Quad/Graphics, Inc. (QUAD) Q4 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics Fourth Quarter 2015 Conference Call. During today's call, all participants will be in 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 this event is being recorded. I will now turn the conference over to Kyle Egan, Quad Graphics' Manager of Treasury 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, our Executive Vice President and Chief Financial Officer. Joel will lead off today's call with highlights of our financial results along with a more detailed discussion of our path forward in 2016. Dave will follow with a more detailed review of our fourth quarter and full year 2015 financial results and a summary of our 2016 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 on Slide 2. 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. Today, I am pleased to report that our fourth quarter results were better-than-expected thanks to our team's focused efforts to aggressively manage costs and improve manufacturing productivity. Our team took swift action following a challenging third quarter and helped to offset the increased pricing and volume pressures that had accelerated in the second half of 2015. As a result net sales for full year 2015 were $4.7 billion consistent with revised guidance and our preliminary results released on January 6th. Full year 2015 net sales by product line and geography are shown in Slide 3. Adjusted EBITDA, adjusted EBITDA margin, free cash flow and debt leverage ratio were all significantly better-than-expected and exceeded both revised guidance and our preliminary results. Moving onto Slide 4, as we look ahead the global economic climate remains very much in flux. Therefore, we will continue building on our cost control momentum through aggressive, innovative cost management and improve labor productivity all of which supports our goal to be the industry's high quality, low cost producer. At the same time we will continue to transform our company by repositioning our true benefits to our clients and our role as a printer to align with the new world of marketing. This is our focus in Chapter 3 of our company's journey. As I have shared with you before, we refer to our company's 45 year journey in chapters. Chapter 1, our first 40 years was characterized by tremendous organic growth. Chapter 2, which began in 2010 has been about our role as a disciplined industry consolidator. Today, we continue to do our transition to Chapter 3, which is about transformational opportunities in a multichannel media world. In Chapter 3, our five strategic goals remain consistent. One, strengthen of the core print categories that generate a significant amount of free cash flow to support transformative opportunities. Two, grow the business profitably including expanding print product lines that have higher growth potential such as packaging and in-store marketing as well as our QuadMed business. Three, walk in the shoes of our clients to anticipate their needs and then deliver solutions that help them achieve their business objectives. Four, engage employees in our brand promise and the company culture as we work to find a better way. And five, enhance financial strength thereby creating shareholder value. As I have discussed on previous calls, marketing has been upended by technology. In today's world the individual consumer is in control of how and when they engage and consume content and they are doing it across an ever expanding choice of media channels. This has created a crisis of measurement for many marketers as far as their marketing spend and campaign management. They are trying to generate more content for more channels with the same or fewer resources. Further, many are struggling to find the optimal ways to orchestrate their activities with the right mix of media channels that will break through the noise and engage end users to increase response and convert customers. Given these rapid changes, clients' marketing partners are struggling to help them figure out how to use multiple media channels effectively and in unison. And many are focused solely on digital and social channels, ignoring the value and importance that traditional channels of print bring to a campaign. As a result many marketers are failing to optimize their marketing spend. This situation has created an opportunity for Quad/Graphics to further our role as a marketing solutions partner, helping our clients to better leverage the expertise and insights we have gained over the past 45 years supporting some of the most iconic brands in history. Our expertise and insights come from decades of experience helping our clients optimize their marketing spend in print and now we are leveraging and expanding that knowledge into other media channels. We are experts at content production for print and digital output and can process content quickly to the highest quality standards at a low cost. In many instances we are doing this content production right on site at the client locations as part of our Facilities Management Services. Marketers and publishers also recognize our expertise in strategically applying data to improve response rates. For more than 25 years, we have been the market leaders in helping our clients execute data driven print marketing via one-to-one messaging on a mass scale using our sophisticated inkjet and four color digital press technology. As a result we have become a trusted partner and increasingly are being welcomed into strategic conversations with our clients as they are creating campaigns. Currently we are continuing to build the platform, form the strategic partnerships and secure the talent including former clients and marketing professionals, to enhance our offering to marketers and publishers while continuing to deliver the value we offer clients today. We are confident in our vision, which addresses our clients' needs to improve both the efficiency and effectiveness of their marketing spend across multiple channels. We have been working to expand our solutions set as it relates to helping clients improve marketing spend efficiencies. For example, we are capitalizing on our long standing expertise and process engineering to conduct work flow audits and process optimization for our clients. These process optimization programs are managed by professionals, with client site experience and examine the entire marketing and publishing work flow from beginning to end. As a result we help to identify opportunities to reduce cycle time and save money through eliminating redundancies, widening the ad sales window and allowing clients to bring their solutions to markets faster and smarter. Another way we are helping clients improve the efficiencies is by managing all production related services including paper purchasing which then allows them to reduce working capital levels, freeing up funds for marketing initiatives. This liberates our clients to focus on all important revenue generating activities. Recently we signed a multiyear contract with Forbes magazine to manage all its production, distribution and paper purchasing in addition to continuing to print the magazine which we have been doing for more than 25 years. By consolidating and streamlining staff and back office functions with us, Forbes is realizing tremendous efficiencies and cross savings. Now the publisher is free to focus on what it does best, creating content and advertising revenue. We look forward to growing this part of our business which reinforces our commitment to partner with our clients and finding creative solutions to their most urgent challenges. Yet another way we help clients improve their efficiencies and realize cost savings is through our robust co-mail solutions that include our own proprietary software for analyzing clients' incoming mail files and optimizing mail distribution plans. Advance finishing capabilities and technology for compiling multiple clients' magazine or catalog titles or letter-size direct mail into a single mail stream to earn USPS work sharing discounts and their all transportation and logistics operations for drop shipping to more than 300 USPS multiple processing centers. Quad/Graphics' co-mailed approximately 5.4 billion magazines, catalogs and direct marketing pieces in 2015. Accordingly we saved clients significant money on postage and those savings can be reinvested in efforts to improve the client's top line. This brings me to Quad/Graphics ability to advance the effectiveness of a client's marketing spend. The money our clients save on efficiencies can be applied to solutions, especially data driven solutions that increase revenue. As I mentioned earlier we have an intimate knowledge of data driven marketing through our many years of experience of helping clients create targeted messaging on a mass scale. The opportunity for Quad in Chapter 3 is to continue to leverage and expand this expertise into other media channels as we already have been doing. We provide these services through our newly repositioned BlueSoho offering and through partnerships we continue to develop within that business. In addition given our role as a printer we have insight into the marketing objectives of thousands of clients and regularly receive feedback on the effectiveness of their marketing programs and tactics through their ongoing marketing testing. We leverage this knowledge to further develop innovative and complementary products and services. Through our time tested relationships we understand the unique challenges and opportunities they face, which we will use on our path forward to optimize our client's marketing spend across multiple media channels. In this regard we are moving well beyond t merely providing outputs for a marketing campaign but are also assisting in the creation and activation of the entire campaign itself. Again we are positioning our platform, forming strategic partnerships and securing the talent to develop our offer to help our clients create integrated data-driven omnichannel strategies, strategies that coordinate the strengths of multiple online and off-line channels. Of course, print continues to have an important role in the new world of marketing. Research shows that marketing isn't properly leveraged and then measured across multiple media channels such as print, mobile, social and email with better response rates. We continue to be proud printers and will continue to invest in ways to make print smarter, more personalized and more strategic to drive action. In the last year we have helped more than 25 pure play e-tailers who have traditionally marketed through digital only mediums launch printing catalogs and/or use direct mail to drive traffic to their e-commerce sites. After initial mailings the majority of these e-tailers showed increased circulation or page count or both for subsequent mailings. These e-tailers understand that in today's highly fragmented digital world, print stands out. Not only does print drive their target audience on line to shop and purchase but they have found that print is superior for scaling and acquiring repeat customers. It also acts as a tangible extension of their brand. Sports Illustrated expanded content beyond the printed page of its popular 2016 swimsuit issue through the activation of virtual reality videos. Using a smartphone, a Sports Illustrated app and Quad's Virtual Reality Viewer, readers get behind-the-scenes virtual reality content related to the issue. Our Virtual Reality Viewer is made from non-core will is made from non-corrugated paper and was bound into 500,000 newsstand copies. It has captured significant interest especially among marketers who see the potential for branding on the viewer and promoting their products or services in a new appealing way using virtual reality. Of course we continue to strengthen our core print categories, which generate a significant amount of free cash flow to support other transformative opportunities. These opportunities include expanding into product lines with higher growth potential including packaging and in-store marketing both of which we strengthened through the acquisitions in 2015 as well as our continued expansion of QuadMed to provide healthcare service to other companies. In addition strong free cash flow allows us to return capital to our shareholders through our sustainable quarterly dividend. Before I hand the call over to Dave, I would like to extend my many thanks to our employees for their dedication, determination and hard work to finish the year strong. We are confident in our ability to skillfully manage the industry challenges ahead while continuing to transform our company, to better serve our clients through leveraging expertise and insights we have gained as a printer to other media channels. To maximize efficiencies and marketing spend effectiveness, while also competing aggressively in the marketplace, creating shareholder value and achieving long term stability and success. With that I will now hand the call over to Dave.

Thanks, Joel and good morning, everyone. Our fourth quarter financial results reflect swift and decisive cost reduction actions to address our third quarter financial performance shortfall. Thanks to the focus and efforts of all Quad employees we were able to reduce our cost structure by $100 million on a run rate basis for 2015. This was completed ahead of schedule and therefore benefitted our fourth quarter financial results, primarily by reducing our manufacturing costs within our cost of sales line. Fourth quarter cost of sales as a percentage of sales was 79.3% flat with 2014 despite a 6% reduction in sales. These cost reductions primarily consist of reducing our main factory footprint through the closure of four facilities, two of which were announced and closed in the fourth quarter, our Augusta, Georgia and East Greenville Pennsylvania facilities and two of which were announced in early 2016 are Lenexa, Kansas and Atglen, Pennsylvania facilities. The print volumes from these plants are primarily being consolidated into a more efficient mega plant facility where we can realize greater manufacturing and distribution efficiencies. For each closed facility we take great care in the well being of our displaced employees, providing them with outplacement services or the opportunity to transfer to other facilities where we are concentrating volume and are in need of additional skilled labor. Despite the impact of the closures on these employees they have shown great pride in their work as they have continued to perform for our clients and we thank them for this dedicated service to Quad. Additionally our production teams have worked hard to improve manufacturing productivity as they fix the productivity issues we discussed during our third quarter earnings call, which were primarily due to the hiring and training of a significant amount of new workers in our Wisconsin platform that was receiving print volumes from closed faculties and increased manufacturing complexities from product mix. Our final area of cost reduction focused on reducing our SG&A headcount and indirect costs to lower our overhead and scale. Most of the SG&A cost reductions will begin to benefit our SG&A in the first quarter of 2016. These cost reductions and productivity improvements were the primary driver of the improved results in the fourth quarter relative to our revised guidance provided on the third quarter earnings call. It's also important to note that in our view we are never done with the streamlining our cost structure and we will keep this positive momentum going to continue to take costs out in order to offset future pricing and volume pressures facing our long run print business. On Slide 5, you will see a snapshot of our fourth quarter 2015 financial results as compared to 2014. Net sales for the quarter were $1.3 billion down 6% from 2014. This decline reflects the 5% combined in volume and price declines primarily due to ongoing industry price and volume pressures, a 2% reduction in pass through paper sales and a negative 1% impact from foreign exchange due to the strengthening dollar on our international sales. These sales reductions were partially offset by 2% increase in sales primarily related to the Copac and Specialty Finishing packaging acquisitions we completed in 2015. Adjusted EBITDA was $154 million in the fourth quarter as compared to $183 million in 2014, and our adjusted EBITDA margin was 11.5% compared to 12.8% respectively. The decrease in adjusted EBITDA and adjusted EBITDA margin primarily reflects the impact from the 5% reduction in sales from ongoing price and volume pressures partially offset by the impact from cost reductions and improved manufacturing productivity in the fourth quarter and additional earnings from recent acquisitions in the packaging business. Slide 6 is a snapshot for our full year 2015 financial results as compared to 2014. Net sales were $4.68 billion which were slightly better than our preliminary net sales estimate of $4.65 billion we provided on January 6th and at the high end of our revised guidance range of $4.6 billion to $4.7 billion. 2015 net sales decreased 4% from 2014 primarily due to a 5% decline from volume and price pressures, a 1% reduction in pass through paper sales and 1% negative impact from foreign exchange. These declines were partially offset by 3% increase in sales from packaging acquisitions. Adjusted EBITDA was $462 million which was in line with our preliminary adjusted EBITDA estimate of at least $460 million. It surpassed our revised guidance range of $430 million to $450 million but decreased $81 million from 2014. Adjusted EBITDA margin was 9.9% as compared to 11.2% in 2014. The year-over-year decrease of adjusted EBITDA primarily reflects the impact of 5% reduction in sales from ongoing pricing and volume pressures, lower manufacturing productivity prior to the fourth quarter and higher SG&A costs partially offset by additional earnings from recent packaging acquisitions and the impact of cost reductions and improved labor productivity during the fourth quarter. The fourth quarter cost reductions will fully impact 2016 and have been reflected in our 2016 guidance that I will walk through in a bit. Also during 2015 we recorded a non-operating non-cash goodwill impairment charge of $808 million or $542 million after related tax benefits. The impairment charges recorded in 2015 resulted in a complete write-off of all goodwill on our balance sheet. This goodwill was almost entirely associated with the 2010 World Color Press acquisition. While the amount of the impairment charge was significant it was non-cash and it did not impact our key financial metrics including adjusted EBITDA and free cash flow. On Slide 7, we have a summary of our free cash flow which we define as net cash provided by operating activities including pension contributions less purchases of property plans and equipment. The company generated $215 million of free cash flow in 2015 compared to $154 million in 2014. This represented a $61 million or 40% increase over 2014. The $215 million of free cash flow was better than our preliminary estimate of $210 million and $35 million greater than the high end of our revised guidance range of $165 million to $180 million. The increase was due to sustainable reductions in ongoing working capital levels from improvements made in our Order to Cash revenue collection cycle. Our free cash flow yield at 43% which is significant in today's market and in our industry, given what we believe is the sustainable level of free cash flow. On Slide 8 you will see that we ended the year with $1.3 billion in debt and capital leases a decrease of $56 million from December 31, 2014. On year end debt leverage ratios decreased to 2.92 times, a 17 basis point improvement from September 30, 2015. We improved our debt leverage ratio through debt reductions by focusing on a number of items within our control. First, as we discussed previously, we improved our adjusted EBITDA trajectory in the fourth quarter by achieving $100 million in cost pickup earlier than expected. Second, we improved working capital levels on a sustainable basis to drive free cash flow. And third, we optimized our balance sheet to generate $60 million of cash in 2015 by selling or converting certain non-operating assets to cash. While these sales are not included as a component of free cash flow, as they represent non-operating cash flows, they are important levers to pull to reduce debt. We believe we can continue to harvest non-core assets of approximately $60 million over the next couple of years. We continue to believe that operating in a 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. As it relates to pension obligations the year end liability was $185 million, a decrease of $37 million from 2014 primarily due to single employer and multi employer pension plan contributions. Since we acquired these frozen pension plans from World Color in 2010 we have reduced this pension liability by $377 million. Looking forward pension cash contributions will decrease in 2016 and 2017 due to improvements in the funded status of these acquired plans and funding release legislation. Slide 9 includes a summary of our debt capital structure. Liquidity under our $850 million revolver is $731 million as of December 31, 2015. We have no significant maturities until April 2019. The weighted average duration under our debt capital structure is 5.1 years with a blended interest rate of 4.9%. our fixed rate debt is at an average interest rate of 7.1% and our floating rate debt is at an average interest rate of 3.1%. Our debt capital is 57% floating and 43% fixed. We believe this floating versus fixed rate debt structure provides us with the financial flexibility needed 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. One item of note as we have continued to pay down our debt, subsequent to year end we began repurchasing a nominal amount of our $300 million tranche of 7% senior unsecured notes in the public market due to our strong liquidity position and the current high yield bond market dynamics. These dynamics resulted in less liquidity and trading of our bonds and what we view as an arbitrarily low trading price as low as $0.59 on the $1 which equates to an 18% yield. The repurchase provides an efficient way of reduced debt and managed leverage. To-date we have repurchased $27 million of bonds for $18 million in cash. Slide 10 is a summary of our 2016 annual guidance, originally released on January 6. We anticipate 2016 net sales to be in a range of $4.4 billion to $4.6 billion. Our net sales assumption includes continued downward pressure from price declines of 1% to 1.5% of consolidated net sales and organic volume declines of 3% to 5%. We expect adjusted EBITDA to be between $420 million and $460 million. So at the midpoint adjusted EBITDA is expected to decline 5% from 2015. However, this represents a significant improvement from the 15% rate of decline we experienced in 2015. The improvement is due primarily to the increased cost reduction efforts we discussed earlier. The result is an adjusted EBITDA margin of approximately 10% at the midpoint of our guidance essentially flat with 2015 margin. We expect our free cash flow in 2016 to be in a range of $190 million to $230 million representing $210 million at the midpoint of our guidance. We continue to generate a significant amount of free cash flow and the 2016 free cash flow guidance incorporates continued cash flow tailwinds for working capital reductions as a result of sustainable improvements in our cash conversion cycle. The 2016 guidance also reflects a $40 million reduction in capital expenditures and $5 million less in pension contribution. On the working capital front, we are executing on sustainable initiatives to permanently lower our working capital levels. Through our Order to Cash program we have taken a full six days out of our cycle time to collect cash from our customers. The good news is that we are not even half way through our cycle and see the potential for another $150 million cash improvement over the next few years of which at least a third of that improvement will be realized in 2016. Capital expenditures are expected to be between $85 million and $100 million or 2% of net sales. At the midpoint of this guidance this represents a $40 million decrease from the $133 million in capital expenditures we spent in 2015. Our platform requires less investment today and into the future as the platform has benefited from significant investments as to integrate acquisitions and invest in automation which have outpaced industry norms and helped build what we believe is the most efficient and automated manufacturing and distribution platform in the industry. The remainder of our 2016 guidance includes depreciation and amortization of $280 million to $290 million, interest expense of $85 million to $90 million, cash restructuring charges of $50 million to $60 million, pension cash contributions of approximately $20 million and cash taxes of less than $10 million. On Slide 11, you will see our commitment to our dividend which is a key way in which we return value to our shareholders. In continuation of our commitment, our net quarterly dividend of $0.30 per share will be payable on March 18, 2016 to shareholders of record on March 7, 2016. We have consistently paid out our quarterly dividend and based on our stock price at the close of the business on February 22nd, our annual dividend of $1.20 per share is yielding approximately 11% but represents less than 30% of our total free cash flow. Also during the first quarter of 2016 we have repurchased Quad stock as part of our existing $100 million share repurchase program authorized in 2011. We repurchased approximately 1 million shares for $8.8 million averaging $8.96 per share. We are committed to increasing long term shareholder value and given the low price our stock traded to in January which was trading below $8 per share and returning %15 dividend yield and our confidence in our future outlook of the company we believe limited share repurchases are a prudent use of cash and represent an attractive opportunity to increase returns to our shareholders. We are also carefully balancing the share repurchase with our stated use of cash to continue to pay down debt and reduce leverage. As we move 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 initiatives to remain a low cost provider while continuing to generate significant free cash flow. We will continue our focus on maintaining a strong and flexible balance sheet to adjust to changing industry conditions while also investing in our business and returning capital to our shareholders through our quarterly dividend and most recent share repurchases among other priorities. Now I had like to turn the call back to our operator to facilitate taking your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jamie Clement from Macquarie. Please go ahead.

Joel, obviously we are in kind of a weird economic situation, where I don't know, maybe we go into recession maybe we don't. I don't think anybody really knows. But in terms of -- as you look at how this year progresses and obviously considering you've got pretty tremendous seasonality. What are the things that you are going to be looking for in terms of signs over, let's say the next four to five months? That would indicate, okay, there's another leg down versus we've stabilized here. And follow-up question. And maybe this would go to Dave. If there's a broader macro problem that this country faces, what are the buckets that you can go after kind of for next round of cost savings, if that becomes necessary?

Well Jamie, I think that the question is a pretty broad one but it's probably one of the more important questions I think that would be asked today. And I think what that really is, is about cost management and really adjusting for whichever way this thing goes. I think myself and along with a lot of other CEOs from a lot of different industries have been kind of nervous for longer than the headlines would say, about what '16 was going to look like. We for instance could see it in sort of some of the upfront costs that our customer is trying to [indiscernible] as they adjust based on what they are seeing. And obviously the fall was a tough time for retailers with the warm weather, et cetera. But the big deal here whether it happens or not, we are managing this as if we are going into a recession plain and simple. I don’t like missing quarters. I don’t think any CEO of a public company likes missing a quarter like we did in the third quarter. My reasons are a little bit different than most because I happen to represent the largest shareholder base with my siblings and myself and then we have quite a few shareholders who also rely on it and many of whom are my thought management and my employee base on a pretty broad base. And so for us it's about running a company for the long term, but to be successful over the long term the path to get there is to be successful in the short term too and so that's where the third quarter when we were -- we were surprised and its completely unacceptable to my own employees as I was getting emails from people on the floor saying, Joel how did you let this happen. But they also know that it's not about me, it's about everybody letting it happen. Let me just make a quick point here and I have said it before. 2015 is the first time in a long time that Quad hasn't been doing a massive integration. Doing massive integrations most of the cost takeout comes in the form of the overlaps, it's the synergies and that requires a lot of effort and a lot of resources of the corporation. So it's very hard to kind of do integration takeout as well as cost takeout for the overall growth of the company at the same time. And so we started '15 really planning for looking at ourselves as its own integration without doing an integration. In other words, okay guys, we have got breathing room here finally we can all kind of sit back and say, okay look at what we have assembled and look at our costs and understand now where is the next opportunity to takeout significant costs. So when the third quarter happened, it's not like we just woke up one day and said let's start taking costs out. We had significant plans to adjust our company downward in terms of its cost structure. An example would be the two plants we closed in the fourth quarter. Those plans had been made for a while and were probably more of a Q1, Q2 thing of '16 and we ended up doing in Q4. And what made me very excited about that, well we are not happy to close plants by the way, was that when we looked at Q3 everyone said all right, we have got to figure out how to speed up our current plans and also to be more innovative about how we take cost out. And so what we ended up doing is closing those two plants in the fourth quarter which we typically stayed away from because that's our busiest season and so for obvious reasons you don’t. But if we don’t -- after -- the process we have created to close plants if we can't do it in a busy season maybe we haven't learned enough and so we decided to pull the band aid off and we proved to ourselves that we could do it. And I think that's given everybody a lot of confidence that we can find costs where -- before another important point on costs stays out and how we kind of look at the bucket is there is sort of a easy take the fat out of the girth of the company process which is what we finally got to get to after not doing all these through the integration which by the way there is more for us to be able to do. But we also identified that there is things that -- myself, personally going up around the company [indiscernible]. You look at the fabric of the company and you think hey, we can't get rid of that, we can't change this because that's who we are, it's part of our culture. But you really get -- quickly get confused over time about what's truly the fabric of the culture versus an excuse for why we do so. And so I gave the go ahead and I think everyone took it upon themselves to kind of change that paradigm of if we did see things were in fact the same that we could -- they did work off the table what we will do and it resulted in quite a bit of [able grade] of cost takeout. And so I believe, I am a big believer in cost takeout has to be sustainable. You can't [indiscernible] the platform, you don’t just kick the holes and stop maintaining equipment, it's got to be something that adjusts your size of the girth of your company to the volume and the pricing that allows you to do it as well as -- you have spent all of 45 years creating a really innovative group of people, how do you take that innovation and come up with cost advantages that take it to a whole another level. And I'd say that we are in the middle of continuing to really execute on the whole lot of exciting things that will continue on into '16 and the urgency is there because I have informed our people that plan as if you are going into a recession and if we don’t I'd be perfectly happy to be wrong on that prediction. So with that take I can let you answer the rest of the question.

Both side and Jamie I think the other thing I would just add is that it's about this atmosphere and culture of continuous improvement. So many of those things that we are working on have been projects that were started and will continue to yield results for us well into the future. And it's about configuring to find that next innovative project that's going to allow us to take costs out over the future. So that strong CI culture that really started at Quad within the production core has migrated itself across the entire enterprise since we added them in and so you see a whole enterprise wide kind of lean environment that we have created here at Quad and will continue to yield cost savings into the future.

And if I could ask just one more. Joel, I noticed the Virtual Reality Player in this week's Sports Illustrated. Can you provide any sense of how -- I think I saw one article that was describing it positive. We have been talking with the folks at Sports Illustrated, now that the magazine has gone out, are people actually using that?

Well it's too soon to tell. I am sure they are.

I don’t know I used it pretty quickly.

And our data is coming back and that you spent a lot of time on it. But this isn't new. I mean Google has a version of it that is more corrugated. It's a stronger one but more expensive one. We did this with some of our knowledge in commercial packaging to create something interesting. I have seen it being used with apps where you go on and it's like you are on a roll -- you are on a roller coaster literally at a theme park and you can turn your head and get whatever view of what's going around you including what's behind you and see what the roller coaster looks like when you are doing a loop, a 360 degree loop. So I think we saw a lot of discussion about virtual reality in the news lately from the Googles and the Facebooks of this world. It's technology that's moving very quickly and to be able to -- on a very low cost basis be able to take the phone and a printed piece to create a very different experience is pretty exciting. So I applaud SI for doing it, because that issue gets a lot of attention and it’s a perfect example where that technology can work. But I could see it being used by retailers to go on a virtual shopping experience of their retail stores. So it's those types of things that we have been innovative about and maybe not always the first in some of it but making sure that we bring it to market in ways to grow our client's top line. We are kind of shifting from trying to just be a low cost person in the views of our customers in helping them adjust the efficiencies of print alone to be a partner of that hopes you grow your revenue. And it's truly started to happen. So we are very excited about that.

And then last one, Joel, I guess [indiscernible] increase should be rolling off I guess in a couple of months and I think that's what [4% change]. Any sense of what that might do for example to catalog growth?

Yes. I mean direct mail on catalog is the highly susceptible ones to -- well they are all susceptible to rate changes. It's just that catalogers and direct mail have more of an ability to kind of flex their volumes based on costs because they just pull back on the prospect if there is a big increase. Let's not forget though that there was a rule change at the post office last year with their automated FSS system that was essentially another price increase to people who had lighter weight books. So I am looking forward to that [engine] rolling off because that could help correct some of those challenges and create some opportunity for people to reinvest in prospecting again. So time will tell because you got this whole overlap to your point of this weird economic backdrop that people are trying to figure out and I think part of what's driving things is you got a consumer who has had a reset of how they think about spending money. I mean most of the people who have entered the economy in the last five years of that age group have grown up in a tough economy. And so in their spending years they don’t need as much. They are buying fewer things per order. So it is a very strange backdrop and it's something we will watch. But I am planning in running this company as if there is a recession and I hope there isn't

Thank you all as always for your time.

Operator do we have more questions.

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

One quick question. Your focusing on lowering costs closing facilities. You lowered your capital expenditures. Are you concerned that this could backfire in the future when it comes to generating sales?

Absolutely not. Keep in mind that through all this integration process, this sort of long term mega plans that Quad had and in the entire platform Quad had was very well maintained. When we acquired World Color, we acquired Vertis, we acquired Brown, these were companies that were -- having to squeeze into muscle by pulling back on maintenance. So we have invested over the past several years in those platforms that we haven't closed to really base line the equipment back up to where it needs to be and that's not cheap. We have literally rebuilt the presses. And then start a sustainable maintenance program. So a lot of the spending that we have had to do to update that stuff has gone, we aren’t pulling back on investment in things like digital presses, we are not pulling back on investment in things like automation that pull labor cost out. It's just that we can now pull back on the stuff that the big integrations required us to do because we have an acceptable way a platform should run in our mind and if it's not acceptable either its closed or we invest the capital to bring it up to speed. And so no, I am very comfortable with where we are from a CapEx standpoint, because in our case it's not about squeezing down the platform. We are actually – it’s an amazing story that these guys are telling in my plants here. One example, we have lots of paper warehouses and Dave mentioned lean practices in CIC, continuous improvement. I mean we have millions of square feet just tied up with paper and one of the reasons we are pushing paper sales is we manage our paper that we supply to customers somewhere around in the 25 days of paper on the floor at a given time. On average our customer supply paper is over 50 days. So we have increased the percent of paper that we supply to our customers by over 11% in the past year. I am sorry from above 30% to 41% of our total paper. In addition to that our lean people took a look at how we are dealing with today's rule sizes and such. And they did a lot of studies and in one case we cut the required square footage of paper warehouse down by 50% in one plant. Well guess what, these mega plants are really efficient. So any square feet that I can increase for utilization as we consolidate the industry helps us produce products at a lower cost in these lower cost plans. Does that make sense?

Yes. When you mentioned consolidating the industry and I know you said you are focusing right now on in a way internal integration. Are you still looking for potential acquisitions?

Well we are always keeping our eyes open for acquisitions. Like I said we did two packaging acquisitions and an in-store acquisition in 2015. But it's been kind of nice to be on a hiatus from large ones because it's been the first time we could step back and kind of address I think what a lot of companies are having to address over the past several years, alone by just looking at the total company. So, we get things across our desk all the time and it has to be compelling. We have been very disciplined about the use of capital. We have talked to you about that. We have showed you the results of it. We have talked to you about when we walk away from things and we don’t talk to you about when we walk away from things. So we will be opportunistic and strategic but it's got to make sense.

Okay. Thank you so much.

Thank you Katja. Operator?

This concludes the question-and-answer session. I will now turn the call back to management for any closing remarks.

Well thank you all. I know this is a more usually -- more of a lengthy conversation readapt yearend, but I think a very important one. I am extremely proud of what we have done. It's been nothing short of amazing and I am speaking to the people in the plants right now, because you all have proven that you are True Blue Quad and that you know how to react. And so I thank you for that. And I thank you all for joining the call. See you next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.