Quad/Graphics Inc (QUAD) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Quad/Graphics third-quarter 2015 conference call.

(Operator Instructions)

A slide presentation accompanies today's webcast and participants are invited to follow along, advancing the slides themselves. To access the webcast follow the instructions posted in last night's earnings release.

Alternatively, you can access the slide presentation on the investors section of the Quad/Graphics website under the events and recent presentations link in the left-hand navigation bar.

(Operator Instructions)

Please also note that today's event is being recorded.

At this time I would like to turn the conference call over to Kyle Egan, Quad/Graphics Manager of Treasury and Investor Relations. Sir, please go ahead.

Thank you, operator and good morning everyone.

With me today are Joel Quadracci, our Chairman President and Chief Executive Officer, and Dave Honan, our Executive Vice President and Chief Financial Officer. Joel will leadoff today's call with key highlights for the quarter and Dave will follow with a more detailed review of the financial results followed by a 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 in the slide presentation reconciliations of these non-GAAP financial measures to GAAP financial measures. A replay of the call will be available on the investor section of our website shortly after we conclude. The slide presentation will remain posted on Quad/Graphics website for future reference.

I will now hand the call over to Joel.

Thank you, Kyle, and good morning, everyone.

As we communicated in our news release, our performance in the third quarter was challenging and well below our expectations. We attribute our performance to three main drivers.

First, we saw a greater than expected pullback in industry volumes during the third quarter. Publishers continue to experience sluggish ad sales with third-quarter pages down 11.7%, versus the same period in 2014. Retailers also cut back on print ad spending in the quarter because of the low growth economy and challenging retail environment.

Additionally, we saw pricing pressures accelerate in the quarter, primarily in long run print due to an increased competitive environment. Pricing now is down 1.5%, which is the high end of the range we originally anticipated for FY15.

And finally, our manufacturing productivity was down in the quarter, primarily due to labor availability in our Wisconsin platform, higher training and onboarding costs associated with hiring in that platform, especially as we ramped up for the busiest time of the year, and increased manufacturing complexity in our product mix. As a result, we have reduced our full-year 2015 guidance and Dave will provide full details a little later in the call.

We are constant in our ability to skillfully manage the challenges before us, whether they are short-term or productivity issues or long-term industry conditions. Through the dedication, determination and hard work of our employees, we will continue to transform our company during this challenging time in the printing industry, serving our clients well while positioning ourselves to compete aggressively in the marketplace and achieve long-term stability and success.

Accordingly, we are taking swift and decisive action to address our performance in the quarter, and are announcing $100 million cost reduction program for 2016 to bring our cost structure in line with revenues. We have a long-standing commitment to being industry's low-cost producer and this program is a continuation of that commitment.

We will continue to focus on eliminating excess manufacturing capacity through additional plant closures and will close four plants by the end of 2015. Two of these plants, Loveland, Colorado and Enfield, Connecticut, were both announced in August and ceased production in October. This morning, we also announced we will be closing our East Greenville, Pennsylvania and Augusta, Georgia plants by the end of this year.

Our strategy has remained unchanged. We will consolidate work into facilities where we believe we can achieve the greatest manufacturing and distribution efficiencies.

By the end of this year, we will have closed 31 plants since July 2010 World Color acquisition. For each closed facility, we take great care in the well-being of our displaced employees, providing them with out placement services or the opportunity to transfer to other plants where we are concentrating volume and are in need of additional skilled labor. In addition, we are reducing SG&A cost by reviewing every function at the Company and thinking differently about how to run our business in a more streamlined way. Just last month, we announced a new simplified organizational structure to better serve the evolving needs of marketers and publishers in today's multimedia world and reduce our cost structure.

If you look at what's happening in our clients' world today, they face critical challenges. Marketing and publishing have been completely upended with the explosion of media channels. Our clients are asking themselves, what channels should we use and in what combination, to engage our audience and drive desired results? We know printer delivers results, especially used in combination with other media channels. Unfortunately, many marketing approaches remain siloed, which has created a crisis in measurement for our clients.

They are challenged to measure the true return on their marketing investment across and between channels, both online and off-line. Looking ahead, we believe our clients will migrate towards organizational structures that promote seamlessly connecting content across channels. The days of having separate teams focused on print, digital, e-commerce, social outreach, mobile initiative, no longer make sense.

And we are no different. The next evolution of our organizational structure focuses on the unique value we bring to marketers and publishers, while also helping us to realize improved efficiencies and cost savings. Eric Steinbach, who has 31 years of printing industry experience, is now President of Publishing Solutions. He is responsible for long run consumer publications, special interest publications, books and directories. Eric is well-versed in the world of publishing and will lead Quad/Graphics in creating client value from integrated solutions that increase reader engagement, streamline production services, and reduce costs.

Tim Ohnmacht, a 21-year veteran of the company, is now President of Marketing Solutions and is responsible for retail inserts, catalogs, direct mail and commercial specialty. Tim will understand the challenges and opportunities facing marketers, will lead Quad/Graphics in creating client value from integrated solutions that help increase consumer engagement, revenue and cost savings opportunities in a variety of vertical industries including retail, automotive, healthcare, financial, and insurance.

Our streamlined organization structure is a natural step in our journey to transform Quad/Graphics and will allow us to grow share of wallet by making it easier for a client to take advantage of our full continuum of integrated solutions, contribute to an overall better client experience in eliminating silos to make it easier for clients to do business with us, facilitate quick nimble decision-making with our Company, and accelerate the implementation of best practices, including continuous improvement in lean methodologies that eliminate waste and reduce costs.

As we move forward, we will continue to focus on our five primary strategic goals to transform Quad/Graphics and drive performance through innovation. These goals include strengthening the core print categories that generate a significant amount of free cash flow, to support growth opportunities. Recently, we expanded our presence in the growing packaging industry through the acquisition of Omaha-based Specialty Finishing, a packaging manufacturer with a loyal blue-chip customer base that has enjoyed 8 straight years of consecutive sales growth.

This acquisition, along with our April 2015 acquisition of Copac, has significantly increased the scale and geographic footprint of our QuadPackaging business and enables us to more effectively compete for large volume and multi-location clients across the United States, Europe, Asia and Central and South America. QuadPackaging has grown quickly under the leadership of Tom Garland, a packaging industry veteran, and today it's fast approaching $200 million in annual revenues.

In books, we continue to reinvent our platform through the investment in high speed digital web presses. As we continue installing these digital presses, we see tremendous opportunities for this platform to support multiple product lines, including highly personalized direct mail. We will continue to build our digital press platform and related data-driven marketing capabilities to create revenue-generating and cost savings opportunities for multiple product lines.

Before I hand the call over to Dave, I want to talk about free cash flow. We believe Quad/Graphics will continue to be a significant free cash flow generator. Currently free cash flow is up $106 million over last year, despite lower than expected adjusted EBITDA. We have initiatives in place to maintain free cash flow well into the future, and as always, we will use that capital in ways that will generate value for our Company and our shareholders, including maintaining the strength of our balance sheet through debt and pension liability reductions and returning cash to our shareholders through an annual dividend of $1.20 per share, which has a yield of nearly 10%, but only represents one third of total free cash flow.

So in closing, I'd like to thank our employees for all their hard work and dedication, especially now during our busiest quarter. Our employees take great pride in their work, and I know I can continue to count on them to help advance our strategic initiatives and do whatever is necessary to help us succeed, despite intensified industry headwinds. At Quad, we have always been about finding a better way and that's especially true when times get tough. This time will be no different.

I will now hand the call over to Dave.

Thanks, Joel, and good morning, everyone.

Slide 4 is a snapshot of our third-quarter 2015 financial results as compared to the third quarter of 2014. Net sales for the quarter were $1.2 billion, down 6.5% from 2014 it. This decline reflects a 5.4% combined volume and price decline, primarily due to greater than expected pullback in publication volumes and retail inserts, and pricing pressure that accelerated during the quarter, as well as a negative 1.1% impact from foreign exchange due to the strengthening dollar on our international sales. Adjusted EBITDA was $117 million for the third quarter, as compared to $151 million in 2014, and our adjusted EBITDA margin was 10.1% versus 12.2% respectively.

The decrease in adjusted EBITDA and margin a primarily reflects the pullback in industry volumes and pricing pressures that accelerated in the third quarter and approximately $10 million of higher manufacturing costs associated with lower productivity. This decline was partially offset by additional earnings from recent acquisitions in our packaging business. During the third quarter, we took a nonoperating, non-cash goodwill impairment charge of $775 million, or $530 million after a related tax benefit.

The company performed an interim goodwill impairment test for the reporting units within the US print and related services segment, triggered by the decrease in our stock price and ongoing volume and pricing pressure that we've been experiencing, which resulted in an impairment charge in the quarter. The goodwill that was written off was almost entirely associated with the 2010 World Color Press acquisition. While the amount of the impairment charge is significant, it is a non-cash impairment charge and ultimately does not have an impact on our key financial metrics, including adjusted EBITDA and free cash flow.

On slide 5, we've included a summary of revised the 2015 annual guidance that reflects the pullback in industry volumes and pricing pressures that accelerated in the quarter, as well as lower productivity levels in our manufacturing platform; full-year 2015 net sales to be in the range of $4.6 billion to $4.7 billion, lowered from our previously disclosed guidance range of $4.8 billion to $4.9 billion. This change reflects a continuation of the third quarter increased pricing pressures at negative1.5% of consolidated net sales. This is now at the high end of the pricing decline range that we provided with our original 2015 guidance.

Additionally, volume is estimated to decline between 4% and 6% of consolidated net sales, excluding foreign exchange impacts. This is consistent with the pullback and volumes we saw the third quarter, which were below the high end of our volume guidance range of negative 3%. 2015 adjusted EBITDA to be in the range of $430 million to $450 million, reduced from our previously disclosed guidance range of $500 million to $520 million, reflecting the adjusted EBITDA impact of the volume and pricing pressures and approximately $25 million of higher manufacturing costs in 2015 from lower manufacturing productivity.

As Joel mentioned, manufacturing productivity was down due to labor availability in our Wisconsin platform and the associated training and onboarding costs as we ramped up hiring for the busy season, as well as an increased manufacturing complexity in our product mix. We believe the productivity issues are fixable and will be a key focus in our $100-million cost reduction program.

2015 free cash flow will be in the range of $165 million to $180 million, reduced from our previously disclosed guidance range of $180 million to $200 million. We expect to achieve a 12% year-over-year increase in free cash flow at the midpoint of our updated guidance, primarily from improvements in working capital and lower cash taxes, despite lower adjusted EBITDA.

2,000 restructuring and transaction related cash expenses will be in the range of $45 million to $55 million, a $20 million increase at the midpoint of our updated guidance, as compared to our previous guidance range of $25 million to $35 million. The increase is primarily associated with incurring the initial cost in 2015 to achieve the $100 million of cost savings in 2016. In total, we expect to incur an estimated $40 million in cash restructuring costs in 2015 and 2016 related to the $100 million cost reduction program. 2015 capital expenditures will be in the range of $140 million to $145 million, a decrease from our previously disclosed guidance range of $145 million to $165 million and cash taxes will be less than $10 million, a decrease from our previously disclosed guidance range of $20 million to $35 million.

Slide 6 is a summary of our year to date free cash flow. We define free cash flow as net cash provided by operating activities including pension contributions less purchases of property plant equipment. The company generated $68 million of free cash flow through the first nine months of 2015, representing a $106 million increase over 2014.

We continue to generate a significant amount of free cash flow and, as indicated in our revised guidance, we expect to finish the year with free cash flow in the range of $165 million to $180 million. This is an increase of nearly $20 million at the midpoint of our updated guidance range over the $154 million of free cash flow generated in 2014.

We believe we have the ability to sustain free cash flow at our 2015 revised guidance range into the foreseeable future due to cash flow tailwinds of approximately $200 million to $300 million in reduced cash needs to run our business in three primary areas. First, working capital reductions, our ability to continue to streamline our cash conversion process which reduces the number of days from the point we receive an order until we're ultimately paid by our customers, will drive at least an estimated $150 million in further operating working capital reductions.

Second, lower capital expenditure requirements, our modern and highly automated manufacturing platform can be sustainably maintained at capital expenditure levels of less than 2% of our revenue, which is well below our historical investment levels of 3% of revenue. Our platform requires less capital expenditures going forward, as our platform has benefited from significant investments in the past which outpaced industry norms. This lower capital requirement will translate into $40 million or more in annual cash savings going forward.

And third, pension funding requirements: cash contributions into our pension plans should be at least $15 million lower over the next two years due to improvements in our funded status of the acquired World Color pension plans and funding relief legislation. We remain confident in our long-term ability to generate a significant sustainable amount of free cash flow which provides us with the resources to drive our strategic plan and create value for our shareholders.

On slide 6, we have also noted the free cash flow yield on our stock price. As of the close of the business on November 3, our free cash flow yield was approximately 30%, which is significant in today's market and in our industry, given what we believe is a sustainable level of free cash flow.

On slide 7, you'll see that we ended the third quarter with $1.5 billion in debt and capital leases, an increase of $113 million from December 31, 2014, primarily due to our packaging business acquisitions of Copac and Specialty Finishing. In addition, our single and multi-employer pension obligations have decreased $28 million from December 31, 2014. Our quarter end debt leverage ratio increased to 3.09 times versus 2.82 times as of the end of the second quarter of 2015. The increase is primarily related to the Specialty Finishing packaging acquisition completed in late August, seasonal working capital needs as of third-quarter's typically our peak for working capital and lower adjusted EBITDA.

We continue to believe that operating in the 2 times to 2.5 times leverage range over the long-term is the appropriate target and we will remain diligent in reducing debt and pension liabilities going forward as a primary use of cash. Since the close of the World Color acquisition on July 2, 2010, we have paid down $573 million in debt and pension liabilities through August 30, through September 30 of this year.

Slide 8 is a summary of our debt capital structure. Availability under our $850 million revolver was $574 million as of September 30, 2015. We have no significant maturities until April 2019. The weighted average duration under our debt capital structure is 5.2 years with a blended interest rate of 4.6%. Our fixed rate debt structure is at an average interest rate of 7.1% and our floating rate debt is at an average interest rate of 3%. Our debt capital structure is 61% floating and 39% fixed.

We believe this fixed versus floating rate debt structure provides us with the financial flexibility we need over the long term to balance our key priorities, to pay down debt and pension liabilities, invest in our business, pursue future growth opportunities and return value to our shareholders.

Slide 9 shows our commitment to our dividend, which is the key way in which we return value to our shareholders. In continuation of our commitment to our dividend, our next quarterly dividend of $0.30 per share will be payable on December 18, 2015 to shareholders of record as of December 7, 2015. We have consistently paid out a quarterly dividend and, based on our stock price as of the close of business yesterday, our annual dividend of $1.20 per share is yielding approximately 10%, but represents only one third of our total free cash flow.

As we move forward in this challenging industry environment, we will continue to serve our customers well and be disciplined in how we manage all aspects of our Business, especially in driving improved productivity and sustainable cost reduction initiatives to remain a low cost provider, while continuing to generate a significant amount of free cash flow.

We will continue our focus on maintaining a strong and flexible balance sheet to adjust to changing industry conditions and also investing in our Business and returning capital to our shareholders through our quarterly dividend among other priorities.

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

(Operator Instructions)

Our first question today comes from James Clement from Macquarie. Please go ahead with your question.

Good morning, gentlemen.

Hi. How are you?

Doing all right. Joel, you guys talked I think a fair amount about plan capacity reductions and that being a component of the $100 million in cost savings. Can you talk about some of the other areas you talked about productivity a little bit. But can you go into a little bit more detail on that and perhaps some of the other things that make up the $100 million?

Yes. Absolutely.

If you don't mind humoring me for a few minutes here, let me just kind of go backwards to the journey we've been on, on cost take out, so when we got through the, the beginning of the recession and we changed course and started being a consolidator, at the time, the industry needed a major reset in the base line of capacity.

And so we knew that with our capacity being what it was and well invested in large plants, that we could adjust the volume need of our a specific combined companies in terms of capacity requirements so we started aggressively taking plants down. Now, not only did we do that, because that's what adjusts to the volume, by taking capacity out, but we also started investing in things with IT infrastructure, automation, things that allow you then later on to continue to take costs out of the existing plants.

And so, if we fast-forward to 2015, I've talked about this being the first year where we haven't been doing a major integrating acquisition. And so it's not about right now, it hasn't been about as much, trying to pull these companies in and figure out which plants were down although we are doing that, too. But it's been about looking at the girth of the company, the indirect labor that we have to support the resulting platform.

It's hard to focus on the core of the business and how we run as a corporation when you're doing all this integration. And so, we did a lot of switching of gears this year and put in a lot of plans to start taking out the cost we know we can take out because we know there's a better way.

We just haven't had the manpower and the focus to be able to do it while we're doing these other integrations. So a part of the $100 million cost is, we've done a lot of significant reduction in SG&A positions as well as costs that are needed.

We've done off-shoring of some of the more data intensive type of input work to our Poland operations where Quad people have established a whole program over there that's working very well. The basic things of getting better control of travel and things like that. But right now, as we got in, and these were all being executed on.

I also, as I said in my script, restructure the company to better align us for what the marketplace is doing but that also took out several top level positions.

Right.

In terms of GMs running silos and so whatever you sort of -- and we had to have the silos as we were sort of pulling in these product lines, doing these integrations, to keep our hands around them. But, we felt it was time now to switch gears back to simplifying by removing those silos because that's what we need to perform and execute for our customers when we're doing these continuum sales.

But equally as important, it exposes a lot of costs that don't need to be there and a lot of process improvement that can be handled that you couldn't see before, note not by any fault of anybody other than the fault of a silo, which is what a lot of our customers are dealing with now, and I think companies all over the world are dealing with.

And so, we started doing that but when I saw our third-quarter results here and what was happening with volume and also pricing, the volume I can adjust for as we're doing, you noticed we announced two major platforms into this morning on top of two other ones that we did. But that also said to me that we are in need to get ahead of the curve, and resetting a baseline of cost for this company.

So not just the continued, run the business as you see, sort of challenges in the regular pricing declines we saw or the volume declines we saw. This was a new accelerated think thing I hope is short-lived but, to me, hope is not an operating strategy.

It's about taking this Company, who is very capable when we talk to the troops about tough times, of going the extra mile and we're actually looking at the fabric of our Company and kind of taking a different twist because cost take-out, yes, everyone talks about cost take-out and you can do so much until you don't know where else to go until you look at the Rubik's cube differently and you do things like I did with the reorganization of taking silos out that expose you to a whole lot of other things we do.

And I want to make a very strong statement here that this $100 million cost take-out program, I mean this isn't like we just woke up one day and said we had to take $100 million out because of the third quarter. What it did do is a continuation of cost we were already planning on taking out but I was very frustrated with the results. And so was the team, so are my employees and we said we got to go faster.

We've got to be more aggressive and we've got to be even more bold than we were capable before. This Company has the creativity, it has the talent and has the wherewithal to do that to get ahead of the curve, if this is a trend to come. I will tell you that the $100 million is in the bag for 2016. And we're not stopping there.

Okay. So, Joel, one of the things you touched on there and I'm very curious to get a little bit more on this, is, I think you talked about indirect cost, indirect labor not related to manufacturing and that kind of thing.

And one of the concerns I think that some of us have had about Quad over the years, is that you all have gone way above and beyond in terms of investing in things like data analytics, even some of the app stuff you've been working on for years, and really trying to help some of your customers in my opinion kind of solve some of their problems. So the thing about it is, it's not been clear to us that you guys have actually been paid for this. So I mean --

Yes, Jamie is not clear to me that we've actually been paid for it yet but what I will tell you is, we've been talking this game for a long time and our customer base is going through lots of challenges. First of all, if you look at the retail community you can-- The top, I don't know, four or five retailers all have new management teams, they have all new Chief Marketing Officers. And so they're all taking a fresh look at things.

You have things like what Amazon did for back to school on July 15 by announcing Prime Day, which threw everybody off their game. And so, a lot of disruption is happening and how they go to market and what's very clear to me because in the last, call it 10 months to 12 months, in my conversations at the C-suite of large retailers, small retailers, catalogers, collocations, is this sort of confusion or crisis of measurement is real, that people are looking at how their marketing departments work and they're siloed. That means they're measuring channels separate from each other without understanding the interconnection.

And a lot of the stuff we've been investing in is allowing them, we're helping many customers and we're proving it, that we can show them the interrelationship and in many times and show them that they need to do more print. We have 12 e-tailer pure players who a year ago weren't doing catalogs.

Right.

They're now doing catalogs and they can't believe the traffic being driven to their e-tailer site. And so I think it's a matter of how fast do our customers evolve to understand how they can fix this problem and understand how we can be the ones to fix that for them. I've never seen so much momentum in all the years I've been doing this type of conversation as I've seen in the last 10 months to 12 months.

There certainly are customers who are waking up in a very big way and are paying us for it. But it's a matter of -- we need these industries to kind of, and they know it, they need to get going and understanding this omnichannel thing faster and better and that's where I think we'll win.

And last one if I may, I mean Joel it sounds like, with the $100 million in the bag, even if current business conditions continue, quite simply the way the math works for me is, it sounds like free cash flow next year should be stable and it actually sounds like EBITDA should be up with the cost savings plans right?

Well look, next year, I'm looking at Q3 right now and again, I was surprised by the pullback in volume as well as the increased pricing pressure even after all this capacity has come out. It's all going to depend on all the factors that you know.

What's the consumer really doing? I hate to tell you, and maybe I'm the first one telling you this, is the headlines about the economy do not actually match what's going on. I think in many sectors you are seeing a lot of people hold back, Milwaukee, a lot of manufacturing companies have gotten hit really hard. And I worry about next year's GDP growth. If it's under 2%, this is a lot of consecutive years for all these businesses to have to manage costs out. And I talk about our customers, I'm talking about everybody throughout the chain.

But like I said, I can't predict where those pressures will go. But, I look at third quarter as sort of one of those warning signs of whatever happens I need to reset my baseline of costs. We're doing it aggressively and I'm not stopping at $100 million.

Okay.

And so --

Yes, Jamie, and just to add onto that, I think the key assumption to look at of what's going on in this industry is pricing. You've heard us talk about that's now gone to the higher end of our range in terms of decline in pricing at 1.5%. So really, as pricing goes, so goes how we will guide next year.

We will be back after the fourth quarter results to give you a look at 2016 so we'll be able to update you a little more from an adjusted EBITDA standpoint, but we felt that it was important to understand that, despite what's going on with the adjusted EBITDA, there's a lot of tailwind to this free cash flow.

And as you look at our free cash flow and what we can do in terms of improving our operating effectiveness of our working capital, and investing wisely into our business, but we have the benefit of a lot of investment in the past that's been way above industry norms, and which this platform was built upon and which drives the productivity we have that can be maintained at a much lower investment level and quite frankly not having to put as much money into pensions, it gives us a nice tailwind to say, hey this cash flow that your seeing this year, what we're guiding to, is sustainable into the near-term future.

So you really like how the year kind of plays out from a free cash flow perspective and we'll be able to monitor what's going on with the top line before we come back to you after the fourth quarter call.

Jamie, also let me just also reiterate something maybe we do not hit hard enough, but a good $10 million of our miss was productivity. And so it's kind of a tale of two cities.

Here on closing two plants this morning which you say, okay, well why was the labor availability a problem? Well because it shows you that it's working in terms of moving work to the plants that have had all that significant investment, are the most efficient and specifically a lot of that challenge happened in our Wisconsin operations where we have multiple million plus square feet plant, 14 total plants, and we got caught, starting in the spring, of having a real challenge of finding skilled labor.

And so I think you're seeing that play up a lot of areas in the country but for us we were ramping up because a lot of work was coming into Wisconsin. We've got some great tax credits in partnership with Wisconsin to do it, but a lot of our productivity issues stem from just, it took too long to get the people in.

And so now we're actually in a better place and we're, the training has kicked in, we spent a lot of money on the training to get people up to speed faster, how do we make sure we retain people in the first 60 days where the highest turnover is, but that's an important thing because productivity to me, that issue is the fixable part of this. The other stuff is that we do have to react to.

Okay. I'll get back in queue, thanks very much for your time.

Okay.

Thanks, Jamie.

Our next question comes from Katja Jancic from Sidoti & Company. Please go ahead with your question.

Good morning, Katja.

Good morning. Joel, you briefly mentioned the expansion of digital press technology. Can you provide us with an update as to how it's going and also remind us what the value of digital print is?

Well, so from a standpoint in the book operation where most of it's been, there's a big transformation going on in what our clients need and everyone thought it was what they needed is to move everything to a Kindle. That hasn't played out that way because people actually do like books.

Surprise. But, what they do need to do is get rid of inventory and so there's a transformation going on from these long run, heavy metal presses that produce hundreds of thousands of things very efficiently, to on-demand digital presses that can create much lower batch sizes.

The book publishing industry, because of the way legacy of technology and digital wasn't here yet, they are forced to have just hundreds of millions of dollars worth of inventory at any given point where much of it is going to become obsolete. That's a huge cost. So that's why we invested in the five digital presses down in Versailles, Kentucky.

Those are up, fully running. Our only challenge in terms of taking on more work there, is we've hired a lot of people to train up and that's happening, the running rate, when we'll continue with that and we found another possibility. Not another possibility. We've installed another digital press into our DM platform because what's happening in direct mail is people want total variability.

Four color all the way through where, when a direct mail piece comes to Joel, about what he bought online and why did you abandon your shopping cart, we want to be able to have a personalized piece, with an image of that piece right there to increase response rate. So I see this technology continuing to evolve very quickly. And expand, continue to expand within the Quad operations as we just installed the one in direct mail.

And so the value of it is changing the game in books, in terms of inventory levels and also being personalized textbooks, to the value in DM is to turbo charge an already very aggressive offering in terms of using data to drive response.

If I'm not mistaken you previously mentioned that you are going to install more of these digital press technology. Is this strategy going to change now, with the more challenging environments?

We will be opportunistic about the CapEx. I mean, as Dave said, a lot of the big CapEx we've done has been in heavy platform. That's automating things like forklifts, bringing plants that we acquired up to speed to our level of what needs to be done.

And so we can back off that gas pedal because these are already the most modern plants in the printing world. And, we're not going to stop spending in CapEx but the requirement on the heavy metal side is a lot less so that as we look at CapEx projects, it can be about creating value for our customers and creating top line revenue, which is where we'll be opportunistic. But we'll also be very disciplined about it as always.

Now you're debt leverage is a little elevated because of the acquisitions. When do you -- What's the timeframe as to when could you bring it back to the more normal two point times?

Katja, from a use of cash perspective, our primary use of cash is going to be in debt pay down so we're slightly elevated, as you mentioned, due to the acquisitions we've done this year. And lower EBITDA levels will continue therefore to pay down debt aggressively, be opportunistic about investments back into the platform, as Joel talked about, especially from a strategic standpoint. And then, the third thing is our commitment to the dividend is $1.20 per share, it's yielding well over 10% now, based on what we're trading at today.

And that we believe is a sustainable dividend as we move forward. It's only a third of our free cash flow, so those three things are the primary uses of our cash. Will continue to pay down that debt because when it's above 3 times, that's just at a level that we believe is the smartest thing is to continue to pull it down and get back towards our long-term horizon of 2 times to 2.5 times.

Okay. Thank you very much. That's all for me.

Thank you.

Ladies and gentlemen --

Operator?

Please go ahead, sir.

Are there any more questions?

At this time, I'm showing no additional questions.

Okay. Before we go, look, I want to make it clear, I think I've made it clear, that I'm very frustrated with the quarter and we all are but at Quad/Graphics, frustration usually leads to a high degree of motivation and that's just the way our culture works. And, I think that's proven with being very confident about our cost take out program that we're putting through and also the free cash flow that this Company generates, sustainability is real, which I think is a great story for a 10% plus yield that our stock has right now.

But finally, I just want to take a brief moment to recognize two employees. This is a family Company. It's a family-based Company and now we have over 24,000 employees. In many ways for me, it's not like what it was where I could know everybody and see everybody.

And we lose people from time to time. You know? Their life ends. And it has an impact on everyone around them.

But two in particular I'd like to talk about because I'm not able to talk about everybody who touched my life in one way or the other. First is Gary Anderson. Gary is a 30 year plus employee, who literally helped build this Company. He works in our maintenance group that is responsible for installing presses, moving presses, bringing them up to snuff, making the machine work. And he literally helped us build in the Greenfield days and re-create the industry in the consolidation days. But Gary lost his life to a long battle with cancer a couple weeks ago.

And the other person is [John Hurds]. John is a 20 year plus employee in our IT group who I've known over the years and I know his partner, Heather Schneider, over of years and in fact I had to give her a big hug this morning as I walked into work because I hadn't seen her since John passed away. I think it's important, and this is a message really to our employees, that we recognize that we have a lot of people.

We recognize when we close plants we're parting ways but when we lose someone to death, that impacts the family. It's not just losing someone who helped to build a company. But it's losing somebody who impacts the employees around them.

And these two are certainly two who have impacted a lot of employees around them. So on behalf of all of you who may have lost coworkers over the past couple of years, please, I want to just use these two, as these were a personal connection to me, but that doesn't mean I don't want to have a personal connection with everybody. I get an email whenever we lose anybody.

But I would like to end with that and thank all the employees for all the work they're doing and all the work they're going to be doing. Thank you.

Ladies and gentlemen, the conference is now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.