Quad/Graphics Inc (QUAD) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics first quarter 2012 conference call. During today's call, all parties will be in a 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 Mr. 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 Dave Honan, Vice President, Corporate Controller and Chief Accounting Officer. Joel will lead off today with a high level review of our top achievements for the second quarter and provide an update on our key strategic focus areas. John will follow with a more detailed review of our financial results, which will then be followed by Q&A.

I would like to remind everyone that this call is being webcast, and forward-looking statements are subject to Safe Harbor provisions as outlined in our quarterly news release and in today's slide presentation. The slide presentation can be accessed through a link on the Investor Relations section of the Quad/Graphics Web site at www.QG.com. There are also detailed instructions on how to access the slide presentation in our second 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, everyone, and thank you for joining our call today. I would like to begin our second quarter performance review by highlighting three areas where we continue to show progress. First, our trend of generating strong recurring free cash flow, continued into the second quarter, where we generated $60 million. On a year-to-date basis we generated $167 million of recurring free cash flow compared to $102 million for the same period in 2011. We are proud of our consistent track record, and as we look forward we remain confident in the cash generating power of our Company.

Second, I would like to note the continued progress we are making to strengthen our balance sheet and maintain strong credit metrics. During the second quarter, a period that most of you know is impacted by lower seasonal volumes, we paid down $42 million in debt. For the year, we have paid off more than $132 million in debt, and our leverage ratio of 2.2 times remains within our targeted range of 2 to 2.5 times. We continued with our conservative view towards the use of cash, and during the quarter chose not to buy back shares, but instead focused on paying down debt and pension liabilities. We will continue to remain flexible and opportunistic in terms of our future plans for capital deployment.

As always, the priorities for our capital will be adjusted based on prevailing circumstances, and what we think is best for shareholder value creation at any particular point in time. The third area of progress that I would like to highlight this morning is that on July 2, the Company marked the two-year anniversary of the Worldcolor acquisition. I am proud to say that the during the second quarter we have officially and successfully completed the largest integration ever undertaken in the printing industry. As I reflect on our journey over the past 24 months, I am pleased and impressed by three significant achievements.

First, the incredible effort of so many employees who sacrificed time with their families, so they could roll up their sleeves and get the job done. Second, the unwavering commitment and support from loyal customers who stood with us as we transformed our platform. And third, the fact that two formidable rivals came together so quickly in the spirit of making one truly great Company. This was not an easy undertaking, especially when you consider that it was done during unprecedented economic times. Times that clearly accelerated the industry's transformation. We closed the integration process with a well-balanced score card that incorporates four key areas, financial metrics, customer retention, employee integration, and IT integration.

First, from a financial perspective, we are on track to achieve slightly more than $275 million of annual synergy savings, and exceed our original guidance of $225 million by more than 20%. Our one-time costs to achieve this synergy will be less than $225 million, well within the expected range of $195 million, and $240 million. We spent approximately $0.80 for every dollar of synergy we created, a ratio that we are quite proud of, and one that we worked hard to obtain.

From a customer retention perspective, we focused on keeping our customers' needs at the forefront of the entire integration process, while we made platform changes that benefited our Company and our customers. In the end, we transitioned approximately 580 customer titles to more efficient platforms. At the same time, we streamlined our sales structure to better serve our customers, and help them take advantage of the entire continuum of our expanded product and service offering. As we know, change is not easy, so I sincerely thank our customers for their dedication and commitment to Quad/Graphics over the last 24 months.

From an employee integration perspective, our efforts extended to a number of different areas, including the rollout of our Quad Blues uniforms which are proudly worn throughout the Company and by me. As a Company, we spent time educating employees about our unique culture and values. We also consolidated 73 different holiday schedules, 66 different vacation plans, and 73 different employee handbooks into one common set of Company policies. Another major undertaking was harmonizing health care plans in the United States, and introducing our own QuadMed brand for patient care.

Our QuadMed subsidiary provides high quality primary care services with a focus on prevention, to keep our employees healthy, and productive while significantly reducing our health care costs. As it relates to retirement plans, we re-established retirement benefits for eligible employees who had their pension frozen. Employees now participate in our personal enrichment plan, which includes a 401(k) and Company-matched on employee's weekly contributions. The plan also features the opportunity for annual profit sharing contributions, and during the second quarter, eligible employees received their very first profit sharing contribution as a combined Company.

From an IT integration perspective, we executed a complex integration plan to deploy our proprietary brand of ERP software tools across our manufacturing platform. This allows for increased efficiency and operational visibility across our entire platform. We also fully integrated our logistics systems to provide a unified IT solution for managing freight across North America. In the end, we created a stronger, more efficient platform, that has positioned us to compete more effectively as we move forward.

I am often asked, if you could do the Worldcolor acquisition all over again, would you? And without hesitation, the answer is most certainly, yes. We have been on a transformative journey over the last 24 months, and while it has had it's highs and it's lows, we learned a tremendous amount. And in the end, we leveraged the best of both platforms to provide our customers with leading-edge manufacturing and distribution platform; expand our geographic footprint and product offering to better serve our customers; brought together the best and brightest employees in the industry to continue to innovate and redefine print in a multi-channel world; and improved our expertise in successfully completing a large, complex integration.

I am grateful for the hard work and dedication of so many employees who helped make this achievement possible. I also want to take this opportunity to acknowledge the hard work that is currently taking place on our integration efforts in Mexico. We have been applying the same disciplined approach to integrating Transcontinental operations with our own in Mexico, and I am happy to report that our plans are advancing as anticipated. We are pleased with the progress we are making, and that the acquisition has been so well-received by our customer base in Mexico.

Slide 5 summarizes the five key strategic focus areas under our control, which we believe best position us for stability and long-term success. Our customer-centric approach provides a foundation for renewing our core business and growing market share. For example, in our marketing solutions group, we recently signed a multi-year agreement with the Bon-Ton department stores which operates more than 270 department stores in 23 states, under the nameplates including Bon-Ton, Bergner's, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger's, Younkers and Parisian. Quad has been a valued direct mail and catalog supplier to the Company for many years, and now with our expanded platform, Bon-Ton just awarded us a retail insert program, while also renewing their catalog business.

Bon-Ton values our team. They value our technology, and they felt confident in trusting us, with their direct mail and insert program requirements. Bon-Ton represents just one of many sales success stories we are seeing from the recent streamlining of our sales structure, which enhanced our ability to sell the full continuum of our offering. This approach creates value for our Company and also creates value for our customers, who discover and benefit from the efficiencies of a strong, single source supplier.

In our publishing solutions group, we are honored to announce a new agreement with National Geographic, one of our most distinguished and long-standing accounts. National Geographic is best known for it's flag ship magazine that we are under contract to print into the next decade. We recently signed an agreement to continue printing it's special interest magazines, that includes the National Geographic Traveler, Little Kids, and Kids titles, plus it's catalogs. A key component of our new catalog proposal included our co-mail solutions, that will help National Geographic save a considerable amount on postage. This success is a perfect example of our strategy to win market share by creating value in two distinct ways.

First, to maximize the revenue customers derive from their print spend by providing integrated solutions that span the continuum of our offering. And second, by helping them reduce production and distribution costs, arguably the largest expenditure on their income statement. Our mailing and distribution capabilities are a big part of how we help our customers reduce costs. We have built the leading platform with software capabilities and volume that are second to none in the industry. In the first six months of 2012, we have co-mailed 1.8 billion magazines, catalogs, and direct mail pieces, which represents a 17% increase over 2011. As we combine the substantial volume with our unique software to merge mail streams, we are able to provide our customers with significant postal savings. We believe this gives us a long-term sustainable advantage versus our competition.

Our next key strategic focus area is redefining print. And just today, we proudly announced how we helped Maxim, the largest young men's lifestyle magazine in America, redefine print. The September issue of Maxim, which hits newsstands nationwide on August 14, will feature the publication's new Maxim Motion experience powered by Actable, our own interactive print solutions app.

Maxim readers will now be able to see a model's image come to life on the printed cover and select pages inside the magazine by using the camera on any app-enabled mobile device. We used a combination of image recognition and augmented reality techniques to launch related video content directly from the printed page, where the video appears to play seemingly right on the page. This makes for a fun and interactive experience with print that does not involve QR codes. Maxim will also be able to measure and analyze app performance through Actable's sophisticated analytics and recording feature.

I spent quite a bit of time in the marketplace talking about our interactive print solutions, and I hear what a challenge it is for our customers to integrate all media channels. We believe we are perfectly positioned as a technology integrator, helping our customers integrate the latest and greatest technology with print. Our interactive print solutions came out of our Quad Idea Catapult, a framework for capturing and implementing innovative ideas from anywhere within the Company.

This is a perfect example of how we empower employees to actively participate in improving our Company. Innovation can be found in both big and small areas. For example, just recently, an employee in our Sussex finishing department suggested we create an app for accessing work schedules on a mobile device. Within weeks, we launched our new Quad work schedule app for smartphones. This is just one of the many examples of our unique culture, and how we empower our employees every day to find a better way.

John will cover the remaining key focus areas in his financial overview for the quarter. So I will close with the fact that we remain confident in the strength of our balance sheet, and our ability to generate strong, recurring free cash flow. We will remain focused on those areas in our control, and believe that we are well-positioned to take market share and succeed in this industry, despite existing the challenges. With that, I will hand it over to John.

Thanks, Joel, and welcome, everyone. Slide 6 is a snapshot of our second quarter 2012 financial results, as compared to our second quarter in 2011. Net sales were $934 million, which compares to second quarter 2011 revenue of $977 million. This 4% decline reflects the expected volume and pricing pressures. Cost of sales of $741 million was lower than second quarter 2011 cost of sales of $757 million. SG&A expense was $81 million, as compared to $105 million in 2011. Depreciation and amortization was $85 million, compared to $84 million in the second quarter of 2011. Interest expense at $21 million was 29% lower than the second quarter 2011 interest expense of $29 million, due to our focus on debt reduction, as well as the refinancing we successfully completed in July, 2011.

Our adjusted EBITDA was $112 million, versus $116 million for the second quarter of 2011. Our adjusted EBITDA margin for the quarter was 12%, as compared to 11.9% in the second quarter of 2011. We have once again included an adjusted EBITDA bridge in our slide deck, to better explain the impact of adjusted EBITDA in the quarter. There are three major positive impacts for the quarter. First, our incremental synergies of $21 million. Second, a reduction in selling, general, and administrative expense of $13 million. This reduction was due to our focused effort to create sustainable cost reductions that are over and above the Worldcolor integration synergies, and connect to our goal of converting the majority of cost of variable, including components of fixed cost and SG&A.

And finally, a reduction to bad debt expense of $6 million. This was primarily related to a favorable contract renegotiation of payment terms, that resulted in a reduction to our bad debt reserve. These positive impacts were offset by volume and price declines that impacted adjusted EBITDA by $36 million during the quarter. As expected, ongoing volume, and price impact during the quarter, were the largest driver of this decline, and $8 million attributable to the book business which reflects both volume and productivity issues. As Joel mentioned earlier, we are proud of our consistent recurring free cash flow, and the work we are doing to maintain a strong balance sheet.

Our recurring free cash flow, which we define as cash flow from operating activities less capital spending and excluding nonrecurring items such as restructuring costs, was $60 million in the second quarter, and $167 million on a year-to-date basis. We believe recurring free cash flow is an important metric for us, and we expect our business to continue to generate a significant amount of recurring free cash flow. We will continue to actively manage working capital, and the efficient investment in capital expenditures. The reconciliation of recurring free cash flow for the three and six months ended June 30, 2012 is included in the supplemental information located in our slide presentation.

The continued strong recurring free cash flow provides us with the ability to pay down our debt and pension liabilities. During the quarter, we paid down debt of $42 million, and $132 million in the first six months. This represents a total of $457 million of debt paid down since the close of the Worldcolor acquisition just two years ago. Our pension, multi-employer pension plans or MEPS and post retirement liabilities were $547 million as of July 2, 2010 when we acquired Worldcolor. As of June 30, 2012, this liability was $376 million representing a reduction of $171 million, of which $31 million has been paid down in 2012.

Slide 9 provides a summary of the improvements we continue to make from our December 31, 2011 debt metrics. Our interest coverage ratio for the quarter increased to 6.7 times, versus 5.9 times at the end of last year. Our leverage ratio of 2.2 times represents a reduction as compared to the 2.3 times at the end of 2011. This reflects our efforts to both manage the components of working capital, as well as ensure we are making the right capital allocation decisions.

We are pleased to be within our targeted range, and continue to believe that operating in the 2 to 2.5 times leverage range is the appropriate target. However, we acknowledge that at times we may decide to go above or below that range, given economic changes, working capital seasonality, timing of investments, and growth opportunities. A component of our financial strength is having a balance sheet that is strong and flexible, so that we can adjust to changing economic conditions, invest in our business, pursue growth opportunities, and return value to our shareholders through our quarterly cash dividend.

At the top of slide 10, you will note that we continue to have no borrowings under our $850 million revolver at the end of the second quarter 2012. Interest expense decreased 29% to $21 million, representing a significant decrease from 2011. 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 has an average maturity of 10 years with a weighted average life of 6 years. The blended interest rate on our total debt is 5.0% and the outstanding principal balances are 54% floating, and 46% fixed. We have no significant debt maturity until July, 2016, which includes our main revolver that was successfully completed in July, 2011.

Given the significant flexibility under the revolver, and our strong recurring free cash flow, we believe we have sufficient liquidity for current business needs, sustaining the dividend and supporting future investments. As expected, year-to-date June 2012 net sales were $1.92 billion, or 4% lower than 2011. Cost of sales at $1.5 billion was 2% lower than 2011. Year-to-date SG&A expense was $173 million, as compared to $203 million in 2011. Depreciation and amortization was $169 million in 2012, as compared to $171 million in 2011. Interest expense was $42 million, representing a 29% reduction from the $59 million in 2011. Adjusted EBITDA and adjusted EBITDA margin were $238 million, and 12.4%, respectively. This compares to $258 million and 12.9% for the same period in 2011.

I would like to note that our quarterly dividend of $0.25 per share will be payable on September 21, 2012 to shareholders of record as of September 10, 2012. I will close by stating that although we are satisfied with the areas of achievement that Joel highlighted in the first part of our call, we continue to remain cautious, given the low visibility and sluggishness in the economy. Given these challenges, we will continue to manage those areas under our control that include improving productivity, implementing sustainable cost reductions to be the low cost producer, and continuing to generate consistent and strong recurring free cash flow to maintain a strong balance sheet, and pursue appropriate investments that create long-term value for our Company and our shareholders.

I would now like to turn the call back to the operator, who will facilitate taking your questions. Operator?

(Operator Instructions).

Your first question comes from Scott Cuthbertson with TD Securities. Your line is open.

Good morning, Scott.

Yes, good morning. Thanks for taking my question. A couple of things. Just wondered, with respect to the EBITDA bridge, John, the synergy realizations you had there, I am just trying to add it all up to $275 million. Are you -- from your preamble, I take it you are not really including the $13 million in SG&A as part of the sort of $275 million that should now will realize from the integration of Quads. So I guess there is another $33 million left to go? Is that correct?

Dave, Dave Honan, why don't you take that?

Sure. Good morning, Scott. The $13 million is not included in that synergy number. The $275 million is an annualized run rate. To date, you will see that when we file our Q later today, there is $242 million that has been realized through the P&L for the synergies. The remainder, the difference between that $275 million and the $242 million will come through, mostly throughout the rest of the year, and some of that will trickle on into 2013 on an annualized basis, as those come through our P&L.

Okay, great. And I'm just sort of thinking ahead to 2013, I mean if we just, for the sake of simplicity assume that all of the synergies from the acquisition will be realized in 2012 -- I mean you basically, in the quarter, you had between the -- in between the $21 million in incremental synergies from the acquisition, integration, and the $13 million in SG&A, it was pretty much flat, in terms of offsetting the volume and price head winds that you had of, I think it was $36 million. So I mean if we take out the incremental synergies of $21 million, it is going to be a tougher sort of head wind going into 2013. Can you sort of speak to how the EBITDA momentum or dynamics will change, once you have finished the integration and as you move forward into 2013?

Yes, Scott, this is John. I think we've been indicating over the last two or three calls, that our focus has really changed, away from just focusing on the integration and the synergies that are coming from the integration, recognizing that we are in an industry that does have the volume head winds, and therefore, it is really about continuous cost reductions. And so I think we have been demonstrating that we are able to continuously take costs out, whether it is on the manufacturing floor, whether it is in SG&A, and things like travel, or professional expenses. We continue, I think we're doing a really good job of applying the continuous improvement techniques throughout manufacturing, and especially now into the whole selling and administrative area.

Scott, this is Joel, just to add on to that, I mean, Quad has been doing lean manufacturing throughout our process or close to it, coming up on a decade, I guess. And it is a process that you don't do overnight. So as you think about the expanded platform we have, we are spending a lot of effort in implementing lean manufacturing throughout. And so to John's point, we are geared in sort of the Quad world of continuous improvement and know how to do it. But there is lots of opportunity, as we continue to push that throughout the rest of the platform. So while the integration may be finished, we still have opportunity in terms of what we do with that improvement.

Okay. Thanks. That's helpful. And I mean I know it is always difficult to quantify that, but is the $13 million that you realize this quarter reasonable, a reasonable example of what you think you may be able to do going forward in that respect?

You are talking about in the SG&A, Scott?

Yes, that's right.

Yes, yes. It is.

Okay. Good. And the other thing, John, just wondered, and forgive me, I should refresh myself on the terms and conditions of your private bond, but you are doing a great job on debt reduction. Obviously, those bonds have a higher coupon than some of the other parts of your capital structure, but what is your ability to repay those bonds early, if you saw fit to allocate your capital in that way?

We have the ability, the nature of the private placement notes is, there is a make-whole, so you have to go through the economic analysis. But I think as we look at it, Scott to us, it is really managing the risk of the overall balance sheet. So I think it is important to have a component that is fixed. I think it is really important to have the private placement notes with that 10-year final life, and the amortization that is a ratable amortization. Because I think a lot of times, it is not just the interest rate of your debt, or the amount of your debt, but it is frankly, how you have the debt structured. So we found that to be a good strong anchor to have. And I think we will always want to continue to have longer term maturity type notes, and notes with a fixed interest rate as opposed to just relying on 5 to 7-year debt and floating rate.

That makes sense. And the other thing I wondered, there is a couple moving pieces obviously in the -- if you look at the different divisions. Is it possible to quantify the impact of the asset swap with Transcontinental on your numbers this quarter? Obviously, you, in the international division, that had a bit of an impact.

Well, as you know, we've treated Canada as discontinued, so it is out of the comparison, so that is not creating any noise. As it relates to the assets acquired in Mexico, the incremental revenues in the quarter were $18 million, and $36 million in the first six months.

Great. Thanks. Very helpful. And the last thing I wanted to ask, Joel, is just a bigger picture question. As we roll through the Q3 results, from the broadcast fiscal year here in Canada, and some Q2 results from some other media companies up here as well, up here we had like basically a strike on advertising in April, where everybody was -- didn't spend much money. Then things have gradually improved through May, June and July, and the outlook for the fall is much more optimistic than it was in the spring, looking at the summer. Just wondered sort of what the tone is down there, with respect to your view of advertising demand, as we head into your more busy season?

I probably would characterize it as, visibility is still really tough. I am not sure that we have gotten a lot of indications, maybe that far out like you have. But it is interesting. I mean, we certainly saw advertising come down in the first half, by about 8%. And again, advertising is one of those things that people can cut quickly when they see sort of stormy clouds ahead, and we certainly have seen stormy clouds.

But if I look at this month's Vogue magazine or In Style, I mean Vogue alone had 650 pages of advertising in over 900 pages, it felt like a phone book. But on the other hand, you will see some other publications that probably aren't fairing as well. So it is a little bit of a mixed bag. And I think that the -- we will continue to be cautious about it. Because of obviously all of these sort of economic turmoil that has been happening down here, and the related I guess, visibility issues that it causes amongst businesses. So we continue to be cautious about where things go. But you see some moments of light. But again, I think until people feel confident about the future, the visibility thing is going to be an issue.

Great. Thanks very much.

Your next question comes from Dan Leben with Robert W. Baird. Your line is open.

Hi, this is Tom Jackson filling in for Dan. I appreciate you taking the question.

Good morning, Tom.

Good morning. Just looking at sequential change in gross margin here. I was hoping you could help us isolate the key factors that are impacting it? How those facts maybe trended through June, and how you see that dynamic playing out maybe in the back half of the year?

Well, some of the -- Tom, this is John. I mean clearly some of the impact that we are seeing is from the reduced volumes and the pricing pressure that we have been talking about for the past year.

Yes.

In the quarter, and in the half, we had more paper pass-through sales than what we had in 2011. So that has -- that represented some of the negative impact, that those are on a pass-through basis.

Yes.

I guess, overall, the way we look at the business, we know we are going to have kind of moving pieces on mix. We are going to have times, where we are getting more costs out of cost of sales. And there are times, like we had a very good quarter on the management of SG&A. And I think at the end of the day, the way we are trying to manage the business is looking at, how are we doing at continuing to take costs out to be the low cost producer? How are we doing at creating absolute EBITDA? And how are we doing at converting our income statement into cash flow of absolute cash generated, free cash flow from the business, that can be used for growth or debt pay down which obviously, the last three quarters, we focused on the debt and the pension pay down.

Okay. Thanks for that. And I take it, would you be able to kind of quantify the difference between pricing and volume, the impact in the quarter?

As we have talked about before, Tom, it is really difficult to try to break out that difference, because you make a decision that says here is a piece of business that you choose to not take the last pricing step for. And so therefore, it shows up in lower volume. Another piece of business you retain, and you have to be more aggressive on the price, given the excess capacity as it shows up in pricing. So we look at it, again, we look at it on a combined basis.

And also as books come into the schedule -- this is Joel -- it depends on the mix of pages per book, and things like that. So the make up kind of comes as it comes as it comes, and that can have an impact on the sort of the quote-unquote pricing.

Okay. All right. Thanks for that. And then, just going off to what you just mentioned on remaining firms, sometimes competitors, you have talked about in the past, that some competitors have been a little bit more aggressive in pricing, and sometimes you have had to stand pat and not take the bait. How is that dynamic changed in the past six months? Have you relented a little bit more? And then how do you see that playing out?

Well, I think we see it as kind of being consistent with what we have been talking about. Pricing is tough, and I think as long as there is excess capacity in the industry, you're going to have companies that are just trying to keep the lights on, and trying to take market share. But at the end of the day, we have chosen in the past, not to follow or take the bait as you say. And other times we say look, we've got a great cost structure here and we will take it, because it makes sense for us. But again, we do go through a pretty disciplined process of making sure it makes sense.

We can protect ourselves on any piece of business if we so choose. But that doesn't necessarily always make it a value-creating move. And so it is kind of a balancing act that we go through, an important one. But yes, the industry continues to be tough. I don't know that it is tougher than what we've said. But pricing is certainly there. And as long as there is overcapacity, you will continue to kind of see that. So everything will continue to evolve. And I think we are seeing a lot of companies kind of start to exit, when you go into the smaller printer market, because they're not able to sustain it. But again, it continues to be tough out there.

Okay. Thank you for that. And then I was wondering if you could kind of help us break down a little bit the different segments, how mag cat retails compares to other segments? Also maybe talk about new revenue opportunities going forward? I mean, this morning you talked about the Actable interactive print solution. Do you have other digital initiatives lined up down the pipeline, or can you help us understand that?

Yes, sure. I mean, some of our smaller parts of our business, such as direct read, we know that it is in a decline per year, and we manage it that for that. So it doesn't take a lot of CapEx. We have got an excellent team that can manage down as the volume goes and it creates good cash flow while we have it. On the book side, I would say that books has obviously been impacted a little bit by the digital conversion, with things like the Kindle, but also, by budgets of the state governments. But -- and that is in North America. The reality is actually if you look at our business in Mexico, and in parts of Latin America, South America, actually the book demand is pretty strong. So it's -- there is I think a North American story, and then a South American story. But again, books is a pretty small part of the business.

We mentioned magazines. The advertising climate continues to be tough, and visibility is still limited. Bullet again, I mentioned that there is some really big books that are going to be hitting the newsstands for the September issue. And catalogers, I would say are holding their own. I think they say that their customers are still buying, albeit it maybe smaller order sizes, and prospecting is a little bit tougher than before, and that really speaks to consumer confidence.

And as we think about retail insert, it is kind of interesting. Because we saw this past year, a large retailer decided to cut way back on it, and have since reversed that plan. Because when you stop marketing your brand, you stop store traffic. And the reality is, is even though the retail inserts are not sexy, it is still very powerful. And then when you talk about the media solutions group, and what we did with Maxim today, there is actually quite a few things going on there. And if you have a chance to look at this, it is really, really pretty cool. And it really kind of shows the power of mobile and print, and how they can link together to be much more powerful, than what print and just online were.

And so we have -- our pipeline is filled. The number of projects that are going on, and making print more Actable, making it more integrated, is tremendous. One example that comes out of this whole process is the use of video. We started last year, or the year before, and starting to produce some video, small videos, for like product demonstration. And what our customers found, this was on the catalog side, that if you have a customer use a QR code to go to a site, using a video demonstration and product they are looking at, their response rate goes way up, and the chance of selling that product goes way up.

And so in 2011, we ended up producing about 200 videos, and this is something we hadn't done before. We have a photo group, but we didn't do a lot of video. Today we're sitting on a backlog of 4,000, just less than one year later. And so we built a whole video group around this. So that is a good example of how I think this connection of media really will help play well for creating new opportunity. And I think part of it is, not just the revenue that comes from the media solutions group, but it is really the revenue that continues to come from changing what print is today, and what it can be.

And I think the other thing that you have to know, when you link mobile to print, is it is completely measurable. We can tell our customers, what all the different phones are looking at on a page. We can tell them where they are in the United States or in the world. We can tell you how many phones are Android versus iPad. And if we know the unique identifier, we can tell you if that person came back again. And if we know the cell phone number, we can actually tell you who is doing it, and tailor the experience to them. So it is some pretty powerful stuff, and something that I'm very excited about.

When I'm in the marketplace, which I'm spending a lot of time these days, and expect to be on the road quite a bit just talking to customers, the biggest issue I hear from CMOs and CEOs is not whether or not you need a digital strategy or a mobile strategy or what is going to happen to print. Their biggest challenge is no one is telling them how to tie it all together. I don't think agencies are doing a good job of that, because they tend to be siloed. But as a printer, print is still the foundation of their marketing spend, and they understand that. So when I come to them with this mobile opportunity, I am not just showing them the mobile opportunity, I am showing them how to integrate it into their marketing program. So kind of a long-winded answer, and I could go on for hours on this one, because I'm very excited about it. But it is definitely a powerful thing, and I think we will be driving that not only in this country but around the world.

Great. I appreciate the color there. And then I just have one last one. The SG&A specifically decreased a little bit more than we expected. I know you mentioned synergies and bad debt. I was just hoping you could provide a little bit more color on what all went into that? Was it mainly sales force reduction? And then, do you see more declines for the remainder of the year? Do you see that stabilizing, kind of that 80,000 or than $80 million quarter quarterly rate, and then, yes, just what you expect for the rest of the year?

Well, is it -- you are trying to get an overall color, Tom, on the SG&A?

Yes, just what all is in that? Is that mainly S? Is there a lot of -- was it mainly sales force or other --?

It is going to be more in the G&A. I mean, e broke out the reduction in the bad debt reserve that drove approximately $6 million of debt.

Right.

And that was obviously discrete to a contract renegotiation. There's like about $4 million in reduced employee costs. There is $2 million in professional fees. There is about $6 million in synergies related to Worldcolor. There is about $2 million that relates to legal and environmental reserves, related to facilities that were sold that -- reserves that weren't needed. Then about $4 million of other miscellaneous spending reductions. So it is really an across the board approach.

And in the back half of the year, I mean is there a lot more you can take out? Is this kind of one big --

Tom, it is going to be continuous --

Yes.

As we answered another question. This is an industry where it is about maintaining or trying to enhance your position as the low cost producer. That means it is all about continuous improvement and continuous cost reduction within the plant, and within the office.

Okay. Thank you very much.

Operator, we have time for one more question.

Your last question comes from Haytham Hodaly with RBC Capital. Your line is open.

Thanks, good morning. First just a clarification, and sorry if I missed that. But in terms of your 2012 guidance, are you still sticking with that, in terms of sort of the key items on revenue, margin and cash flow?

Yes, we are maintaining our guidance. I mean, as we sort of talked on the call, as we talked in the past, the first half of the year is the seasonal slower time of the year. Second half is the seasonally high period for profitability. But we haven't -- we have no reason to be making any changes to our guidance. We will obviously be focused on costs.

Okay. That's great. And then in terms of integration costs, just one clarification, I guess you are now expecting $225 million. With respect to I guess, first, how much of that has already been spent to date?

Hi, Haytham, this is Dave. About $190 million of that has come through the P&L at this point.

Okay. That's great. And then I guess another question is, does the $225 million in guidance, does that include any sort of integration related bonuses? And if not, if you can give us any kind of color on magnitude and timing of those?

Yes, that is included in the 190 million.

Okay, that's --

It is -- the amount that has been accrued is in the $190 million, as well as in the $225 million that we're talking about, includes our projection for that.

Okay. That's great. And then John, a question on pension. I guess just could you give us an update, in terms of what you expect, I guess you reiterated guidance for '12, is there some kind of early sign you can tell us, in terms of your contributions in 2013? And then specifically, with respect to the MEPS, when do you expect to make those payments?

Dave, why don't you take that one?

Okay. The recent legislation change for funding really had a pretty minimal impact on us for 2012. We are expecting, we have given guidance before of $56 million of pension contributions in '12. We expect that will come down by about $6 million, once the final interest rates are given for that legislation, so $50 million in '12. And then we think going forward, that legislation impact for '13, is going to reduce '13's contributions by $22 million going forward. As far as the MEPS payments, we continue to work with the trustees of the -- of both MEPS that we are negotiating, and exit from those plans. And at this point in time, we don't have a better estimate of when we expect those cash flows to come out. We have got roughly $95 million accrued for those exits.

And that's helpful. And then maybe one last question if I may for Joel, a big picture question. I guess congrats on completing this integration. And I guess at this point going forward, we all know that additional or consolidation is inevitable in this industry. So I guess my question is, are you now prepared to start or to start a new or larger sized deal domestically? And then, what type of leverage would you be willing to accept on the balance sheet, in order to complete an acquisition like that?

Well, look, I mean we switched gears, just because we finished the integration this month, we actually switched gears a little while back, in terms of moving the business forward. I think that is evidenced by the transaction we did with Transcontinental in Canada, picking up the assets in Mexico, as well as our investment in India, which I think is an interesting opportunity. Look, we kind of look at our balance sheet as something we want to continue to be strong. It has proven to us in the past that having that strength is good for good times and in bad. And being able to take advantage of opportunities, whether they are good times or bad times.

So we tend to remain pretty conservative on the balance sheet. And I think in this day and age, it is the right thing to do. In terms of acquisitions or mergers, yes, I think there is going to continue to be consolidation. We really -- I mean, we have obviously created a muscle here, to be able to do integration. I am very proud of what we have done and how we have done it. But mergers and acquisitions for us are just another tool in the toolbox of what we're going to do with this Company.

So as we kind of think about on a go forward basis, strategically, it is about making sure that the core business is strong, that we are focused on, not only creating good cash flow, but continue to innovate, so that our customers continue to want to be in this core space. But also looking for growing middle classes. And that is the story behind India and Mexico.

I heard a statistic recently that came out of the Aspen Institute, that the middle class in the world is due to double by 2030. Obviously that's not going to come from mature marketplaces, but it is going to come from these developing ones. And so I think we're kind of -- our strategy is going to be broad. If there is an opportunity that comes along that makes sense, we will do it. But we won't do it in terms of -- at the expense of over-levering a balance sheet, which will prevent us from continuing to be successful as a Company. So again, very disciplined approach, and we will take it as it comes.

Thank you.

You're welcome. So with that, I want to thank everybody for joining us today. But before we end the call, I want to leave you with one final thought that I would like to share. And that is on July 29, we marked the 10-year anniversary of the passing of my father, the founder of this amazing Company. As a Company, we not only celebrated his life that day, but we also celebrated what he created over the course of his career, and what he taught us about creating opportunity, in times of adversity.

We were all brought up to feel that we were capable of doing more, and in the 10 years since his passing, we have proved that and much more. We are a Company with a soul, and a Company that will continue to innovate and take advantage of sensible opportunities now and into the future that are thrown our way. Now, and just as we continue to build this Company, founding it daily, we will repeat what has been done, over and over again in the past. And so with that, thank you all for joining the call, and we will see you next quarter.

Thank you. This concludes today's conference call. You may now disconnect.