Quad/Graphics Inc (QUAD) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad conference Quad/Graphics conference call. During today's call all parties will be on listen-only mode. Following the speaker's presentation, the conference call will be open for questions. (Operator Instructions). I would now like to turn the call over to Barbara Bolens, Assistant Treasurer and Director of Investor Relations for Quad/Graphics to begin. Please go ahead.

Thank you, and good morning, everybody. With me today are Joel Quadracci, Quad's Chairman, President and Chief Executive Officer; and John Fowler, Executive Vice President and Chief Financial Officer. Joel will begin the call with opening remarks. John will then provide a pro forma financial review of the second quarter results of the combined Companies and briefly discuss the legacy Quad/Graphics results as reported. He will provide some high level guidance on CapEx, depreciation and amortization, and interest expense. After, John and Joel will take us through a slide presentation outlining the strategic importance of the Worldcolor acquisition recently completed and progress we have made to date with respect to integration and synergies. Following our formal presentation, Joel and John will take your questions.

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 the quarterly news release posted on our website. The slide presentation can be accessed through a think on the Investor section of the Quad/Graphics website at qg.com. There are also detailed instructions on how to access the slide presentation in our second quarter release released issued last evening. The slide presentation and a replay of the call will also be posted on the Investor Relations section of the Quad website. I will now turn the call over to Joe.

Thank you, Barb, and thank you all for participating today in Quad/Graphics first quarterly conference call as a publicly traded company. I will make a few remarks on the quarter in a minute, but I would like to comment on some of the events that have transpired since June 30.

As you all know, we successfully completed the acquisition of Worldcolor on July 2, and Quad began trading on the New York Stock exchange on July 6. This was a complicated transaction that required attention and energy of many people. I'm very pleased to report that thanks to everyone's hard work hard work it went as planned, and most importantly we have hit the ground running. I commend all those from both legacy Companies for the outstanding work that they have done. We are positioned and dedicated to completing this integration and to meeting or exceeding our synergy targets within the prescribed timeline.

Integration activities began on day one, and to illustrate that point, in the first week we rounded out the new management team and structure that includes the best and brightest from both Companies. The leadership structure encompasses people three levels down in operations, sales and administration and has been commune communicated and implemented to everyone across the organization. As well, we have completed the integration of our sales force, our on plan with the consolidation of our corporate headquarters into Wisconsin, and last week announced plant consolidations.

In that announcement we targeted four plants for closure and accelerated the previously announced closure of another. Work will be moved to facilities throughout the combined platform where it can be produced most efficiently. This consolidation will result in the reduction of approximately 2,200 employee positions and the permanent removal of a significant amount of this production capacity from the marketplace. As we said in the release last week, actions like this are not easyand are not taken lightly, because they involve the disruption of people's lives. But these difficult decisions are what are required for the business. Going forward, we will continue to make the right decisions for the benefit of all of our stakeholders and the vast majority of our employees.

In the lead-up to and since the acquisition, we have been as open and transparent as possible with our employees, customers, suppliers and shareholders. On July 2, I addressed all of our employees Company-wide in a comprehensive live video town hall meeting and have followed up with periodic communications since. Open and frequent communication is a part of the Quad culture and we believe a key component of our success. We will continue to make the difficult decisions that are necessary as we move further through the integration process.

Over the last two months John and I have met or talked with many of you on this call. While we have a lot on our plates right now, we will make time in our schedules for you so you can get a better understanding of us as individuals, as a management team, and on how we plan to improve and grow our business. As you have questions I encourage you to reach out to Barb, who will be managing the Investor Relations program. She will assure we are involved as much as possible.

We have been very proactive in reaching out to our customers. Again, I will have more to say about this in the slide presentation, but overall this transaction has been well received by the customer base. In the second quarter and post-closing we have continued to renew and sign new work with Quad and legacy Worldcolor customers across all of our business segments.

We are always working with our customers to help them make print relevant and profitable in their marketing campaigns. Our multichannel approach is well developed. It includes educating pure online retailers to the advantage of using a print to introduce customers to the products and to drive them to purchase online, or help traditional print customers integrate print with cross-media digital channels any time anywhere. Our cross-media marketing team is comprised of individuals from both Companies and have given us a more complete slate of products and services, as well as a wealth of new ideas for all of our customers.

I'm also very proud to say that recently our Hartford, Wisconsin, facility received the Leadership in Energy and Environmental Design certification's Silver rating from the US green building council. This is the second Quad plant to receive this certification. Quad/Graphics is the first printer and we believe the first heavy industrial manufacturer of any kind to receive LEED certification for an existing manufacturing facility of this type. This is part of our goal to continue as the environmental leader in the print industry.

In a minute, John will take you through the second results, but first I would like to make a couple of comments. Quad's reported net sale is for the quarter and year-to-date were essentially flat compared to prior year. Our reported adjusted EBITDA and adjusted EBITDA margins declined slightly compared to last year. This was entirely expected, because we were focused on making sure we made the proper investment in manufacturing and labor infrastructure to maximize the value of the acquisition and to hit the ground running. I believe our pro forma numbers demonstrate this was the right strategy. Pro forma adjusted EBITDA and pro forma adjusted EBITDA margins of the combined Company significantly increased compared to prior year. The pro forma adjusted EBITDA margin is already in line or better than our major competitors, and we expect it to improve to historic Quad levels as we realize our synergy opportunities.

I'll be back in a few minutes to talk more about our opportunities and the compelling reasons for this acquisition, but simply put, everything we have learned from due diligence and from what we have seen and experienced since July 2 makes us believe that our synergy targets, expanded platform, and customer base provide us with a truly unique opportunity to create significant value going forward. We know that now and going forward the proof will be in the pudding. Our history and culture are that we set challenging but realistic objectives and deliver on our commitments. We are organized, focused, and incentivized to deliver the integration and maximize synergies for the benefit of all stakeholders.

And so with that, I would like to turn it over to John Fowler, who is our Chief Financial Officer. John?

Thanks, Joel. I would also like to thank everyone for joining us on our first call as public company. We look forward to looking with you in the months ahead and welcome any questions you have as you get to know our Company.

Because both the acquisition and the public transaction occurred after June 30, the GAAP numbers we reported today are for the stand-alone Quad/Graphics. As a result, I will spend most of the time going through the pro forma numbers, as we believe they are more reflective of what the new Quad/Graphics will look like going forward.

Pro forma net sales were $1.08 billion, which is a slight decrease from the second quarter of 2009. Topline pressure in 2009, caused by the recession-driven decline in marketing and advertising revenue, has moderated. However, pricing pressure in the industry remains. Seasonally, the first and second quarters in our business are the softest, as thestrongest drivers of volume and revenue, such as back to school and holidays, occur in the back half of our year.

Pro forma cost of sales and SG&A decrease in the second quarter to $817.2 millionand $111.3 million respectively. The overall decline was driven by continued cost reduction activities undertaken by Worldcolor. We were able to move forward with reducing their cost structure in anticipation that the acquisition would provide them with all of the corporate-level support and shared services in the future. Partially offsetting the decrease in the cost of sales and SG&A was the investment we were making in administrative, manufacturing, and infrastructure labor costs at Quad/Graphics, all of which were higher than we would have normally maintained driven the second quarter revenue run rate. This was done to ensure that our organization was ready for the integration from day one, which as Joel, mentioned we have done.

Restructuring charges for the combined Company were $47.6 million,of which $24.4 million was noncash, versus $6.5 million in total in the second quarter of 2009. This consisted primarily of costs of the combining of Quad/Graphics two Poland operations in one mega-plant and $20.5 million in preacquisition restructuring costs for initiatives already underway at Worldcolor.

For the quarter, pro forma adjusted EBITDA, which we define as EBITDA plus nonrecurring expenses such as restructuring and transaction related costs, was $148.3 million, which is a 27% increase over the second quarter 2009 pro forma adjusted EBITDA of $116.6 million. The adjusted EBITDA margin for the quarter was 13.8% versus 10.6% in 2009, an increase of 320 basis points. We are very pleased at the adjusted EBITDA and adjust the EBITDA margin improvement for the quarter, especially in light of the modest decline in revenue.

For the stand-alone Quad/Graphics results as reported, revenues were up slightly despite the continued pricing pressure in the industry. Cost of sales and SG&A increased slightly due to the previously mentioned investment in manufacturing, administrative, and labor infrastructure in anticipation of a fast start on the integration immediately after closing. Interest expense declined slightly due to the deleveraging efforts Quad has been making the last several years. In spite of the investments in the infrastructure, our adjusted EBITDA as a stand-alone a company was down minimally, and adjusted EBITDA margin continued solid at 14.5%.

We will discuss the strategic rationale for the acquisition shortly, butI believe that the strength of our pro forma adjusted EBITDA and pro forma adjusted EBITDA margins this quarter highlights the significant value that we expect will be generated for our shareholders following the integration of the acquisition. The improvement this quarter in adjusted EBITDA is before the $225 million of synergies we have projected we can achieve. We believe that this demonstrates that this acquisition is truly a one plus one equals three. Meaning that the value and free cash flow created for our shareholders will be much greater than it was as two separate entities.

Before I turn the call back to Joel, I would like to discuss guidance. We expect that on a pro forma basis depreciation and amortization will be $340 million to $370 million for the full year. However, we will be completing our purchase accounting work and accounting entries during the third quarter and will revise this estimate as necessary.

We expect capital spending to be $170 million to $200 million and interest expense to be $115 million to $120 million. We will be updating this guidance and providing some preliminary 2011 guidance during our third quarter call this fall. We will not be providing guidance for revenue and EBITDA , given we are only five weeks into the integration activities. When we are through the majority of the integration initiatives, we will reevaluate whether we will provide any additional guidance.

Finally, as part of the attachments to the news release last night, we have provided additional breakouts of 2009 pro forma data by quarter. I would now like to turn the call back to Joel, who will begin the overview of the strategy and integration plan of the Worldcolor

Okay, thank you, John. Now we will look more specifically at the rest of the slide deck, with the overview of the newly combined business creating value for our shareholders. And so as we look at the strategic rationale for Worldcolor acquisition, you can see what the combined Company looks like from a net sales standpoint of $4.8 billion.

As we achieve the $225 million in synergies, we expect adjusted EBITDA to be about $946 million and the pro forma adjusted EBITDA margin to be of minimally 19.8%. And I think as you look at where Quad is today and has historically been, at the -- we are at the 18% level, and that has ranged as high as 22%, and Worldcolor is at the 13.4% with today's industry average being at 13.4%. So clearly I think as we look at what this combination does from that standpoint, we are creating definitely an industry leader.

The other things that this acquisition does is it diversifies our product and service offering, it expands our geographic footprint domestically and internationally, it optimizes the Quad's superior manufacturing and distribution platform through robust operational efficiencies, positive margin performance,improved speed to market and product integrity for the USPS delivered products, and increased volume driven postal savings. We also have significantly improved supply chain management capabilities through this combination, not just within the pricing -- with pricing -- the things that we can realize, but also because of the visibility Quad's strong IT network brings to the procurement game.

Furthermore. the combination of the two Companies will continue to have a modest leverage profile with enhanced liquidity and tremendous free cash flow. So turning to the next page, that graphically shows where the two stand-alone Companies were from a revenue standpoint and where they will be from a pro forma standpoint, you can see where we stack against our competitors. But from an adjusted EBITDA margin, Quad continues to be the industry leader as a stand-alone company at 18% and Worldcolor at 13.4%, but again with the realizing the synergies of $225 million, we expect that to move up to 19.8%.

If we take a look at the financial snap shot of our two Companies put together, the upper left-hand graph shows that the industry has bottomed out as it relates to the recession. On the right-hand graph you can see the very healthy EBITDA that has been generated by the two Companies on a trailing 12 month basis, and again, remember that this is very healthy before we add in the $225 million of synergies.

Looking at the capital expenditures, I think the important thing to note is that we believe that the run rate that we are at in the last 12 months as well as 2009 as a total is a sustainable level. That is the reason that we provided the guidance of $170 million to $200 million of CapEx. We believe that is sustainable into the future. Approximately half of this is what I would define as maintenance CapEx, which is 2% of revenue. And the other half is investment in our future, whether it be in automation projects or technology for revenue generation. And as we think about maintenance CapEx, keep in mind that as a result of the consolidation of the combined platform, we can take advantage of prior investments in good equipment by both Companies to supplement the maintenance CapEx, as well as provide for growth internationally, or frankly, if the US print markets recovers more rapidly than what we think. And finally, the bottom right is the ultimate (inaudible) of the free cash flow that these two Companies can generate together.

And so in creating a major industry player, just to kind of summarize what we mean by that. Again at the financial strength, the industry leading adjusted EBITDA margin we believe is very important, but more -- but also this strong balance sheet that we will continue to have on into the future will create opportunities for Quad.

In terms of experience proven leadership, that is not just about John and I, that is about the entire team. We have a lot of longevity in our -- of management team, both from the legacy Quad side as well as the Worldcolor side, and a very talented and motivated base of experienced employees throughout the platform. The expanded range of services in locations brings a strong presence in books and directories, an increased range of retail and direct mail products, amore comprehensive range of services and revenue-generating solutions that we can provide to our customers to help them grow their topline, and an enhanced geographic presence with manufacturing flexibility.

And from a distribution standpoint, which is very important in the print industry for our clients, it further enhances the opportunities to reduce our clients' postage cost. We have been and will continue to be a leader in integrated co-mail solutions, which will be applied to a larger and broader platform. And we have created greater freight volumes with the combined Companies. And so all this together really combines to make what we think is going to be a very compelling story on a go forward basis.

And so diving deeper into our competitive advantages, we talk a lot about our efficient, modern, and integrated platform as being among the best in the industry. And to give you some color on why we say that, we'vehad a very sustained approach in investing in our platform to manage the cost and to increase our client revenues. When you look at printing equipment, much of it has what you call a very long mechanical life. What that means is we can run a printing press 40 or 50 years if we maintain it well.

But the way Quad has approached the industry is that it is really about economic life of that equipment, and what that means is even though you can run it that long, you may not want to, because at some point some time technology has changed enough that the overall cost impact of the new technology makes the old technology obsolete. And so, through Quad's history we have continued to do that, which is what has resulted in the most modern platform in the industry. Also, we have taken a strategy of having a mega-plant structure, which provides enhanced capabilities and efficient platform. Many of the legacy Quad plants are in excess of a million square feet, which you will see in a moment.

Integrating the manufacturing platform with one IT platform has been a key to many areas of our success. To put it into perspective, every employee at Quad/Graphics has had an operating e-mail account since 1984, beforemost people knew what e-mail was. And so early on Quad understood that having a strong IT platform with lots of automation tools for information flow will ultimately provide the visibility of the platform that we need, not just to run the business day to day, but also in situations such as the integration that we are going through now.

In addition, we believe we have had a leading distribution capabilities. We are the industry's largest co-mail program, which provides efficiencies for customers, and our facilities are strategically located to serve end customer optimally. And as we look at platform in a few moments, you will see that the Worldcolor side has helped round out that geographic location domestically.

Quad had has had a commitment to innovation and rapid technology. QuadTech, which is our R&D arm, has been in existence since the early '80s and has developed a lot of industry-changing control technology that has allowed us to run a more efficient platform. CRT, which is our ink manufacturing division, has allowed us to control our costs on some of our inputs, but more importantly control the quality through the control of the inputs in the process. And we are very proud to say that the Wall Street Journal in their patent scorecard for the past two years has named Quad/Graphics has the top five for industry impact for all heavy industrial manufacturers. In other words, that is for the IT that we have created, but how we used it to impact the industry as a whole.

We continue to have an intense customer focus. That is not just from a high level of customer service and also a consultancy approach, but we believe that customer focus also means that consistent investment in technology to enhance their experience, whether from a cost side or revenue growing side. And finally, a consistent ownership structure and proven management team with employee-centric cultures has been key to our success.

With we look at our customer base, I will tell you that it is the who's who across all our segments. And the fact is that we have had a lot of strong support as we have made this announcement about the combination of the two Companies, and we continue to get strong support as we have announced some of the integration processes that we are going through.

So looking at the Quad plant scale that offers significant advantages, you can see how our network is deployed throughout the world. Previously legacy Quad was in Poland, and as we just previously announced, we have consolidated our two plants into one mega-plant following the strategy we have had in the United States from a distribution standpoint. And in Latin America, Quad formerly was in Brazil and Argentina, and now you can see we round out -- rounded out that continent.

And looking at the United States, you can see the footprint of the larger mega-plants combined with the geographic locations of a lot of the rural plants that come to play. And when you look at the anchor of the large plants we will be able to continue to create these distribution advantages for all the plants in play.

As we said before, it is really important for us to have a strong credit profile and strong balance sheet. Quad's strategy has been to have a conservative investment-grade balance sheet, with access to capital in good and bad times. And as we take a look at where we are when put the two Companies together without synergy, we have debt of approximately $1.8 billion,trailing 12 months adjusted EBITDA of $721 million, so we are starting out with a leverage of 2.5. And if you look at where it becomes with synergies as we add -- achieve this $225 million of synergies, then the debt leverage ratio goes down to 1.9.

That is frankly the reason that we structured the acquisition as a share exchange, because we did not want to lever up. Historically Quad has been comfortable operating in a leverage range of 2.0 and 2.75. We previously stated that our target leverage ratio is 2.0, and our objective is to return to investment grade.

So looking at the segments that Quad/Graphics is in, you can see that by combining the two Companies we actually further diversify our product offering. And again we have been very strong historically in the magazine catalog side, which will continue, but added geographically and in terms of product offering.

And so one of the things that I know that we want to touch on and people are very focused on these days is where does print exist in the multichannel world, because digital has gotten so much and online has gotten so much attention as of the past many years. Overall, Quad believes in print, but it believes that it needs to be a part of that multichannel mix and is an important anchor to that multichannel mix.

And I think what surprises people as you kind of look through some of the segments -- in magazine circulation from 2008 to 2009 actually stayed pretty stable in a time of turmoil, and in fact in some cases grew, and the broadest category of readers is 34 and younger. And so I think that from a magazine standpoint, publishers are trying to figure it out, trying to figure out what the new model is, which I believe is an opportunity for the printed magazine.

Retail inserts remain a very cost-effective way to promote brand messaging to the masses. The fact of the matter is is retail inserts drive traffic better than many other ways of doing it. Catalogs drive consumers to action through the use of nonprint channels. If you are a cataloger, without the catalog your online activity dries up. Data-driven personalized direct mail increases buy rate significantly versus non-personalized direct mail. If you put the right message on the right product in front of the right person at the right time, chances are that response rates will go up.

Small to medium sized businesses continue to see directory advertising as an important tool, and publishers are including bundle options for print and online. Again, a multichannel play. And, of course, book publishers are getting a lot of attention these days with the advent of the Kindel and the iPad, and book publishers are using digital print technology to increase the timeliness and cost-effectiveness in print to coordinate with new digital content distribution methods. And so again, I think that world will continue to change, but so will the printed piece continue to change with digital print technologies, which allow for more timeliness, more print on demand and smaller batch sizes.

So moving forward into the integration and synergy plan in progress to date. We feel very confident at where we are at. We feel good about the $225 million number. We have hit the ground running, and the reason we feel good about the process is we spent a lot of time designing and implementing how we were going manage this very complicated process. You have to remember that we had about five months of planning from the time we announced the deal to the time we closed it, due to the antitrust process and then to the SEC process, which was done in a linear fashion as opposed to at the same time. And so fortunately that gave us five months of time to plan.

And so we have created a structure with an executive steering committee and a focused integration leader, as well as a program management office that helps all the different integration teams, of which there are over 17, stay on track and stay on target. And a very key part of that is back to our IT infrastructure. We know how to measure everything. We know how to see everything, and so we use that information and that measurement to help people understand where they need to focus and how they feed to need to progress.

And so when we look at what are the drivers of integration and synergy success in our world, you can really look at it in four main buckets. The plant consolidation, where we are moving to more efficient platforms; logistics; SG&A, not just through the combination of the two headquarters, but also through implementation of our IT infrastructure to be more efficient in our SG&A expenses; andof course, procurement, which again I said is both in our ability to buy more efficiently from a price standpoint, but also to visually see throughout our platform the little nits and nats that we buy, whether it's from paper down to pencils, the visibility is very important in understanding how well we are doing from a procurement standpoint.

And all the while, while we are doing this, we have had an intense focus on our customer base. While they have been positive about the deal and been understanding about the process we are going through, it is very important that we keep them happy with us by focusing on them. So we have had very detailed plans for each customer who may be affected by the integration. And if we do all this right, which we believe we will, this will create tremendous share value as well as employee opportunity, because a healthy, profitable company is one that will grow and continue to create opportunities.

And I will add that, as disclosed in our 8-K in July, you have a management team who, of those who are involved in actually moving the ball on the transition here, are effectively and well compensated and incentivized to go for the maximum amount of synergies, and I assure you we will.

And so when you look at milestones to date, we are off to a fast start. I think that's clear. We announced the four plant closures and accelerated a fifth. From a client integration and operation standpoint we have customer alignment with the sales force that is complete. We've had a comprehensive plan designed to smoothly transition client work. From an SG&A standpoint, we have -- we are operating on a consolidation of the corporate headquarters by year end. That is on track. From a procurement standpoint we've identified significant consumable savings, and many of those savings began day one from a run rate standpoint.

And from a corporate structure standpoint, which sometimes can be the more difficult part of figuring out who is in charge of what and how to communicate that, that work is complete. We have done that three levels down throughout the organization, and it has been communicated to employees.

And so finally, while we are focusing on the integration, it is very important to not confuse this with being distracted by the integration. We are also running our business and moving forward with strategies of growth and innovation in every business sector and every geography that we are in. And this will be discussed in the coming months. And so with that, operator, we would like to turn it over for question and answer.

Thank you, sir. (Operator Instructions). Our first question comes from [Scott Cuthbertson] with TD Newcrest. Please go ahead.

Yes, thanks very much, and good morning. Thanks for the presentation and the pro forma financials, John. That is very helpful as well. I just wondered, you guys are off to a great start, and you mentioned that the results to date really haven't even dipped into the $225 million in synergies. I just wondered at this point as you are just getting into the process, if you could give us any help on the timing of the realization of the synergies over the next 24 months?

Good morning, Scott. I think we have provided the guidance that -- the $225 million, I think we provided a tight time frame with the 24 months. And I think the real takeaways that we need to take from this is, as Joel said, we had five months to plan this. We have a detailed playbook. We are adjusting that playbook as we go along, as we learn information, as we respond to customer requests. I think people should feel comfortable we have a tight time frame of the 24 months, we've got a number of $225 million, and as Joel said, there is significant incentives that the Board has put in front of us for exceeding those.

And also when you think about this, I don't want this as we go forward to be just about the synergies. I think it is really about how do we combine the synergy tool with the rest of the tools that we have used to drive our business. We take a look at the -- how we are driving our platform through productivity, how we are using lean enterprise process to improve our margins, how we are managing labor. And the end of the day we are trying to drive, whether it is from synergy or productivity, we are trying to drive EBITDA, EBITDA margins, and total return. We are trying to combine that. Just as you get a better understanding of us over time, we are trying to combine that with the intense capital discipline that we have had in the past, whether it is about investment to capital spending, how we manage working capital. Because at the end of the day what we found in the legacy Quad is, if we combine all of these tools together, maximize EBITDA, maximize EBITDA margin, and maximize our capital discipline, we will get a return on capital that is greater than our cost of capital. And as we go forward in the kind of years ahead, you will hear us speak more about that, because we think that is ultimately the best predictor of a company that is going to be able to drive share value.

Okay. Thanks for that. And I guess perhaps more specifically, just on the consolidation you announced recently with the five plants, can you tell us when you expect the timing of that to be complete and any potential ongoing savings resulting from that specific initiative?

We won't break out individually by plant, but I can tell you it is beginning very quickly here within weeks in terms of some of the work that moves around throughout the combined platform but you can pretty much count on that we should be complete with the process by year end.

And what we are seeing in the plants we are shutting, Scott, is consistent with what we had in our playbook as it related to synergies and the related costs of synergies that -- we disclosed the cost of synergies in the 8-K last night.

Right, okay. I guess the other thing, which is perhaps even tougher to define, but just you mentioned -- and this is consistent with your results last quarter that you have been -- that you have been careful to plan to make sure you are ready for this integration. And that has resulted in you carrying a bit of extra costs in the first couple of quarters just because you wanted to be ready for this integration. Can you give us any kind of color on the dynamics of how that is going to play out? I mean you had to invest ahead of the integration, now the integration is coming. Of course, it is a very dynamic situation, but I'm just kind of wondering how that process is going to unfold?

I guess the best way I would answer that, Scott, is historically we have done a very good job of being able to maintain margins and manage costs to the revenue run rate that we have had. So I think the assumption would be that is what we would have been doing in the first and second quarter, and also recognize that some of the investment we were making was in our G&A portion as we prepared ourself for being a public company. But we aren't trying to specifically break that out, because it honestly becomes a little bit like red dollars and green dollars. Just suffice to say we have historically maintained margins and adjusted our costs to match our revenues.

Okay. So I guess in the context of the other comments that headquarters is going to be consolidated by the end of the year. We've probably seen some of the ramp-up, and then as we get closer to the end of the year we will see more save is from there.

That would be a reasonable approach.

Okay. And just finally, I just wondered just in general you did mentioned volumes are okay, but there is still pricing pressure. Just wondering if you can give us any additional color on the tone of the market, any dynamics with respect to demand for certain products or different geographies, anything like that.

I think we are in a lot of different categories, so pricing is different depending on the category, which we don't break out. But, yes, pricing pressure continues to be there a bit. But I think anecdotally, as we kind of hear from customers, we are hearing good things about advertising in the second half starting to pick up momentum. You have seen some of the direct mail and catalog value come back as people try to rebuild the customer lists and see that the consumer is starting to respond again. So while it's -- we are not expecting a barn burner from the standpoint of the negative stuff that exists out there about the economy. We are seeing some positive momentum, and as you will see in some of the slides, we really do feel that the industry had bottomed out and is now kind of starting to look at some what of a recovery.

Great. Well, thank you very much.

Next up is Drew McReynolds with RBC Capital. Please go ahead.

Thanks very much. And good morning, and congratulations on everything. Just a couple of follow-ups to Scott's questions. Just first, just back to the integration, and then maybe I have to update my numbers, but I think you were throwing out integration costs of $195 million to $240 million, and then obviously on the Quad platform you had some further restructuring. So maybe if you could just provide an update as to whether that integration cost range is still relevant. And should we expect incremental restructuring charges on the Quad platform, or do we just now treat everything as a combined platform going forward?

Yes, I think that -- Drew, good morning. The $195 million to $240 million estimate that we had previously provided, we still think is the correct number. That number had -- was as of integration going forward, so on a going forward basis any costs that are incurred in the new Quad/Graphics, whether it is legacy Quad or legacy Worldcolor, would be in that bucket. The Poland consolidation was separate from that.

Okay.

Other than the Poland, everything else is -- will be in that $195 million to 240 million.

Okay. That is helpful, thank you. And I seem to recall back in your previous quarterly conference call mentioning Canada's performance was really the underperformer. Just wondering if there is any update on the turnaround there that you can provide?

Yes, I think that they have got a new management team up there, and we have been giving them lots of resources. We intend to continue that turn around, and they have been making really good progress, not just from the standpoint of how the plants are running, but also in the marketplace. So I think -- obviously, any of these things are work in process, but we feel good about the resources we are giving them and the management team in place to do it. Canada is a good marketplace, and we want to be committed to it. And so in true Quad fashion we will make the investments we need to make sure they are an efficient platform that produces well for our client base. So again, to us, that adds an additional geographic location for us that we think is important.

Okay. Thank you. And just switching gears a little bit,obviously the merger is a big kind of shot across the bow arguably within the industry. Just wondering as far as the competitive dynamic goes, big picture, just whether there has been any change out there, maybe versus your expectation. If you can provide us a little color on that, that would be great.

I don't know if the terminology of shot across the bow is really the right way to put it. Again, I think that all industries got hit pretty hard in the last two years, and this has been an industry that has had its challenges, but it is a great industry. From a competitive standpoint, I kind of look at how are we going compete with all the different medias. We have got some good competitors out there. We were happy to have good competitors out there, but happy that the industry is in great solid shape to play a part of the multichannel mix that is happening.

The work we are doing is for creating value for our shareholders. And the opportunity came up, and we have we think the right tools to make this very come compelling, and so for our shareholders we are doing what we need to do to create value. But from an industry standpoint I think that it is important to have a very healthy industry for our clients' sake and for our own sake. So we will continue to focus on moving the industry forward with our leading innovation and hope the others do as well.

Okay. And maybe just a final question. Just circling back to free cash flow priorities. You did indicate getting an investment grade rating is obviously a priority. The Company, combined entity, will generate a significant amount of cash. Can you just speak to whether it is a share repurchases, dividends, further M&A, debt repayment; just give us a sense of where all the free cash flow could ultimately go?

Well, I think that is going to be something that we evaluate over time, because really when you think about with you can do with a tremendous free cash flow that we are going to have, which is really one of the big stories here, you got to look at five different buckets of how you can spend that. You could pay down debt. You can pay dividends. You can do stock buybacks. We can look at accretive acquisitions that will add value to our customers and to our shareholders. Or also you can invest in the platform, and I think that over time we would be very disciplined about striking the right balance.

Ultimately I think it would be nice to have a well thought through dividend strategy. But at the same time we have told you that we are very committed to a strong balance sheet. And over time we will have opportunities where it requires another acquisition or in other cases a technology that comes along that we want to invest in. And so I think you will see us be very disciplined in striking a good balance between the five buckets. But to tell you what order that is in is irrelevant, because I think at different points in time you need to do different things.

But I think early on here it will be a lot about paying down debt and getting the synergies that we have all talked about. And then from there we will continue to manage it.

Okay. Thanks, Joel and John, I appreciate that.

Thank you.

Next is [Mark Berkowitz] with Chatham Asset Management. Please go ahead.

Hi, thanks. My question was actually just answered by the previous question asked. Thank you.

Thank you, Mark.

Next is Dan Leben with Robert W. Baird. Go ahead, please.

Great, thanks. Can you just talk a little bit about what you saw in the quarter in some of the larger segments, say magazine, catalog, and retail? Kind of what the trends were there during the quarter?

Hey, Dan, how are you? In terms of breaking out the different segments, we are not really kind of doing that right now. As you can imagine, we are only five weeks into this, and we have been focusing on -- a lot on the integration. But again, when I think about the trends, I think you are kind of seeing all the different segments react to a recovering economy andtrying to figure it out. I wish I had a crystal ball of what each will do in the future, because I think they would also like that as well. But again, I think if you look at the slides, you can see that we believe that in pretty much most of the segments that we have seen a bottoming out, and hopefully we will see some positive forward momentum.

We didn't -- Dan, we didn't see anything unique in any of those different product lines in our second quarter that was unusual of one with significant growth and other significant decline. I would say it was pretty consistent.

Great. And then the charges you outlined in the 8-K this morning for the plant closure, should we think about most of those hitting in the third quarter, or more spread out across the third and fourth quarter? How should we think about modeling those?

I would spread it out over the second half of 2010.

Okay. And then, John, you talked a little bit about the typical seasonal uptick. Could you just help us understand or Quad historically what the uptick looked like just on a seasonal basis to the third quarter and fourth quarter relative to where you are at in the second?

I think the way we are looking at it is we are trying to manage the business, Dan, is really looking at not at kind of a legacy Quad, legacy Worldcolor, but really looking at managing this as a combined company. And that is why we attached to the press release the 2009 pro forma by quarter, so that you would have that ability to kind of understand the seasonality of our combined business.

Thanks, John. And that was incredibly helpful by the way. Thank you. And just last one for me. You talked a lot about the strength of the IT systems at Quad. Just help us give us a sense of the timing of when everything is going to be integrated on to one system from an IT perspective as well as a financial accountings perspective.

Well that's an easy answer. Not.

The fact of the matter is is there's a lot of tool sets that we employ in running our business. There's a lot of focus right now on getting the HR platform combined, as well as the accounting platform. That stuff has our priority because of the moving parts here. But you will see us kind of roll the platform out over time.

We have a scheduling system that is linked to the PLC drives on every -- the control units on every piece of equipment at legacy Quad. Some of that stuff will take longer because of the complexity involved. But when we talk about an IT platform, I mean it really is holistic approach from everything we do to manage this Company. And so again, we are kind of going with the most important in terms of being able to see and visualize the stuff that is important for getting the synergies and combining the Company on into the stuff that is going take a little more time and investment.

Some of the IT systems that we do, it is not always about just put in a new program and turn on a switch and everything works really well. It is about change management, and so whenever you are going through a major upgrade in an IT system there is a lot of training and explanation that has to go hand in hand with it, because typically it is about changing an existing process at the same time. And so I'm sorry it is not a simple answer, but I will say I think we have got it correctly prioritized for being able to achieve what we need to with the information that we need to see.

Great, thanks. That's helpful, guys.

Our final question today comes from Charlie Strauzer with CJS Securities. Please go ahead.

Good morning.

Hi, Charlie.

Just a couple of house keeping. What was cash flow from operations in the quarter?

Hold on one second here.

That would have been in the -- in our attached statements. Net cash provided by operating activities for the stand-alone Quad in the -- for the six months was $74.3 million,and I'm just trying to find the quarter in front of me. Sorry.

No problem. What is your expectation for share count?

I'm sorry?

What is your expectation for share count for the year?

For the share count?

Fully diluted, yes.

I believe we are at a little less than 48 million shares outstanding, and we would not expect that share count to be any different at the end of the year.

Got it. And then any guidance on tax rate?

We are work on that in conjunction with the purchase accounting. There is a -- what I can tell you is we are going to have a lot of noise in the near-term period because of the -- some of the transaction costs will be deductible, and some will not be deductible. You will have some of the same thing with the costs to achieve. What we put into the -- we will be back to you as you with something as part of the additional guidance in the third quarter call, but I will say that we had used a 36% effective rate as a long-term estimate when we put together the pro formas for the S4. I would say that is in the real many of reasonableness, if you had to pick a number now. But that would be -- Charlie, that would be a longer-term number, and kind of shorter term we will see some bounciness, and we will try to come back to you with more specificity as we complete our purchase accounting.

Great. And then while you are looking for the quarterly cash flow numbers, have you had -- if you look at kind of the industry print [ship business], it shows kind of an uptick, about 2% last month. Kind of the first time in a long time that you have seen that kind of a decent jump in print shipments. Industry utilization rates are coming back again. Can you talk a little bit in terms of how that relates to the overall Quad and Worldcolor combination? Are you seeing similar types of organic trends in our businesses?

There is a lot of different kind -- for us there is a lot of moving parts right now Charlie and that is the reason that we are not providing the guidance.

And the cash generated from operations from our second quarter, the first question that you asked me was $35.9 million.

And that is the Quad stand-alone?

Quad stand-alone.

Do you have it for Worldcolor, too?

No, I don't have that. We can get back to you with that number.

Great, thank you very much.

I will now turn the call back to Joel for closing remarks. Please go ahead, sir.

Thank you, and thank you, everybody, for joining us on in first conference call. I think it is clear that we are serious about what we are doing here. We hit the ground running. We will continue to move at a fast pace. I do have to once again thank everybody who has been involved this at both legacy World and legacy Quad side, because it is not just about one or two people, it is about 20,000+ people who have been focusing intently on what the combination means.

We will continue to work hard, and we will continue to interact with you as the story develops and be transparent as Quad has been in our history. So, thank you, everybody, for joining us today, and we will talk to you soon.

Thank you very much, ladies and gentlemen, this conference is now concluded.