Quad/Graphics Inc (QUAD) 2011 Q4 法說會逐字稿

Welcome to the Quad/Graphics fourth quarter 2011 conference call. During today's call, all parties will be in listen-only mode. Following the speakers' presentation, the conference call will be open for questions. (Operator Instructions) I would now like to turn the conference call over to Kelly Vanderboom, Vice President and Treasurer for Quad/Graphics. Kelly, please go ahead.

Thank you, operator and good morning, everyone. With me today are Joel Quadracci, Chairman, President and Chief Executive Officer; John Fowler, Executive Vice President and Chief Financial Officer; and David Honan, Vice President, Corporate Controller, and Chief Accounting Officer.

Joel will lead off today by reviewing the financial and operational results for the quarter. John will follow with a more detailed review of our financial results and provide 2012 guidance. Following John's update, Joel will provide concluding remarks, then will both be available to take questions. The review of our operating and financial results will include Canada, unless otherwise noted. Given the pending deal closed with Transcontinental, our 2012 guidance will exclude Canada. As it relates to 2010, we will continue to make our comparisons to the pro forma Company on a full-year basis.

I would like to remind everyone that this call is being webcast, and forward-looking statements are subject to Safe Harbor provisions as outlined in our quarterly news release, and in today's slide presentation. The slide presentation can be accessed through a link on the Investor Relations section of the Quad/Graphics website at www.qg.com.

There are also detailed instructions on how to access the slide presentation and our fourth-quarter earnings press release issued last evening. A replay of the call will also be posted on the Investor Relations section of the Quad website after the live call concludes. I will now turn the call over to Joel.

Thanks, Kelly. Good morning and thank you for your participation today. I'm pleased to report that our performance exceeded our revised expectations in a number of key areas. First, our 2011 full-year adjusted EBITDA was $638 million, surpassing our revised 2011 guidance range of $610 million to $625 million due to our strong fourth quarter performance. Volume, price, and revenue were in line with our quarterly expectations, and due to a focused effort to improve productivity, and aggressively manage costs, we saw improvement during the quarter as compared to our revised guidance.

Our 2011 adjusted EBITDA margin was 13.7%, and excluding our Canadian operations, this margin increases to 14.3%. From a balance sheet perspective, we continued with our disciplined approach to capital deployment.

As we have consistently said, how we deploy capital is a key factor in value creation. The timing and priorities for capital deployment will change as circumstances dictate. For example, as we completed the balance of 2011, we decided to take a more conservative view toward the use of capital given the continuing transformation of our industry.

As a result, we decided not to buy back shares in November and December and instead made a significant debt paydown during the quarter of $163 million. Since the close of the Worldcolor acquisition, we have paid down a total of $325 million. Given our strong balance sheet and credit metrics, our year-end leverage ratio was reduced to 2.3 times, and remains within our targeted range of 2 times to 2.5 times.

Next, our ability to generate strong free cash flow is the key to the success of our capital deployment strategy. I am pleased to report that our 2011 annual recurring free cash flow of $340 million surpassed our original guidance of $260 million to $300 million, continuing our track record of solid and consistent cash flow generation.

Finally, based on our confidence to generate strong recurring free cash flow, combined with our solid credit metrics and balance sheet, we have decided to increase our quarterly dividend payout by 25% to $0.25 per share. Given our successful finish to the year combined with the strength of our free cash flow and the lower risk profile that our recent leverage reduction has provided, we felt the time was right to increase the dividend now. Going forward, our priorities for disciplined capital deployment will be adjusted based on changing economic conditions and what we feel is best to create shareholder value.

Before we look at the fourth quarter performance, I would like to touch on the pending closure of our asset swap with Transcontinental and the progress we're making on the integration in Mexico. On February 7, 2012, we received authorization from Canada's Competition Bureau to proceed with the sale of our Canadian facilities to Transcontinental. We expect this transaction to close shortly.

Our Vancouver facility is not part of the transaction, and will remain part of Quad/Graphics' North American manufacturing platform. The sale originally announced in July of 2011 was part of a deal that included acquiring Transcontinental's three Mexican plants. This part of the transaction closed on September 8, 2011, and I'm happy to report that our integration plans are advancing as originally anticipated.

The acquisition has been well received by our customer base in Mexico, and we are confident that we will see market growth and additional opportunities to further expand our presence there. With less than six months remaining in an extremely complex 24-month integration of the Worldcolor acquisition, I am pleased to report that we are on track to exceed our original synergy savings guidance of $225 million.

Based upon our estimates, we anticipate that our total annual synergy savings will be somewhat more than $250 million, upon completion of our integration period in June of 2012. To date, we have completed 11 of the 12 announced plant closures and realized a net reduction of approximately 4,500 full-time equivalent employees. During the quarter, we achieved $44 million in incremental synergies, and since the Worldcolor acquisition, we have achieved $196 million in total synergies.

As we take a look at our fourth-quarter results, net sales were $1.31 billion versus $1.39 billion for the same period in 2010. This variance is primarily driven by pricing and volume declines in Canada, US retail inserts and books. Adjusted EBITDA was $197 million versus $224 million for the fourth quarter of 2010.

The unfavorable quarterly variance, which was less than anticipated, was driven by volume and price declines along with higher bad debt provisions in 2011, and one-time gains from 2010. Decreases in the quarter were offset by achievement of our synergies including improved productivity. Given the improving productivity trend in the second half of 2011, we feel comfortable stating that as we start 2012, we are indeed back to the productivity levels expected in our original integration plan. Our fourth quarter adjusted EBITDA margin was 15%, and excluding our Canadian operations, this margin increases to 15.4%.

Moving onto slide 7, we take a look at our 2011 and 2010 revenue, excluding our Canadian operations, broken out by product line and geography. Overall, we see consistent year-over-year percentages with a slight increase in media solutions, directory in Latin America, offset by a slight decrease in catalog, Europe, and other revenue.

While many of these individual product lines are going through varying degrees of transformation, it is important for you to understand that at Quad/Graphics, we strive every day to be a trusted partner to our clients, one that can help them navigate both cyclical and secular pressures today and the future. For it is from these challenges that we find our inspiration to further innovate, automate, and expand our product offering.

Our strategies are tailored by product line, but are driven by the common purpose to create customer value in two essential ways. First, to maximize the revenue customers derived from their print spend by providing integrated solutions that expand the continuum of our offering. And second, to minimize customers' overall total cost of print production by continually striving to increase our own productivity while reducing their mailing and distribution costs.

We believe this strategy creates true value for our customers and will help retain them over the long term. Further, when combined with our low cost producer status, we believe this strategy will allow us to gain market share.

Let me share two brief examples of how our strategy is working to create customer value. First, our recently announced agreement with Rite Aid, one of the leading drugstore retailers in America, exemplifies our strategy to provide integrated solutions that span the continuum of our offering. We had previously printed all of Rite Aid's retail inserts for the Eastern states. Now with our new agreement, we will expand our share to print 100% of their national distribution including all Western states. We also will start producing the digital online versions of Rite Aid's retail promotions, as well as expand our content prep work for both print and online channels.

Our coast-to-coast production platform combined with our integrated media solutions offering was a key differentiator for us in this renewal. The second example I'd like to share supports our strategy to create value by helping minimize the overall cost of print production. We recently renewed an agreement to print 100% of the catalog program for a leading outdoor merchandise direct marketer. We are their exclusive catalog print partner and annual catalog volumes are projected to top over 110 million books.

Our ability to provide a competitive co-mail strategy was a key differentiator in the successful outcome of this renewal. In 2011, Quad/Graphics co-mailed more than 4.8 billion magazines and catalogs, earning significant discounts from the USPS on behalf of our customers. Given that mailing and distribution represents more than half the cost of the typical catalog and magazine program, our ability to save money for customers in this area is a critical value proposition.

To close out this slide, I will note that while we remain confident in our strategy to maintain and grow market share, it is important for you to understand that we remain cautious about 2012, due to the industry challenges we continue to face. I have said before, given those challenges, we must continue to remain focused on the key areas that are under our control.

Moving onto slide 8, we see a snapshot of the five key strategic areas under our control. These areas link seamlessly together to build the foundation for our future success. The first strategic area is our relentless focus on keeping our customers' needs at the forefront of all we do. Our Company's history is rich with examples of how we listen to our customers and act accordingly.

My personal belief is that you can never stop improving upon the customer experience, and as I meet with customers each week, that is the one consistent question I have is, how can we improve? We have learned a lot over the years and more recently through the integration process, and each day we continue to find ways to make it easier for our customers to do business with us.

With that in mind, as we begin 2012, we start with a renewed spirit and a new sales structure focused on streamlining our overall approach to our customers. As previously announced, we have reorganized our US sales teams into two main areas, Marketing Solutions, and Publishing Solutions. The Marketing Solutions team is focused on those customers who use catalog direct mail, retail inserts and in-store marketing to promote products and services, whereas the Publishing Solutions team is focused on those customers who sell content and advertising by consumer magazines, special interest publications, books, and directories. Both teams are augmented by enterprise solution resources that focus on providing end-to-end solutions to our customers with a concentration on expansion into new markets.

This renewed customer centric approach is designed to help both marketers and publishers take maximum advantage of Quad/Graphics' complete continuum of integrated solutions to help them better engage end users and drive improved response from print and print-related solutions. We are seeing success with our integrated selling approach.

For example, in our recently renewed multi-year agreement with OfficeMax, we are proud to continue to print 100% of their retail inserts and catalog programs. We are also expanding our service footprint with OfficeMax to include direct mail, freight, and in-store signage. The signage offerings supported by our recently expanded in-store marketing and point-of-purchase display division called Tempt In-Store Productions. As a result we expect to increase our annual revenue with this major account by almost 20%.

Our next strategic focus area is our continuing vision to redefine print in a multichannel media world. We understand the power of print and also understand the power of integrating print with multiple forms of media to create a consistent brand experience and improved response. We work every day to find new and innovative ways to help our customers unleash the power of print and make it more relevant and effective.

From creating an integrated multichannel campaign using personalized direct mail, e-mail, and personalized URLs to track response across multiple channels, to help people engage with print using a mobile device to experience the power of image recognition, augmented reality, or near field communication to how in-store signage opens the door to exciting interactive branded product experiences, and to the creation of content for simultaneous deployment to print and tablet devices.

We believe the marketer and publisher of tomorrow is trying to figure out how to use all channels, and as their print partner, we know we are uniquely situated to help them. At the end of the day, we believe that it is not an either /or situation, as digital complements print and together they create greater value for the reader or a more powerful call-to-action for consumers to shop. We build from strong relationships with our customers in each of our core product lines, and, as I said earlier, we are committed to expanding our service footprint with integrated solutions that expand the continuum of our total offering.

Empower employees is our next key strategic focus area. We have a long history of empowering employees to think and act like owners. We strive to create an entrepreneurial environment that promotes an open exchange of ideas in support of innovation. We are print innovators and some of our best ideas come from our employees. As we innovate and focus on integrating print with other media channels, we pair our experienced print experts with NexGen talent to advance idea generation and implementation.

Low-cost producer status is our fourth key strategic focus area. As you know, industry pricing has been a topic on each of our calls for the past year-and-a-half, and we continue to stand firm in our disciplined approach to pricing work in a way that will generate free cash flow and create value for our shareholders. Given the transformation we are experiencing in our industry, our ability to be the low cost producer becomes increasingly important.

As a Company, we are making great progress towards this goal by remaining focused on three key areas. First, our drive to maximize integration synergies. Second, our focus to improve productivity in all that we do. And third, our relentless pursuit of cost take-out through a variety of means, including the expansion of continuous improvement programs to reduce waste, eliminate redundancies, and shorten cycle times.

As I said earlier, our productivity trend line is improving and we expect to see ongoing improvements as we proceed with enhancing and expanding our lean manufacturing and other continuous improvement programs. And finally, critical to our foundation is our financial strength, and our continued focus on maximizing free cash flow and making decisions to ensure we have a strong balance sheet.

The bottom line is this provides us with the flexibility to strategically deploy capital as circumstances dictate. Quad/Graphics balances the use of cash between deleveraging its balance sheet through debt and pension reductions, compelling investment opportunities, and returning cash back to shareholders. With that, I will now turn the call over to John to present a more detailed financial review.

Thanks, Joel and welcome, everyone. As Kelly mentioned, we are including Canada in our 2011 financial discussion, unless otherwise noted. In our Appendix today, you will find a reconciliation summary of our continuing and discontinued operations. Our 2012 guidance will exclude Canada.

Slide 9 is a snapshot of the fourth-quarter financial results compared to the fourth-quarter 2010 results. As Joel mentioned, net sales were 5.4% lower than last year's fourth quarter, at $1.31 billion. Cost of sales at $1 billion was 5.4% lower than fourth quarter 2010. SG&A expense of $115 million increased 7.4% from $107 million in 2010. This was caused by a higher bad debt provision in 2011, and one-time gains in 2010. Depreciation and amortization was $89 million, flat to prior year, and interest expense was $23 million, representing a 26% reduction from $32 million in 2010.

Recurring free cash flow, which we define as cash flow from operating activities less CapEx, and excluding nonrecurring items such as restructuring costs, was $340 million in 2011, surpassing our original guidance range of $260 million to $300 million. We believe free cash flow is an important metric for us, and we expect our Business to continue to generate significant free cash flow. We are actively managing our free cash flow with particular attention to working capital and efficient investment in capital expenditures.

The reconciliation of recurring free cash flow for the 12 months ended December 31, 2011, is included in the supplemental information located in our slide presentation. We have again included an adjusted EBITDA bridge in our slide deck to help better explain the impacts to adjusted EBITDA in the quarter. This quarter, the positive impact was incremental synergies of $44 million, which includes the improved productivity.

Total synergies achieved in the quarter were $74 million, and are shown net of the $30 million of synergies achieved in the fourth quarter of 2010. Offsetting these synergies were volume and price declines, which impacted adjusted EBITDA by $41 million. A weak economic climate, and ongoing industry challenges were the largest drivers of the decline. $11 million was from the nonrecurring gains in 2010, that primarily relate to adjustments for a fire insurance gain in 2010. $9 million was due to the book business. $6 million was from higher bad debt expense versus 2010, and $4 million resulted from other impacts.

Slide 11 shows a snapshot of our cash, debt, and credit metrics as of December 31, 2011. During the quarter, we paid down debt of $163 million, and $325 million since the close of the Worldcolor acquisition. Our interest coverage ratio for the quarter increased to 5.9 times. Our leverage ratio at the end of the quarter was 2.3 times, which reflects our efforts to both manage the components of working capital, as well as ensure we made the right capital expenditures.

We are pleased to be within our targeted range and continue to believe that operating in the 2.0 times to 2.5 times leverage range is the appropriate target. At times, we may go above or below that temporarily, given the economy, working capital seasonality, timing of investments, and growth opportunities.

Our pension, multi-employer pension plan, or MEPS, and post-retirement liabilities were $547 million as of the July 2, 2010 date that we acquired Worldcolor. As of December 31, 2011, this liability was reduced to $392 million. We reduced our pension and post-retirement liabilities by $155 million through a combination of cash contributions and the pending divestiture of the Canadian obligation upon the closing of the Transcontinental transaction. This reduction in our pension liabilities took place despite a 2011 year-end decrease in the discount rate used to value the liability, which by itself, would have increased the overall liability.

Critical to the success of our financial derisking strategy, was our ability to focus on reducing our pension liability, and exiting the multi-employer pension plans. In 2011, we took the steps under our control to withdraw from the MEPS and replaced them with a Company-sponsored pay-as-you-go defined contribution plan, which is historically the form of retirement benefit provided to Quad/Graphics' employees. We expect to finalize the withdrawal process with each of the MEPS plan administrators over the next several years.

As Joel mentioned, we remain focused on maintaining a strong balance sheet through debt reduction, as well as reducing our outstanding pension obligation. This, combined with our ability to generate significant recurring free cash flow, gives us the confidence to increase our dividend by 25%. I am pleased to report that we have no significant debt maturity until July 2016, which includes our main revolver that you may recall was successfully refinanced in July of 2011. At the end of the quarter, borrowings under our $850 million revolver were $85 million, at an interest rate of 2.6%.

Our floating rate debt today is at an average rate of 3%. Long-term fixed rate debt consisting of private placement notes continues to be at an average interest rate of 7.5%, and have an average maturity of 10.5 years, with a weighted average life of 6.5 years. The blended interest rate on our total debt is 5%, and the outstanding principal balances are 55% floating and 45% fixed. Given the increased flexibility under our new revolver and our strong recurring free cash flow, we believe that we have sufficient liquidity for current business needs, sustaining the dividend, and supporting future investments.

For the full year 2011, excluding Canada of $344 million, net sales were $4.33 billion, or 1.7% lower than 2010. Cost of sales at $3.3 billion was 1.3% lower than 2010. SG&A expense of $407 million decreased 1.7% from $414 million in 2010. Depreciation and amortization was $345 million in 2011, representing a 3.1% reduction from $356 million in 2010. Interest expense was $108 million, representing an 18.2% reduction from $132 million in 2010.

Adjusted EBITDA and adjusted EBITDA margin were $618 million and 14.3%, respectively. This compares to $650 million, and 14.8%, for the same period in 2010. As it relates to 2012, we anticipate our revenue, which as a reminder, will now exclude Canada's 2011 revenue of $344 million, to be approximately $4.0 billion. We also expect that our adjusted EBITDA margin will remain flat to slightly less than our 2011 adjusted EBITDA margin of 14.3%, and recurring free cash flow will be in excess of $300 million.

Let me take a moment to walk you through our 2012 revenue guidance. It is important for you to understand that we view 2012 as an unusual year as it relates to the Canadian divestiture, industry conditions, and market share decisions. Key drivers of the 2012 revenue decline are as follows. 50% of the decline is attributable to the divestiture of Canada. As I have previously stated, this branch is $344 million. Of the remaining 50%, roughly two-thirds is related to volume and price impacts, some of which we view as cyclical reaction to economic pressure, and some as secular pressure.

The remaining one-third is driven by market share decisions. Of this market share loss, the majority represents one significant customer. It is hard to lose any customer, especially a long-term relationship. The decision to walk away from business is always difficult, but we believe that pursuing prudent profitable volume is the right way to create value for our shareholders.

We expect our 2012 depreciation and amortization to be $340 million to $360 million, interest expense to be $85 million to $95 million, capital expenditures to be $125 million to $150 million, and cash taxes to be less than $10 million. We expect that cash contributions to our single-employer pension and OPEB plans to be $56 million, and our non-cash pension expense to be less than $10 million.

As Joel said, we believe in our strategy to redefine print, and we will continue to aggressively manage what is within our control, such as cost take-out and free cash flow, and make decisions that are in the best interest for our shareholders. With this foundation in place, we believe that a recurring 2012 recurring free cash flow will be in excess of $300 million, and supports our decision to increase the quarterly dividend by 25%. I would now like to turn the call back to Joel, who will provide some concluding remarks after which time we will take your questions.

Thanks, John. 2011 was an eventful year for Quad/Graphics. We continued the complex process of integrating operations from the Worldcolor acquisition, the largest integration ever undertaken in the history of our industry, amidst a challenging economy and industry conditions. We are very proud of what we're creating, and confident in our future as innovative people redefining print.

We will continue our relentless focus on helping our customers maximize revenue from their print spend, and minimize their overall total cost of production, while all the while, progressing on our goal of driving integration synergies, improving productivity and reducing waste and cost. Through the dedication and hard work of our employees, we will continue to transform our Company during this transformational time in the printing industry, positioning ourselves to compete aggressively in the marketplace, and realize long-term stability and success. And so with that, operator, we are ready to take some questions.

(Operator Instructions) Scott Cuthbertson.

Just a couple questions. Just wanted specifically on the magazine front, I just wondered if you're seeing a similar impact to what we saw in books over the last year or two, where there has been a shift to e-readers, which resulted in declines of the print product. Are you seeing any print magazine page counts or overall volumes, I guess, more exactly from the e-readers?

No. We really aren't. I think that, in general, the publishing industry continues to figure out how can they participate in that? I think they will start gaining some success, but from a stability standpoint, I think magazines have a pretty good story to tell. If you look at 2011 throughout the year, the first-half advertising was actually hanging in there pretty good. And then when all the economic disruption happened, we saw a pullback that I think we told everybody about, starting in mid-summer. But even with that, I think circulation, including newsstand was only off about 1%. So as we go forward, the thing about magazines, again, I think that it's going to continue to be a strong foundation. If I take my revenue hat off for a second and talk about production and how we -- what are those challenges we have in a plant when there is changing cyclical dynamics or changing secular dynamics, is really that, from a throughput standpoint, how can you manage to it?

Magazines have a consistent cadence about them, as they go through the plant. You may see a drop off in ad pages from time to time, and that just means we're printing fewer pages but we're still binding in general the same number of books. So we really like the consistency that magazines gives us, from a manufacturing standpoint because it doesn't have the disruption in terms of maybe in a retail insert program where someone pulled out a total program because they're trying to manage their budget or in the catalog side, where there's a little bit more variability because you have a whole prospecting component versus a customer component that can change a little bit more. So back to answering your question, no, we really aren't seeing impact from tablets, and don't expect to see a huge swing in the foreseeable future.

I do expect to see an increase, though, in people using the tablet as publishers are looking at how do they sell their brand? How do they sell their content? Clearly, the consumer wants to use all the different forms of media to consume everything. I think that's always going to be the trick in the future is, for Quad and for our customers, is how do you learn how to use them altogether? Because it's not going to be one or the other.

Great. Thanks for that. Joel, while I have you, just from your perspective as CEO, and looking at the business in a five-year planning time horizon, [meaning] implications for next year is that EBITDA will be lower again, despite all the synergies that you're realizing through the integration of the Worldcolor acquisition. What's -- where do you see the industry five years from now? What, specifically, are you going to do to try to preserve and hopefully improve the overall levels of contribution that you're creating?

Well, I think it's on a lot of fronts. First of all, there's a lot of -- printing is still a pretty fragmented industry, and as you look at the last recession, there was a pretty big recess in volumes out there and a lot of people made it through. Unfortunately, I think that going through the events of last year and also I think a continuing challenging 2012 for both the economy and the industry is that I think you're going to see a lot of consolidation happen. It may not mean always acquisitions. It may mean that people just cease to exist, and that's the hard part about this. So I think you'll see that the strong will survive. I think being a low-cost producer is key to that. Not only being low-cost producer but I'm spending a lot of time in the marketplace right now, and I was just with a major ad agency yesterday, I've got to be with a major catalog on Monday.

Everything I hear is, and from Chief Marketing Officers on up, and on down, is the biggest question they have is not, when do we stop printing? Their biggest question is, I know I need -- I know print is a big foundation, but I'm really confused at how to make all these other technologies work, or how to make them work together, more importantly. I think the strategy that we've embarked on is through the financial stability we have, is to be able to invest in those opportunities to tie mobile applications to print and make sure that we're showing how print actually can be even more responsive than it is when you turbo charge it with using digital media. In addition to that, I think that we continue to look at our business as a portfolio of businesses. I think you see that play out today, or in the very near future, with the completion of the divestiture of Canada, but also increasing our presence in Mexico.

I've been very pleased with the customer response in Mexico, because it is a growing middle-class. We're seeing a demand down there that's proving that print will continue to be a part of it. As we look at Latin America, the rest of Latin America and South America, we're starting to see some good demand down there, because the retailers are coming in, following that middle-class, as well as in other parts of the world. So I think it's a little bit of -- you've got to manage the business well and hard, and I think that even when you have some cyclical nature or even in businesses that have some secular decline, you can make a lot of money in this stuff.

Who would have thought that one of our smallest parts of the business, which is directories, creates some really good cash flow? It's been declining for awhile from a top line standpoint but our team in directories is ahead of the curve of that. They're managing it for that and making good money doing that. So I think it's sometimes more about when there's quick disruptions that are tough to manage to, such as the Borders liquidation last year for the industry. That was tough to manage to.

I think the challenge on the book side is going to be a little bit about a much more increase in demand for shorter runs, because digital print technology has come into being, and we've implemented a huge amount of digital technology including building some of our own. So those types of things take a lot of aggressive management. But as we look at the core businesses, I think that they're going to continue to be a good foundation for marketing in general. I think that we're pretty good at spreading our wings and getting into things that naturally get us there, whether it's our acquisition of Schreiber, which has some packaging component to it, it's the Tempt In-Store stuff, which is pretty new and taking off in terms of in-store signage, which we do not only here but also in Europe and I could see us expanding that. And on into other places that we just naturally will go.

So it's a long-winded way to say that you have to take it as it comes, and you have to be opportunistic when you need to be. But I think in order to say that you feel really strong about your five-year look, it's making sure that your day-to-day running of the business is in support of financial strength, creating a lot of free cash flow, and really sticking true to your core of empowering your people to be innovators and continue to push the business forward. In short, it's blocking and tackling everyday, while keeping a good eye on what could be strategically interesting. I hope that helps.

Yes. That's great. Thanks for that, Joel. I guess just for John, more specifically, you answered half my question on the SG&A why it was up in Q4. You had the bad debt and stuff. Can you provide any outlook for that number? If we make the adjustments to Q4, is that a reasonable run rate?

Well, we aren't -- Scott, we're not trying to break down the guidance into individual items. I think we -- as we've shared before, there's not a lot of visibility out there that we're working with. But I think the real key thing is we're going to keep on trying to drive some additional synergies, some of which will impact SG&A. I think we've talked that we'll understand that at the end of the day, we need to master our cost structure to our revenue structure and we're going to be doing that in SG&A. So while we're going to be continuing to try to drive that down.

Okay. Just finally, thanks for the product line comparison on slide 7. That's helpful. I'm assuming that the all the co-mailing efficiencies that you get for your customers are included in the magazine catalog divisions?

Well, if you want to get some of the efficiencies that you're seeing and some of the revenue benefits you're seeing, you're going to see -- it's going to be spread between logistics and into the individual business units, which is going to primarily include magazine, catalog, and to a lesser extent, direct mail.

Okay. Great. Thank you.

Next question, operator?

Mark Moskowitz.

I have a question about your margin guidance for 2012. Quarter over quarter, if you look at Q4 2010 to Q4 2011, the margin compression there, I know you guys upped your synergy expectations for the Worldcolor acquisition, but I'm just wondering, what makes you guys comfortable you guys can maintain a flat EBITDA margin for 2012 as compared to this fiscal year?

Mark, one of the benefits we've got out of doing the Worldcolor acquisition was in addition to expanding our product line offering, and having more breadth and volume as it relates to driving our logistics, was being able to look at the overall industry and being able to continue to consolidate the work on to the most efficient platform, which is going to have higher productivity. It's going to allow us to be able to increase capacity utilization, and frankly, the way we've been managing the integration has allowed us to be able to deal with where we see volume declines to be able to take what -- for many other companies might be fixed costs and truly make them variable.

So we feel comfortable as of the flat to slightly less -- we have a lot of initiatives in place that as I said, go beyond the integration synergies and we've always had a lean manufacturing approach. We've always been focused on continuous improvement and we're going to continue to be able to do that. But I'd say that the biggest thing is our ability to take a look at our business, drive productivity, concentrate work on the most productive equipment, and be able to take our costs, both fixed and variable and make them variable as we go forward.

Okay. So with that said, I know you guys only have one more plant remaining of the original 12 to close. Are you continually looking at capacity amongst additional outside of those 12 plants that you could possibly close? And then obviously, you guys have your hands full with the continued consolidation of Worldcolor, then the plant swap. Are you guys considering possibly -- what I guess I'd like you to characterize what the M&A space is out there to remove further capacity from industry?

Well, first of all, as it pertains to the integration, we've always said it's this two-year timeframe, which is coming up at the endgame at June of 2012 here. We've got a great play-book that everyone's going by. There's been a lot of moving parts, and I think if you look at the bulk of it, we've gone through, but that doesn't mean we're not looking for more opportunities, and integration means a lot of things. It's from roll-out of -- obviously from closing plants and consolidating but also rolling out things like tool sets, IT tool sets to make things easier, productivity improvements, just taking a look at your organization and thinking a little differently. So we'll continue doing that. But I want to say that we, probably as a management team, have our hands less full than I think we did. Only a little while ago in terms of the actual integration because we've got this incredible team of people in the plants that -- they know what to do. They're executing on it. Will there be more stuff, more tough decisions? Absolutely. But I say we're through the bulk of that.

And then so that being said, I think that we've freed up a lot of our managerial time for me to be back in the marketplace, for me to be out there looking for the next opportunities. I think we just proved that. We acquired a small Company, Williamson Press, down in Dallas. It may be a small tack-on for our commercial group, but they're huge in terms of their reputation. Jesse and Jerry Williamson, the brothers, who built this place, have just an outstanding reputation amongst some of our biggest clients and some of the biggest clients we don't have. I was down in Chicago with them yesterday doing sales calls, which is a lot of fun for me, and I'll continue to do that. And in that case, it wasn't about, boy, can we consolidate the industry further? It was about seeing an opportunity that's going to be good for our customers and good for our shareholders with a good quality company. So there will be opportunities. There have been every week for the past year to do an acquisition that would consolidate the industry. It doesn't mean you should.

So I think we'll be very disciplined about that. Certainly, there will be opportunities that may make sense as a pure consolidation play, but it's really got to go through the rigor that we go through in being disciplined about the deployment of our capital. So I think we'll also see some things that we have opportunities from a technology standpoint. We're doing a lot of partnering with people on the mobile device side. You could probably see some investments that we may make if we feel comfortable about that, and that's going to continue to ebb and flow. But again, it's about creating the best opportunity for our clients and for our shareholders. I'm going to be very careful about just consolidation for consolidation's sake.

And Joel -- sorry to interrupt, one other question on the customer side. Particularly within your existing customer base, are you having some ongoing discussions in terms of, do you have any large contracts possibly coming up this year? How are those conversations going? Obviously can't get into specifics, but within broad strokes, what are you seeing on that side?

Yes, you're correct. We can't get into specifics but I will say that when you think about print, every year you have contracts coming up. It's like the portfolio is not all turning in one year. A lot of them are for years to come as opposed to current year. So yes, we do have those, and I think that the conversations are going to go fine. It is an aggressive marketplace out there in terms of pricing but I think that people understand that this is about the long term, and it's about how helpful can we be to them building their top line? So we're spending a lot of time on that. But I don't see something out there for 2012, that says boy, we got something big at risk. But we do have discussions in place, as we do every year. We will continue to be very aggressive about our offering, and John referred to some market share that we decided not to pursue. The reality of a tough pricing environment is sometimes that means you decide not to go there, and as you walk through the different places that John, maybe you can expand on how we think about market share, we will be aggressive about market share. But that doesn't mean that we won't go there.

Yes. Mark, I think that as we look at it whether it's a new opportunity or an existing relationship, we're looking at, what's the probability over the life of the contract? We're looking at the customer and saying, what's their future growth and what's their future growth opportunity for us? And cross-selling opportunity into all the different things we're doing in print? We're looking at contribution to adjusted EBITDA. We look very hard at working capital and credit risk in today's environment, and so at the end of the day, what's going to be the impact to recurring free cash flow? So we have a very comprehensive way that we look at it in order to be comfortable that we're making the right decisions.

I'd say that again, our strong focus on having the flexibility by having a good profit margin relative to the industry and our flexibility we're creating with our balance sheet gives us a lot of bullets to go after market share, and we will use those bullets.

All right. Thank you very much, guys.

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Okay. Well, thank you, operator and just some parting thoughts here. I'm going off script because I'm supposed to say something fluffy here. The reality is, is that we have put a lot of focus on the business, and I think that the focus we put on managing our financial strength, along with our customers, has really given us the confidence in terms of being able to do what we need to do to run this business. Increasing the quarterly dividend by 25%, we feel really good about the sustainability of supporting that dividend. And in looking at the cash flow that we can create even if we're looking at a little bit of a revenue decline next year, it still produces over $300 million in free cash flow.

Finally, I think the consistency of performance of the Company is really dictated by the team that it has, because you can only go as far as your army is able to go, or the talent they have to be able to go there and the weapons that they use. My hats are off to my team, and that's not my management team alone. It's everybody on down to the floor, the 1,000-plus managers, the people on the presses, the binderies. I've thrown a lot at them this past year and I've asked them to do a lot. I will continue to ask them to manage a good business. But with that team, I believe very strongly that we will continue to be able to manage this business very well on into the future. So with that, I thank you all for joining us today, and we'll see you next quarter.