Quad/Graphics Inc (QUAD) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Quad/Graphics third quarter 2010 conference call. During today's call, all parties will be in listen-only mode. Following the speakers' presentation, the conference call will be opened for questions. (Operator Instructions) You can download a copy of today's presentation by clicking on the presentation SS button.

I would now like to turn the call over to Barbara Bolens, Assistant Treasurer and Director of Investor Relations for Quad/Graphics. Please go ahead.

Thank you, and good morning, everybody. With me today are Joel Quadracci, Quad/Graphics' Chairman, President, and Chief Executive Officer, and John Fowler, Quad/Graphics' Executive Vice President and Chief Financial Officer. Joel will lead off today with some comments about the financial results for the quarter, but will spend more time going through the status of our integration activity as well as an overview of the investment and growth initiatives we accomplished during the quarter. John will follow Joel's remarks and provide a more detailed review of the third quarter financial results.

We have one quarter as a combined company we will make comparisons to the pro forma company for third quarter 2009 as well as the pro forma year to date numbers for both 2010 and 2009. As this is the first quarter Quad/Graphics is reporting as a combined company with Worldcolor included, there were many opening balance sheet entries and purchase accounting adjustments that occurred in the quarter. John will spend time explaining how these have been reflected in the financial statements. And John will also provide an update on the guidance we initiated in our second quarter call as well as some preliminary numbers for 2011.

I would like to remind everybody that this call is being webcast and forward-looking statements are subject to Safe Harbor provisions as outlined in our quarterly news releases that is posted on our website. The slide presentation can be accessed through a link 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 third press release 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 Joel.

Thank you, Barb, and good morning everyone and thank you for joining us. As Barb mentioned, this is the first time we are reporting with Worldcolor results included in our numbers. Our third quarter was very much in line with our expectations. Net sales were down slightly from 2009 for the combined companies. An expected decline in Worldcolor volumes, inherited pricing from the legacy Worldcolor business and price pressure from industry over capacity put downward pressure on revenues. Offsetting that to some extent was an increase in the legacy Quad/Graphics print volumes, an increase in paper and byproduct revenues, and foreign currency. The decline in pricing and volumes also affected EBITDA and EBITDA margin, as did a catch-up expense in our retirement and incentive compensation and frictional costs involved in transitioning customer orders associated with the integration. Partially offsetting these declines were synergies from purchasing and administrative savings. John will provide a more in-depth review of the financials shortly, but our first quarter as combined company was expected both from a financial and an operational perspective.

Our number one priority during the quarter, after the safety of each and every one of our employees, was to ensure customers continue to received the highest degree of service during the integration process that has been characteristics of Quad/Graphics. I am very pleased that our customers have continued to be very supportive of this acquisition and as a result we have not had significant loss of business, which was an important integration objective.

We accomplished a tremendous amount in our first quarter as a public company and I put these accomplishments in three different categories. They include activities that helped us shore up the acquired assets, those where we invested in our platform, and activities that are moving us forward into the future. In the shoring up category, we made significant progress on the Worldcolor integration during the quarter. I am happy to say that we are on track to achieve the $225 million in annual run rate synergies by July 2012 and we have already achieved a number of procurement and SG&A related synergies.

Of the six plants we announced for closure in the weeks following the acquisition, three have already been completely closed and the remaining three will be complete by yearend, as will Worldcolor's former corporate headquarters in Montreal. It is really important to put this into perspective. The 2.7 million square feet and 2,400 people would be the equivalent of a major printing industry participant if they were at their own company.

Additionally, consistent with our culture to ensure we are protecting our employees and creating a safe work environment, we continue to implement comprehensive world class safety programs at all former Worldcolor locations. These programs include regular safety education in addition to sustainable lean manufacturing and continuous improvement training that also promote employee safety and well-being. And as I said before, nothing is more important to us than returning our employees home safely at the end of each work day.

We continue with realignment of our existing assets in Poland. By year end, we will have consolidated or [Piwa] plant operations into our Wyszkow facility which will create what we believe to be the first megaplant in central Europe.

As we invest in our platform, we continue to build for the future. Last month we announced that we were planning $23 million in infrastructure and platform upgrades in Canada. This will create a more efficient print platform by improving quality and turnaround time. We also are improving our multi-channel marketing services to help Canadian retailers, publishers and other advertisers extend a consistent brand message across multiple print communication channels and integrate those channels with other forms of digital media.

In our retail business, we were pleased to announce earlier this week the expansion of our retail insert platform with the addition of high performance offset presses at our Lomira, Wisconsin plant. This solidifies our coast-to-coast retail insert capabilities by having high quality print production near every major retail market in the US and Canada. In our book platform, we are in the process of expanding our digital printing capabilities to target the rapidly growing short run and print-on-demand book segments. As part of this multi-million dollar investment, we are installing several cutting edge digital presses. This investment will meet US book publishers' growing need for shorter runs delivered faster and more economically. We recently rounded out our investments in HGI and IMC companies we have known for some time. HGI brings with it a strong management team and is a leader in the commercial and in-store point-of-purchase materials market. Through HGI we increased the breadth of products we are able to offer to our commercial customers. Poland-based IMC is a reseller of packaging, stands, displays, and advertising materials and strengthens our retail offering in Europe.

Beyond our integration efforts, we are proactively and strategically moving our business forward in every market and geography that we are in. Whether it is making the investments I just discussed or strengthening of our position in Europe, the fine tuning of our strategy in Latin America as its largest printer, or continuing to support our clients' use of print in the multi-channel world, we are clearly not sitting still. But rest assured, our 17 integration teams are focused and are without distractions. But the rest of the Company continues to move the business forward. And so back to the integration, we believe we are taking the actions necessary to enhance the most modern integrated and efficient platform in the industry while laying the groundwork for future growth. Keep in mind that what we are doing has never been done on this scale in our industry. It is the biggest restructuring of a platform of which I know. Therefore, we are excited about the progress we have made to date but recognize we have much more work ahead of us to ensure we are successful.

I'll now turn the call to John for the financial review, and we'll be back after that to provide some concluding remarks.

Thanks, Joel, and welcome everyone. As we report our third quarter results today, we do so as a combined entity, and the comparisons we make to 2009 will be on a pro forma basis, as we believe that is the most relevant comparison. Similarly, any references to year to date number comparisons will be done on a pro forma basis in both years. I will do my best to explain all the complexity and noise from the acquisition accounting and first combined quarter.

Slide 11 is a financial snapshot of third quarter results compared to 2009 pro forma results. We will provide a more thorough overview of the financials in the next slide. Net sales for the quarter were $1.21 billion, a 2.8% decrease from the third quarter of 2009. This was due in part to a moderate decline in Worldcolor volume which is a continuation of the past quarters when Worldcolor's revenues declined at a faster pace than the rest of the industry. Inherited contractual pricing from Worldcolor caused a slight decline as did the continued pricing pressures from industry over capacity. Positively offsetting a portion of these declines was a slight increase in legacy Quad volumes, paper and byproduct revenues, as well as a number of other factors such as foreign currency, mainly from Canada. Cost of goods sold was constant in dollars but higher as a percent of sales as compared to 2009 due in part to higher paper sales which are sold at a lower margin than manufacturing sales, and the anticipated frictional cost we are incurring as we ramp up plants receiving business while at the same time ramp down plants in the process of closing. Also increasing cost of goods sold was the purchase accounting revaluation of inventory to fair value which increased expense by $5.5 million, as well as the retirement and incentive compensation expense which was higher due to a catch-up book during the quarter. I will address this when we go through the EBITDA overview shortly. The increase in expense was partially offset by modest synergy savings in the quarter.

Slide 14 provides a visual walkthrough of the frictional costs incurred during integration as we move customers' work from one plant to another and ultimately shut down a facility after all customers are moved. It breaks out the cost between production and admin infrastructure. The synergy savings are the result of the total incremental cost bar in phase four, upper right, of the plant that is receiving the work being lower than the total cost bar of the plant closing in the lower left, phase one. This is not a light switch process. Looking at the plants receiving the work in phase one before any work transfers, the plant begins preparing its customer support functions and infrastructure for the new work and begins hiring the skilled work force. Recognize these costs are incremental and temporary but exist nonetheless in duplication. In phases two and three, both production and admin infrastructure increase to support the total volume of work to be transferred. By phase four the receiving plant is efficiently producing the transferred work. Remember, our plants are complex job shops and it takes a period of time to onboard any new customer, learn and meet their production expectations, and efficiently produce their work.

Correspondingly, at the plant being closed down, as the work is transferred, which again is not a light switch process, the revenues decrease faster than the production or infrastructure admin costs can be reduced. Thus, the same jobs in the same plant become temporarily less profitable on a fully loaded basis due to the incremental costs we are still carrying. And when the production is complete until the plant is sold, there are still some admin and infrastructure costs. These frictional costs are normal and fully expected. It is not practical to accurately quantify these frictional costs and thus they flow through operating expenses versus restructuring charges even though they are nonrecurring. I would like to point out that as period costs, these are not part of our expected costs to achieve of $195 million to $240 million but they were clearly expected. This should help everyone understand what we mean by frictional costs as we consolidate our platform.

SG&A expense in the quarter was up 2.8% due to the catch-up in retirement and incentive compensation expense mentioned earlier. Partially offset by synergy savings from the Montreal headquarters wind-down. Depreciation and amortization and interest expense were roughly in line with our expectations. The increase in interest expense is consistent with the increase in debt needed to complete the acquisition. Restructuring for the quarter was primarily associated with the closing and integration of the Worldcolor acquisition, all of which was planned.

Slide 16 shows the reconciliation of the expense to date. Transaction related charges accounted for $32.1 million, employee termination costs were $21.5 million and integration costs totaled $8.1 million, while impairment charges which are noncash totaled $6.4 million and other restructuring charges were $5.9 million. As Joel mentioned earlier, we are well on our way to completing the plant closures we announced in August. Given our fast start and the progress we have made on the integration initiatives to date, we remain comfortable we will achieve the $225 million of synergies on an annual run rate basis by July 2012.

Our adjusted EBITDA and adjusted EBITDA margin reflects the expected effects of pricing head winds, the catch-up of retirement and incentive compensation made in the quarter, the increased frictional costs of integration, and the previously mentioned purchase accounting inventory write-up. As it relates to incentive compensation, our strategy is to provide a sustainable incentive compensation program that motivates and retains talent as well as reflects value created. As we reviewed our incentive compensation following the acquisition, the catch-up expense we booked recognizes the value to our shareholders created by the acquisition. We also reviewed the appropriate retirement contribution because, like many companies, Quad significantly reduced its retirement contribution in 2009. The catch-up component over and above the normalized rate for incentive compensation an retirement contribution was $15.3 million. Netting out all of the noise in the quarter -- restructuring, transaction, and impairment costs, the catch-up component of retirement and incentive compensation and the purchase accounting impact from inventory revaluation, our adjusted EBITDA margin would have been 14.9%. We feel good about this margin given where we are with this very complex integration and the significant costs we are incurring to ensure our customers are transitioned seamlessly.

Looking at the rest of the income statement, we incurred a noncash tax expense in the quarter of $200 million, which is the recognition of the net deferred tax liabilities associated with Quad/Graphics transitioning from an S corporation to a C corporation. Including the one-time costs associated with restructuring, tax expense, and other costs, we incurred a net loss for the quarter of $232.5 million. Without the effect of the tax adjustment and restructuring costs, net income would have been $27 million and earnings per share would have been $0.58. We are frequently asked whether we have seen any material surprises as we integrate the Worldcolor business into legacy Quad. While there are always unknowns in an integration, both positive and negative, our adjusted EBITDA this quarter was very much in line with our expectations.

Looking at the balance sheet, a huge amount of work went into this quarter to come to our opening balance sheet following the close of the acquisition. The next several slides will go through the purchase accounting entries and resulting opening balance sheet.

Slide 19 looks at both the purchase price calculation and then the allocation of assets and liabilities acquired with Worldcolor to that purchase price. On the left side in calculating the equity purchase price, we looked at the number of shares issued at close times the Quad share price on the first day of trading and to that, add the $93.3 million in cash paid. This comes to a total equity purchase price of just over $1 billion. Subtracting out the net assets acquired, gives us to goodwill of $744.7 million.

On the right side of this chart I will focus on the highlighted items. Property, plant and equipment was valued at $844.5 million and was based on a detailed valuation of each significant asset in every location. Identifiable intangible assets relates to the value of our customer relationships and is valued at $393 million. This will be amortized on a straight line basis over six years. Pension and post retirement of $546.9 million relates to the single employer pension plans in the United States and Canada as well as withdrawal liability associated with the multi-employer pension plans. I'd like to note that we have used conservative assumptions in the actual calculations of the underfunded liability. For example, our discount rate for the US and Canada single employer plan liability is 5.1%.

Slide 20 shows the balance sheet as of September 30. The important point to note here is the $1.4 billion of equity, which even after recording all of the tax and restructuring charges is very strong and reflects our objective of correctly capitalizing the Company. As we pointed out on the balance sheet, the new Quad/Graphics is very well capitalized. Our debt to EBITDA ratio is at 2.57 times. Our blended interest rate is 6%. With the outstanding principal balances being 57% floating and 43% fixed. Our interest coverage on a pro forma basis is 5.5 times. On September 30th our borrowings under our $530 million revolver, which was at our seasonal peak for working capital needs, was $227 million. We believe we have sufficient liquidity for both current business needs and future investments. We continue to feel comfortable that we will get back to our target leverage ratio of two times and return to being an investment grade credit.

During the quarter we paid down $44 million of debt. We view this as a very significant accomplishment given we are at our seasonal peak in terms of working capital. We believe this demonstrates the strong free cash flow inherent in the Company and we expect to pay down an even larger amount of debt in the fourth quarter. As we generate free cash flow into the future, our intent in the near term is to continue to use our free cash flow to reduce debt, reduce our pension liability, and invest in the business. Longer term we will look at other ways of increasing returns to shareholders such as dividends. We also understand that the stock does not currently have the liquidity required to realize its full value and are very focused on solutions to help improve liquidity. We will share these solutions as they develop.

In conclusion, there was a lot of acquisition, accounting, and integration noise in this first combined quarter, none of which was a surprise to us. Most importantly, we have hit the ground running to integrate these two companies. The combined company will be the long term, low unit cost producer by maximizing the use of Quad's modern manufacturing platform through an expanded system of mega plants that maximizes manufacturing and, most importantly, distribution efficiencies and our integrated IT platform. In our experience, the low cost producer will always have the best ability to create long term value. We believe this will create the plant consolidation and distribution synergy savings which, when combined with the synergy savings from SG&A and procurement, will result in significant margin expansion. There will be future noise as we proceed through the integration process, but we continue to view this acquisition as a one plus one equals three opportunity.

Before I turn the call back to Joel, I would like to discuss guidance. For 2010 we expect the pro forma depreciation and amortization will be $365 million to $370 million for the full year. We expect CapEx to be $150 million to $170 million. And interest expense to be $130 million to $132 million. Which is consistent with our second quarter run rate interest expense guidance of $115 million to $120 million. For 2011, our initial guidance is that depreciation and amortization will be $345 million to $365 million for the full year. We expect CapEx to be $170 million to $200 million. And interest expense to be $105 million to $115 million. We will continue our policy not to provide revenue or EBITDA guidance due to the continued integration activities and number of moving pieces in our business today.

I would now like to turn the call back to Joel who will provide some concluding remarks.

Thanks, John. Before we move on to the Q&A, I wanted to take a few moments to conclude with several thoughts. I would like to remind everybody that significant thought went into pursuing the opportunity with Worldcolor. We believed there was a chance to create tremendous value for all the stakeholders involved. But we knew there would be a lot of heavy lifting to be done post the acquisition closing. But because we had five months to plan, we were able to hit the ground running at the beginning. Now we are four months into the integration and we have already made significant progress in what is the largest platform restructuring that this industry has seen. We feel really good about the progress we have made and about our outlook for tomorrow. We will continue shoring up the assets we acquired, investing in our platform and continuing to move the business forward, all the while focusing on our customers.

And I would like to thank our customers from both legacy companies for their support in this process. I also want to thank you to the Quad team who have made extraordinary efforts to ensure the success of this tremendously complicated acquisition, the transition to a public company, as well as the integration initiatives going on throughout the Company. We have a dedicated team working towards a single vision of the new Quad. Thank you to everyone.

And finally, with today being Veterans Day, I would like to acknowledge the Quad/Graphics employees who have served our country. It is an honor to have you as part of our work force, and thank you for our service to our country.

Now, Operator, we can open up for question.

(Operator Instructions) Our first question comes from Scott Cuthbertson with TD Newcrest. Please go ahead.

Good morning Scott.

Good morning John. I just wondered, you looked like you're doing pretty well, maybe a little bit ahead of schedule on the integration expenses. I just wondered how they're tracking and whether or not we can expect a similar amount next quarter and what, if anything, you can tell us about the synergy realization that resulted from that in the quarter?

As it relates to the cost to achieve, which I assume is the question that you're asking, we continue to feel comfortable, Scott, that we're going to be in that $195 million to $240 million range. Understand that we stated our objective all along is to meet or exceed the $225 million. And as you know, we're incented as a senior management team to do that. To the extent that we can do that, we may incur some additional costs to do it. We're going to make sure those are in line so we're getting the return on capital.

And, Scott, this is Joel. I would also say that one of the things that changed from our expectations when we looked at that whole planning phase we have was the pace at which we'd begin the integration and how far we'd go. I would say that pleasantly surprised at how fast we were able to get off the starting line and actually the size of the initial phase that we did. So again I think we've achieved more than we originally put in our planning earlier on in the process.

So do you think that pace will roughly continue in the next couple quarters? Or did you have a bit of a headstart in Q3 with respect to the cost?

I think the reality, as I said, Scott, it's not a light switch process. So we were able to identify a lot. It will continue to flow through the fourth quarter and, frankly, accelerate the process. Because a lot of our planning process was oriented around how do we do this with the least amount of disruptions to the customer base so that we didn't put the revenue line in jeopardy. So we announced a lot, we started moving very quickly, but we've been very careful not to get out ahead of our customers and to correctly pace this so that it transitions in smoothly.

The last question I'll ask on this part is, I know it's not a light switch process, I know that there's a lot of frictional costs. I know it's very complicated shutting down one factory and loading up another. But can you help us at all with the correlation between spending $195 million to $240 million over the next 24 months and realizing $225 million in synergies? Is there any kind of rule of thumb? Is there a six month lag? Or is there anything that you can help us with given your experience so far in this process?

Scott, as Joel said, this is the largest transformation and integration that's taken place. And I feel -- I think we had a really good playbook, but there's just so many moving pieces that it's very easy for us to look ahead and say when this process is complete what's it's going to look like? And we feel really comfortable what it's going to look like. There's going to be different amounts of noise as we get the opportunity to move faster. Or if we encounter something where we need to move a little bit slower. Again, our objective, frankly, is not to maximize what we get by quarter, but to make sure we've maximized where we are at the end of the 24 months, whether we're looking at supplier relationships, whether we're looking at customer relationships, whether we're looking at our employee base and how we've dealt with them.

With respect to some of the costs in the quarter, those catch-up retirement expenses and some of that incentive compensation, is that something that we can expect to see again next quarter and in 2011, or was that a one quarter event?

The $15.3 million was the incremental for the quarter which represented the catch-up as if it had been recorded ratably through the year. That will not repeat in Q4.

Okay. That's very helpful. And just in general, last question. You're right in the middle of Q4 and the holiday season. And obviously, some volumes were down a little bit at Worldcolor. Just wondered if you could speak to the different dynamics between the legacy Quad and Worldcolor platforms and what you're seeing in the marketplace in general.

You have to remember, a struggling company, a company that was in bankruptcy, or while they were in bankruptcy is going to act very differently than other companies. And so they very much were in a defensive mode. And you have to remember, a good chunk of our work in the contracts that we have, those are negotiated six months to 12 months ahead of time. So it wasn't a surprise to us that we'd see some further decline in volumes more than what the industry has experienced on the legacy Worldcolor side, as well as the pricing. Because, again, when you're in a defensive mode you have to act very differently.

In terms of the legacy Quad work, we have seen an uptick in volume as the rest of the industry has. I'd say that we're definitely seeing advertising has increased. Mailers have mailed more which is a good thing especially on the direct mail side, the part where it's variable. One thing helping us here is that the Post Office didn't go ahead and increase rates like they were trying. Somewhat countering that and something we continue to watch is the fact that the paper industry had removed a lot of capacity out of their system and there's been some upward pressure on prices.

When I look forward, these days it's very difficult to look into a crystal ball and say where are things going. We're very connected to the health of the economy. Our customers are very connected to the health of the economy. And I really hope that the economy improves more than what people are saying. When you look at a potential 2% increase in GDP in 2011 that some people believe, that's really breaking even in job creation. But I hope that all this stimulus, I hope that the new things that Washington are trying to do will increase it beyond that at a faster pace. But as we like to say at Quad, hope is not an operating strategy. And so we continue to work hard and deal with what we have today. And should things come back in a rosy fashion, one of the great things about this acquisition is that not all the equipment in the closed plants is bad equipment. The older equipment that's no longer deemed efficient will be junked and won't be back in the marketplace. But we're going to have a war chest of equipment that's very efficient and ready to go that we bought on the cheap. And so if the economy does come back, Quad has a very good track record of ramping up quickly. And so I don't know if I'm answering your question specifically, but I think that we're feeling pretty good about what we're doing from what's given to us right now and, again, there seems to be a hint of stabilization, at least in the volumes our customers have.

Thanks very much. I'll leave it for others.

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

Good morning Drew.

Good morning. Just a couple of follow-ups to some of Scott's questions. Definitely appreciate the quantification of some of those one times, and I think the math works this way, John, but the 14.9% EBITDA margin, obviously, you're not excluding frictional costs in that number?

Correct. Those are the ones that I said that they are really impossible to accurately quantify, clearly not in any way to make accountants happy.

Absolutely. Then just for clarification, when you look at your integration cost target range of $195 million to $240 million, of the costs incurred in Q3, how much of those costs fit into that $195 million, $240 million bucket?

We're trying not to break all those out further than what we had on, I forget what the slide was, but we had the slide. Clearly on the slide, the costs that were related to the transaction, those were not in the $195 million to $240 million. So what we'd have is the employee termination costs of $21.5 million and basically everything out of the $74 million, it would be everything but $32.1 million of transaction costs.

Okay. That's helpful, John. I have yet to see the presentation so will definitely go through that. And maybe a question for Joel. Out of curiosity, when you look at plant closures, are there revenue dis-synergies that naturally accompany certain plant closures? And just wondering what the dynamic would be there?

I think it's hard to answer that question with all the moving parts. But as we close plants and shift things over to more efficient platforms, along with some of the product offerings that we've brought to the table, things such as exposing those clients to more home mail opportunities and other multi-channel approaches, we do tend to see some positive impact there.

I think, Drew, that when we calculated the $225 million of net synergies, we called it net synergies. We didn't have any cross selling or revenue synergies in it. But we did have some negative synergies. Some of the negative synergies have included things like looking ahead in 2011 on retirement benefits for Worldcolor employees that have been essentially eliminated. And we also recognized that there was a risk of negative synergies on customer revenues because of contracts that had either change in control provisions or change in location provisions. So we did anticipate it. As Joel indicated in his remarks, I'd put it in the category of "so far, so good" as it relates to customer response. And some of the additional costs we're incurring are associated with, frankly, trying to minimize that so we don't lose at the revenue line. We'd rather spend a little bit more -- and I'll call these frictional costs -- than put customers at risk.

And I think John's point is really valid on the positive revenue synergies, that we really treat that as icing on the cake should it happen.

Okay. That's helpful. Maybe just a couple of others here. With respect to the initiatives underway in Canada, Joel or John, can you give us any sense of when you're going to be through that whole initiative and retooling? When would you be operating, call it, normalized on that basis?

I think that's going to be on ongoing process. Again, it's not a significant part of all this. It was a platform that did need some tender loving care. And so we're making those initiatives as well as trying to implement some of the strategies we've done in the States. That's going to play out over the next year to 18 months just like the rest of this process.

Okay, okay. That's fine. And maybe one last one, Joel. Just with the HGI acquisition, you did allude to, obviously, expanding the breadth of your product offering and a great management team. These types of tuck-ins, is this somewhat typical of the blueprint on the M&A front in the near term?

When you think about growth, you have a lot of tools in your chest to use whether it's organic, whether it's partnerships, whether it's acquisitions. And we don't look at any one over the other. We look at the opportunity and what does it bring to our clients, what does it bring to us?

HGI is not a new company to us. I've known Craig Faust for a number of years. He's quite an entrepreneur, he's got a lot of experience, he's done a great job of building HGI. We started talking. And the two companies have been outsourcing work to each other for a number of years in addition to that. Remember, earlier this year we did, also, an initial investment into HGI and this is really a rounding out of that because both of us saw the huge opportunity with the coming together of Worldcolor from a commercial products side to round out that offering for our existing customers but then also create opportunities for new ones.

As we go forward, we'll certainly take a look at things and with the commercial market specifically being very fragmented, I'm sure there's going to be more opportunities. But there's going to be more opportunities in more geographies, as well. It's not that we're trying to go out and do a whole bunch of acquisitions while we're digesting World, but we're also going to continue to move the business forward as is appropriate.

Okay. That's it for me. Thanks very much.

(Operator Instructions) Next is Dan Leben with Robert W. Baird.

Good morning. Joel or, excuse me, John, first, I know the accountants won't let you exclude the frictional costs, but could you give us a ballpark sense of how big those were, because those of us that have much less stringent guidelines are okay with a pretty wide range?

I think we're going to try to avoid taking estimates and guesses because it really is all through a plant that's ramping down and a plant that's ramping up. And you'd be doing stuff with, I'll call it rough estimates and margins and what would have been. And we'd rather just stay with solid numbers. If we've got solid numbers, Dan, we'll share them. If we don't, we'll explain to you what's going on.

And, Dan, it really also depends on the plants, right? Some have greater costs and some have fewer costs. So it's really hard to come up with a blueprint of specifically what it takes in each plant.

That's fair. Is there any kind of ballpark way you could craft our thinking about it without specific numbers or things to exclude that would get us down in the right range of thinking about how impactful these are?

I think we've provided the view of the quarter without the two unique items. And I think if you take a look at that and think about what was going on in the third quarter, I think that would be the best way to think about it, Dan.

Fair enough. And then on the tax rate post the announcement from the state of Wisconsin, do you have any more clarity on what the tax rate is going to look like going forward?

No. You'll see when we file the Q that we have a really unusual, goofy tax rate because of all the different things associated with the transaction. Getting through the purchase accounting with the current rule that requires you to complete it immediately, that really was our focus during the quarter. And from a tax point of view, their focus was on what was the correct tax rate and the applicability if we booked the deferred tax liability, recorded all the transaction related expenses, opening balance sheet, et cetera. We're going to be addressing what we think the longer term effective tax rate and cash rate is as we go ahead over the next two, three months. So I think we'll be in a better position to comment on that when we get to the Q4 call. If we get something sooner that we feel real comfortable with, we'll get it out to everybody because we recognize that's something you're looking for in your models. But we just don't have it now.

Thanks. And then Joel, could your just talk a little bit about with HGI, pretty competitive market they're in, if there's some areas specifically where you see unique opportunities to gain some market share?

Again, it's a very fragmented industry, and I think that when you look at the impact of digital printing in the marketplace today, that's a huge opportunity. I think if you just look at our history at Quad and how we've maintained a very efficient platform and how we've used larger plants to really benefit our customers, you can probably think through that and see that there's going to be opportunity in places like commercial print. Craig Faust is an incredible leader and I think that as a part of our management team, his company is so similar to ours and how they approach things from that same standpoint, that I think it's just going to be a huge opportunity for us to grow that segment in and of itself.

Great, thanks guys.

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

Thank you everybody for your time today. Clearly it's a busy quarter. But we're very pleased with where we're at and we wish you all a very good weekend and we'll talk to you soon. Thank you.

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