Quad/Graphics Inc (QUAD) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics fourth quarter 2013 conference call. During today's call all parties will be in a listen-only mode. Following the speakers' preparation the conference call will be open for questions. (Operator Instructions).

I will now turn the conference call over to Mr. Kelly Vanderboom, Vice President and Treasurer of Quad/Graphics. Kelly, please go ahead.

Thank you, Operator and good morning, everyone. With me today are Joel Quadracci, our Chairman, President and Chief Executive Officer; John Fowler, Incoming Vice Chairman and Executive Vice President; and Dave Honan, Incoming Vice President and Chief Financial Officer. Joel will lead off today with an overview of our financial highlights and then provide a summary of our key focus areas. John will follow with a more detailed review of the fourth quarter and full year 2013 financial results, followed by a summary of our 2014 guidance by Dave Honan.

With the exception of certain debt ratios, prior year financial results do not include the acquisition of Vertis. All actual 2013 results include Vertis from the day of acquisition on January 16th, 2013.

I would like to remind everyone that this call is being webcast. And forward-looking statements are subject to Safe Harbor provisions as outlined in the quarterly news release and in today's live presentation.

Our financial results are prepared in accordance with Generally Accepted Accounting Principles. However, this presentation also contains non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margins, recurring free cash flow, and debt leverage ratio. We have included in the slide presentation reconciliations of these non-GAAP financial measures to GAAP financial measures.

In addition, we are amending our non-GAAP financial measures to now include free cash flow as opposed to recurring cash flow. Free cash flow is defined as net cash provided by operating activities, including pension contributions, less purchases of property, plant and equipment. In speaking with our investors, it is clear there is a preference for reporting free cash flow. We believe that this is an applicable measure moving forward as it provides a true picture of cash available to fund our key strategic initiatives, reduce debt, pension liabilities, and return capital to our shareholders.

The slide presentation can be accessed through a link on the Investor Relations section of the Quad/Graphics website. There are also detailed instructions on how to access the slide presentation in our fourth quarter earnings news release issued last evening. A replay of the call will also be posted on the Investor Relations section of our website after the live call concludes today. I will now turn the call over to Joel.

Thanks, Kelly. And good morning, everyone. I am pleased to report that our performance was inline with our expectations. Full year 2013 net sales were $4.8 billion, as expected. Volume, price and revenue were inline with our fourth quarter expectations. And due to a focused effort to improve productivity and aggressively manage costs, we saw a sequential improvement over the third quarter performance. This resulted in 2013 full year adjusted EBITDA of $577 million.

Our ability to generate strong free cash flow is critical to the success of our capital deployment strategy. I'm pleased to report that our 2013 annual recurring free cash flow of $380 million met our reported guidance of in excess of $360 million, continuing our track record of solid and consistent cash flow generation. As Kelly noted, we are amending our non-GAAP financial measures to now include free cash flow as opposed to recurring free cash flow. And John will speak to this transition later in the call.

As always, we remain flexible and opportunistic in terms of our future plans for capital deployment, which include balancing our key priorities to invest in our business, pursue compelling acquisition opportunities, reduce debt and pension liabilities, and return capital to our shareholders. During the year, we reduced our pension obligations by $191 million, and since the close of World Color acquisition in 2010 by a total of $360 million. I'm pleased to report that we met our 2013 year-end goal of reducing underfunded pension liabilities, including multi-employer pension plans, to less than $200 million.

In addition, after the acquisition of Vertis, we continue to reduce our debt, and as of December 31st, 2013, our debt leverage ratio decreased to 2.44 times, within our targeted range of 2 to 2.5 times.

Slide four is a snapshot of our 2013 net sales by product line and geography as compared to 2009. From the comparative pie charts you can see that as we have grown our company, we have diversified our offering. In 2009, magazine and catalogs were our largest product lines at 57% of total net sales, while retail inserts were just 8%. In 2013, magazines and catalogs decreased to 33% of total net sales, while retail inserts grew to 26%.

We will continue to diversify our offering and focus on clearly defining our value proposition to support the unique characteristics of our product lines. In retail inserts, for example, we now work with 18 out of the top 20 retailers in the United States. With our coast-to-coast national platform of 30 strategically-located facilities in the US we have the ability to version and produce distinctive retail insert formats closest to their final destination point. We can augment the insert with data-driven direct mail pieces to promote brand loyalty and engagement.

In addition, through our Media Solutions, offering we can help our retail clients connect their content to the web, tablet and mobile channels, develop workflow solutions to streamline content management and page assembly workflows, achieve cost savings through onsite facilities management services, and strategically plan and place media based on store locations and market analysis. Given the disruption taking place in the retail marketplace, we believe that our Media Solutions helps position Quad/Graphics as a valued strategic partner.

In addition our in-store marketing solutions group, called Tempt In-Store Productions, is another valuable resource for retail clients. Temps helps retailers and brand marketers of all kinds create enticing in-store marketing displays, including interactive elements. As you may have seen, Tempt just announced an enhancement to its creative and structural design capabilities with the launch of a North American design center in New Berlin, Wisconsin. The design center features a retail lab with a dedicated prototyping zone where clients can develop and test ideas to drive increased shopper engagement and revenue. This new design center is part of our global platform for serving national and multi-national retailers in-store marketing needs around the world from our facilities in the United States as well as Europe and Latin America.

Slide five is a summary of our four strategic goals which we believe will allow us to be successful despite ongoing industry challenges. Our strategy to transform the industry is tailored by product line and geography but is also driven by a common purpose to create value in three distinct ways. First, we maximize the revenue our clients derive from marketing spend through media channel integration to create measurable client value. Channel integration is something that I spend a lot of time talking about with our clients in the marketplace.

What I hear from our clients on a consistent basis is a growing concern around an ever-changing media landscape and their ability to connect all channels together and impact consumer behavior. As a printer and media channel integrator, we have the tools and capabilities to help our clients navigate today's multi-channel world by capitalizing on principality to complement and connect with other media channels. We do this by leveraging the power of print with data analytics and leading edge technology to help out clients retain existing customers and acquire new ones through higher brand visibility and improved response rates.

The second key way we create value for our clients is based on our ability to minimize our clients' overall cost of production and distribution. This has become increasingly important because distribution and mailing costs typically represent the largest percentage of our clients' total cost of production.

The US Postal Service continues to face massive financial challenges which it is attempting to overcome, in large part, with a sizeable postage rate increase. On January 26th, a 6% postage rate increase went into effect which included the expected annual consumer price index increase of nearly 1.7% plus an additional emergency, or exigent, increase of 4.3%.

The exigent increase was approved by the Postal Regulatory Commission as a temporary measure for the Postal service to recoup revenue lost during the 2008 recession. The Postal Service claimed the economic downturn constituted an unforeseen condition that justified an increase above the CPI cap. The increase was to be phased out after roughly two years when the Postal Service recovered what it had lost.

However, earlier this month the US Senate Committee on Homeland Security and Government Affairs, which oversees legislation affecting the Postal Service, advanced a bill to make the temporary emergency rate increase permanent. If approved by the Senate and subsequently by the House, this will create a new higher baseline for all future rate increases. We opposed both the exigent decision and disagree with the rationale for the decision.

The Postal Service's actions show a fundamental disconnect with mailers and the mailing marketplace. We believe that the current increase should not be used as the new baseline, as it will more than likely reduce demand in the near-term, further exacerbating the Postal Services financial challenges. Further the Committee's proposed legislation would weaken the Postal Regulatory Commission's rate-setting role, giving the Postal Service power to set rates in the future. We firmly believe that as a monopoly, the Postal Service should continue to have PRC oversight to ensure the rate-making process is open and fair. We have joined with a number of mailers to challenge the exigent rate decision in court.

Additionally we have made our opposition to the Senate legislation known through direct outreach to legislators and through our participation in the Coalition for 21st Century Postal Service, the Affordable Mail Alliance, the Direct Marketing Association, the Association of Magazine Media, and other industry coalitions working to provide affordable postage rates.

Our message is clear. Congress needs to pass meaningful reforms that will provide the Postal Service with the authority to streamline operations, drive innovation and better manage healthcare costs to give it long-term financial stability. As an industry leader, we will continue to push for postal reforms while helping our clients capitalize on solutions that offset postage costs.

Given the exigent increase, our co-mailing and commingling solutions have become even more important than ever to our clients and prospective clients. The co-mail process merges multiple magazine and catalog titles into a single mailstream to earn sizeable postal discounts. Co-mingling is similar, merging letter-sized direct mail from multiple marketers into a single mailstream. The more volume we combine into the single mailstream, the greater the postage savings for our clients.

One of our competitive advantages is our unique software that analyzes clients' incoming mail files from across our entire network so we can optimize mail distribution plans by pairing the right clients' titles together based on delivery location and dates, among other data. Quad/Graphics is the co-mail volume leader in the industry. In 2013 co-mailed approximately five billion mail pieces, including magazines, catalogs, and letter-sized mail. We will continue to look for innovative ways to generate co-mail savings for our clients. We have spent more than three decades building the technology and the platform to generate every savings opportunity possible, which is what our clients need most right now.

Our ability to select and successfully carry out industry consolidation opportunities represents the final component of our strategy to transform the industry and create value for our clients. Given the challenges facing the industry, we believe our modern and efficient manufacturing platform and financial strength provide us with a distinctive competitive advantage. Industry challenges began to accelerate with the 2008 recession creating a reset in demand, significant excess capacity and ultimately consolidation opportunities like World color.

The key issue has been the industry pricing pressures that come with excess capacity. These industry pressures are something we discuss on each of our investor calls, along with our strategy to invest in the productivity and efficiency of our manufacturing platform, consolidate facilities, and transfer work to the most efficient equipment to offset these pressures.

We believe that the industry is now at a tipping point, and the acquisition of Vertis was the first example of that in the industry. At the end of the day, printers across our industry are producing the same work for fewer dollars, a challenge that the industry has had and will continue to have as it goes through this tipping point. Although the exact in inflexion point for the industry is uncertain, we have been and will continue to take advantage of compelling opportunities during this critical time in the industry.

The good news for Quad/Graphics and our shareholders is that our strong financial position continues to provide us with the ability to capitalize on further consolidation opportunities. Since 2010, we have removed approximately seven million square feet of industry capacity. Through these opportunities, we have and will continue to expand into new markets or add complementary capabilities and create significant efficiencies in our overall production and distribution process.

A perfect example of this strategy was our 2013 acquisition of Vertis. We recently passed our one year mark on this acquisition and the integration process is going well. I am proud of all of the hard work by some employees to advance the integration forward and I'm pleased to report that we remain on track to achieve our integration goals. We are very satisfied with our decision to acquire Vertis, which expanded our position in retail inserts direct marketing in-store signage and displays, thereby expanding our relationship with major retailers who are looking for help connecting print in a multi-channel world. We remain confident in our integration process to drive future cost savings and improve the efficiency and productivity of our platform.

Our second strategic goal focuses on maximizing operational and technological excellence. Due to a disciplined return on capital approach to investments, we believe we have one of the most automated, efficient and modern manufacturing platforms in the industry. In addition, our commitment to lean enterprise, which reinforces our corporate culture of continuous process improvement, remains a high priority throughout our company and supports maintaining our position as a high quality, low cost producer in the industry.

As a company, we have remained focused on training, education and development of our workforce, maintaining a disciplined approach to maximizing capacity utilization and productivity across our platforms, and identifying sustainable cost reductions in both indirect labor and direct costs through a variety of means including automation, efficient labor management, material waste reduction, total production maintenance and expediting plant throughput.

Our third strategic goal focuses on our ability to empower, engage and develop our employees to think and act like owners and create solutions that advance the company's strategic goal. To help employees, we provide training and education programs throughout their careers. Much of this training is exclusively developed for our employees by our education division, along with continuous improvement safety groups.

In addition, at a time of extreme disruption in the healthcare industry, we continue to invest in Quad Med to improve access to high quality, cost-effective healthcare through a combination of on-site insured clinics, tele-medicine and workplace wellness and disease prevention programs for our employees and their dependents.

Our fourth strategic goal is to enhance financial strength and create shareholder value. This strategy is centered on ability to maximize free cash flow and earnings, maintain consistent financial policies to ensure a strong balance sheet and liquidity level, and retain the financial flexibility we need to strategically allocate and deploy capital. As we have said, our priorities for capital allocation will be adjusted based on prevailing circumstances in what we believe is best for shareholder value creation at any particular point in time. These priorities include investing in our business, deleveraging the company's balance sheet through debt and pension reductions, and returning capital to our shareholders through our quarterly dividend program.

We are maintaining our dividend at the current level and we will continue to evaluate increasing it in the future as appropriate. Our next quarterly dividend of $0.30 per share will be payable on March 21st, 2014 to shareholders of record as of March 12th, 2014.

As it relates to our investment strategy, our plans have not changed. We continue to focus on strengthening the core of our business which will allow us to grow in a disciplined approach in areas that include the compelling industry consolidation opportunities that I spoke of earlier, as well as opportunities to expand growing geographic markets in print products with higher growth potential.

Our core product offering, which includes retail inserts, magazines, catalogs, books and directories, fuels the company's ability to execute on acquisitions. During the fourth quarter, we welcomed Proteus Packaging into our family. Proteus is a designer and manufacturer of high-end paperboard packaging and a natural extension of our growing packaging business. Proteus offers creative packaging solutions for a wide variety of industries, including pharmaceutical, health and beauty, food and beverage, biotech, automotive, software and electronics. We also acquired Proteus' sister company, Transpack, a company that specializes in industrial packaging and international logistics. Both companies based in Wisconsin and a combined net sales of approximately $35 million.

In addition, at the beginning of this month, we closed on the acquisition of UniGraphic, a leading commercial and specialty printing company with annual revenue of approximately $45 million. UniGraphic has facilities in Boston and New York and offers commercial and specialty printing, in-store marketing and kitting and fulfillment solutions for variety of industries, including arts and entertainment, education, financial, food, healthcare, mass media, pharmaceutical and retail. The acquisition of UniGraphic supports our strategy to invest in businesses with print product lines with higher growth potential, such as commercial and specialty and in-store marketing.

With this acquisition we strengthened and expanded our presence on the East Coast and expanded our in-store marketing footprint to include both coasts as well as the Midwest. This, combined with our operations in Poland and Latin America enhances our ability to service national and multi-national retailers, large format and in-store marketing needs around the world.

It is important to note when reviewing opportunities like Proteus and UniGraphic, we use a disciplined value-driven approach to ensure that certain criteria are met before the opportunity is selected. This criteria includes making certain that there is a good strategic fit, that the economics make sense and will create value, that the integration plan will be executable in a timely manner, and then after the acquisition we will retain the financial strength and flexibility we had prior to the acquisition. And so I would like to welcome all employees from Proteus, Transpack and UniGraphic to the Quad/Graphics family.

And with that, I will now hand the call over to John to present a more detailed financial review of 2013, followed by Dave Honan who will provide 2014 annual guidance.

Thanks, Joel and good morning, everyone. Slide six is a snapshot of our fourth quarter 2013 financial results, including Vertis, as compared to our fourth quarter 2012 results. Net sales were $1.3 billion as compared to $1.1 billion, representing a 19% increase due to the Vertis acquisition.

If we look at the Vertis business as if we acquired it at the beginning of 2012, our pro forma consolidated net sales declined approximately 5%, of which we estimate Vertis represented nearly half of this decrease. The remaining decline related to our core business and reflects topline challenges from ongoing industry pressures. Overall, this variance is inline with our net sales expectations for the quarter.

Cost of sales was $1 billion as compared to $872 million. SG&A expense was $103 million as compared to $87 million. Depreciation and amortization was $82 million, as compared to $86 million. Restructuring, impairment and transaction-related charges were $12 million in 2013, which included $1 million of non-cash charges. In comparison, restructuring, impairment and transaction-related charges were $31 million in 2012, which included $9 million of non-cash charges. Excluding the non-cash amounts, restructuring, impairment and transactional-related charges for the fourth quarter decreased from $22 million in 2012 to $11 million in 2013.

Interest expense was $21 million, as compared to $20 million.

Our adjusted EBITDA was $198 million, as compared to $174 million. Our adjusted EBITDA margin was 14.7% as compared to 15.3%. Our adjusted EBITDA margin reflects the hard work of many to overcome the impact of ongoing industry pricing and volume pressure and Vertis' historically lower margin profile.

As Joel mentioned, we are proud of our consistent recurring free cash flow and the work we are doing to maintain a strong and flexible balance sheet. Our recurring free cash flow was $380 million for 2013, as compared to $375 million in 2012. This variance is primarily due to approximately $90 million of additional cash generated from the restoration of normalized working capital related to the Vertis acquisition, partially offset by increased capital expenditures of $46 million, and $39 million of other decreases to recurring free cash flow.

We define recurring free cash flow as cash flow from operating activities which includes pension contributions, less capital spending, and excluding non-recurring items such as restructuring and transaction-related costs. Going forward, the company is amending its non-GAAP financial measures to report free cash flow instead of recurring free cash flow. We believe this is an appropriate measure moving forward as it provides a true picture of the cash available to invest in our business, including funding compelling acquisition opportunities, reduced debt and pension liabilities, and return capital to our shareholders.

Free cash flow is defined as net cash provided by operating activities, which includes pension contributions, less purchases of property, plant and equipment. Free cash flow, including restructuring payments, and excluding the approximately $90 million impact of Vertis working capital restoration, was $202 million for 2013.

On slide eight, you will see our interest coverage ratio at December 31, 2013 remains unchanged at 6.7 times, and our quarter end debt leverage is 2.44 times. We continue to believe that operating in the 2.0 to 2.5 times leverage range is the appropriate target. However, we acknowledge that at times we may go above or below that range given economic changes, working capital seasonality, timing of investments, and growth opportunities.

Our strong annual free cash flow provides us with the ability to invest in our business, deleverage the company's balance sheet with debt and pension reductions, and return capital to our shareholders. Since the close of the Worldcolor acquisition on July 2nd, 2010, and after funding the Vertis acquisition, we have reduced debt by a total of $388 million through December 31, 2013.

As it relates to our pension liability, we are proud of the progress we continue to make in reducing the pension and post retirement liabilities we acquired as part of the Worldcolor acquisition. From our July 2nd, 2010 acquisition date through December 31, 2013, we have reduced the $547 million of acquired pension and post retirement liabilities by $360 million, to $187 million.

At the top of slide nine, you will note that we have $210 million of borrowings under our $850 million revolver as of December 31, 2013. Our floating rate debt today is at an average interest rate of 3.1%. Long-term fixed rate debt, consisting of private placement bonds, is at an average interest rate of 7.4% and has an average maturity of ten years with a weighted average life of six years.

The blended interest rate on our total debt is 4.7%. And the outstanding principle balances are 63% floating and 37% fixed. We have no significant debt maturity until July 2017. Given the flexibility under our revolver and our strong free cash flow, we believe we have sufficient liquidity for current business needs, returning capital to shareholders, and investing in opportunities that will drive future value.

Slide ten is a snap shot of our full year 2013 financial results as compared to 2012. Net sales were $4.8 billion as compared to $4.1 billion. Cost of sales were $3.8 billion as compared to $3.2 million.

SG&A expense was $416 million as compared to $347 million. Depreciation and amortization was $341 million as compared to $339 million.

Restructuring, impairment and transactional related charges were $95 million in 2013, which included $20 million of non-cash charges. In comparison, restructuring, impairment, and transactional related charges were $118 million in 2012, which included $10 million of non-cash charges. Excluding the non-cash amounts, restructuring, impairment and transactional related charges for the year decreased from $108 million in 2012 to $75 million in 2013.

Interest expense was $86 million as compared to $84 million.

As Joel mentioned, our adjusted EBITDA was $577 million versus $566 million. Our 2013 adjusted EBITDA included a number of events that benefited 2013 results by approximately $19 million. These event-driven impacts included the sale of our Brazil business to a joint venture in which we maintain an ownership interest, the resolution of certain legal, environmental and bankruptcy matters and other favorable non-recurring adjustments. Adjusted EBITDA margin was 12% as compared to 13.8%. I will now hand the call to Dave Honan, our Vice President and Incoming Chief Financial Officer, for an update on 2014 guidance.

Thank you, John. And good morning, everyone. Slide 11 is a summary of our 2014 guidance. Key assumptions impacting our earnings guidance for 2014 are as follows. First, as Joel discussed in his opening remarks, we expect industry pricing pressure to continue in 2014. Part of the price impact in 2014 results from our renewal of a larger than normal number of multi-year magazine and catalog customer contracts in 2013.

The value of the contracts renewed in 2013 were twice as large as our typical renewal year and will impact pricing throughout 2014. We will have a significant step down in exposure on multi-year contract renewals over the next couple of years. Including the impact of the 2013 contract year renewals, we believe pricing will negatively impact our net sales by 1% to 2%, which is consistent with our prior year guidance. Had we not had the larger than normal renewals, pricing would have trended below the low end of our range.

Second, we believe that the exigent postal rate increase will have a negative impact on volumes, primarily in the second half of 2014 for products distributed through the mail. We have assumed a decrease in volume of approximately 2% of our mailed products, which includes catalogs. However, the actual impact on volumes is unknown at this point. Finally, as John mentioned, we had $19 million of favorable event-driven impact that occurred in 2013 that will not repeat in 2014.

With that said, we anticipate our net sales to be in the range of $4.6 billion to $4.8 billion. In addition, we expect 2014 adjusted EBITDA to be between $520 million and $550 million, and 2014 free cash flow to be between $155 million and $165 million. As mentioned earlier on the call, the company is amending its non-GAAP financial measures to report free cash flow, which replaces our previous use of the recurring free cash flow metric.

The remainder of our 2014 guidance includes depreciation and amortization of $330 million to $340 million. Interest expense of $80 million to $85 million. Cash restructuring charges of $35 million to $55 million. And capital expenditures of $150 million to $175 million, which includes a $17 million carryover from 2013 projects that have yet to be completed. And cash taxes of $40 million to $45 million.

We expect the cash contributions to our single employer pension [OPEP] and [MEP] plans to be approximately $60 million. And this consists of $45 million of payments for single employer and OPEP plans and $15 million for MEP plans. These contributions totaled $55 million in 2013. As Joel highlighted, we are pleased to have accomplished our goal of reducing our underfunded pension and MEP liability to be below $200 million. Our consistent financial approach is the key to our continued ability to reduce our pension and debt obligations and further strengthen our balance sheet.

As we move forward in this challenging industry environment, we continue to be disciplined in how we manage all aspects of our business, especially driving improved productivity and sustainable cost reduction initiatives to remain a low cost producer. We will continue our focus on maintaining a strong and flexible balance sheet to adjust to changing industry conditions while also investing in our business, including compelling acquisition opportunities and returning capital to our shareholders, as evidenced by our quarterly dividend.

Before I hand it back to Joel, I would like to thank John for helping me out these past few years as we prepared for this transition. I'm excited to be named the CFO, and look forward to working with Joel, John and the rest of our executive leadership team on our long-term plans for continued success.

Thanks, Dave. And congratulations on your expanded role. I would also like to congratulate and thank John Fowler, who is transitioning to Vice Chairman and Executive Vice President after serving as our CFO for 34 years. Throughout all of these years, John has been instrumental in developing, implementing and financing the company's profitable growth, both domestically and abroad.

Going forward, John will be responsible for global strategic planning and business development. He will continue to be intimately involved in day-to-day operations but with a concentrated focus on overall business strategy and investment opportunities that will drive our company's long-term success and ensure our industry-leading position. That has been a long planned succession strategy that began roughly eight years ago, and his ongoing strategic role at the company will assume a smooth transition on its financial responsibilities.

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

(Operator Instructions). Your first question from the line of Haran Posner.

Good morning, Haran.

Good morning. A few questions from me. Maybe I will start with your guidance. And you did give us some color, I think you ran through some of the numbers fairly quick. Just wanted to confirm. First with respect to EBITDA, John, you alluded to -- correct me if I'm wrong -- $19 million of one-time benefits in 2013 that will not recur next year. Can you give us a little more color on that?

This is Dave. Thanks for the question. From a non-recurring standpoint, we had several event-driven things that happened in 2013 that won't repeat in 2014. We -- as part of the restructuring activities, we have sold off a lot of vacant facilities. Assigned with those vacant facilities, there were some environment issues that freed up reserves related to environmental reserves around those as we sold those. That is the largest piece of this difference we are talking about.

There was also some event-driven activities with legal and bankruptcy matters related to the Worldcolor bankruptcy, in which we assumed as part of that acquisition. There was a lot of resolution and that freed up some of the bankruptcy and legal reserves associated with that.

The other major component of that was the sale of our business that we had in Brazil to the existing joint venture we have in Brazil. And that accounted for a gain that came through in 2013. Those items won't repeat in 2014. But that made up the bulk of what that $19 million is all about.

And just to clarify, David, those $19 million, that is all in EBITDA?

That is all in EBITDA.

Okay. All right. Then another question on the USPS. And I think you give us good color there in terms of your underlying assumptions in your guidance. Just wanted to clarify, with the postage rate increase, for you guys obviously this is risk to volume but you do pass that cost through to your customers, is that correct?

Yes, that is correct. That is incurred by them.

Okay. So potentially you can see this being a short-term positive from a revenue standpoint and a negative for margin?

No, the -- it doesn't go through our revenue line. It is actually the customer is being billed directly from the USPS. What we do for the customer is to mitigate this stuff is we perform the co-mailing and distribution function. But we try and skip most of the post office to provide them with the most efficient way to hand off to the post office. But ultimately the postage bill is billed directly to them and not through us.

Haran, our point in our guidance was that we expect every time the USPS would take a large increase in the postal rates that is going to impact ultimately what our customers put through the mail and that would impact our ultimate printing volumes. What Joel is referring to is we have strategies to help customers offset that increased postage cost through co-mailing and commingling operation.

Got it. Thank you for that. And maybe just -- when I look down the guidance items on free cash flow and most came in a little bit worse than I had expected, and maybe that is my fault. But just wondering -- not sure there is another way to ask, is there sort of a degree of conservatism that you feel that you built into this guidance for next year?

We think the guidance is adequate. I don't think I would call it conservative. I think it is typical and consistent with how we've guided in the past. I know there has been some reaction to free cash flow. But on an apples to apples basis it is important to go through this. Because we made the change to how we define free cash flow as opposed to recurring free cash flow. If you go on an apples-to-apples basis, 2013 free cash flow was $202 million. And we are guiding to the midrange of $160 million. If you took the middle of the range.

The decreases in the free cash flow is really going to be aligned with what you see in the decrease in our adjusted EBITDA range. We will have larger CapEx expenditures and larger taxes -- cash taxes but that is offset by lower cash restructuring needs, as we have gotten through the bulk of our restructuring associated with the acquisition activity that has come through, with the largest being that of Vertis.

As we look forward if you look at trends in the free cash flow, also it is important to note there will be decreasing cash needs related to a couple of areas. The largest of which was just the pension plan. We think we are at a height now on cash contributions and continue to see the cash contributions associated with pension plans come down in the future. Along with, we are probably at a height on CapEx. If you look at a three year historical average for our CapEx, we are above that. We would expect to come more back to a normalized historical level on CapEx. So those are some positive factors impacting cash flows as we move forward.

And this is Joel. Let me also just further comment and point out because it is very important for people to understand this, that the guidance on the EBITDA range being lower, a very significant factor in that is the fact that with long-term contracts you -- every year you have a certain portion of your portfolio that gets re-priced in that year for the following years. And in 2013, we had a significantly large portion compared to what we normally experience that came up for re-pricing. It was more than twice what we usually experienced.

And so with that being said, they got re-priced last year but that impact is in 2014 and beyond. So we kind of know that. If you would have taken out the noise of that and it had a more normalized contract renewal rate, the actual pricing reduction that we would have seen would have been under the low end of our range of 1% to 2%.

As we go forward in 2014, the amount of those long-term contracts that are facing potential re-pricing is 50% of what it was in 2013. And so that would sort of speak to that -- it was sort of an abnormal year for re-pricing. And so that is why when you look at the drop in EBITDA, a huge part of that is the re-pricing of that portion.

That is very, very helpful, Joel. And maybe just a follow-up on that. This these contracts, can you help me understand -- is there sort of inflation clauses in them going forward after the re-price happens?

Yes, it kind of ranges all over. Typically, it is some sort of -- and it depends on the product type and the degree of difficulty going through the plant and the degree of exposure to costs and things like that. But typically it is associated with what happens with CPI. Some other things such as freight and even ink and materials isn't CPI, it is more based on pass-through. In terms of the normal running of the business it is typically some sort of linkage to CPI.

And maybe just pursuing the CapEx issue and it was an item that was higher than I expected. And you are saying is sort of at a high at this point. Just wondering if you can help us with guidance going forward, maybe as a CapEx intensity number, a percentage of revenue that you would expect. And the reason I ask is that Donnelley had their Investor Day yesterday, and I don't cover that company, but it seems like the CapEx intensity guidance that they provided, specifically in the business lines that I think you guys are in, seems a little bit lower. And so I'm just wondering if you can help us with going forward what we should expect?

Absolutely. And we historically have been higher than Donnelley in which we invest back into our platforms, being an organically grown company up through three or four years ago. When you look at what we spend on capital expenditures, we spend about 3% of our topline on CapEx. And that is what you see in the guidance for 2014. If you broke that down -- 1.5% to 2% of that is maintenance CapEx. If we were to need to fluctuate, we could pull that down a bit. And 1% approximately is for growth CapEx in our business. We continually balance that. We look at what the growth and productivity needs are for our platform and continue to make decisions that are right balanced approach to how we position our business going forward as a low-cost producer.

And some of that CapEx, you think about the needs of our clients. They need us to be able to do more variable printing. They need us to increase the amount of co-mailing we can do. And so we continue to invest in the things that our customers need.

That is all very helpful. One other question with respect to Donnelley's purchase of Consolidated Graphics. I'm wondering if this consolidation creates any opportunities for you in that particular space that you can see?

I don't know that that -- sure, it is a competitive market out there. I think that is an example of the tipping point the industry is going through. You had us with Worldcolor and Vertis. Donnelley is consolidating with Consolidated Graphics. We have been building around our commercial platform for awhile now. Just after we did Worldcolor we acquired a commercial printer, not as large as CGX. But over time here we have been building that around the needs of our clients, and UniGraphic is an example of that.

Again, I think it is more for us the opportunity is the stuff we hear our customers talk about, which is, help us navigate this new media landscape. As we go forward in commercial and in-store and all of the things that our platform brings to us has been the result of acquisitions that we do, but the result of what they are asking us to do. We play in the same spaces but pretty much everyone is kind of focusing on the customers' needs.

Appreciate that, Joel. Last one for me here. With respect to the recently announced management changes that you alluded to. Obviously all sounds like a natural transition within the company. Just the one question here that I have and I think I know the answer, but you did create the new role for a Chief Operating Officer. And I just wanted to hear from you, Joel, that really you are in no way stepping back from the business here and continue to be very involved?

Why would I want to leave two degrees in Wisconsin today? No, I -- look, it is a natural evolution of our business. Some of the changes I made was just a natural timing point of being able to align and provide the focus to the different business segments that we have been in. And the biggest part of our business, which would be retail and then publication and catalog, we have all been very involved in it. It is a matrixed organization because that is where all of the integration is taking place or most of it.

Now, that we are predominantly beyond the halfway point of the Vertis integration and have done all of the work on Worldcolor, it was a good opportunity now to sort of align and have GM's be put in place to focus on those two as we go forward.

The Chief Operating role is a bit of a [bull and frog] routine as well, as Tom Frankowski, who has been a long time partner of mine, has been running the manufacturing side for the business because we had so many moving parts. But a natural point now for me to hand over more responsibility on the core print product lines. Because as goes the core, our ability to continue to be low-cost producer, helps us fuel the other things we are doing in the business.

And so I really wanted to make sure that we had the right focus in the core. And also make sure that I have the time and the ability to look at where do we deploy that capital. And so I have been spending a lot of time on, obviously, looking at the potential of consolidating acquisitions or new opportunities in things such as packaging, when we talked about Proteus. And the little sleeper thing that we have, which has been a help for the shareholders by reducing the healthcare costs to our employees as Quad Med, which happens to be in an area that the world is being disrupted, and that is healthcare. We have been growing that business on the outside.

And then we are going to continue to have opportunities around the world. It is really -- we are almost a $5 billion company now. And there was a recognition on my side that I want to make sure I have the right focuses in the right place. And then make sure I'm focused in the right place for our shareholders' growth to really deploy that capital and continue to have a long-term approach here. I'm definitely not going anywhere. I'm a big shareholder of this company and I have two sisters and a brother to keep happy, along with 25,000 employees. This was all about the next evolution in our company.

I appreciate all those comments. Thanks very much.

You're welcome.

Operator, next question.

Your next question comes from the line of Jamie Clement.

Good morning, Jamie.

Joel, John, Dave, Kelly, good morning.

Welcome back.

Thank you. Thank you. Well, it's 21 degrees here and I think we are a less hearty sort than you guys. So I don't think bragging about toughness -- just kidding.

It is negative two here now but screaming towards three degrees later this afternoon.

That is promising. Anyway, a list of random but somewhat related questions. On the third quarter call and press release, you called out Vertis as being not quite where you thought it might be when you started the year. Not a lot of commentary in print, not a lot of commentary about Vertis in the prepared remarks. Can I ask for an update there, in terms of how that business is doing, vis-a-vis expectations, let's say 12 months ago?

Just to clarify in third quarter what we had been talking about was not whether or not the acquisition was living up to expectations, it was production in the platform. And what we knew as we did the Worldcolor deal that had gone through bankruptcy and come out, and Vertis, obviously, this was their third bankruptcy. Leading up to this stuff one of the things people pulled back on is maintenance of the platform.

Right.

So as you recall, we closed the deal in the second week of January last year. And so right away as soon as we closed and cleared HSR, all of that stuff, we really hit the ground hard to try and bring those processess and that equipment up to speed. Which requires us to really make up for several years of only fixing things when they break. The way we operate is by total productive maintenance, which means that you schedule in maintenance time. So when you are running and you need the equipment to run it is not breaking.

We got a lot of work done the first part of year but as we got to the busy season you have to stop because that is -- especially in retail, its very back half focused. The platform gets loaded up to a high capacity utilization. And what happened in the third quarter is we started to see the results of not being able to be at the place we wanted to be, given if we were given more time before the busy season. So we had a lot of equipment breaking down. And what that does is it causes snowball effect where you have to expedite shipping and you need to ship things around. And so as you kind of look at the fourth quarter we really got to a point where that stuff worked itself through the system.

Yes.

And in third quarter I think we said we are doing a lot of work to try and improve the situation and that actually happened. And so now we feel that we are in a much better place -- actually in fourth quarter we were in a much better place of being able to perform without added costs. On a go-forward basis we continued to go with our regular systemic program of upgrading the capacity. So come busy season next year, we don't have the same issues.

When you say upgrading the capacity, are you talking about cherry picking equipment, as the phrase you used a couple of years ago with respect to Worldcolor, you are not talking about substantial additional capital investments, are you?

There is some here and there. We've created capabilities for retail in plants that previously didn't do retail because that helps our customers. But mostly it is as we closed some plants and consolidated equipment to other facilities, good equipment, we are continuing on with that. When I talk about bringing the platform up to speed, it is about making sure we catch up on the maintenance issues and have the right equipment there. It is not like an increase in capital expenditures outside what the guidelines.

Yes, no, it didn't sound like it. Okay. Joel, what are the things about -- and I think you all report a little bit on the late side, as far as earnings season goes. And I think one of the things -- one of the big stories of this earnings season has been how lousy commentary from major retailers have been. And from a modeling perspective or just from an expectation perspective, we all know that your first half is obviously tremendously seasonally weaker than your second half.

But I know you came from the sales channel within Quad and obviously you talk to large customers all the time and you serve many different industries. In commercial printing in general, retail is very important. Have you seen evidence of a knee-jerk pullback in ad spending, whether this is weather related, whether it is an overrated consumer economy, we will find out in a couple of months. But the fact is the numbers have been bad, generally speaking, out of retail. What are your thoughts as a printer for some of those companies?

We don't get too concerned about quarter-by-quarter because we really run this business for the longer term. But --

Sometimes I think they do, though. That is the question.

They do but they still have to drive store traffic.

Right.

And print continues to be one of the main ways that they do drive store traffic. I do come from sales. I spent a lot of time in the marketplace. In fact, I was down in Florida at two major retailers yesterday. And their commentary is anecdotally them and others that I heard is there is just a lot of pressure on the consumer with additional costs.

Yes.

We joke about the weather. It is so cold here I actually grew a beard to stay warm. But they have increased energy costs and increased food costs these days. And the reality is that the average consumer out there hasn't been afforded huge wage increases over the last several years because of the slow growth economy. So we do hear that the consumer is a bit finicky, even into the grocery store side where they are not buying the nice-to-haves as much either.

The way we view retail and why we like what we have done here is it is an area that is being disrupted. They are trying to figure it out. It is an area that continues to use print as one of its most effective ways to drive store traffic.

Sure.

And it is an area where our customers clearly have told us that they need help connecting all of the dots in all of the different mechanisms that they do. A lot of people when you talk to them about video these days, they are like, we don't have a strategy. That is one of the fastest growing marketing mediums with You Tube, which is why we invested in that. When you have customers under pressure and you have a platform that can really improve their traditional print, but then concept that helps them navigate the other things, it is about helping them get greater response for their dollar of marketing spend.

Right.

So when people are in need that is where there is opportunity. And we feel we are very well situated to help retailers through this. That being said, where do they find the costs? A lot of times they will try and pull back where they can. You still have to drive store traffic.

Right.

And so we'll see where it goes.

Yes. Okay. And I think a final question and I might like to, if possible, hear the man's opinion with the most seniority in the room, John.

When you say that, do you mean the oldest one?

You just said it. I didn't have to. When we see -- John, when you have seen in the past exigent -- whatever the word you want to use, you could say stupid, whatever -- increases out of the USPS, how sensitive -- when you look at the ROIC, if you will, of your customers and I know it must vary dramatically by product line -- but in general terms, what kind of impact -- just how scared or spooked would a mailer be when they see a number like this?

Well, they, number one, what we have seen in the past is generally a lag because they have existing plans to market and sell product that they have already purchased. So we tend to see it doesn't have an immediate effect and that is why I think Dave talked about --

-- the second half.

-- seeing it in the second half. Secondly, it is not going to be to their core customers that are regular buyers. It is going to have a bigger impact on who they are prospecting to. Because they run they sophisticated models that allow them to see what are they getting a return on based upon the product being sold and the mailing list to whom it has gone to.

There is not great statistics in the past because we've had such a bumpiness. Last time was 2007 and we saw a large increase that probably ranged from 15% to 25% or 30%. It was huge as compared to the 6%. It was done in May of 2007, so we didn't see anything until 2008. And then we were frankly headed into a recession.

I think this is lower than it has been in the past. But it is going to impact our volumes. So our best estimate as we looked as our mailable product that Dave shared was the 2% based upon our history. But we had these dramatic swings from being really high at the 15% to 25%, 30% or down sort of at the 2%, which makes it difficult to estimate. But we took our best shot at what we think is going to impact us this year.

Sure. No, that sounds very fair. I'm trying to -- I'm just going down my list here. I get -- I will actually -- that is all for me right now. And as always, I appreciate the time.

Thanks, Jamie. Operator, any more questions?

There are no further questions at this time.

Okay. Well, thank you all and we will see you next quarter.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.