Good morning, ladies and gentlemen. Welcome to Quad's Fourth Quarter 2018 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 this morning's earnings release. Alternatively you can access the slide presentation on the Investors section of Quad's website under the Events and Recent Presentations link. Following today's presentation, the conference call will be open for questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kyle Egan, Quad's Director of Investor Relations and Assistant Treasurer. Kyle, please go ahead.

Thank you, operator, and good morning, everyone. With me today are Joel Quadracci, Quad's Chairman, President and Chief Executive Officer; and Dave Honan, Quad's Executive Vice President and Chief Financial Officer. Joel will lead off today's call with a discussion of our continued Quad 3.0 transformation. And Dave will follow with a summary of Quad's fourth quarter and full year 2018 financial results and a summary of our 2019 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. Quad's 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. Finally, a replay of the call and the slide presentation will be available on the Investors section of Quad's new website quad.com shortly after our call concludes today. I'll now hand the call over to Joel.

Thank you, Kyle, and welcome, everyone. 2018 was truly a pivotal year in our Quad 3.0 transformation. Our fourth quarter performance reflects our continued focus to execute on our strategic priorities to ensure the long-term growth of our company, as a marketing solutions partner. We have been aggressively implementing our 3.0 strategy through strategic investments in high-level marketing talent, technology and services to expand our offering with our clients. These investments include the 2018 acquisition of marketing services provider, Ivie & Associates; the 2018 majority investment in digital agency Rise Interactive; and the 2019 acquisition of Periscope, one of the nation's top five independent creative agencies by annual revenue. Periscope helps expand our offering with its world-class capabilities and creative account management and strategy including media buying and analytics. With these investments, our offering further extends beyond print and content execution to include an integrated stack of higher-margin marketing services, which in turn drives incremental revenue across our print categories. We differentiate our offering by leveraging our data-driven print expertise as part of a truly integrated marketing solutions platform to help our clients reduce complexity, increase efficiency, and improve marketing spend effectiveness. I am proud to say that the revenue associated with integrated services is now approximately 20% of our total net sales and represents over a 40% growth since 2017. To reflect the scale of our offering and the role we now play with our clients, last week we announced the evolution of our brand from Quad/Graphics to Quad. This change represents the strategic next step in our transformation as a marketing solutions partner and better aligns with the expanded services we provide our clients today. Quad will retain the company's iconic logo element, the stacked Qs and Gs that symbolize printing press rollers and process colors, as it…

Thanks Joel and good morning everyone. 2018 was a busy and transformative year for Quad. We continue to execute on our strategic priorities to drive EBITDA enhancement and strengthen our balance sheet, while making long-term strategic investments to accelerate our Quad 3.0 transformation. In addition to the acquisitions Joel previously mentioned, we've made nearly $100 million in capital investment in 2018 to enhance offerings and drive further productivity improvements in our manufacturing and distribution platforms, which sustains our historically strong free cash flow. We've also made significant investments in our employees through hiring additional integrated marketing services talent to help accelerate Quad 3.0 growth and increasing hourly production wages in our most competitive labor markets to help us better recruit and retain our most valuable assets, our employees. Additionally during the fourth quarter, we announced our intent to acquire LSC Communications to help further strengthen our manufacturing platform to fuel Quad 3.0 and our integrated marketing solutions offering which delivers cost and time-savings opportunities for our clients and drive shareholder value. In anticipation of the LSC acquisition, we recently announced the amendment and extension of our debt facilities which provides us with the appropriate liquidity and structural flexibility to complete our pending acquisition of LSC and maintain a strong flexible balance sheet. I'll provide more detail on that structure in a bit. But first I'll start with an overview of our 2018 financial results. Slide 8 provides a snapshot of our full year and fourth quarter 2018 financial results as compared to 2017. We're pleased to report that our net sales and adjusted EBITDA results were in line with our expectations and our full year financial guidance. Net sales for the three-months ended December 31, increased 1.5% to $1.2 billion reflecting the impact of the Ivie and Rise investments as…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jamie Clement of Buckingham Research. Please go ahead.

Hey, good morning. Good morning, everyone and congrats on the year.

Thank you, Jamie.

Hey, Joel, I'm going to start with Dave because he gave out a lot of numbers and I was scribbling them down. And I just -- I don't want to lose my train of thought here, if that's okay.

Yes. He does that from time to time.

Yes, yes, yes. No, he's out of control. He's in fuego. Anyway, so Dave, so I want to get -- and after Dave answers, Joel, certainly chime in, right? But I think -- excuse me, I think, you're looking for -- you gave the reasons. I think it's about a $40 million year-over-year decline in adjusted EBITDA in the first quarter. Because, obviously, you had some of that non-recurring stuff going on and obviously you've got the investment. Do I have that right?

Yes. What we walked through is $30 million of decline in the first quarter. And $22 million of that was the fact that we had some one-time benefits in the first quarter of last year that won't repeat in 2019, the largest of which was a insurance claim that we had for a fire in one of our facilities.

Okay. So -- but I think it was a good number -- the reported adjusted number in the first quarter last year was about $110 million. And I think your midpoint is about $70 million. Is that right?

Yes.

Yes that's right.

Okay. All right. So if I look -- so with that said and you commented on this I mean, you're basically looking for flat to up EBITDA 2Q through 4Q. And I'd like to hear a little bit more about that. But if I look at -- and I like the way you're now breaking some of this stuff out. But if I look at slide 6 and specifically slide 7 where organic growth in integrated services has been minus one over five years, how in 2Q through 4Q do you end up being EBITDA flat to up while presumably you're still spending to invest and grow these businesses long-term?

Yes. I think the key -- and you'll hear a lot about that in our script is that we're making investments today that are for the longer term. And one of the bigger investments we made Jamie was in starting wages in our facilities to be able to attract really good talent and be able to retain it and be able to augment that great productivity our current labor force is producing today. That's not going to have an immediate impact on productivity. You initially make that investment, but as those people get trained and they get more and more productive over time you start to see that payback. Some of that is going to start to impact -- because remember, we did this in September of last year some of that's going to start to impact us in the back half of the year during our seasonally busiest time. In addition, one of the reasons why our free cash flow was a little bit lower than what we had expected for 2018 is we actually increased the investment in automation in terms of capital expenditures into our facilities to try to come back at this really competitive labor market. The impact of those investments start to hit in the back half of the year as that equipment is put into place and that starts to produce for us during our seasonally busiest time.

And Jamie, just let me just add on to that. Again lower employment rates are challenging for any business so it's not just the hiring. Don't forget it's the retention. I cannot -- so we've had to invest in that as well. But ultimately...

And training also, right. Training, right?

What's that?

Training right?

Yes it goes hand-in-hand and we're already seeing productivity improvements as a result of what we did in September and we'll continue to see that ramp. But let's also not forget that we have a pending large-scale consolidating acquisition happening. And so when we think about getting ready for that that's also the reason to make long-term investments and making sure that our platform remains the best and that we've got the right talent framed up and the right automation to continue to make sure that we end up with the best platform at the end of this.

Yes. And then I would tell you the other component to why we're starting to see a little bit more back-end growth in 2019 is all the investments we've made in Quad 3.0 and our services side. The January acquisition of Periscope as that comes and integrates with our enterprise-wide selling initiatives, you'll start to see the benefit of that across our largest clients and our most strategic clients in the back half of the year. So it's -- we really see the momentum that we've carried in from a Quad 3.0 perspective. And both Joel and I mentioned in the script, it was another year of new revenue of $150 million out of Quad 3.0. So cumulatively since last -- since 2017 it's over $300 million of new incremental revenue associated with how we're going to market now on the services side.

And I do want to remind everybody 2.0 and 3.0 because so often people get in the trap of saying, well, let's just focus on the integrated marketing services and what that's going to do. Don't forget that it drives a significant amount of print volume as well in the different categories, which tend to be the bigger invoices. And I'll give you an example, towards year-end a longtime major retailer where we do lots of retail inserts for; we've been engaged with them for well over a year on 3.0 strategy of efficiency and effectiveness. And towards the end of the year we were awarded a $10 million increase in business to do all their in-store signage. So that's a great example of where we see a lot of the benefit is as you get into these things, you're acting as a consultant on one side to talk about efficiency and content creation and deployment and then acting more like an agency on the deployment side. You tend to see a lot of our bigger ticket items maybe lower margin, but bigger cash flow generating items get kicked up a bit. And so that's the important thing about this. And I do also want to just emphasize that it's not like we just decided to do this today. If you go back to our brand change and you look at slide 3 where Quad/Graphics, the original logo had graphics the same size. Look at 2015, we made the graphics a lot smaller and changed the positioning where the local pin goes. That was because 3.0 was already being worked on back then and we knew at some point, the next step would be to drop off graphics. And so as we tell you that we believe in our strategy, we believe in making the long-term decisions to support that strategy regardless of what short-term implications there might be, it pays off and we will continue to do that.

Okay. Thank you for that vision, Joel. Going back to slide 7, looking back at 2014 you have integrated services at 13% of revenue, now pro forma up to 2019 is -- if I go back five years currently I think your pro forma mix is like 10% logistics there, nine percentage points media. Was it like overwhelmingly logistics five years ago in the blue segment? Like in other words has the media solutions segment over the last five years had the lion's share of the growth?

Yes, I think there's an element of the media services that has declined proportionate with our large scale execution decline. But that'll be offset by growth in targeted execution media deployment. And then also logistic services has grown over the past couple of years despite what's been going on with the large scale execution. I would tell you it was roughly services if you go back in time back to even when we first went public it was around 10% of our business. So it has been growing for us despite overall the impact of some decline on the print element on that. But we continue to look for more services, in which to grow that space.

Okay. Thank you for that. And one last one. Dave, I wasn't totally -- with the refinancing and looking at some of your guidance items here, particularly that the LSC-related payments line item the $20 million to $30 million, so versus where you were at December 31st in terms of total debt that was drawn when I'm looking at your interest expense guidance and that $20 million to $30 million so how much is actually drawn as of now? In other words sort of pre-drawn before the close that you're paying interest on?

Yes. We structured the new the amended debt to have an element of a term loan A that could be delayed draw until -- right now that has not drawn down and that will draw down when the acquisition is completed. So that's why I made the comment about our interest rate in the short-term is a little higher because it's mostly a mix of our debt is mostly term loan B focused which has a higher interest rate. But when the deal closes, when LSC closes, we'll then be able to fund that up through the A, which is a much lower interest rate than the term loan B. And that will blend our interest rates, so our interest rates will be equivalent -- today we're at 5.4%, will go up about 25 basis points. But in the short-term, we've talked about it in the script, it could go up about one full percentage point.

Okay. But in terms of actual incremental debt that you're paying on, is it about -- is it the $200 million of the term loan B that you're currently paying on? That's going from the $300 million to the $500 million. Do I have that right?

No. The $500 million is what we'll be paying on in the short-term.

Yes, yes. That's what I'm saying. So $200 million incremental?

$200 million incremental. Correct, Jamie. Sorry, I didn't understand.

Okay. All right. No, no, no, no. Sorry, I didn't make it clear. Got it. Thanks so much for the information. I appreciate it.

All right, Jamie.

Operator, next question.

Our next question comes from Dan Jacome of Sidoti. Please go ahead.

Hi. Good morning. First question, can you just share…

Good morning, Dan.

…can you just share some insight – good morning. Can you share insight just keeping in mind you can't disclose everything just yet because the acquisition hasn't closed, but what have you learned from the DOJ process, especially with the December request for additional information? Just trying to gain some insight, one, what have you learned? And then two, generally, anything you've learned about how the DOJ views acquisitions of this nature and size in your particular North America commercial printing landscape?

I obviously can't speak for them, but the process is as expected. And we've been doing the work to respond to all their questions and it really corresponds to being ready to close by midyear. So the process is the process and it's going as planned.

Yes. I'm just a little surprised you guys didn't bake that into your guidance. I was wondering if that is because of the additional request or that point is moot and it's just because you're waiting for all your financing ducks to line up, which it sounds like they already have. So I'm just trying to gain some further insight. We're talking today on this conference call about the pro forma numbers, why you didn't give some guidance with the acquisition baked in if the target range of a mid-2019 close hasn't changed? A – Dave Honan: Yes. Dan, our practice will be once the acquisition closes we'll update our guidance for that acquisition. We followed that practice all along. It's tough to predict the ultimate timing, but we still believe that we're looking at a mid-2019 close on LSC.

Which is very consistent with the second request process with either the FTC or DOJ.

Okay. I can live with that. And then the services, nice job, 20% of the mix, it looks like. And I don't know do you have a long-term target of where do you like to see that go just for modeling purposes? Or a lot of that is going to be contingent on what compelling acquisition opportunities might be out there for you?

Yes. We want it to go up.

Obviously, but do you have a target?

Obviously, it will continue to grow. I mean, we're not going to be giving guidance on that at this point. But remember that the more successful we are there, it also drives larger dollar volume in the print space as well. And so you can't just kind of break out one and say that "hey, some day this is going to alone kind of grow and make up for the lower growth in some of the other areas" because it actually drives some of the other areas. But as it happens as normal we will continue to show you guys how we're progressing, I think that we started last year giving guidance -- or not guidance reflecting on how much came -- how much revenue came from 3.0. That was the $150 million in 2017 followed by another $150 million in 2018. And again that's a combination of those services, but also the print products.

Great. And then just one last question. When the acquisition does close let's -- will you put out a press release that same day with a pro forma guidance? Or will we have to wait until their next earnings release assuming it falls intra-quarter?

Yes, we'll make that decision based on the actual timing of when the acquisition closes and where we're at in our cycle here of reporting to the public and guidance. Tough to predict at this point, so Dan, we'll be flexible on it.

Thank you, guys.

All right thanks Dan.

Thanks, Dan.

Operator, next question.

Our next question comes from Bill Mastoris of Robert W. Baird. Please go ahead.

Thank you. Dave on the very last call I asked you a little bit about your intentions with regard to the highest cost of debt at LSC, the 8.75% secured note. And at that time, you indicated that everything was kind of under evaluation. I wonder if you have any type of update. I mean is this going to be something that you wait until the October call date? Or whether you just want to take it out early maybe with a tender? Or maybe you keep it outstanding until the premium actually drops a little bit? Any thoughts that you have there would be greatly appreciated.

Yes, that's all dependent on the timing of the LSC acquisition, Bill. So, it's really tough to answer at this point. We -- when I made my pro forma comments, we assumed a midyear close. We would take that out accordingly. And -- but until we know the ultimate timing of the closure of the transaction, I can't really give you any guidance on that.

Okay. Would it be fair then Dave to assume that the revolver capacity is basically going to be used to redeem that particular issue? I mean right now you have ample amounts and I would think that the delayed term-draw would be used to go ahead and take out all of the other LSC debt? Is that a fair assumption?

That's a fair assumption.

Okay. And then lastly as -- sometimes your debts will slip into a discount price. I'm just wondering in the past you have been very aggressive in bond buybacks whenever you've seen an attractive price. Can we assume that there's going to be any type of that activity post the LSC closing?

I would use the adjective we've been supportive in the debt markets. And we take that on a situational basis and as facts states. If you go back to 2014, we were active in the high-yield market to buyback some of those bonds which had traded to a very low level. There wasn't a lot of support in the market and we felt it was best for the market to step in and support that and provide some liquidity to the holders. I think you'll see the same type of practice out of us when we look kind of long-term with the relationships and make sure we're very supportive of the market.

Okay. Thank you very much. I appreciate all the color.

Operator, next question.

Our next question is a follow-up from Jamie Clement of Buckingham Research. Please go ahead.

Yes. Hey Joel hi. In the -- in one of the merger documents there was discussion of that you all were considering possibly a fairly large special dividend associated with the LSC transaction. That was then kind of taken off the table. I don't know if Periscope took that off the table or whether a special dividend might be something under consideration after the deal closes. Can you comment one way or the other?

Yes. I mean it was one of the things that we were sort of contemplating as you look at the structure of the deal and what's possible, but it really -- the complexity was pretty great in trying to figure that out. It just didn't make sense. And yes, of course we look at uses of capital here and Periscope was I think a very important one for us to do. And I'm always going to prioritize what's best for the business long-term. And so we took it off the table because it just didn't make sense anymore.

Okay. Fair enough, thank you very much.

You’re welcome. Operator?

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks. Joel Quadracci Okay. Thank you operator and thank you everyone for joining us. It's been quite an exciting couple of weeks for us as we make our brand change to really catch up to how we're actually acting. And so, we wanted to wait till we had points on the scoreboard so that the change was actually inline with what we're actually doing. So we're very excited about where we're going. It will be an interesting year and we look forward to talking to you next quarter. Thank you all for joining us.

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