Quad/Graphics Inc (QUAD) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics fourth quarter 2010 conference call.

(Operator Instructions)

I would now like to turn the conference call over to Barb Bolens, Assistant Treasure 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 and talk through the status of our integration activity. John Fowler will follow Joel's remarks and provide a more detailed review of the fourth quarter financial results. We will continue to make comparisons to the pro forma Company for fourth quarter 2009 and a year-to-date numbers will be made on a pro forma basis both for 2010 and 2009 as well. John will also discuss the high level guidance issued in our news release last night. Following John's update, Joel will conclude with an overview of our outlook for 2011.

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 our slide presentation that are both 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 and our first fourth quarter earnings press release issued last evening. A replay of the call will also be posted on the investor relation section of the quad website after the live call concludes. I will now turn the call over to Joel.

Good morning, everyone, and thank you for joining us. Overall, we are very pleased with our results for our fourth quarter which was our second quarter as a combined Company. Revenue was up slightly over the pro forma fourth quarter 2009. Legacy Quad/Graphic volumes improved slightly as did our paper and bi-product revenues. At the same time revenues continued to be affected by pricing headwinds due to over capacity in the industry, lower world color volumes, and contractual pricing inherited as part of the acquisition. Despite these headwinds we faced, we are very pleased with the adjusted EBITDA of $224.2 million and adjusted EBITDA margin of 16.2%.

As we move through our integration, serving our customers and ensuring work is produced without disruption has been and will continue to be our priority. We have moved both quickly and deliberately during the transition of work, and so far nearly 400 titles have been moved to a more efficient platform. This was done during a busiest season, and we retained 97% of the revenue from transition titles. We believe that this is a reflection of the level of detail and thought that went into our integration plan. We are very pleased with and thankful for our customer support through this process. We invested in both people and process to ensure an orderly transition of those titles.

In our third quarter call we introduced the concept of frictional costs, or those incremental costs associated with ramping up plants receiving work or ramping down plants that were closing. In the fourth quarter we were very pleased with our ability to manage the frictional cost of moving the work out of the plants being shut down. During the quarter we continued to effectively execute on our integration plan and have made great progress. By the end of 2010 we had closed six plants, as well as the Worldcolor Montreal headquarters. Another plant was closed at the end of January, and yet another is expected to be closed by the end of April.

The impact of these and other restructuring actions will result in a closure of approximately 3.6 million square feet of manufacturing, warehousing, and office space, and a gross reduction of 4,400 employees. To date we have realized a net reduction of approximately 3,000 full-time equivalent employees. The consolidations are not yet complete as this is a 24-month process. As a result of our progress to date, we are now confident that we will achieve somewhat more than our 225 million synergy savings. We will continue to look for additional cost savings opportunities to build on our integration synergy savings.

Our progress on employee integration is another area where we have made great strides. I am very pleased with the progress our HR leadership team has made since the Worldcolor acquisition in working through some very complex employee and labor integration issues. One of the issues we addressed quickly is that of the US multi-employer pension plans, or MEPs, because they were in critical status. I'm very pleased to report we have reached an agreement with the unions to exit the US MEPs and replace those plans with one that is both sustainable and pay-as-you-go. The $100 million liability for the withdrawal from the US and Canadian MEPs was recorded on the initial combined Company balance sheet.

Since close, we have worked to harmonize many of our US-based benefit plans. We now have one common policy -- vacation policy -- as opposed to 64 plans at Worldcolor and one at legacy Quad/Graphics. We have also reduced the previous 92 post-retirement healthcare plans at Worldcolor to one. This greatly reduces the complexity of administering those plans. Furthermore, we are continuing to invest in our employees.

Beginning in 2011, we reinstated both Company-wide merit increases and also reinstituted the 401K match and profit sharing plan for [Lacey] Worldcolor employees. While this adds cost and creates expense headwinds, we have now created employee benefit and retirement plans that are sustainable for the long term. One of the very unique ways Quad has worked to mitigate some of the rising cost of employee benefit plans is through QuadMed, our in-house primary care and wellness services provider. We started QuadMed more than 20 years ago to improve the cost and quality of healthcare for our employees and their families and we have succeeded.

By focusing on wellness and prevention versus reacting only to illness, Quad/Graphics has realized healthcare cost 25% lower than a benchmark of comparable companies regionally. We have locked on to a healthcare model that works and have turned it into a competency of Quad/Graphics. What's more, we have been able to leverage this competency as an independent business that provides on-site medical services to other companies as well.

Another one of the highlights of the quarter is the strong debt paydown. We reduced our outstanding debt balances by $179 million, and that allowed us to make significant progress towards our goal of deleveraging the balance sheet and returning to investment grade. We believe that cash flow is one of the most important measures of a printing company's financial success and is one of the key operational principles by which we managed our business for years. As we look forward in our business, we continue to make strategic investments in our platform. During the quarter, we announced that we have combined the commercial and specialty print business we acquired in the HGI acquisition with the commercial print and book operations of two of the acquired Worldcolor plants. We believe this will give us both substance and momentum to build out that platform.

Before John takes over for the more detailed financial review, I would like to summarize several key thoughts. We continue to believe that our platform consolidation is absolutely the correct action to take, especially given the pricing pressures in our industry resulting from continued excess capacity. We believe we have long been one of the most profitable printers in the industry and have achieved those results by investment in our platform, leveraging logistics, lien techniques, and I tools -- IT tools, and focusing on profitable growth. We will continue to follow this path in the combined business as we believe these actions will drive value going forward. We are successfully executing our integration plan, but this is a two-year journey to fully realize the value of the combined businesses. I'll be back after John's financial review to summarize the call. John?

Thanks, Joel, and welcome, everyone. As we report our fourth quarter results today, we do so with a combined entity, and the comparisons we make to 2009 will be on a pro forma basis as we believe that 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.

Slide 13 is a snapshot of the fourth quarter financial results compared to both the third quarter and 2009 fourth quarter pro forma. We are very pleased with the sequential improvement we achieved from the third quarter. Net sales for the quarter were $1.39 billion, a 1.8% increase from the fourth quarter of 2009. Legacy Quad/Graphics volumes increased slightly as did paper and by-product revenues. Downward pressure on net sales resulted from pricing headwinds due to over capacity in the industry, lower legacy Worldcolor volumes, and contractual pricing inherited at acquisition.

Cost of goods sold of $1.06 billion was 5.6% higher compared to fourth quarter 2009 due in part to higher paper sales, which are sold at a lower margin than manufacturing sales, and anticipated frictional costs we are incurring as we ramp up plants receiving business while at the same time ramping down plants in the process of closing. As Joel mentioned, we believe we are doing a very good job of managing the incremental costs of shutting down plants that are closing but are continuing to invest in people and process in the plant's ramping up to ensure we cause no disruption to our customers. We have also begun to experience the initial impact of rising energy and commodity costs, a trend we believe will continue into 2011. The increase in expense was partially offset by synergy savings achieved in the quarter.

SG&A expense of $106.7 million was down 15%, driven by synergy savings and a decline in bad debt expense. The bad debt expense decline was due to a larger customer related expense that occurred in 2009. These reductions were partially offset by increased incentive compensation. Depreciation and amortization of $89.2 million and interest expense of $31.5 million were in line with our expectation.

Slide 17 showed the reconciliation of the $50.9 million in restructuring, impairment, and transaction-related charges for the quarter. Integration costs totaled $17.5 million. Employee termination costs were $15.9 million. Other restructuring charges were $14.9 million while impairment charges, which are non-cash, totaled $2.1 million. And finally, transaction related charges were negligible at $0.5 million.

As Joel mentioned earlier, we have closed six plants, as well as the Montreal headquarters through December 31, with another closure scheduled at the end of January and one additional closure in process and scheduled to be complete by April. We are now confident that we will achieve somewhat more than the $225 million of synergies on an annual run rate basis by July 2012.

For the quarter, adjusted EBITDA was $224.2 million and adjusted EBITDA margin was 16.2%. We saw sequential improvement over third quarter 2010 adjusted EBITDA of $159.2 million and adjusted EBITDA margin of 13.2%. This sequential improvement was driven by normal seasonality, increased synergies achieved in the fourth quarter, and the impact of several one-time costs incurred in the third quarter that had totaled $20.8 million. The 2010 fourth quarter results declined compared to fourth quarter 2009 adjusted EBITDA of $235.5 million and adjusted EBITDA margin of 17.3%. This was due to the expected effects of pricing headwinds, frictional costs of integration, the previously-noted volume declines at Worldcolor Press, and increased costs of sales driven by rising input and commodity costs. These were partially offset by synergies achieved in quarter.

While we have not yet returned to the legacy Quad/Graphics margins, due to our intense integration activities and price competition in the industry, we are pleased with our progress. As reported, net income in the fourth quarter was $26.6 million, or $0.55 diluted earnings per share. Excluding the effects of restructuring, impairment, and transaction-related charges, net earnings would have been $64.3 million, or $1.33 diluted earnings per share.

Slide 20 shows the balance sheet as of December 31. You will note that we have broken out the pension, MEPs, and other post retirement benefits separately. You will also note that book equity is approximately $1.5 billion, evidence of our strong balance sheet. We are very pleased with several aspects of our balance sheet improvement. First, as Joel mentioned, we paid down $179 million in debt during the quarter. Cash flow from the business funded $132 million of that total, and $60 million was from collateral or restricted cash in the Worldcolor business that was freed up and used for debt reduction.

Offsetting that was $13 million of debt assumed in the HGI acquisition. The other notable item on the balance sheet was the $111 million reduction in pension and post-retirement liability from the liability booked in conjunction with the Worldcolor acquisition. This large reduction was a result of cash funding, favorable returns on pension investments, and active management of post retirement issues.

Slide 22 shows a snapshot of our cash, debt, and leverage ratio at the end of the year. Since the close of the acquisition, we have reduced net debt by $216 million which was $229 million in debt repayments, offset by $13 million of debt assumed in the HGI acquisition. Our interest coverage ratio is a very healthy 5.1 times. As of December 31, our borrowings under our $530 million revolver were $57 million, down from $227 million at the end of the third quarter.

The blended interest rate on the total debt balance is 6.2%, with the outstanding principle balances being 54% floating and 46% fixed. Long-term fixed-rate debt consisting of private placement notes is at an average rate of 7.5% and has an average maturity of 11 years and a weighted average life of 6.5 years. Our floating rate debt today is at an average rate of 5.1%. We believe we have sufficient liquidity for both current business needs and future investments.

We continue to target a leverage ratio of approximately 2.0, as we believe that is an appropriate amount of leverage as we return to investment grade. Our strategy for use of cash in the near term continues to be debt payment, reduction in our pension and post-retirement liability, and investment in the business. We plan to address the issue of dividend policy during 2011.

Before I turn the call back to Joel, I would like to discuss guidance. For 2011, we expect that the depreciation and amortization will be $345 million to $365 million. Capital spending will be $170 million to $200 million, and interest expense will be $105 million to $115 million. We expect our effective tax rate to be approximately 40% as we work through the complexity of Worldcolor post bankruptcy. We expect cash taxes for 2011 to be less than $10 million, but we will be making a cash payment of $25 million this month related to 2010. We expect to make cash contributions to the pension plans of $54 million and record $8 million of non-cash pension expense during 2011.

During this complicated integration process where we have many moving pieces and have acquired a company that had a downward trajectory as a result of its bankruptcy, we are making an exception to our limited guidance policy and are providing adjusted EBITDA guidance for 2011. We expect adjusted EBITDA to be slightly in excess of $700 million for the year and will be dependent on the extent to which volumes and the competitive pricing environment affect the economic recovery in the print market.

We expect normal seasonality, which means that the second half of the year will be stronger than the first half, and revenues and EBITDA will peak in the fourth quarter. One item to note is that the first half of Worldcolor's 2010 results was unusually strong due to the temporary cost cutting measures initiated during their bankruptcy. I would now like to turn the call back to Joel, who will provide some concluding remarks.

Thanks, John. As we look ahead into 2011, we are very pleased with the progress we are making on this large and very complex integration. Our focus will continue to be on our customers and ensuring we maintain high levels of quality and service. We have made great progress towards creating a sustainable employee strategy that works to retain our talent and features a pay-as-you-go retirement plan. We will continue to make more progress on this as we move through 2011.

In an industry that has too much capacity, we believe we are taking the correct actions to right-size our platform. We will continue to look for ways to optimize that platform for the greatest returns on our investments. We've spoken often about the long-standing tenants of Quad's culture centered around finding better way to do things, employing lean techniques, enabling process improvement through IT tools, et cetera.

We will look to leverage our core competencies to address rising costs as well as pricing pressures in the print industry. We continue to believe that the Worldcolor acquisition will create significant value to our share holders, and we intend to keep a clear focus on executing the integration plan.

For years, Quad has been focused on adhering to a strict financial discipline around allocation of capital. We will continue to use that discipline to help us run our business today and identify profitable growth opportunities for tomorrow. Finally, we operate in a multi-channel world where print holds a key role. We intend to be one of the print market leaders and will leverage our competencies to help our current and future customers create value.

We have a saying at Quad that success is not for the faint of heart. We believe we will be successful by living by our values of finding a better way, empowering our employees, and adhering to our long-standing principals of financial discipline. Thank you all for attending today's call, and we are now ready for questions, operator.

(Operator Instructions)Your first question comes from the line of Scott Cuthbertson.

Hi, Scott.

Thank you for taking my question. Just a -- first of all congrats on a good quarter. Nice numbers there and good progress being made. Just kind of wondered where you are in the integration. You've net reduction of 3,000 employees. I've got to think you've realized probably $100 million anyways of the run rate and synergies. I just wondered if you could sort of give us an update on where you are within that process and any expenses that you've incurred so far to realize?

Scott, we are -- I would say we've always viewed this as a 24 month process. There's going to be points in time where there's a lot of things happening. Points at which we're absorbing the things that we've already done. And so we're -- we continue to be comfortable that it's a 24 month process. As it relates to the cost, we had originally talked about cost to achieve of $195 million to $240 million. When you compare that to the $225 million of targeted synergies, you had about a 1-to-1 ratio. We're continuing -- we're still only nine months into the 24. We're tracking along that 1-to-1. Our focus, the way we think about it, is our first objective is, what can we do to maximize synergies. Second objective is, how well can we do to manage the cost of achieving the synergies on a 1-to-1 basis. But frankly, we'd rather have $1 of synergy even if it takes $2 of cost to achieve.

Okay. Sorry, go ahead.

That's okay. Did that help you?

That helps but, I'll tell you, really what I'm trying to do, John, is I'm trying to -- I'm very encouraged by Q1 results, very encouraged by the statement that you're confident that you can get more than $225 million in synergies. What I'm trying to do is just reconcile that with the informal 2011 EBITDA guidance of around $700 million, which is a little bit lower than I was thinking you might achieve. Just kind of wondering if you can get some color on that. Are there any one time or otherwise kind of nonrecurring costs which are included in that $700 million? I know you don't want to quantify frictional costs but maybe you could talk just in general how they play a role in that number and what the difference might be with respect to generating EBITDA in 2012.

I think that you're right. We aren't breaking out the details. Yet clearly we're continuing to incur the frictional cost. Scott, I think that we felt that we were nine months into it and that things were going well. Some of the early items, frankly, were the easier ones to identify as clear synergies, such as SG&A and procurement. Clearly with the net reduction of 3,000 people, that's a significant accomplishment. As we run the business, what you need to understand is we look at how well are we doing on total EBITDA. How well are we doing at improving the EBITDA margin. And, especially, how we're doing on free cash flow and the ability to repay debt.

So as we go forward, our view is that you can talk about synergies. You can talk about just some of the things that we are doing in our business to take costs out in response to the pricing pressure from over capacity or the rising commodity costs. And at some point you end up with what I'm going to call red dollars and blue dollars. And I'm not sure how meaningful they are. Our view is that we need to be measured on the green dollars which is, what are we getting to the total EBITDA and what are we getting as far as improvement in the margin and what are we getting as it relates to free cash flow.

And Scott, this is Joel, I'd like to also add some context and continue to remind people that this transaction wasn't putting two healthy Quad/Graphics together. It was putting a healthy Quad/Graphics together with a company that just went through bankruptcy and hit a major road bump. And as companies do that, it's not a light switch to stop that negative -- that downward pressure. There's a lot of work that goes into it. So I think -- remember, keep the context of what we've done here as you go forward that we knew this coming in. We had a lot of work we knew we had to do and we're going to manage to do that. But again, this wasn't putting Quad/Graphics and Quad/Graphics together. It was Quad/Graphics and a company that had gone through some significant challenges.

Thanks, Joel. And that's an excellent segue into my next query which is, just on the -- I realize the measures that Worldcolor took during the restructuring process were unsustainable and you've moved toward a sustainable employee compensation plan and retirement benefits and all that kind of stuff. So, obviously costs are going to go up a little bit in Q1, as you've indicated that you're -- you've normalized that now from where it was on a temporary basis before. Can you help us at all with what that's going to do to your cost line as employees start getting their out from underneath this 10% reduction and no 401K and the other things that Worldcolor was doing on a temporary basis?

Well, Scott, we knew that that was happening at Worldcolor. That was always part of our integration plan that we knew we needed to do that. We had a lot of work to come up with exactly what was the correct way to do it. When we came up with the slightly in excess of $700 million, it was the result of a -- sort of the bottoms up process that both companies had previously gone through and then overlaying these additional items. We feel comfortable that all the things that we needed to put into place, as it relates to the retirement and the benefit and stuff that are going to be adding costs, are being incorporated into the $700 million of guidance that we provided.

And, Scott, remember too that the unsustainable part, the stuff that you did during restructuring, there were other kinking of the hose in terms of things like maintenance. And the problem with kinking things like maintenance hoses is that sooner or later you have to pay the piper. And so, it's not just what happened with some of the 401K stuff, etcetera, there's also other platform related things that were kind of held back on that we have to play some catch-up on.

I think we appreciate that there was certainly lots to do on that and I wish the best of luck with the rest of the process. The last thing I guess -- just wanted to ask about -- just with respect to -- you mentioned you're nine months into a 24 month process, you've kind of got kind of a 1-to-1 target for cash expense and synergies realized. But you've previously described the process of realizing synergies is backend weighted. Is it fair to say that the timing of where you are is roughly equal to where you are in the spending and synergy realization process?

We don't really measure it that way because, frankly, some of the synergies that you're able to get early on, Scott, are things like procurement that don't have a cost to achieve and then other ones kind of happen as things -- as plants go down and work is being transferred. I would say that we're pleased at how quickly we've been able to move on a lot of fronts on the integration.

Okay. Thanks. I will leave it there for others. Thank you.

Okay.

Your next question comes from the line of Dan Leben.

Good morning, Dan.

Good morning. First can you just talk a little bit about some of the volume growth that you saw at legacy Quad and then just if you could build on that a little bit to helping us understand some of the dynamics that had the negative volume in the Worldcolor -- if there were certain products that were stronger or weaker than others?

Well, look, there's a lot of things that kind of go into the top line growth. It's not just volume. It's things like paper and by-product sales. It's things like logistics. So there's -- and in addition to that, the effects of pricing. So it's a little bit of a mix of all of the above. And as we think about it on a go-forward, it's a little bit also about -- or a lot a bit also about trying to understand where this economy goes and how that translates into print. But that being said, our real focus is whatever gets thrown at us on the top line from some of those other moving parts is we'll continue to really closely manage what we can do on cash flow, EBITDA and such -- all the things we talked about.

And Dan, as you know, one of the things that differentiated Quad over the years is a very disciplined approach that we took to pricing. And that was something that we introduced into the other business segments shortly after closing. That's something that we're continuing to focus on because, frankly, that becomes a key item when you're operating in an industry with excess capacity and difficult pricing. So to us, Joel, we always talk about in front of growth we put the word profitable because that really becomes the key focus. Because, frankly, you can get some opportunities but, frankly, if they aren't going to contribute to earnings and cash flow, then you can probably long-term use your capacity in better ways.

Great. And just as a follow-up to that, can you talk historically about the approach at Quad to pricing in terms of walking away from customers? And kind of help us understand the bright points in terms of how you analyze the profitability from when you're willing to walk away and how you price those deals.

Well, it's not like a specific answer I can give you on that because a lot of consideration goes into, on a per account basis, whether it's seasonality or a fit of a plant. But what we don't do is try to fill up excess capacity, that should really be taken out of the system, to try to make that happen. Because to us, that's kind of a recipe for profitless prosperity. And so we're very careful about trying to bring in volume for the sake of volume and just building up excess capacity.

And then last one for me. John, can you just talk about the commodity cost? You mentioned energy -- just talk about those flow through the P&L. Can you give us a sense of, one, the magnitude how large these expenses are and, secondly, just kind of -- what you -- when you were doing the guidance, which we do greatly appreciate, how you thought about energy prices within that?

We were clearly at the early stages of what we were seeing in the fourth quarter of 2010. We got a really outstanding procurement group that are really charged with taking a look at how do we try to offset some of those things. A lot of those initiatives sometimes, Dan, is how, frankly, does procurement partner with operations to take a look at how things are being consumed. And it's often -- it's not just what I'll call the unit purchase price but it's how much of it that you use. So we'll -- that's the stuff that we'll focus on and we'll continue to focus on. And we'll kind of see what comes at us and stuff like that.

Legacy Quad/Graphics, when we -- one of the things that we've always measured is energy use on a per unit basis. Frankly, the energy consumed in Quad/Graphics plants on a per unit basis is significantly lower than that in Worldcolor. Our facilities group has a major focus on looking at what are the appropriate investments that can reduce energy consumption in the Worldcolor plants as a way of offsetting that impact. And as you think about 2011, I think we're all sitting here saying, okay, what's going to go up and by how much and how are things going to resolve themselves in the Middle East.

Could you -- I know you have talked historically, Joel, in talks specifically about the major components of printing being paper, the cost of manufacturing, and then the mailing costs and how those have gone up. Is there an energy number that you kind of, back of the envelope, use to say that 5% of the costs are energy or something along those guidelines that we should think about?

No, we haven't. We've focused on those other drivers and we focused a lot on, as you know, Dan, how do we invest capital into the platform recognizing that our -- when you take away the postage and the paper, the single largest cost for a printer is labor, which is even higher than depreciation and interest. So our focus has been on capital investment, the right modern equipment, and the automation to be able to manage the labor number.

Great. Thanks.

Thanks, Dan.

Your next question comes from the line of Drew McReynolds.

Hi, Drew.

Good morning. Thanks for taking the call. Couple of follow-ups here. First, great to see the adjusted EBITDA guidance. That's very helpful. Joel, maybe you can comment on what type of economic environment, particularly in the US, under pins that guidance and maybe as a benchmark, how that assumption compares to perhaps the growth in Q4, for example.

Well, look, I'm not an economist. I can only kind of see what I hear and feel what I feel. Again, we kind of look forward and say that when you look at 2011 and you look at some of what happened towards the end of 2010 from an economic growth standpoint, we continue to think the jury's out on how strong this recovery will be. But also, what impact that has on the print economy. We'll continue to monitor it. But, again, our focus is really going to be on really managing this integration, managing the EBITDA -- absolute EBITDA and EBITDA margin and cash flow. Whatever gets thrown at us from a economic standpoint, we know how to manage that both up and down. And at the end of the day, I think we feel very comfortable with that guidance that we gave based on what we can see right now.

Okay. And on the possible increase in the targeted synergies, just wondering if you can kind of provide some color on the sources of the incremental synergies.

I think it's really been that we feel good about what we have accomplished in the process so far on the SG&A within the procurement area. And, frankly, what we've been able to do on a net head count basis. So, I think it's just kind of looking at all of those things. We feel good. Those all represented, frankly, three of the major drivers of it. And so we thought that -- we saw that. And, again, as I said on an earlier question, these were the things that were most easily measured. We will be going into a process now that the further we get into it, the more it's going to be difficult to be able to differentiate what is a result of a synergy during integration and what is it that is just part of our continuous improvement program of taking costs out of the business. That's why we felt it was more valuable to provide the sort of bottom line EBITDA guidance along with adding some of the cash uses guidance. And you'll probably hear us talk less and less as time goes on about what the amount of the synergies are. We just wanted people to know that we are being successful and we're really pleased at the progress and the time line that we've been on.

Okay. Now that's understood. And then just based on the earlier question, if we assume kind of a 1-to-1 integration cost to synergy, that's not out of whack at this point?

Yes. But as I say, to me, with the further you get into any sort of a cost reduction effort, whether it's a synergy or making something more efficient on the manufacturing platform or increasing up time or whatever, we're going to look at it on our return on capital basis. So we're going to look at it and so, if something requires $2 in order to get $1 of savings, trust me, that really works in a return on capital model and we're going to go ahead and do it.

Okay. Okay. No, that's fine, John. And then just back to the frictional costs from a 30,000 foot level. If you look at the frictional cost incurred in Q3 and those costs incurred in Q4, is there any kind of directional up or down or flat that you can point to just to help us understand the impact -- at least on a sequential basis?

They were both very intense quarters as far as frictional costs from the stand-point that the 400 titles that were being moved, the -- 3.6 million square feet of plants that were going down, the 4,400 people and the nets of 3,000, they were both intense quarters as it related. And keep in mind that when you think about the frictional costs, the ramped down of a plant that's closing, that's a relatively finite period. Whereas when you're ramping up, you've got the -- when you're ramping up, you've got the ramp up but then you've to remember we're a job shop. So as a new piece of work comes in, if we're producing the work as we've grown the plants that have receiving the work, we've diluted our crews so that there's people that haven't been working together the way they were working together a year ago. So in a ramp up that's going to have a longer tail to it.

But in general, I think you also can think about frictional cost. These things will ebb and flow throughout the 24 month period. So, at times were we're busy executing on things that have been done, as John said, we felt good about the frictional costs of bringing plants down, now we're executing on plants that are coming up. Should there be more activity? You'll see it a different sort of flow of frictional cost as we go through this 24 month period.

Okay. No, that's very helpful. And, Joel, just while I got you here -- when you look at the Worldcolor platform and, obviously, kind of the revenue profile there, do you feel you have fairly good visibility on that trajectory in terms of 2011 and --

Yes, yes. Again, this was a broken business. And we had parts of the platform that probably should have gone away awhile ago and some of that is gone now. But, yes, we do have visibility. We've confirmed that it was a troubled business when we acquired it. But there -- I'd say that we have a good handle on trajectory and feel good about sort of knowing all of the ins and outs of the parts that we have to manage to as you manage that downward pressure they experienced.

Yes. I think there is a lot of good people that came with the acquisition. I can speak in my area -- a lot of strong financial people. They didn't have some of the systems and the reporting and the tools that we did to be able to measure things. But I think it was a group of people that had the business in the palm of their hand of knowing what's going on. So I feel comfortable that we're getting good visibility. As we put together, frankly, we would not have put out a $700 million number if we didn't feel that the process we were able to go through, both on the Worldcolor side and Quad/Graphics side, wasn't a real strong one.

And if you go down into the plant level too, I mean there's some really good talented printers. I mean, these are printers just like us and -- but they haven't necessarily kept up with giving those printers the right tools for what's available today. As we do that, whether it's the terms of automation or information tools, things that gives them visibility as to how to manage those platforms, again, I think as we give them those tools, there are some really good people are going to help us execute on fixing the ship.

Okay. And my last one here maybe for you, John -- I'm assuming this is all going to be in the filings -- but can you just give us the deficit on the defined benefit plan at year end excluding the MEPs?

Yes. So the -- as I said, you know the MEPs are $100 million. The -- on the pension plans which I'm just trying -- I'm just taking a look at them -- the pension plan amount is -- the deficit is $338 million.

Okay.

And that includes the [Opec] --

Okay. And that's obviously both Canada and US in there?

That is correct, yes. But we feel good with the progress that we made, which is both the willingness to make the cash contribution, the investment earnings, and the active management. So, we're really please that we took a significant step to taking risk out of our balance sheet as a result of under funded and unfunded retirement benefits and feel real good about what we're doing with the employees -- giving them a fair and sustainable retirement plan to replace something that was questionable, whether it was ever going to be received.

Okay. That's great. That's it for me.

Okay, thanks.

(Operator Instructions) Your next question comes from the line of Svet Nikov.

Good morning.

Hi. Thanks for taking the question. What do you expect to be the cash cost of exiting the MEP relative to the $100 million liability?

That would be the cash cost.

And it's already negotiated?

No, it's not. Where there's the -- we dealt with the unions reaching the agreement to exit the MEP. There's a continuing process with the trustees of the MEPs to go through the specifics, which would include the timing and the exact amount. So, that's to go. But we feel good that we've -- have a conservative and appropriate number there for. But it will be a cash cost.

And do you think that happens in 2011?

You know, we're -- we've got some more pieces of the process to go. My best guess would be it would be early 2012 would be the more likely.

Okay. And as far as the cost of synergies, just wanted to clarify, so far the way I look at it is you've incurred $120 million-ish related to restructuring costs. There's also about $41 million or $42 million of transaction costs. And as I look at the target of $190 million to $240 million, roughly speaking, is that total number supposed to include friction cost as well? Or is that only with --

No. The friction costs, frankly, are ones that you -- there's no good way to break out. Those are just running through our regular P&L. So none of that is being included in that number.

Okay. And final question on the friction costs, is it -- I mean, do you have an estimate that you might be able to qualitatively comment on what you expect in 2011, what -- versus what you saw in 2010?

No. I think to Joel's point, it's going to ebb and flow. And I think to a great extent, we're trying to avoid trying to break all these different things out because, candidly, sometimes when you start breaking all these things out, number one, it's arbitrary estimates. Number two, they start ending up being excuses. And to us, again, as I said, at the end of the day it's just green dollars. It's what do we get to EBITDA, EBITDA margin and, most importantly, what do we get to cash flow and what do we have available to pay down debt, invest in the business, and create value for our share holders. I hate to go down that route because then you start making excuses for yourself.

Right. I mean, I guess -- and probably other's share the same efforts to understand where the -- what the end game is in terms of numbers once all this is over. But if you look back to a year ago when the merger forecasts were put together, the total was pre-synergies was somewhere in the, I guess, $700 million to $700 million plus area of EBITDA. And I think a lot of people are looking at it as $700 million plus synergies by the time this is all said and done. The friction cost make it a lot cloudier to see the path to that. But I guess the question is, do you still feel comfortable, broadly speaking, with your initial plan over sort of a two to three year time frame if you were to jump over the intervening friction cost and so forth?

Well I think, number one, the stuff you're referring to is projections that were prepared by each company for their respective boards in conjunction with approving a transaction. That's very different than a five year strategic plan. And they were also done probably about 18 months ago as far as the underlying data. So I would treat that as just -- frankly, we're not looking back at that. That is not something that we're focused on. That had -- that was two companies talking to their respective boards, looking at a transaction, negotiating with each other. It's sort of -- it's, frankly, it's just not relevant to how we're running the business or how we're thinking about stuff as well as it's old data -- 18 months a lot passes by in the industry. So I think that the best thing to do is take a look at what did we do in the third and fourth quarter? What are we talking about in 2011? How are we managing and creating the cash flow? And how do things evolve?

Right. No, I appreciate that. I think the challenge is when we look at the third and fourth quarter, the friction costs then we can separate them from the ongoing recurring performance of the Company.

Yes. And to say we don't break them out and I think you've got to kind of look at what we've been speaking to. The things that I think we're doing very well as far as the speed and the accomplishment on the integration. Clearly as we've referenced in the call, there's a lot of pricing pressure in the industry. That is very significant. So that's the significant factor that, frankly, we have -- we look at that as our -- rather than the frictional costs, we look at that as the biggest challenge as to how are we going to -- whether you call it synergy or whether you call it cost reduction, how are we going to reduce costs in order to deal with what's happening on the pricing.

Yes. And again, back to my comment about giving context about what types of companies been put together, it a strong company with one that's gone through bankruptcy. So, to some degree, you have to take into account the downward pressure that they experienced whether it's contractual pricing that has been reset or volumes that had been impacted through their bankruptcy. Again, we have these longer customer relationships but that has to be taken into account here. And I think, in addition to that, is we did mention the temporary fixes that were done as they were in bankruptcy, coming out of bankruptcy, that, again, I said -- like I said before, you have to pay the piper at some point when you're not maintaining equipment. And so there's a whole lot of that stuff that you have to take into account when you're try to add things together and create a model.

Right. Thank you.

Okay. Thank you.Operator, are there any more questions?

Your next question comes from the line of Drew McReynolds.

Hi, Drew.

Hi. Just a follow up to that last one, maybe phrased a different way. I know, Joel, you presented at a conference last week or the week before, and you were talking about historical margins for Quad in the 18% to 22% range, so the biggest question once the dust settles on the integration is, are you comfortable that you're into that range? And then, ideally, are you -- can you get back to 20% plus or is it kind of a wait and see?

Well, look, we're very pleased with what we got to in the fourth quarter from a EBITDA margin standpoint. Clearly, it's still a seasonal business so that tends to be the peak. But, no, we're not where we want to be. We're not where we had been in the past and we'll continue to strive to get there. But keep in mind, some of this is going to be dependent on how does the economy bounce back and how does it translate into the print environment. But also how does this whole topic of too much capacity in the industry and its resulting pricing pressure, how does that play itself out.

So, I think to answer your question, it depends on some of those factors. But our goal is certainly to get north of where we are. It's our historic place to be. We have a lot of expertise and wherewithal to manage cost out of the business. But, yes, eventually we'd like to get there. The question is is how long's it taking and what are the other contributing factors that allows you to get there?

Thank you very much.

Okay. Thank you, Drew. Operator, any other questions?

At this time there are no further questions.

Okay, well thank you, everybody, for joining us today. We're, again, very pleased with what we've accomplished to date, but it is a intense process we're going through that will take us two years. And I'd also like to just thank, again, with all the moving parts we've had, not only our employees for making it happen, but also our customers for supporting us through all this. And so with that, I want to wish everybody a great weekend. We'll talk to you soon.

This concludes today's conference call.