Quad/Graphics Inc (QUAD) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics fourth-quarter and full-year 2014 conference call.

(Operator Instructions)

Please also note, this event is being recorded. I will now turn the conference over to Kyle Egan, Quad/Graphics Manager of External Reporting and Investor Relations. Kyle, please go ahead.

Thank you, operator. Good morning, everyone. With me today are Joel Quadracci, our Chairman, President and Chief Executive Officer; and Dave Honan, Executive Vice President and Chief Financial Officer. Joel will lead off today's call with highlights of our financial results along with an update on our strategic goals. Dave will follow with a more detailed review of our fourth-quarter and full-year 2014 financial results and a summary of our 2015 guidance, 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. 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 margin, free cash flow, and debt leverage ratio. We have included, on the slide presentation, reconciliations of these non-GAAP financial measures to GAAP financial measures.

The slide presentation can be accessed through the Investor Relations section of the Quad/Graphics website, under the Events and Presentations link in the left-hand navigation bar. There are also instructions on how to access the slide presentation in our quarterly news release issued last evening. A replay of the call will be available on the Investor Relations section of our website after today's call.

I will now turn the call over to Joel.

Thanks, Kyle, and good morning, everyone. I am pleased to report that our fourth-quarter and full-year 2014 net sales, adjusted EBITDA and free cash flow were in line with our expectations. We continued our journey to transform our Company and the industry while maintaining a stringent focus on serving our clients well. We acquired commercial and specialty printer Uni Graphic in February followed by Brown Printing in May and successfully completed the integration of Vertis.

Throughout the year, we remained committed to our priorities to maintain a strong and flexible balance sheet, invest in our business, pursue profitable investment opportunities and create long-term value for our shareholders and clients. When we talk about our journey as a Company, we like to refer to it in chapters. Chapter one began 44 years ago in 1971 when my father Harry decided there had to be a better way to run a printing company and started Quad/Graphics.

Chapter one was all about building a strong foundation, a 40-year period in which we established our Company's values and culture, grew rapidly through greenfield growth, built a premier manufacturing and distribution platform equipped with the latest technology and established a reputation as one of the industry's foremost innovators. During those years, we fastened our seatbelts and we sped forward with fast and furious organic growth. When chapter one culminated in 2010, Quad had grown from a tiny upstart into a $1.8 billion printer, employing nearly 12,000 people across 11 domestic plants, plus international locations in Poland, Argentina and Brazil.

Chapter two of our Company's journey began in 2010 and continues today. This chapter is about our role as a disciplined industry consolidator. We saw an opportunity to start participating in industry consolidation, beginning with the great recession, which severely impacted volumes. At the same time, digital and mobile content delivery methods came of age as consumers rushed to adopt new technologies creating confusion for marketers on how to use print in combination with other channels as part of a multimedia campaign. This created an era of opportunity for companies like Quad with a small balance sheet and access to capital markets and with manufacturing and distribution economies of scale.

In recent years, we have completed a number of consolidating acquisitions. The July 2010 acquisition of World Color was a transformative event in our Company's history. We significantly enhanced Quad's size, range of products, services and solutions, and overall industry presence. In addition, we became a controlled publicly traded company using equity to finance a portion of the acquisition in order to preserve the strength of our balance sheet. Since 2010, other consolidating acquisitions have included Vertis and Brown and the asset swap with Transcontinental.

Through each of these transactions, we have been able to enhance or expand our product offerings, while removing inefficient and underutilized capacity, pulling out cost, and transitioning work to the most efficient platform. This includes facilities that we built and maintained during chapter one of our Company's history, as well as plants we acquired in which we continue to make strategic investments. All along the way, we have shown financial discipline, maintaining a strong balance sheet while paying down the debt and pension obligations from the World Color acquisition. Prior to the 2010 World Color acquisition, our debt leverage ratio was 2.68 times. Today it is 2.6 times, despite having completed multiple consolidating acquisitions over the past 4.5 years.

In the past year, we started our migration into chapter three, which is about continued Company transformation. In this chapter, we will remain focused on serving our clients well while adding products and services that support their needs globally. This includes reinventing existing product lines, such as our book platform, which I will discuss a little later in the call. As always, we continue to look for ways to enhance our position in other core product lines, too, while expanding into product lines with higher growth potential, such as packaging and commercial and specialty print. For example, in 2013, we entered the folded-carton market with the acquisition of Proteus Packaging, and we look forward to growing this part of our business.

As part of our focus on growth and opportunities in commercial and specialty print, we recently announced our acquisition of Marin's International, a worldwide leader in point-of-sale display. The Paris-based company has products in more than 100 countries. Its international patent portfolio features a variety of display systems, including the popular Lama that instantly pop open into position. Quad has been manufacturing display systems for Marin's customers for more than 10 years from our facilities in Poland. In fact, we are Marin's single, largest display manufacturer in Europe.

With Marin's we enhance our existing in-store and large-format marketing solutions and expand on our ability to help retailers and brand marketers promote their brands as part of a global campaign. While small, the Marin's acquisition enhances our position with major consumer packaged goods companies and retailers with which Marin does business all over the world. We will leverage our portfolio of products, services and solutions to enhance the conversations Marin's already is having with its clientele today.

In chapter three of our Company's evolution, we are also looking at the continued expansion of our QuadMed subsidiary, which specializes in employee-sponsored health-care solutions. Founded in 1990 to address our own employees needs for quality, cost-effective primary care, QuadMed today provides workplace solutions on a national level to employers of all sizes, including private and public sector companies. These services include on-site and near-site primary care clinics, retail clinic management, telemedicine, and comprehensive health and wellness programs.

As we move forward, we will continue to be focused on five strategic goals to transform our Company and drive performance through innovation. We believe this focus will allow us to be successful despite ongoing industry challenges. Our first strategic goal is to strengthen the core print categories of retail inserts, publications, catalogs, books and directories, as shown in the pie chart on slide 4. While these product lines have been under pressure in recent years, they remain foundational to most marketer's and publisher's business strategies and represent a huge business opportunity for us.

Further, through these core product lines, we generate a significant amount of free cash flow to support other growth opportunities. As such, we are focused on strengthening these product lines to create additional value. Using a disciplined return on capital framework, we make significant ongoing investments in our core manufacturing and distribution platform. These investments, which include equipment automation and continuous process improvements, increased efficiencies and throughput while reducing labor.

These investments directly benefit our clients, too. An example of this is our co-mail platform in which we combined [multiple] magazine or catalog titles, or letter-sized direct mail into a single mail stream to earn USPS work-sharing discounts for our clients. In 2014, Quad/Graphics co-mailed approximately 5.3 billion magazines, catalogs and direct marketing pieces, an organic growth rate increase of approximately 5% over 2013. This year, we will begin incorporating volumes from the May 2014 Brown acquisition, further enhancing savings opportunities for our clients.

Our expertise in co-mailing, which includes our own proprietary software for analyzing client's incoming mail files and optimizing mail distribution plants, is resonating with catalogers, direct marketers and magazine publishers. For example, Hearst Magazines, one of the world's largest publishers of monthly magazines, recently signed a contract with us to continue printing 20 of its 21 US magazine titles through the year 2020. This multi-year contract, valued at more than $500 million over six years, speaks to Hearst's confidence in us as its print partner. Hearst cited our co-mail expertise as a major reason for the renewal. Additionally, the publisher credited our commitment to quality, innovation, and outstanding customer service as the other reasons for maintaining a relationship with us.

Our second strategic goal is to grow the business profitably through ongoing innovation, organic growth and disciplined acquisitions. As far as acquisitions, we continue to pursue opportunities that expand our business into new product categories and geographies, transform an existing product line, or create value-driven industry consolidation as already discussed. Regardless of the type of acquisition, we continue to take a disciplined approach pursuing acquisitions that are a good strategic fit, make good economic sense, have integration plans that are executable in a timely fashion and without risk of significant client disruption, and lastly, allow us to retain the financial strength and flexibility we had prior to the acquisition.

We will continue to capitalize on growth opportunities through ongoing investments and innovations in our existing platform, too. Case in point, our recently announced three-year plan to transform our book platform through our investment in 20 or more high-speed color digital web presses, complementary front-end work flow solutions for accepting orders and putting them immediately into production, and backend integrated systems for finishing distribution and fulfillment. Our investment in digital printing technology will radically transform the supply chain for publishers by reducing the need to carry large inventories that may go unsold and become obsolete.

According to a recent INTERQUEST study, 9% of printed books in North America are currently produced on digital printing equipment, and that amount is expected to grow to nearly 25% in the next four years. To date, we have installed 3 of the 20 high-capacity digital web presses. By mid June, we will have a total of 5 presses up and running. Of course, our ability to innovate extends well beyond the plant floor. Today's marketers and publishers are seeking a partner who can deliver their brand consistently across multiple media channels, and we have the tools and talent to help them achieve their goals.

Recently, we announced the strategic repositioning of our existing BlueSoho business for that purpose. BlueSoho combines three business units into a new integrated marketing and technology firm that helps retailers, publishers and Fortune 500 companies with brand activation campaigns, digital and mobile solutions, local promotional strategy, planning and buying, and creative and production services. Existing business units now under BlueSoho include -- Our New York City-based digital art and image retouching studio we launched in 2004 called BlueSoho. Nellymoser, the interactive mobile business that joined us through the Brown acquisition, which creates mobile companion apps and cross media channels. Our media planning and placement group, which came to us through our 2013 Vertis acquisition.

Through BlueSoho, Quad/Graphics will continue to provide existing clients with robust solutions for integrating print with other channels to drive business results. However, the strategic repositioning BlueSoho as an independent brand will enable Quad/Graphics to capture new business among publishers and marketers who may not have considered us for multi-channel execution in the past.

Our third strategic goal is to walk in the shoes of our clients. We are focused on creating a client experience that cultivates raving fans. One way we do this is by partnering with them to fully understand their internal processes, marketing strategies and challenges so we can better deliver the solutions that will help them achieve their business objectives. As a business solutions consultant, we examine everything from their marketing strategy, including how they manage their customer data, to production and marketing workflow processes.

Our goal is to help our clients lower their operating costs, improving productivity and decrease time to market while providing revenue generating ideas and omni-channel strategies. This deep dive into the client business reflects our consultative approach to doing business. Another way in which we are providing value to clients is through Company-sponsored thought-leadership events including Camp/Quad, which addresses the challenges in multi-channel marketing and the Quad/Graphics postal conference, which covers ways to offset our clients' single, largest manufacturing related expense.

Our fourth strategic goal is engaging employees through our Company's unique corporate culture, which encourages employees to take pride and ownership in their work, take advantage of continuous learning and job advancement opportunities, share knowledge by mentoring others, and innovate solutions. One key way we drive employee engagement is by acting on employee feedback gathered through daily conversations, surveys, roundtable discussions and open forums at Company and departmental meetings. More recently, we've rolled out a number of programs specifically targeted at improving employee engagement through events that build camaraderie and recognize employee contribution.

Our last goal, enhancing financial strength and creating shareholder value, focuses on our disciplined approach to maximize free cash flow and adjusted EBITDA, maintain consistent financial policies to ensure a strong balance sheet and liquidity level, and retain the financial flexibility needed to strategically allocate and deploy capital as circumstances change. As always, we adjust our capital allocation and deployment based on prevailing circumstances and what we think is best for shareholder value creation at any point in time.

These priorities include making compelling investments that drive profitable, organic growth in productivity in the Company's current business, execute on acquisitions into higher growth print product categories or growing geographic markets, pursue value-driven industry consolidation, deleveraging the balance sheet through debt and pension liability reduction, and returning capital to the shareholders through dividends.

With that, I will turn over the call to Dave, who will provide a more detailed review of our financial results, along with our 2015 guidance.

Thanks, Joel. Good morning, everyone. Slide 9 is a snapshot of our fourth-quarter 2014 financial results as compared to 2013. The acquisition of Brown is included in our 2014 results since the date of that acquisition on May 30.

Net sales were $1.4 billion in the quarter, representing a 5.5% increase from 2013 due to the Brown acquisition, offset by ongoing volume and pricing pressures, lower pass-through paper sales and a negative impact from foreign exchange rates. Our adjusted EBITDA was $183 million, as compared to $198 million in 2013. Our adjusted EBITDA margin was 12.8%, as compared to 14.7%. These decreases reflect ongoing pricing and volume pressures and the margin dilution impact of Brown's historically lower margin profile, partially offset by productivity improvement.

Slide 10 is a snapshot of our full-year 2014 financial results as compared to 2013. Net sales were $4.86 billion and were within our guidance range of $4.8 billion to $4.9 billion. Our 2014 net sales increased by 1% versus 2013, due to incremental net sales from the Brown acquisition. Our adjusted EBITDA was $543 million, within the 2014 guidance range of $535 million to $560 million, but decreased from $577 million in 2013. Our adjusted EBITDA margin was 11.2%, as compared to 12% in 2013, primarily due to the ongoing volume and pricing pressures and the margin dilution impact of Brown's historically lower margin profile, partially offset by productivity improvements.

We also achieved the remainder of our 2014 income statement guidance, including depreciation and amortization of $336 million, within the guidance range of $335 million to $345 million, restructuring, impairment and transaction related charges of $67 million. These restructuring charges decreased $28 million from 2013. When excluding non-cash impairment charges of $14 million, our 2014 cash restructuring charges were $53 million, which were within our guidance range of $45 million to $65 million for cash restructuring. Interest expense of $93 million was within our guidance range of $90 million to $95 million. Interest expense increased from $86 million in 2013, due to a higher weighted average interest rate as well as additional borrowings to fund the Brown acquisition.

On slide 11, we have a summary of our free cash flow, which we define as net cash provided by operating activities, including pension contributions, less purchases of property, plants and equipment. Our 2014 free cash flow was in line with our expectations at $154 million, including $192 million of free cash flow during the fourth quarter, which is our strongest seasonal quarter for free cash flow generation. The $154 million of free cash flow was $1 million below our 2014 guidance range of $155 million to $165 million, primarily due to higher working capital levels, which were partially offset by reduced capital expenditures.

As compared to 2013, free cash flow decreased from $292 million, primarily due to an estimated $90 million, one-time benefit realized in 2013 on the restoration of working capital levels associated with the Vertis acquisition, which was acquired without normalized levels of accounts payable. Excluding this impact, free cash flow declined $48 million primarily due to lower adjusted EBITDA and increased working capital, including the working capital impact from the Brown acquisition, partially offset by lower capital expenditures.

On slide 12, you will see that we ended the year with a $1.4 billion in debt and capital leases, an increase of $19 million, from 2013, and our year-end debt leverage ratio was 2.6 times versus 2.44 times in 2013. The increase in total debt and the debt leverage ratio is due primarily to increased debt to fund the Brown acquisition and lower adjusted EBITDA. During the fourth quarter of 2014, our debt leverage ratio decreased 21 basis points from 2.81 times at September 30, as we utilized the $192 million of fourth-quarter free cash flow generation to reduce debt. We continue to believe that operating in the 2 to 2.5 times leverage range is the appropriate target over the long term. But, we may, at times like now, operate outside this range depending on the timing of compelling strategic investment opportunities like the Brown acquisition in 2014 and seasonable working capital needs.

We continue to remain diligent in reducing debt and pension liabilities. Since the July 2, 2010 World Color acquisition, we have reduced debt by $369 million and reduced pension obligations by $325 million. As it relates to our pension obligations, the year-end liability was $222 million, an increase of $35 million from 2013. This increase is primarily due to a $95 million increase in the pension/liability valuation as a result of a 90 basis point decrease in the discount rate assumption used to value the pension liability.

This was partially offset by $51 million in cash contributions in 2014. During the year, we also terminated the World Color post-retirement benefit plan, which removes further funding obligation for those benefits and resulted in a $5 million, nonrecurring gain during the fourth quarter, which was recorded in restructuring, impairment and transaction related charges and excluded from are adjusted EBITDA.

Slide 13 includes a summary of our debt capital structure. During 2014, we refinanced and extended maturities on $1.9 million of our debt structure, including issuing our inaugural $300 million, senior unsecured notes. Additionally, during the fourth quarter, we completed the repurchase of $109 million of fixed-rate private notes under our master note and security agreement. We were able to repurchase these notes at essentially par value. The result of these transactions enabled us to extend and stagger out debt maturities, balance our fixed-to-floating rate debt closer to a 50% floating/50% fixed rate, and provide more borrowing capacity to execute on our strategic goals.

Availability under our $850 million revolver is $754 million at December 31, 2014. We have no significant maturities until April 2019. The weighted average duration under our debt capital structure is 5.4 years, with a blended interest rate of 5%. Our fixed-rate debt is at an average interest rate of 7.2%, and our floating rate debt is an average interest rate of 3.1%. Our debt capital structure is 55% floating and 45% fixed.

We believe this fixed versus floating rate debt structure provides us with the financial flexibility we need over the long term, including balancing our key priorities to pay down debt and pension liabilities, invest in our business, pursue future growth opportunities and return value to our shareholders. One essential way in which we return value to our shareholders is there are quarterly dividend program. Our next quarterly dividend of $0.30 per share will be payable on March 20, 2015 to shareholders of record as of March 9, 2015.

Slide 14 is a summary of our 2015 financial guidance. We anticipate our 2015 net sales will be in the range of $4.8 billion to $5 billion. Our net sales assumptions include continued downward pricing pressure of negative 1% to negative 1.5% of consolidated net sales. Organic volume, which excludes acquisitions, a flat to down 3%, partially offset by volume contributions from 2014 acquisitions of approximately 3%. We expect 2015 adjusted EBITDA to be between $500 million and $540 million.

Quad continues to be a significant free cash flow generator. As such, expects our free cash flow to increase in 2015 to a range of $180 million to $280 million, due to reduced cash flow needs for pension, restructuring and working capital. Primary assumptions in our free cash flow are as follows. Pension cash contributions will be approximately $30 million in 2015, as compared to $51 million in 2014. The $21 million reduction in pension contributions is driven primarily from changes in pension funding laws. Cash restructuring charges are estimated to be between $25 million to $35 million in 2015, as compared to $53 million in 2014. These charges are net of a $10 million nonrecurring cash payment received from Courier Corporation in February from the terminated acquisition of Courier by Quad.

Capital expenditures will range between $145 million to $165 million, which includes approximately $20 million in carryover projects from 2014. This compares to $139 million of capital expenditures in 2014. We ended 2014 with higher working capital than what we would have liked, primarily due to higher working capital needs for the Brown acquisition and higher accounts receivable. We anticipate we will be able to reduce working capital levels in 2015 to more than offset the impact of the increased capital expenditures. The remainder of our 2015 guidance includes, depreciation and amortization of $315 million to $325 million, interest expense of $85 million to $90 million, and cash taxes of $20 million to $35 million.

As we move forward in this challenging industry environment, we continue to be disciplined in how we manage all aspects of our business. Our recent decision to not pursue a higher bid on the Courier acquisition is evidence of this discipline. We believed our offer, the equivalent of a total purchase price at $20.50 per share representing an approximate 40% premium for Courier, would have provided significant value over the long term for all of Quad/Graphics' and Courier stakeholders, including shareholders, employees and customers in the book market. However, when Courier received an unsolicited offer for $23 per share, representing an approximate 60% premium, we declined to negotiate further as we felt the economics of the deal were less compelling and would not have created value for our shareholders.

Further, while Courier would have helped accelerate our three-year strategic plan to transform our book business, it was and is not foundational to that strategy. When it comes to spending our capital, we will continue to maintain a disciplined approach. Our focus continues 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.

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

(Operator Instructions)

Jamie Clement, Macquarie.

Gentlemen, good morning.

Good morning, Jamie.

Joel, I don't know if you want to handle this. It is in response to some of Dave's prepared remarks. I was looking at your revenue guidance for 2015. It certainly looked like the low end would be a little bit better than some of the volume and pricing ranges on the talked about historically. Dave, I think you said, looking for pricing erosion, about 1% to 1.5%, and I think the high end of that range and what you said over the last couple of years has been more like 2%. I know you had a lot of contracts up for bid about a year or so ago. Are we finally seeing some signs that capacity coming out of the industry is starting to help pricing firm up? Or is this more of a function of your co-mailing services, all of that sort of thing?

I think it's a very good question. As you know, we have been dealing with the industry challenges for a while now. If you go back to 2009, the trough of capacity utilization was around 61%, using the government numbers. Today it's closer to somewhere around 72 %, so directionally, I think that has happened. Volumes, again, I think was always something we felt we could manage pretty well. I look at the catalogs, what they mailed, as an industry maybe a decline of 2% in 2014, as a good sign.

Keep in mind, that was on top of a significant exigent postal increase that happened. We had predicted that volume would actually decline further than that, and we didn't see that. Which makes me believe that if that significant hit to their largest cost weren't there, that, actually, volumes would have been even better. I think the good news there is that the exigent case is done and that we're locked into some more reasonable postal increases over the long term here.

The pricing I think, when you think about what we have guided to in the past, was the 1% to 2%, and today we're saying 1% to 1.5%. You did catch that as a little bit of a change for us. I want to remind everyone, too, that when you look at the 2014 performance, that included the impact of a significantly higher number of contracts coming due in 2013 that had to be mark to market in 2014. So even when we've told you last year, that when you took the noise of that out, we actually saw pricing a little less than a negative 1%. Yes, we've changed our thoughts but it's still negative, and we're planning for that but feeling a little bit better.

The other story here, and I'm not sure it comes out in the script, but I think it's important to note is we are a portfolio with a lot of different product lines. When we talk about one of our main strategies of strengthening the core, the core is really the traditional print that we have always been in which is: magazine, catalogs, retail inserts, and to a lesser extent, books and directories. We actually created more stability than I would have thought in 2014. What we got pulled back on was maybe some of the other businesses, lesser businesses, that we don't -- they're good businesses. They're just not, as we referenced, the core.

Things like Mexico and Latin America, specifically, Argentina, Brazil; we saw worst performance in some of those than we would have expected, and that pulled us back. That masks, I think, some of the stabilization we saw in our core. I'm actually feeling very good about that.

Now, it's not to say that everything is going to be perfect and easy this year, but it does mean that I think we're building off a great foundation and that all of the work that we've done all the things we've said are indeed working. I don't know if that helps.

I think the one area also to address is, I think we saw ad magazine pages that were not good this past year, being down about 10%, 10.5% for the industry. For Quad, maybe off less than that, about 8% due to our portfolio mix. Circulation, I think, in magazine continues to hold up. I feel that they're going to be looking more towards the total performance as companies when they realize that in a multi-channel world it's not necessarily just about selling the ad pages. It's about using the editorial content in print as the foundation to grow revenue on all of the channels. I do think people are going to want to be reinvesting in the content creators as this world continues to evolve.

Joel, following up on that, in terms of looking at print as part of a multi-channel world. There were a couple of interesting articles about a month or two ago, one in the Wall Street Journal, talking about JCP going back to focusing on the catalog a little bit more. Some of those articles made the point, which I think is probably a correct one, that some folks are going back to the catalog as being a feeder to their e-commerce business. Can you discuss those kinds of trends a little bit?

We've said consistently, through all this media confusion, that print drives traffic. We've lived it. We lived at the top of dot com 1.0 when catalogers though, wow, this new Internet thing is really cool, we can get rid of the expense of the catalog. What happened, those who tried failed miserably because they saw that no traffic came. That is why brand awareness is, and how the consumer reacts, is multifaceted. You have to drive capacity.

We lived it again when JCPenney went through their whole challenge and cut back the simplest of simple of retail inserts, thinking that with their new strategy, you didn't need to spend the money anymore. After the first quarter of significant drop in same-store sale, they rebuilt that program above and beyond, as fast as they could because they realized you have to drive store traffic.

Furthermore, you think about books. I think the big surprise for everyone is, and Apple included, if you look at how they are looking at their tablets now, is books are actually growing. The total book industry grew at about 3.5% last year, when you look at print only, as opposed to the significant decline that people were expecting.

If you break that down further into children and young adults, which grew about 21% last year in printed books, K-12 another 12%, and higher ed, a little lesser at 3%, it goes to show you that people are still people, and you need to use all the different mechanisms you can, because that's where the consumer is. I'd also urge you to look at -- I think it was an article that came out in the Washington Post this week, that talks about books and printed books and talks about the digital natives, the young kids and the twenty somethings; how the ones who are using a lot of computers and tablets in school actually prefer print. A lot of the effectiveness of print is proving itself out. It's a great article, I recommend you looking it up.

Okay. Thank you. Thanks very much. Dave, I will just get back in the queue, but one thing. Just in terms of free cash flow guidance for 2015, you helped us build the bridge there. Obviously, some projected EBITDA erosion. It seems like cash tax is a little bit higher. It looks like CapEx, a little bit higher. Big reduction in cash restructuring expenses. What else am I'm missing in the positive column?

It's helpful to go back and look, too, Jamie, because we've been having this discussion over the past year, with many who follow the stock, is that there was some tailwind coming into our free cash flow as we were talking about 2014 guidance. Those were primarily in the areas of pension contributions, which are down significantly; restructuring, as we get to a more normalized level of restructuring costs in our business, that should range around $25 million a year, to continually take cost out. Then also, in CapEx is, we would guide it a little bit higher last year in CapEx, and that starts to comes down to a more normalized level, around 3% of our revenue, around the $150 million mark. Those three things, we knew coming into 2015, would provide a nice lift for the stock. They did.

I did mention in my prepared comments that we ended the year in 2014 with a little bit higher working capital than we would have liked. We will take that working capital -- that we'll improve on that working capital in 2015. That will help offset some of the things that we saw, where we're guiding to a little bit of higher capital expenditures because we have some carryover programs coming into 2015. I think you will see the additional elements to what you were referring to would be pension. It would be working capital improvement, as we work forward into 2015.

I like where we are able to guide to the midpoint of our range is up 23% over our free cash flow generation from 2014. That does include a $10 million, one-time item, as I mentioned, from the Courier termination fee. But even exclude that out, we're still up 17%. A lot of investors talk to us about the yield of free cash flow on our stock. From what we finished last year, on a $22 stock price, which we entered today and I understand it's higher today, but on a $22 stock price, we were yielding about 15%. On this guidance, we are yielding approximately 18%. We really liked the story that the free cash flow is providing. We've talked to you about where we think there's some nice tailwind on our free cash flow. That is evidence in our guidance that we gave you for 2015.

Okay. Very good. Thank you so much for your time, as always.

Thanks, Jamie.

Greg Eison, Singular Research.

Good morning, Greg.

Thanks, good morning. First, if I could just follow up, I missed one number in the presentation. Could you repeat your volume expectation for 2015? I got the pricing at negative 1% to 1.5%.

From an organic standpoint, it would be flat to down 3%. That would be offset by acquisition volume of roughly 3% in 2015.

Okay. Great. Can you talk about what you think the -- when you talk about that 3% acquisition contribution, is that strictly the remaining months of the Brown acquisition?

Yes, that's the primary driver of it. We acquired Brown, end of May of 2014, so approximately five months coming through for that plus some of the smaller acquisitions we did in 2014.

Okay. So you're not talking about any unannounced acquisitions so far?

No, just the carryover effect of acquisitions that were done in 2014.

Got it. Then, I have a bigger picture thought when we talk about the volume expectations you have. As you continue to invest in your business, investment technology and the services and skill set of distribution that you bring to your customers, and you're in the process of really creating some separation between yourselves and the rest of the industry. As I see it, it looks like the industry will devolve into the winners and losers, in terms of those that can really survive into the future and really be a 21st century business and those that are not going to really make it going forward. Is there a reason for me to expect that at some point you should be able to grow volumes organically as a result of this differentiation? Really, just in taking volume away from the competition organically, as you create that separation. Is that a reasonable expectation?

It is, believe it or not, a pretty fragmented marketplace. Again, we have done a lot of consolidating acquisitions, which I think was the right thing to do, and a lot of rationalizing of that volume. It's hard to tell how fast the shakeout happens, but it certainly has been happening for a long time. That's always our goal is to get to the ability in the core business to grow, as opposed to managing decline.

Again, I think the more important thing to us, is watching the stability of pricing. That comes in a number of different ways. It comes from, obviously, the marketplace. It also comes from your value-added services that you apply and your ability to help those customers offset significant costs that aren't part of your invoice.

As we like to remind people, is that postage cost continues to be north of 50%, 60% of their total cost, with paper and printing being the lesser amount, and actually, print being the smallest amount at typically under 20%. But we are the ones who can impact that the most. When you look at the total client and how people think about the world, that's really key to taking market share. In a tough business, this tough industry where people are trying to hang on, or people haven't taken out capacity out of their infrastructure, you run into some pretty crazy things. There are times when we make the decision not to pursue, even though it may take away from our total volume. Because we don't believe it's the right thing for our employees or our investors, to fill up the most efficient platform with stuff that doesn't recognize value added, to the degree that maybe it could offset pricing differentials.

So it's kind of a long game. Companies, printing companies do create good cash flow, which is why it takes a long time for the shakeout to happen. We feel really good about our approach with our clients, and we tend to not think as much about us versus all of these other companies that may get shaken out. We think primarily about, how do we make sure our customers are really successful at managing these costs, through all the things that we can do? But not just from the cost standpoint. How can we help them use print to gain top-line revenue? And I think that strategy will drive our investment on into the future.

Hello?

Are you there?

Yes. You dropped out there for a second. I missed you. Are you there?

We are here.

I can hear you now. I don't know if it was you or me. The last I heard you say, so it takes times to shakeout the competition because printing companies create good cash flow.

Yes. I guess my final main comment was, our strategy is about investing in our client to help them manage the costs that they have, but more than that about helping them use print as a part of creating top-line growth no matter where it comes, whether it's directly from print or from traffic that print drives to mobile or online. So that will drive our strategy and our investment process, rather than necessarily what's happening to the other sets of competitors.

Got it. If I could change tack to a different subject. When I look at your adjusted EBITDA margin, I understand the effect the Brown acquisition has on margins. Is it fair to state that your adjusted EBITDA margin is probably close to its bottom now, as a result of the Brown effect?

I think you've got to think also about the impact we had with the Vertis investment that happened the last couple of years, because that was a $1 billion revenue company that had virtually no margin. We've improved that, but that is another part of the dilutive effect and understates the performance of the underlying core Quad assets. We still feel good and we knew that coming in. And I think that further margin deterioration is our ability to continue to manage the business well. Again, pricing has been a challenge, but we see that starting to correct itself. Dave, do you have any other comments?

From a pricing standpoint, that's the main pressure on our margins. We did talk about the dilutive impact of acquisitions. Quite frankly, when you are going though a consolidation phase and we're one of the highest margins in the industry, every acquisition you do is going to have a dilutive impact on your margins.

Coming back to the pricing side of it, historically, there has always been pricing decline in the print industry, although that trended, prior to the recession, to about a 0.5 point of decline. I think print companies, including ourselves, I think we're very effective at offsetting about 0.5 point of price decline. It's when you start to get above 1.0 closer to the 2.0, which we saw in some recent years, that becomes very difficult to offset.

So as you watch how pricing goes, I think you'll see where the stability to the margin and the margin percentage will be as we move forward. It's always our goal to be able to offset that. I think we have done a decent job of offsetting the volume impacts. I think we've partially offset some of the volume, and it's our job to go out there and find ways to offset the full impact of what's going on with pricing in our industry.

Okay. As a corollary to my question. Now that you have got some time and service with Vertis under your belt and have Brown already in-house for most of the first year already of its acquisition, do you think you can improve on your margins, improve the corporate-wide margin, now that you have got your hands around those two businesses? Is there room for upside improvement that we can target?

In the core business, those assets where we've consolidated, we continue to make investments in those platforms. That is part of that CapEx. It comes a lot within automation of the platform. We've got some very automated plants. We got some that can be more automated. Then, we have this phenomenon where automation technology is changing very rapidly and allowing you to automate things you didn't think you could before. We use that, as well as the value-add stuff, that we can bring to our customers, to try and offset that. That is the goal and something we have to prove.

Okay. Looking at your overhead side, the SG&A, were there any unusual one-time items that you haven't mentioned that are worth calling out, that were in this quarter or the year that you would like to bring to our attention?

No, we previously disclosed some of the impacts on SG&A, nothing significant in the quarter. On a year-over-year basis, in fact, there was about $11 million higher one-time charges in 2013 than there were in 2014, predominately most of those coming through the SG&A line. But nothing to call out as specifics in the quarter. And then, nothing to call out in addition to what we've called out previously in our filings for the first nine months of the year, too.

Understood. Can we talk about the tax rate? I don't know if you mentioned that in your guidance. What are your expectations for your tax rate in 2015?

Our normalized effective tax rate is around 39%. We finished this year higher than that, predominately because of valuation allowances on international earnings is particularly -- as Joel had referred to, is declines in profit in Mexico and Argentina. That's what increased the tax rate above our long-term stated goal of 39% effective tax rate. A more normalized rate we'd expect going forward would be around 39%.

Good. Let's see. I think that was it. I will let someone else go. Thank you.

Operator, next question.

Fred Krom, Goldman Sachs.

Thanks for taking the questions. Can you just talk a minute about the potential to redeem additional high-coupon private-placement debt in 2015? Generally speaking, in the past, it seems like you've paid down the notes via your revolving credit facility. I was just wondering if you have any intentions to issue additional unsecured bonds at some point in 2015 or in the near future?

We don't have the intent to go back into our private placement notes to redeem those. We did those as a unique item in 2014. That was primarily to, because we were paying down cash at a faster level than what we had in terms of revolver availability. We used some of that redemption to further pay down debt. It also allowed us to move more of our -- in the net basis, more to a fixed and floating rate, on a ratio of 50/50, after we had paid down the revolver that was used to do the repurchase of the private placement. It was about $109 million we did in the fourth quarter, essentially at par. Those were really long tenured portions of the private placement notes. As I said before, we don't have an intention to go back into the market to do that again.

Okay, great. Thanks. Just a further follow up on your commitment to your 2 to 2.5 times leverage ratio, anything from a capital allocation or maybe an M&A standpoint that would cause you to change that outlook over the next 12 months?

No, that is still our long-range outlook. As we move down to 2.6 at the end of this year, we'll continue to look for pay down back into that. With us, we'll continue to look at the balance, too, of acquisitions, of where to use equity and cash as a mix in how we do those acquisitions. In the Courier deal, we did initially put forth roughly a ratio of 40% equity in that deal and 60% cash, in order to maintain our ability to glide that down to the 2 to 2.5 on a reasonable basis. You'll continue to see us aimed toward that. We'll continue to delever back, especially as we get the integration savings of the Brown acquisition come through the next five months of 2015.

Just to add to that, should an acquisition come along that brings us back up again, one of our criterias we always look for does that, then allow us though to start migrating back down again. So that goes into the decision process of how and when we're willing to do something like that.

Just dovetailing off of that comment, with respect to the cash portion of that hypothetical M&A scenario, theoretically, would you be open to issuing new unsecured bonds to fund future M&A or would you continue to use your revolver?

We'll continue to use our revolver. It's really deal dependent. We've got $750 million of availability in the revolver at the end of the year. We'll obviously build -- we'll look at that scenario and recognizing that are seasonable peak need for borrowings under the revolver is in the third quarter where we hit our working capital piece. We'll manage all of that well. It's going to really be dependent on size of the deals. Right now, our intent is, with the deals that we're moving forward with, we've got enough capacity in our revolver to execute on those at this point.

And with the buyback authorization outstanding, I think you have $100 million from 2011. Is that something that you would look to utilize at some point in the near future over the next couple of years? Or is dividends your main policy there?

I think debt pay down and dividends are our main use of cash at this point, as we talked about getting back into the 2 to 2.5 times leverage range, but we have it out there because we want to be balanced about how our approach is into using our capital. It's always an alternative for us. In the near term, it will be debt reduction and continuous support of our dividend.

Okay, great. Thanks. Just one last question on M&A, and you probably won't want to answer this. I was just curious. I'd love to hear your thoughts on the potential regulatory pushback, or maybe lack thereof, of a tie up between your company and your biggest competitor?

I can't predict what the regulatory response will be. I assume you're referring to the Courier transaction. I think it's best to talk to Donnelley about that. But you have to go through the process, and you have to do the work to make a good case. I will tell you that Courier is a great platform. It's a really good company, great management team. Again, I think that is something that they're going though in the process right now, and they'd be best to answer that.

I was actually referring to you and/or Donnelly tieing up, but -- ?

Oh, so me acquiring Donnelly?

Or vice versa.

Okay. I can't speak to that. We haven't done any work on that, and that's not in our plans.

Thanks for the questions.

Operator, next question.

That concludes our question-and-answer session. I would like to turn the call back over to Management for any final remarks.

Great. Thank you all for joining us today. We're obviously pleased with where we came in, in 2014, and we look forward to updating you throughout the year. Take care.

Thank you. The conference is now concluded. We thank you all for attending today's presentation. You may now disconnect your lines.