to do business with us, facilitate quick nimble decision making within our Company and accelerate the implementation of the best practices including continuous improvement in lean methodologies that eliminate waste and reduce costs. As we move forward, we will continue to focus on our five primary strategic goals to transform Quad/Graphics and drive performance through innovation. These goals include strengthening the core print categories that generate a significant amount of free cash flow to support growth opportunities. Recently, we expanded our presence of the growing packaging industry through the acquisition of Omaha-based Specialty Finishing, a packaging manufacturer with the loyal blue-chip customer base that has enjoyed eight straight years of consecutive sales growth. This acquisition along with our April 2015 acquisition of Copac, have significantly increased the scale and geographic footprint of our QuadPackaging business and enables us to more effectively compete for a large-volume and multi-location clients across the United States, Europe, Asia and Central and South America. QuadPackaging has grown quickly under the leadership of Tom Garland, a packing industry veteran and today is fast approaching $200 million in annual revenues. In books, we continue to reinvent our platform through the investment in high-speed digital web presence. As we continue installing these digital presses, we see tremendous opportunities for this platform to support multiple product line including highly personalized direct mail. We will continue to build our digital press platform and related data driven marketing capabilities to create revenue generating and cost savings opportunities for multiple product lines. Before I hand the call over to Dave, I want to talk about free cash flow. We believe Quad/Graphics will continue to be a significant free cash flow generator. Currently, free cash flow is up $106 million over last year, despite lower than expected adjusted EBITDA. We have initiatives in place to maintain free cash flow well into the future. And as always, we will use that capital in ways that will generate value for our Company and our shareholders, including maintaining the strength of our balance sheet through debt and pension liability reductions and returning cash to our shareholders through an annual dividend of $1.20 per share which has a yield of nearly 10% but only represents one-third of total free cash flow. So in closing, I’d like to thank our employees for all their hard work and dedication; especially now during our busiest quarter, our employees great trying their [ph] work and I know I can continue to count on them to help advance our strategic initiatives and do whatever is necessary to help us succeed despite intensified industry headwinds. At Quad, we have always been about finding a better way and that’s especially true when times get tough; this time will be no different. I’ll now hand the call over to Dave.

Thanks, Joel. And good morning, everyone. Slide four is a snapshot of our third quarter 2015 financial results as compared to the third quarter of 2014. Net sales for the quarter were $1.2 billion, down 6.5% from 2014. This decline reflects a 5.4% combined volume and price decline, primarily due to greater than expected pull-back in publication volumes and retail inserts and pricing pressure that accelerated during the quarter, as well as a negative 1.1% impact from foreign exchange due to the strengthening dollar, on our international sales. Adjusted EBITDA was $117million for the third quarter as compared to a $151 million in 2014 and our adjusted EBITDA margin was 10.1% versus 12.2% respectively. The decrease in adjusted EBITDA and margin primarily reflects the pull-back in industry volumes and pricing pressures that accelerated in the third quarter and approximately $10 million of higher manufacturing costs associated with lower productivity. This decline was partially offset by additional earnings from recent acquisitions in our packaging business. During the third quarter, we took a non-operating, non-cash good will impairment charge of $775 million or $530 million after a related tax benefit. The Company performs an interim goodwill impairment test for the reporting units within the U.S. prints and related services segment triggered by the decrease on our stock price and ongoing volumes and pricing pressure that we’ve been experiencing, which resulted an impairment charge in the quarter. The goodwill that was written off was almost entirely associated with the 2010 World Color Press acquisition. While the amount of the impairment charge is significant, it is the non-cash impairment charge and ultimately does not have an impact on our key financial metrics including adjusted EBITDA and free cash flow. On slide five, we’ve included a summary of revised 2015 annual guidance that reflects the pull-back in industry volumes and pricing pressures that accelerated in the quarter as well as lower productivity levels in our manufacturing platform. Full year 2015 net sales to be in the range of $4.6 billion to $4.7 billion, lowered from our previously disclosed guidance range of $4.8 billion to $4.9 billion. This change reflects the continuation of the third quarter increased pricing pressures at negative 1.5% of consolidate net sales. This is now at the high end of the pricing decline range that we provided with our original 2015 guidance. Additionally, volume was estimated to decline between 4% and 6% of consolidated net sales excluding foreign exchange impacts. This is consistent with the pull-back in volumes we saw in the third quarter which were below the high of our volume guidance range of negative 3%. 2015 adjusted EBITDA to be in the range of $430 million to $450 million, reduced from our previously disclosed guidance range of $500 million to $520 million, reflecting the adjusted EBITDA impact of the volume and pricing pressures and then approximately $25 million of higher manufacturing costs in 2015 from lower manufacturing productivities. As Joel mentioned, manufacturing productivity was down due to labor availability in our Wisconsin platform and the associated training and on-boarding as we ramped up hiring for the busy season, as well as an increased manufacturing complexity in our product mix. We believe the productivity issues are fixable and will be a key focus in our $100 million cost reduction program. 2015 free cash flow will be in the range of $165 million to $180 million, reduced from our previously disclosed guidance range of the $180 million to $200 million. We expect to achieve a 12% year-over-year increase in free cash flow at the midpoint of our updated guidance, primarily from improvements in working capital and lower cash taxes, despite lower adjusted EBITDA. 2000 [ph] restructuring and transaction related cash expenses will be in the range of $45 million to $55 million, a $20 million increase at the midpoint of our updated guidance as compared to our previous guidance range of $25 million to $35 million. The increase is primarily associated with incurring the initial cost in 2015 to achieve the $100 million of cost savings in 2016. In total, we expect to incur an estimated $40 million in cash restructuring cost in 2015 and 2016 related to the $100 million cost reduction program. 2015 capital expenditures will be in the range of $140 million to $145 million, a decrease from our previously disclosed guidance range of $145 million to $165 million. And cash taxes will be less than $10 million, a decrease from our previously disclosed guidance range of $20 million to $35 million. Slide six is a summary of our year-to-date free cash flow. We define free cash flow as net cash provided by operating activities including pension contribution, less purchases of property, plant, equipment. The Company generated $68 million of free cash flow through the first nine months of 2015, representing a $106 million increase over 2014. We continue to generate a significant amount of free cash flow. And as indicated in our revised guidance, we expect to finish the year with free cash flow in the range of $165 million to $180 million. This is an increase of nearly $20 million at the midpoint of our updated guidance range over the $154 million of free cash flow generated in 2014. We believe we have the ability to sustain free cash flow at our 2015 revised guidance range into the foreseeable future due to cash flow tailwind of approximately $200 million to $300 million and reduced cash needs to run our business in three primary areas. First, working capital reductions. Our ability to continue to streamline our cash conversion process which reduces the number of days from the point we receive an order until we are ultimately paid by our customers, we’ll drive at least an estimated $150 million in further operating working capital reductions. Second, lower capital expenditure requirements. Our modern and highly automated manufacturing platform can be sustainably maintained at capital expenditure level of less than 2% of our revenue which is well below our historical investment levels of 3% of revenue. Our platform requires less capital expenditures, going forward, as our platform has benefited from significant investments in the past, which outpaced industry norms. This lower capital requirement will translate into $40 million or more in annual cash savings going forward. And third, pension funding requirements. Cash contributions into our pension plans should be at least $15 million lower over the next two years due to improvements in our funded status of the acquired Worldcolor pension plan and funding relief legislation. We remain confident in our long-term ability to generate a significant, sustainable amount of free cash flow which provides us with resources to drive our strategic plan and create value for our shareholders. On slide six, we have also noted the free cash flow yield on our stock price. As of the close of the business on November 3rd, our free cash flow yield was approximately 30% which is significant in today’s market and in our industry, given what we believe is a sustainable level of free cash flow. On slide seven, you will see that we ended the third quarter with $1.5 billion in debt and capital leases, an increase of $113 million from December 31, 2014, primarily due to our packing business acquisition of Copac and Specialty Finishing. In addition, our single and multiemployer pension obligations have decreased $28 million from December 31, 2014. Our quarter end debt leverage ratio increased to 3.09 times versus 2.82 times as of the end of the second quarter of 2015. The increase is primarily related to the Specialty Finishing packing acquisition completely in late August, seasonal working capital needs as the third quarter is typically our peak for working capital and lower adjusted EBITDA. We continue to believe that operating in the 2 to 2.5 times leverage range over the long-term is the appropriate target. And we will remain diligent in reducing debt and pension liabilities going forward as a primary use of cash. Since the close of the Worldcolor acquisition on July 2, 2010, we have paid down $573 million in debt and pension liabilities through August 30th -- or September 30th of this year. Slide eight is a summary of our debt capital structure. Availability under our $850 million revolver was $574 million as of September 30, 2015. We have no significant maturities until April 2019. The weighted average duration under our debt capital structure is 5.2 years with the blended interest rate of 4.6%. Our fixed rate debt structure is at an average interest rate of 7.1% and our floating rate debt is at an average interest rate of 3%. Our debt capital structure is 61% floating and 39% fixed. We believe this fixed versus floating rate debt structure provides us with the financial flexibility we need over the long-term to balance our key priorities to pay down debt and pension liabilities, invest in our business, pursue future growth opportunities and return value to our shareholders. Slide nine shows our commitment to our dividend which is the key way in which we return value to our shareholders. In continuation of our commitment to our dividend, our next quarterly dividend of $0.30 per share will be payable on December 18, 2015 to shareholders of record as of December 7, 2015. We have consistently paid out the quarterly dividend. And based on our stock price as of the close of business yesterday, our annual dividend of $1.20 per share is yielding approximately 10% but represents only one-third of our total free cash flow. As we moved forward in this challenging industry environment, we will continue to serve our customers well and be disciplined in how we manage all aspects of our business, especially in driving improved productivity and sustainable cost-reduction initiative to remain a low-cost provider while continuing to generate a significant amount free cash flow. We will continue our focus on maintaining a strong and flexible balance sheet to adjust the changing industry conditions and also investing in our business and returning capital to our shareholders through our quarterly dividend among other priorities. And now, I would like to turn the call back to the operator who will facilitate taking your questions. Operator?

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from James Clement from Macquarie. Please go ahead with your question.

You guys talked I think a fair amount about playing capacity reductions and that being a component of the $100 million in cost savings. Can you talk about some of the other areas? You talked about productivity a little bit. But can you go into little bit more detail on that and perhaps some of the other things that make up the 100?

Yes, absolutely. If you don’t mind humor me for a few minutes here. Let me just kind of go back towards the journey we’ve been on cost. So, when we got through the beginning of the recession and we changed course and started being a consolidator, after time, the industry needed a major reset in the base line of capacity. And so, we knew that with our capacity being what it was, well invested in large plants that we could adjust the volume need of our specific combined companies in terms of capacity returns. So, we started aggressively taking plants down. Not only did we do that because that’s what adjusted volume by taking capacity out but we also started investing in things with IT infrastructure, automation, things that allow you then later on to continue to take cost out of the existing plants. And so, if we fast forward to 2015, I’ve talked about this being the first year where we haven’t being doing a major integrating acquisition. And so, it’s not about right now it hasn’t been about as much trying to pull these companies in and figure out which plants where down, although we’re doing that to but it’s been about looking at the course of the Company. The indirect labor that we have to support the resulting platform. It’s hard to focus on the core business and how we run as a corporation when you are doing all these integrations. So, we did a lot of switching of gears this year, putting a lot of plants to start taking out the cost we know we can take out because we know there is a better way. We just haven’t had the manpower and the focus to be able to do it while we’re doing these other integrations. So, part of that $100 million cost is we’ve done a lot of significant reduction in SG&A positions as well as cost that are needed. We’ve done off-shoring of some of data intensive type of input work to our pulling [ph] operations where Quad people distinguish the whole program over there. That’s working very well. The basic things of getting better control of travel and things like that. But right now as we got -- and this role being executed on. I also, as I said in my script, restructured the Company to better align us for what the marketplace is doing. But that also took out several top level positions in terms of GMs running silos. And so whatever you -- and we have to have those silos as we are kind of pulling in these product lines, do need these integrations to keep our hands around them. But we felt it was time now to switch gears back to simplifying by removing those silos because that’s what we need to perform and execute for our customers and we’re doing these continuing of sale. But equally as important. It exposes a lot of costs that don’t need to be there and the lot of process improvement that can be handled that you couldn’t see before. No -- that’s by any fault of anybody other than the fault of the silo which is what a lot of our customers are dealing with now and I think companies all over the world are dealing with. And so we started doing that. But when I saw our third quarter results here and what was happening with volume and also pricing, the volume I can adjust for is we’re doing -- you noticed we announced two major plant closing this morning on top of two other ones that we did. But that also said to me that we’re in need to get ahead of the curve and resetting a base line of cost for this Company, so not just continue run the business as you see sort of challenges in the regular pricing declines we saw or the volume declines that we saw, this was a new accelerated thing that I hope is short-lived but to me, hope it’s not an operating strategy, it’s about taking this Company who is very capable when we talk to the truths about tough times of going the extra mile and we are actually looking at the fabric of our Company and kind of taking the different twist because cost take -- I always talk about cost take out, you could do so much until you don’t know where else to go, and tell you look at the Rubik’s Cube differently. And you do things like I did with the reorganization and taking silos out that expose you to whole lot of other things we do. And I want to make a very strong statement here that this $100 million cost take out program, this isn’t like we just woke up one day and said we had to take our $100 million out because of the third quarter. What it did do is a continuation of cost we are already planning on taking out but I was very frustrated with the results and so was the teams, so were my employees and we said we’ve got to go faster; we’ve got to be more aggressive and we’ve got to be even more bold than we were capable before. This Company has creativity; it has the talent; and it has the wherewithal to do that to get ahead of the curve, if this is a trend to come. And will tell you that $100 million in the bag for 2016 and we are now stopping there.

So, Joel, one of the things you touched on there and I’m very curious to get a little bit more on this is I think you talked about indirect cost, indirect labor, not related to manufacturing and that kind of thing. And one of the concerns I think that some of us have had about Quad over the years is that you all have gone away above and beyond in terms of investing in things like data analytics, even like some of the app stuff you’ve been working on for years and really trying to help some of your customers, in my opinion kind of solve some of their problems. Think about it is, it’s not been clear to us that you guys had actually been paid for this. So, I mean…

Jamie, it’s not clear to me that I was actually been paid for it. But what I will tell you is we’ve been talking this game for a long time. And our customer base is going through lots of challenges. First of all, if you look at the retail community, the top -- I don’t know, four or five retailers, all have new management teams with all new chief marketing officers. And so, they’re all taking a fresh look at things. You have things like what Amazon did for back-to-school on July 15 by announcing Prime Day which threw everybody off their game. And so, a lot of disruption is happening in how they go to market. And what is very clear to me because in the last, call it 0 to 12 months in my conversations at the sea suite of large retailers, small retailers, catalogers, publications is this sort of confusion or the surprises of measurement is real that people are looking at how their marketing departments work and their silos. That means they’re measuring channels separate from each other without understanding the interconnection. And a lot of the stuff we’ve been investing in is allowing them or helping many customers and we’re proving it that we could show them the interrelationship and many times show them that they need to do more print. We have 12 e-tailer pure players who a year ago weren’t doing catalogs. They are now doing catalogs and they can’t believe the traffic being driven to their e-tailer sites. And so I think it’s a matter of how fast our customers evolve to understand how they can fix this problem and understand how we can be the ones to fix that for them. I have never seen so much momentum in all the years I’ve been doing this type of conversation that I’ve seen in the last 10 to 12 months. There are certainly our customer who are waking up in a very big way and are paying us. But it’s a matter of -- we need these industries to kind of -- and they know it, they need to get going and understanding this omni-channel thing faster and better. And that’s where I think we’ll win.

And last one if I may, I mean, Joel it sounds like with the $100 million in the bag, even if current business conditions continue, I mean quite simply the way the math works for me is I mean it sounds like free cash flow next year should be stable. And it actually sounds like EBITDA should be up with the cost savings plans, right?

Well, look, I mean next year -- I am looking at Q3 right now and again I was surprised by the pull-back in volume as well as the increased pricing pressure, even after all those capacities come out. It’s all going to depend on all the factors that you know. I mean what the consumer really doing. I hate to tell you, and maybe I’m the first one to tell you this that the headlines about the economy do not actually match what’s going on. I think in many sectors, you’re seeing a lot of people pull-back. Milwaukee, a lot of manufacturing companies gotten hit really hard. And I am worried about next year GDP growth if it’s under 2%. This is a lot of consecutive years of all these businesses they have to manage cost out. So, I am talking about our customers; I am talking about everybody for us the change. But like I said, I can’t predict where those pressures will go. But I look at third quarter as sort of one of those warning signs of whatever happens, I need to reset my baseline of cost. We’re doing it aggressively and I am not stopping at $100 million.

Okay.

Yes, Jamie, just to add-on to that. I think the key assumption to look at what’s going on in this industry pricing. You’ve heard us talk about that’s now gone to the higher end of our range in terms of decline in pricing at 1.5%. So really, if pricing goes, so goes, how we will guide next year. We will be back after the fourth quarter results to give you a look at 2016, so we will be able to update you a little bit more from an adjusted EBITDA standpoint. But we felt that it was important to understand that despite what’s going on with the adjusted EBITDA, there is a lot of tailwind to this free cash flow. And as you look at our free cash flow and what we can do in terms of improving our operating effectiveness of our working capital and investing wisely into our business, but we have the benefit of a lot of investment in the past that’s been way above industry norms and which this platform was built upon and which drives the productivity we have that can be maintained at a much lower investment level and quite frankly not having to put as much money in the pension. It gives us a nice tailwind just to say, this cash flow that you’re seeing this year, what we’re guiding to, is sustainable into the near term future. So, we really like how the year kind of plays out from a free cash flow perspective and will be able to monitor what’s going on with the top line and before we come back to you after the fourth quarter call.

Jamie, let me also just reiterate something that we had hit hard on our foot. A good $10 million of our miss was productivity. And so, it’s kind of tale of two cities. Here I am closing two plants this morning which you’d say okay, well, why was the labor availability a problem? Well, because it shows you that it’s working in terms of moving work to the plants that have had all that significant investment are the most efficient. And specifically a lot of that challenge happened in our Wisconsin operations where we have multiple, million plus worth plant, 14 total plants. And we got caught starting in the spring of having a real challenge finding skilled labor. And so, I think you’re seeing that play out in a lot of areas of the country. But for us, we were ramping up because a lot of work was coming in the Wisconsin. We’ve got some great tax credits in partnership with Wisconsin to do it but a lot of our productivity issues stem from just too long to get the people win. And so now we are actually in a better place and we’re -- the training has kicked in, we spent a lot of money on the training to get people to speeds faster and we make sure we retain people in the first 60 days where the highest turnover is. But that’s a important thing because productivity to me, that issue is the fixable part of this. The other stuff is stuff we have to react to it.

Our next question comes from Katja Jancic from Sidoti & Company. Please go ahead with your question.

Joel, you briefly mentioned the expansion of digital press technology. Can you provide us with an update as to how it’s going and also remind us what the value of digital print is?

From a standpoint of the book operation where most of it’s been, there is a big transformation going on in what our clients need. And everyone thought it was -- what they needed is to move everything to a kindle. That hasn’t played out that way because people actually do like books. But what they do need to do is get rid of inventory. And so there is a transformation going on from these long-run heavy metal presses that produce hundreds of thousands of things very efficiently to on-demand digital presses that can create much lower batch sizes. The book publishing industry because of the legacy and technology of digital wasn’t here yet, this forced to have those hundreds of millions of dollars worth of inventory at any given point where much of it is become obsolete. That’s a huge cost. So, that’s why we invested in the five digital presses down in Versailles, Kentucky. Those are up fully running. Our only challenge in terms of taking on more work there is we’ve hired a lot of people to train up. And that’s happening; they’re running great and we will continue with that. And we’ve found another possibility -- not another possibility; we’ve installed another digital press into our DM platform. Because what’s happening in direct mail is people want total variability, four color all the way through where when a direct mail piece comes to Joel about what people are online and why did you abandoned your shopping cart; we want to be able to have a personalized PC with image of that piece right there to increase response rate. So, I see this technology continue to evolve very quickly and continue to expand within the Quad operations as we just installed the one in direct mail. The value of it is changing the gaming in books, in terms of inventory levels and also being able to personalize text books. And the value in DM is to turbo-charge an already very aggressive offering in terms of using data to drive response.

If I’m not mistaking, you previously mentioned that you are going to install more of these digital press technologies. Is this strategy going to change now with the more challenging environment?

We will be opportunistic about the CapEx. As Dave said, a lot of the big CapEx was done as being in the heavy platform that’s automating things like forklifts, bringing plants that we acquired up to speed to our level of what needs to be done, and so we could back off that gas paddle because these are already the most modern plants in the printing world. And we are not going to stop spending in CapEx but the requirements on the heavy metal side is a lot less, so that as we look at CapEx projects, it could be about creating value for our customers and creating top-line revenue, which is where we’ll be opportunistic but we’ll also be very disciplined about it, as always.

Now, your debt leverage is little elevated because of the acquisitions. When do you -- what’s the timeframe as to when could you bring it back to the more normal two point times?

From a use of cash perspective, our primary use of cash is going to be in debt pay down. So, we are slightly elevated, as you mentioned, due to the acquisitions we’ve done this year and lower EBITDA levels. We will continue there for to pay down debt aggressively. Be opportunistic about investments back into the platform, as Joel talked about especially from a strategic standpoint. And then the third thing is our commitment to the dividend, it’s a $1.20 per share; it’s yielding well over 10% now. It’s based on what we’re trading at today. And that we believe is a sustainable dividend as we move forward. It’s only a third of our free cash flow. So, those three things are the primary uses of our cash. We’ll continue to pay down that debt because when it’s above three, that’s just at a level that we believe is the smartest thing is to continue to pull it down and get back towards our long-term horizon of 2 to 2.5 times.

At this time, I’m showing no additional questions.

Okay. Before we go, look, I want to make it clear; I think I’ve made it clear that I’m very frustrated with the quarter and we all are. At Quad/Graphics, frustration usually leads to a high degree of motivation. And that’s just the way our culture works. And I think that’s proven with being very confident about our cost takeout program that we’re putting through. And also the free cash flow that this Company generates, sustainability is real which I think is great story for 10% plus yield that our stock has right now But finally, I just want to take a brief moment to recognize two employees. This is a family Company, it’s a family based Company and now we have over 24,000 employees. In many ways for me, it’s not like what it was where I could know everybody and see everybody. And we lose people from time to time. Their life ends and it has an impact on everyone around them. But two in particular I would like to talk about because I am not able to talk about everybody who touched my life in one way or the other. First is Gary Anderson. Gary is the 30 plus employee who literally helped build this Company. He works in our maintenance group that is responsible for installing presses, moving presses, bringing them up to snuff, making the machine work. And he literally helped us build in the Greenfield days and recreate the industry in the consolidation days. Gary lost his life to a long battle of cancer couple of weeks ago. And the other person is John Gerdes. John is a 20 plus year employee in our IT group, wide known over the years. And I know his partner Heather Schneider over the years. In fact I have to give her a big hug this morning as I’m walking in the work because I hadn’t seen her since John passed away. I think it’s important and this is a message really to our employees that we recognize that we got a lot of people, we recognize when we close plants we’re parting ways. But when we lose someone to death that impacts the family. It’s not just losing someone who helped build the company but it’s losing somebody who impacts the employees around them and these two are certainly two who had impacted a lot of employees around them. So on behalf of all of you who may have lost coworkers over the past couple of years, please I wanted to just use these two as -- these were personal connection to me, but that doesn’t mean I don’t’ want to have a personal connection with everybody. I get an email whenever we lose anybody. But I would like to end with that and thank all the employees for all the work they’re doing and all the work they’re going to be doing. Thank you.

Ladies and gentlemen, the conference is now concluded. We do thank you for attending today’s presentation. You may now disconnect your lines.