Good morning, ladies and gentlemen, welcome to Quad's Third Quarter 2019 Conference Call. [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 & Recent Presentations link. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Kyle Egan, Quad's Director of Investor g

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. In terms of our agenda today, Joel will lead off the call with a discussion of Quad's Quad 3.0 transformation strategy. Dave will follow with a summary of Quad's third quarter 2019 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 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've 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.com shortly after our call concludes today. I'll now hand the call over to Joel.

Thank you, Kyle, and welcome, everyone. We are making bold decisions to accelerate our transformation through investments in our business that will drive long-term growth and shareholder value and provide us with the ability to take advantage of opportunities in the rapidly changing print industry. I'm pleased to update you on the success we're having on our Quad 3.0 strategy by sharing that it will generate $125 million of expected organic incremental sales growth in 2019, which helps offset over 3 full percentage points of annual print sales decline. Through Quad 3.0, we have created a uniquely integrated marketing solutions platform that includes customer analytics, campaign strategies, media optimization and global production all woven together to effectively address our clients' marketing and process challenges. This non-siloed approach is an important point of differentiation from traditional printers and large agency holding companies. As shown on Slide 3, our integrated offering, which includes an industry-leading manufacturing platform, helps clients reduce the complexity of working with multiple partners, eliminating multiple handoffs that compromise both the strategy of marketing programs as well as the speed at which they are executed. We also enhanced efficiencies through workflow reengineering, content production and process optimization and improved marketing spend effectiveness across all channels through data-driven consumer insights, media planning and creative and campaign strategy. We have invested time and resources to fine-tune our Quad 3.0 platform and continue to scale our solutions to drive additional incremental revenue. To further explain how our strategy is working, I would like to share some recent client wins. On Slide 4, you'll see we've continued to grow our relationship with the leading apparel retailer, Jockey, based in Kenosha, Wisconsin. Our relationship with the retailer began with catalog print and prep work. Then in 2018, we added photography for Jockey's online retail,…

Thank you, Joel, and good morning, everyone. Please note that today's discussion of our financial results excludes the discontinued operations of the book business in all comparative periods, with the exception of cash flow information. Slide 8 provides a snapshot of our third quarter 2019 financial results. Net sales were $944 million in the third quarter as compared to $974 million in 2018, down 3.1%. Organic sales, which exclude acquisitions, declined 4.3% during the quarter. As Joel mentioned earlier, organic sales benefited from new revenue generated from the Quad 3.0 strategy but were offset by ongoing print industry volume and pricing pressures at a negative 0.5% impact from foreign exchange. On a year-to-date basis, net sales were $2.9 billion, flat with 2018. Excluding acquisitions, organic sales declined 2.6%. The organic sales reflect new revenues generated from the Quad 3.0 strategy, offset by ongoing print industry volume and pricing pressures and a negative 0.7% impact from foreign exchange. Our Quad 3.0 transformation strategy is driving $125 million of expected organic incremental sales growth in 2019, which is helping to offset over 3 percentage points of annual print sales decline. Adjusted EBITDA was $80 million in the third quarter of 2019 as compared to $107 million in 2018, and adjusted EBITDA margin was 8.4% as compared to 11%, respectively. The variance to prior year primarily reflects the impacts from a 4.3% organic sales decline, an $8 million impact from the reduction of market prices for paper byproduct recoveries and an $8 million impact from strategic investments made to increase hourly production wages. As a reminder, last year, we began to make additional investments totaling $40 million on an annualized basis to increase hourly production wages in our most competitive labor markets due to historically low unemployment rates and the challenge of finding…

[Operator Instructions]. Our first question today will come from Jamie Clement with Buckingham.

Dave, if I can just start with you, just one housekeeping item and then I'll -- I've got a couple of questions for Joel if that's okay. If I look at like the reported EBITDA numbers from first quarter, second quarter, third quarter, I would get to like about a $225 million number versus the $239.1 million for the 9 months here. Is the difference there, is that all books going discontinued?

That's correct. And Jamie, we've put out an 8-K yesterday to give you restated quarterly numbers back through 2018 that will help you reconcile that, too.

Right. Great. Just wanted to make sure. Okay. So Joel, on the investments in productivity, I guess, going back to 2018, it sounds like you're getting some efficiency gains but not all of them. As we kind of look into next year, would any gains you expect to get there, is that part of the $50 million cost savings plan? Or is that in addition to?

Well, so let me hit on this. So when you look back to '18, we suffered from a productivity standpoint because of the changing labor market. And so our productivity actually was worse than we had in the past. And given either with or without the LSC transaction, we -- these plans need to have well-trained people to run efficiently. And so we made the tough decision to really bite the bullet and increase significantly the starting wage as well as then you have to deal with compression as a result. And we did that in concentrated areas where we had the biggest problems. What I find interesting these days is that with the known entity of the labor market, everyone's talking about wage pressure, but it seems, as I talk to industry after industry, everyone's putting off the inevitable as long as possible. In our case, if you put that off, you -- we saw it. You get hurt pretty hard. And the problem when you do this, and you do it in the way we did, is all the cost is a light switch. It comes on right away. The productivity improvements come later. And so there's a lot of timing in this. And I'd say that from '18 to '19, it's actually significant, the productivity improvements we've had year-to-date. We've seen incredible increase in productivity wherever we've been able to impact the labor rates because we've definitely seen a higher-quality employee as well as less turnover. And remember, when you have the turnover because of the tight labor market, the training side gets hurt pretty hard because you're spending that money but then you have to start over again. And you don't train someone in one day. So we saw the increase in productivity happening throughout the year. But no, you're correct, we haven't gotten to the point of totally offsetting it. But we feel good about in 2020, continuing that trend upward in terms of productivity improvements.

Yes. And Jamie, to directly get to the point, I think where you're going to, these -- the $50 million in cost savings are specific programs outside of the productivity that we're talking about that will happen over the longer term related to this $40 million investment in wages.

Right. So that's a lot of the typical things we do at continuous improvement, et cetera. The productivity stuff is stuff that will continue outside of that.

How much do you -- I mean, I know it's -- maybe it's a moving target? I don't if it's a specific goal. But I mean, how much more in the way of productivity do you think you'd be able to get maybe over the next 6 to 9 months or 12 or 18?

I don't know. I'd guess we're probably in the seventh to eighth inning. Is it fair?

Yes. I think it's going to take more than 12 months to fully see the impact. And it's really going to be based on what happens on other external factors in the labor markets in which we faced the challenge of low unemployment. And so time will tell on that, but we really like the progress the teams have been making in these plants through increased speeds despite more complexity to what our customers are asking us to do with print because of the personalized nature of where we've moved with print. So it's just been tremendous, as Joel said, to see the quality rise, the retention rates get longer and just -- and put more quality books out the door on time.

And obviously, it's not just wage that does this. We've done a lot of innovation in terms of how we recruit, who we recruit to. We've started things with inner cities, where there's underserved populations. So it's a holistic approach. But one of the things I think you got to really understand here that's really important is as we look at our performance right now, it's not heavily focused on some sort of surprise on the top line. Almost the opposite. We've had -- we've been able to offset top line regular decline by over 3 percentage points so far this year. And that's pretty significant. I mean if I look at the different areas of where we see volume decline, it really is a little bit of sluggishness on the retail side with retail inserts. And if you look at the GDP report this morning, they echoed that sentiment by saying that there's sluggishness in retail. But I'll also say that the retailers, while there may be sluggishness in the retail insert, these are the ones that, and I used a couple of examples here today, are spending more money on the rest of our offering, which actually helps offset, in our mind, some of the revenue we lose on an account-by-account basis. Those weren't insignificant revenue increases through services, which have a smaller invoice number -- dollar amount in typical products, but it also resulted in more products as well. So that's why 3.0 is important.

Joel, borrowing from some of the language in the press release and maybe help us understand this a little bit more. I think that some might think that language around taking advantage of changes in the print industry is not necessarily the same thing as accelerating the 3.0 transformation. Can you bridge those 2 together for us a little bit?

Certainly. It's both. I mean, look, when you look at the potential of the LSC transaction, that -- the industry needed another reset, okay? And we felt, I think LSC felt, that this was a great way to do it in a controlled way for all constituents. That's clients, employees, shareholders. But because of the delay that the DOJ did -- remember, they didn't get to the point of actually blocking it. They sued the block. But we walked away because I think both sides understood that with that uncertainty in a dynamic industry with dynamically changing media trends, that the risk would've been a lot higher if we didn't walk away from it. And so now, that not happening, what hasn't changed is the industry still needs a reset and we're doing it. You saw us close two plants after the deal fell apart, and we continue to look at ways to make sure that our best-performing platforms are running at a high labor rate. Now that being said, there's going to be other shakeout there. And as you know, we always look at consolidating opportunities if they're affordable and if they really lend itself to us creating great, strong free cash flow so we can continue to use that to transform ourselves. And so that's the second part of bridging your question is we're showing you that 3.0 is no longer an experiment. It's not being an experiment like 3 years ago. We've been putting points on the scoreboard now, and it's accelerating faster and faster. And so we've done a lot of heavy lifting in terms of creating the infrastructure it takes to do this type of sale at scale. That's hiring talent, that's reorganizing sales departments, that's bridging gaps between different business units. And so to…

Okay. Joel, with respect to some opportunities that may arise, given that a lot of your competitors are way, way, way sub your scale, many of them having problems. I mean do you anticipate kind of opportunity for kind of Vertis-type situations going forward? Is that what you're alluding to?

It could be. If you recall, Vertis was in conjunction with the restructuring. There could be opportunities just to acquire. But again, it really depends on what it brings to the table for us. We're not going to do it for the sake of doing it, as you know. But I have to tell you that -- and by the way, there still is a very large competitor out there with LSC. And -- but I will tell you that as things go forward here, it's tough just to be printing products in this environment because then you're just dealing with the organic decline. What we're showing you is that the 3.0 strategy is about offsetting the organic decline. My goal is to replace the organic decline and then get to grow. But that's not a light switch, as you know. But look at what we've been doing and look at the numbers we keep putting out there. That's what you need to focus on, and that's how we're going to continue to manage ourselves.

Joel, how far along -- I don't know if you want to talk in kind of 9-inning terms. But in terms of like educating your print customer base on all of the solutions and the services related to 3.0 that you all provide, like are you still encountering customers that say, hey, I did not know you did that?

It's changed dramatically. I'd say that this year was a very noticeable change. And to your point, the challenge is that people are used to managing marketing in silos and from different suppliers out there, whether it's the big holding companies in one place. Print has always been really just about buying the execution. But everybody is under pressure from a marketing standpoint. This is -- I'm talking about this broadly. It's not just people who use print. It's people who market. The idea of having a fragmented spend in marketing right now and managing that way is that's going to separate the winners from the losers because you can have a great product, but if you're not marketing to the consumer the way they expect it in an integrated way, using data and using the right analytics at the right time in the right geographies in the right circumstances, someone is going to outpace you. The other thing that we're seeing is an acceleration of nonprint users starting to use print. We were out at Adweek. We sponsored one of the sections. A lot of talk about the power of direct mail. And that's where when you think about our partnership with dtx with Tim Armstrong, we've seen this trend for a while that digital-only marketers have really done well over the years. But now the expense of doing it is rapidly increasing and the effectiveness is dropping. Because even in digital, that's very fragmented and people aren't necessarily able to measure it the proper way. And so now we see people coming into print, very significant names by the way, and I think if you look at direct to consumer, the original ones were catalogers, right? If you think about an L.L.Bean or something like that, they were…

No. No. Not at all. Very helpful.

This is a really important point for everyone to understand, especially in context of what we've announced today and why we're doing it.

This will conclude today's question-and-answer session. I would now like to turn the conference back over to Mr. Joel Quadracci, CEO, for any closing remarks.

Thank you, operator, and thank you, everyone, for joining us. As we shared on today's call, we are confident in our Quad 3.0 strategy, which is working. We continue to expand work with existing clients as well as win new work. Given our success with Quad 3.0, we are taking proactive steps to further accelerate our transformation, making investments in our business that will drive long-term growth and shareholder value and provide us with the ability to take advantage of opportunities in the rapidly changing print industry. As always, we remain focused on making decisions in the long-term best interest of our clients, shareholders and employees. So with that, I thank you and look forward to speaking with you again next quarter.

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