Quad/Graphics Inc (QUAD) 2016 Q4 法說會逐字稿

Welcome to the Quad/Graphics fourth-quarter 2016 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 Investor's section of Quad/Graphics' website under the Events & Recent Presentations link in the left-hand navigation bar.

Following today's presentation, the conference call will be open for questions.

(Operator Instructions)

Please note this event is being recorded. I will now turn the conference over to Kyle Egan, Quad/Graphics' Manager of Treasury and Investor Relations. Kyle, 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 lead off today's call with highlights of our financial results, along with more detailed discussion of our path forward in 2017. Dave will follow with a more detailed review of our fourth-quarter and full-year 2016 financial results and a summary of our 2017 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 on slide 2. 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's 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. Today, I am pleased to report that our fourth-quarter and full-year 2016 results exceeded our expectations and show that we are more than -- we more than accomplished what we set out to achieve for the year.

Throughout 2016, we continued to transform both our business and industry through strategic investments in our asset base, and through the creation of new and innovative solutions designed to create greater value for our clients. We also continued to implement sustainable cost reductions and productivity improvements while maintaining a focus on top line revenue to drive EBITDA enhancement.

Full-year 2016 net sales were $4.3 billion and reflect ongoing industry pricing and volume pressures. Slide 3 shows net sales by product line and geography which have not changed significantly year over year with the exception of increased revenue in Quad Packaging, one of our targeted growth areas. In the year with continued top line pressure, I could not be more proud of our performance.

As a team, we increased full-year 2016 adjusted EBITDA by $11 million to $480 million; increased adjusted EBITDA margin by 90 basis points to 11.1%; increased full-year free cash flow by $31 million to $246 million; reduced debt and capital leases in 2016 by $218 million, and improved our debt leverage ratio by 52 basis points to 2.36 times, well within our guided range of 2 times to 2.5 times.

As we look forward to 2017, we will continue to take advantage of our unique position in the industry as both a global printer and marketing services provider. To ensure we maintain our momentum on our path forward, we will continue to generate sustainable strong free cash flow to support value-creating opportunities as part of our Company's ongoing transformation; drive further EBITDA enhancement through ongoing sustainable cost reduction and productivity improvements while remaining focused on incremental revenue; strengthen our balance sheet through ongoing debt and pension reductions, which we recently fortified with an updated debt capital structure that Dave will expand on in his section of the call; provide long-term shareholder returns and accelerate the transformation of our go-to market strategy in chapter 3 of our Company's journey.

As you know, we describe our transformational -- transformative journey in chapters. Our first chapter covered a period of tremendous organic growth that began with our founding in 1971 and concluded in 2010. During this first 40-year period, we grew rapidly through greenfield growth, built a premier manufacturing and distribution platform, equipped with the latest technology, established a reputation as one of the industry's foremost innovators, and created a lasting Company culture based on strong values that remain in place today, more than 45 years later.

Our second chapter began in 2010, when Quad took on the role as disciplined industry consolidator. We saw the opportunity to disrupt the printing industry in response to severely impacted print volumes following the great recession of 2008 and 2009. Through a series of consolidating acquisitions, we were able to enhance and expand our product offerings while removing inefficient, underutilized capacity; pulling out costs; and transitioning work to more efficient, sustainable facilities.

As we move forward in chapter 3, we will continue to create a better way. As industry dynamics change, we will be opportunistic and evolve to meet the changing needs of our customers and continue to transform Quad in two distinct ways, as shown on slide 5. First, we will continue to redefine our role in a multi-channel world from a long, rich history as a printer that provides high-quality products to a marketing services provider that helps clients market more efficiently and effectively, using our strong print foundation in combination with other media channels.

And second, with an engaged work force, we will continue to invest in and strengthen our core manufacturing platform to ensure it remains the strongest and most sustainable in the industry. We will continue to aggressively manage costs and improve productivity to hold the line on adjusted EBITDA margins. This supports our goal of being the industry's high quality, low cost producer while generating strong free cash flow to support value-creating opportunities that advance our Company's ongoing transformation.

As I've discussed on previous calls, marketing has been upended by an ever-expanding choice of media channels. The consumer has control of how and when they engage with the brand. This has created a crisis of measurements for many marketers, as they try to figure out how to generate more content for more channels with the same or fewer resources.

Further, many are struggling to find the optimal way to orchestrate their activities, with the right mix of media channels that will breakthrough the noise and engage end users to increase response and convert customers. Given these rapid changes, our client's marketing agency partners are struggling to help them figure out how to use multiple media channels effectively in unison.

In some cases, this has caused an overindexing of marketing spend in digital, mobile and social channels. As a result, many marketers are failing to optimize their total marketing spend. This situation has created an opportunity for Quad to further our role as a marketing services partner by helping clients deliver the right message, by the right media, at the right time, leveraging our expertise and insights gained over the past 45 years, supporting iconic brands.

We have capitalized on our long-standing expertise in lean enterprise and process engineering to conduct work flow discovery and process optimization for our clients. These process optimization programs are managed by professionals with client-side experience and examine work flow from strategy through output to any channel.

As a result, we identify opportunities to reduce cycle times and save money through eliminating redundancies and allowing clients to focus on what they do best, bringing new products to market faster and smarter. We are experts at content production for print and digital output and can process content quickly to the highest quality standards at a low cost.

In many instances, we are doing this content production right on site at the client location as part of our growing multi-channel marketing content creation services. We continue to significantly grow the number of clients for whom we are providing these types of services.

A good example of this strategy is our relationship with Cabela's, the world's foremost outfitter of hunting, fishing and outdoor gear. As I shared with you on a previous conference call, Cabela's expanded its more than 25-year relationship with us by transitioning its in-house creative services to BlueSoHo, our integrated marketing agency.

These services include design, copyrighting, and production as well as photography and videography for the outfitters catalog, packaging design, advertising and online presence. The operation is based in the state-of-the-art facility just down the street from Cabela's world headquarters and employs approximately 90 former Cabela's employees, who now perform the work as Quad employees.

As we evolve in chapter 3, we will continue to build upon our marketing services foundation to help better inform and measure our client's marketing decisions across print, digital, social, mobile and other channels. Accordingly, clients will be able to more effectively coordinate the strengths of different channels, and increase the return on investment for each dollar they spend on marketing.

To accelerate this vision in 2016, we made strategic investment in our partner, Rise Interactive. Rise is a digital marketing agency that specializes in media, analytics and customer experience. They were named a strong performer in a Forrester Wave Report for search marketing agencies, earning the highest possible scores for market research, reporting and analytics, and client satisfaction.

This partnership combines Quad's expertise in optimizing a client's marketing spend in offline channels, with Rise's expertise in online channels, to create more integrated powerful marketing campaigns, bridged by the expertise we already have in place with BlueSoHo. This focus on performance marketing provides enhanced value to our clients through; one, better orchestration of media to improve the consumer brand experience with consistent messaging and appropriate pacing of digital and print media. Two, greater relevancy through enhanced analytics that drive personalized data-driven messaging for creating deeper consumer engagements and increased customer loyalty; and, three, improved reporting to measure how print and digital channels jointly impact customer behavior and sales and thereby, guide more effective spend across channels.

To accelerate the transformation of our enhanced go-to market strategy, we will maintain a customer-first mentality in all we do; continue to add new client side marketing talent to advance our understanding of our clients' business needs and change the conversation beyond our role as a critical commodity vendor to a trusted marketing services provider; continue to build out our vertical market approach in targeted industries, including publishing, retail, health care, and consumer packaged goods; and enhance and expand our offering through ongoing innovation, augmented by external partnerships to continue providing a truly unique offering in the marketplace. As an example, we recently seized on the opportunity to disrupt the book industry, with a customized solution designed to create value for publishers.

The centerpiece of our solution is a proprietary demand-driven ordering system that helps clients better manage ordering and inventory and in turn, reduce inventory obsolescence and the overall cost of goods. In short, the system analyzes product and market characteristics to dynamically adjust forecast quantities, and then rapidly replenishes inventory when and only when supplies run low.

Our book platform that we transformed through multiple high-speed color digital web presses and integrated front-end and back-end systems is central to that solution. We created the solution from scratch, following in-depth conferences with Cengauge, an education and technology company based in the US. Cengauge previously used multiple printers in multiple countries to print and distribute more than 15,000 different book titles.

Warehousing and inventory obsolescence were costing the publisher millions of dollars each year. By positioning ourselves as a strategic business partner and offering Cengauge a one-of-a-kind solution, we were awarded with a multi-year, multi-million dollar contract that began in early 2017.

Under the Cengauge contract, Quad provides 100% of its paper, 100% of its printing, business process outsourcing for various procurement functions, and on-site facilities management for production services, continued improvement, and program management. We took responsibility for and now employ several former Cengauge employees as Quad employees, who help to ensure a seamless transition of services.

Cengauge now benefits from faster time to market and will save millions of dollars in production, distribution, and inventory costs over the life of the contract. We continue to provide variations of this solution to other book publishing clients and prospects.

In closing, and before I hand the call over to Dave, I'd like to extend my sincere thanks to our employees for their ongoing dedication, determination, and hard work. They made it possible to deliver a strong year and we look forward to their continued hard work and commitment in 2017.

With that, I will now hand the call over to Dave.

Thanks, Joel, and good morning, everyone. We had a strong year in 2016 and our financial performance exceeded expectations that we set out to achieve at the beginning of the year due to driving operational efficiencies and cost reductions throughout the entire Company. Bottom line, despite a sales decline, we increased earnings and cash flow in 2016, using that cash flow to pay down $218 million in debt to continue to strengthen an already healthy and flexible balance sheet.

Slide 6 provides a snapshot of our full-year and fourth-quarter 2016 financial results as compared to 2015. Full-year net sales were $4.3 billion, down 5.8% from 2015. Organic sales declined 4.5% due to ongoing industry volume and pricing pressures after excluding a 1.4% positive impact from acquisition, a 2.1% negative impact from lower pass-through paper sales, and a 0.6% negative impact from foreign exchange.

The organic sales decline was consistent with our previous guidance of a sales decline of 5% to 7%. Full-year adjusted EBITDA increased $11 million to $480 million in 2016. Adjusted EBITDA margin increased 90 basis points to 11.1% as compared to 10.2% in 2015.

The increases in both adjusted EBITDA and margin exceeded the top end of our original guidance range for the year and were at the midpoints of our increased guidance range we provided during our second quarter call. They primarily reflect ongoing improvements in manufacturing productivity and sustainable cost reductions as part of our previously announced and implemented cost reduction program.

For the fourth quarter, net sales were $1.2 billion, down 8.8% from 2016. Organic sales declined 6.3% due to ongoing industry volume and pricing pressures, after excluding a 2.2% negative impact from lower pass-through paper sales and a 0.3% negative impact from foreign exchange. Adjusted EBITDA declined $14 million in the quarter to $140 million, and despite the lower adjusted EBITDA, margins remained flat at 11.7% due to lower cost of sales and SG&A, driven by productivity and sustainable cost reductions.

Our team continues to focus on proactively matching our cost structure to the realities of top line pressures we face in the printing industry. During 2016, we achieved our $100 million target in productivity improvements and cost reductions, which helped drive our increase in earnings year over year. As we've stated on previous calls, our goal is to drive sustainable continuous improvement programs to reduce costs by a minimum, a minimum, of $60 million annually.

On slide 7, you will see a summary of our 2016 free cash flow, which we define as net cash provided by operating activities, including pension contributions less purchases of property, plant, and equipment. The Company generated $246 million of free cash flow in 2016 compared to $215 million, representing a $31 million, or 14% percent increase between years and exceeded the $230 million top end of our original guidance range and finished near the midpoint of our upwardly revised guidance.

The increased free cash flow was driven by higher earnings, reduced capital expenditure needs due to past investments in creating our highly automated and efficient manufacturing and distribution platform, and sustainable ongoing improvements in working capital levels. Free cash flow is the foundation of our disciplined capital deployment strategy, and we believe we have the ability to sustain this level of free cash flow into the foreseeable future.

On slide 8, you will see that we ended 2016 with just over $1.1 billion in debt and capital lease obligations. We continue to remain focused on strengthening our balance sheet through debt and pension reductions. Our strong free cash flow generation enabled us to reduce debt by $218 million, or 16% during 2016, finishing the year at a leverage ratio of 2.36 times, this is well within our long-term and consistent policy of targeting 2 to 2.5 times leverage.

Also, we were able to reduce our pension liability by $23 million and ended the year with an unfunded pension liability of $162 million. We reduced the pension liability through a number of initiatives, including a lump sum program in which we settled $93 million of pension liabilities for $75 million in cash payments, a $10 million discretionary contribution to the plan and a higher-than-assumed pension plan return on our investments of 7.3%.

We reduced the overall pension liability despite the backdrop of a 23 basis point decrease in the discount rate to 3.91% used as the value of the pension liability at the end of the year. This lower discount rate would have increased the pension liability by $22 million if it were not for the initiatives just described.

All in, we've reduced debt, capital lease, and pension obligations by slightly over $1 billion since we went public and acquired World Color Press in July of 2010. We will continue our focus on debt and pension reduction as the primary use of cash and continue to believe that operating in the 2 to 2.5 times leverage range over the long-term is the appropriate target. As a reminder, we may operate outside this range, depending on the timing of compelling strategic investment opportunities.

Slide 9 is a summary of our debt capital structure as of December 31, 2016, as well as a summary of the amendment and extension to our credit facility and new interest rate swaps completed in February of 2017. For comparative purposes on slide 9, the new debt capital structure is treated on a pro forma basis as if it were in place at the end of 2016 rather than in February of 2017 when we completed the amendment.

We amended our existing senior secured credit facility to extend the Company's debt maturity profile by two years to 2021, while maintaining the same pricing and same covenant structure. Because of our continuing strong free cash flow generation, and the corresponding decrease in our debt levels, we've lowered the maximum borrowing amount of the revolving credit facility to $725 million from the previous $850 million and we replaced our current Term Loan A with the new $375 million Term Loan A, both of these instruments now mature in January of 2021.

We also entered into a five-year interest rate swap to swap $250 million of variable rate debt into fixed rate debt at 3.9%. With the swap included, 62% of the Company's debt is now fixed rate debt, with an overall advantageous blended interest rate of 5% on net total debt.

Available liquidity, when measured against our most restricted financial covenants, remains unchanged at $699 million at the end of 2016 under both the old and amended debt structures. We accomplished our debt financing objectives by extending maturities by two years, moving to a more fixed rate debt structure at that advantageous 5% overall blended interest rate, and maintained sufficient capacity to provide capital for our strategic initiatives.

Slide 10 summarizes our 2017 financial guidance. We anticipate 2017 net sales to be in the range of $4.1 billion to $4.3 billion, down 1% to 5% versus 2016. Our consolidated net sales assumptions include continued downward pressure from prices, declines of negative 1% to 1.5% of net sales, and organic volume declines of 1% to 4%. The volume guidance shows an improvement in our net sales trends we experienced in 2016, this is primarily due to new business net benefits 2017 such as Cengauge Learning, the book publisher relationship Joel discussed earlier in our call.

We expect adjusted EBITDA to be between $440 million to $480 million, representing a 4% decline at the midpoint of that guidance range versus 2016, and essentially flat adjusted EBITDA margins at 11% due to continued productivity improvements and cost reduction targets totaling more than the $60 million of minimum annual targets I discussed previously. These savings helped offset the net sales decrease.

We expect free cash flow to be between $225 million and $275 million. The $250 million midpoint of the range is consistent with 2016 free cash flow generation, as we'll continue to benefit from working capital improvement initiatives and efficient use of lower capital expenditures and less pension contributions in 2017.

The remainder of our guidance includes depreciation and amortization in the range of $225 million to $235 million; interest expense in the range of $70 million to $80 million; restructuring and transaction-related cash expenses in the range of $30 million to $40 million; capital expenditures in the range of $75 million to $90 million; cash taxes in the range of $10 million to $20 million and pension cash contributions of $10 million, primarily related to exited multi-employer pension plan payments.

Slide 11 shows our commitment to our dividends, which is a key way in which we return value to our shareholders. Our next quarterly dividend of $0.30 per share will be payable on March 10, 2017 to shareholders of record as of February 27, 2017. We consistently pay a quarterly dividend and our annual dividend of $1.20 a share is yielding approximately 5% but only represents 25% of our free cash flow.

As Joel mentioned previously, we will remain focused on driving further EBITDA enhancements and strong free cash flow generation through adding new business, productivity and continued cost reductions. Strong earnings and cash flow will allow us to continue to strengthen an already healthy balance sheet through ongoing debt and pension reductions while also continuing to invest in our business to accelerate the transformation of our go-to-market strategy and return capital to our shareholders through our quarterly dividend, among other priorities.

Now I'd like to turn the call back to our operator, Gary, who will facilitate taking your questions.

We will now begin the question and answer session.

(Operator Instructions)

The first question comes from Jamie Clement with Macquarie.

No comments in the script about the macro backdrop and I just figured I could just take a shot and ask you what maybe you're hearing from your customers. Are they sounding more optimistic, et cetera, et cetera?

So you're looking for my crystal ball, huh?

Exactly. Or better yet, another way to ask, what signs would you be looking for, other than more pages coming off of your press that things are getting better?

Look, I think that there's all sorts of economic aspiration going on out there, and I think if you look at like the fourth quarter, we saw some softness but then you look at what GDP growth actually was, it was below 2%. Now we're seeing just a lot of people trying to adjust with the pressures. You look at the retailers, et cetera, but I think there's a lot of wait and see.

There's obviously an administration trying to pull itself together here, which always takes a little bit of time. When we -- everyone starts to get more guidance and understanding of what they're going to do with tax law or regulation, I think that's going to be one of those things everyone's looking at.

Meanwhile, I think a lot of our customers are looking at themselves and they're really trying to speed up their own transformations, and it's actually created a big opportunity for us because, when people are looking at themselves and trying to figure out how to compete in an ever-changing world that just seems to constantly happen now, it's actually given us the ability to have conversations that we weren't able to have before.

And I've talked about this all last year, but I have to tell you, the willingness and the acceptance of thinking differently with some of the solutions we're bringing to our clients has sped up rapidly, and so we're, like Cengage, like Cabela's, there's quite a few other things like that, that we're doing to help people manage the times and gear up for whatever positive stuff comes or whether slow growth for a while.

So I feel really good about where we're positioned with our clients because, as I say, never waste sort of confusion and disruption. Always use that as an opportunity with not only investing in the capabilities you can provide your customers but in actually helping your customers. And so everyone in our organization is very focused on how can we help our customers be successful and grow and I talk a lot about what's going on in multi-channel, and I talked about it in the script.

That's part of the opportunity because there's a lot of, shall I say, misspending going on and not necessarily in the right order, and the right combinations across channels, and -- or analytics, whether it's in BlueSoHo or what we see in Rise Interactive. We actually see people way overspending in search, for instance, and we can see that. So now we're starting to really work with them on how do you look at them holistically, whether it's the advertising spend in print and how it impacts things online.

So again, I think everyone's probably going to tell you the same thing, that it's a wait-and-see to see what the world kind of transforms into from an economic standpoint, but we're not wasting that time in terms of really pushing forward with helping our clients.

Joel, how -- can you talk about the relative stickiness of business that you generate through BlueSoHo? Like, in other words, is this kind of project by project or is it more of like a longer-term consultancy economic arrangement?

It's really a long-term arrangement. I mean you start with some short-term things where you start a process map and really look at how does content creation flow in their four walls but also back into our four walls because we're very process-connected as a printer between our customers and us.

And like, in transformation, we -- Quad is lean enterprise. We're not lean manufacturing; we're lean enterprise. And what happens in these process mappings that we do is the first sort of what you call initiation phase, really sets up an ongoing opportunity for creating more and more savings, or more and more opportunity, I think in terms of what you do with the data and how you market it.

And so for those who really understand continuous improvement and you think we live in our four walls about all the cost take out we took out last year and what we'll continue to do. People start to think, well, that's just -- you're cutting out fat. Well, no, what happened -- that's the beginning stages. What happens in continuous improvement is you start to be able to look at your business in a very different way and so it becomes less about just cutting costs, and actually thinking differently about how I do things and where I do them.

Cabela's is a perfect example of that. That started with just a process map of how we could help them streamline their internal operations, and it just started spider webbing into a whole different view that said -- had Cabela's say, well, why are we doing this internally? Why don't you take over our customers -- our employees and do it on your side because clearly, you're going to keep moving the ball forward, both in content creation but then content execution.

And so that's -- when you think about stickiness, I think that anytime that you're really focused on the client but doing it in a very deep manner with lots of investment and talent on our side and capabilities, certainly it's going to be a longer-term sticky opportunity.

Okay. And Dave, if I can ask you a quick question, how many innings into a nine-inning game do you think you are from the ability -- from the perspective of taking out permanent working capital from the business?

Yes, I would say we're probably mid-innings on that. And it really goes back to Joel's comment about how you look at continuous improvement, et cetera. So it's about how we operate it from the time an order comes into the door until we get paid by our customers, and how can we reduce that through better process, better communication, and better delivery for our clients.

Okay. Guys, thanks very much for your time. I appreciate it.

The next question comes from Dan Jacome with Sidoti.

So, nice year for sure, without a doubt. Just wanted to, first, turn to the debt structure change. It looks like you kept the covenants intact. Just trying to understand that better. I'm not a credit guru by any means. What were the lending parties kind of looking at and feeling good about? Was it just the free cash flow EBITDA generation you've picked up in the last year or two? And the debt? Was there any other metrics for me to understand?

Well, I think it really comes down to -- we continue to deliver on what we say we're going to do. And with our bank group, really, what we did in this amendment was purely extend out our debt structure another two years from 2019 to 2021, everything else stays the same. And it was a debt amendment that went very well for us and it was oversubscribed so that just tells you we continue to deliver on those results and our partners will continue to support us.

We've got deep and long relationships with that bank group. I mean, many of these date back to the early 1980s and they've seen kind of our openness, our transparency, and our ability to do what we say we're going to do, and that really helps out as you go through a challenging industry like print. And as we go into our transformation, we've got a full bank group that's on board.

I also would add into this besides the great execution on that, we really did see this as a risk op opportunity. We paid down a lot of debt, so we were able to shrink down the size of that debt agreement. We also were able to take a portfolio of debt that was 60% floating interest rate debt and change it to 62% fixed interest rate debt at a time where we believe that there's likelihood of rising rates.

So it was kind of a chance to take some risk off in terms of the structure of the debt capital structure. So we're really pleased, quite frankly, with how that went in February. It's really -- it's rejuvenating to us to see the strong support we get from our bank group.

Excellent. All right., good. I appreciate that. I know Jamie touched on cost reduction, middle innings sounds good. Just on working capital, remind us again what buckets there might be some low hanging fruit left. I know in the past you've talked about receivables but then it's a lot more than just that. Just help us understand that a little bit better as we close the year.

Specific to working capital or free cash flow in total?

Yes, working capital, like what buckets, I mean if you could talk about it. Just what buckets are exciting you guys?

Yes, I think we've got still work to do on the receivables side and that's really about continuous improvement and process throughout. Inventory is another area that provides an opportunity for us, and it really hearkens back to what Joel talked about, about how we take on more work for our clients.

We can more efficiently, across our scale, purchase paper than what our clients can. And the more we pull actually paper into our platform and the more efficient we can be in managing that paper, whether it be space in our warehouses, whether it be the scale in which we can negotiate contracts at lower prices, but also how we manage the turn of that inventory quickly.

Typically, we turn our inventory a lot faster than what our clients turn their inventory. It allows our clients to get a working capital benefit as part of that. So inventory is an area where we'll continue to see progress and improvement in our working capital.

And one thing I just want to add on that point. And it kind of goes to Jamie's question before about the stickiness. When we're doing all these services and in the case of Cengage or Cabela's, where we're acquiring the paper for them and they used to do it. That's a true supply chain approach.

And what we're doing for them is returning all sorts of working capital to them so you look at the relationship and it morphs from, really, just one of what's the pricing to one of how is the overall relationship helping improve their business, and that's one example of what we're doing.

Got it. And then, staying on free cash flow, CapEx guidance $75 million to $90 million. Do you guys talk about how much of that is maintenance, or is that all maintenance and how much might be strategic? I can't remember if you guys break that out in -- on past calls, so just curious.

We've directionally talked about that, Dan. I think. You know what, these levels about 1 point of our -- we invest about 2% of our top line into CapEx and upwards of 3% in times where we see compelling opportunities. About 1 point, or 1% of our sales, does go to maintenance type of CapEx to continue to maintain this very efficient and productive manufacturing and distribution platform.

Yes, the other half then would be innovation like automation on shop floor. It will be like the digital transformation on the book side, and in other cases, growth, as we've been doing in the packaging side.

Okay. And then that's helpful. I wanted to turn -- just like the industry overall commercial printing, you guys are doing a good job rationalizing capacity. I'm just curious if you have any line of sight. Like what are the other industry actors doing because at the end of the day, it's still a very fragmented industry. Do you have any view on that?

Yes I think it's -- you're going to see continued consolidation at -- especially at the lower level. These are a lot of single plant companies, some multi-plant companies, but ultimately, you have to get rid of the fixed costs when there's a capacity demand change. And I think that's what we're most proud of is, from day one, when we started chapter 2, regardless of what the industry was doing as a whole, we were doing it ourselves.

Because if you don't do it, it really speaks to sustainability of not only your platform but your Company because ultimately, even if as Jamie says, the economic times continue to be tough, what impact does that have on the industry? Well, ultimately it has a much worse impact on the rest of the industry than us, and so that's our ability to, I think, consolidate the industry, maybe not through always acquisitions but consolidating it through one client at a time.

And if you look at our history, that's how we grew up in chapter 1. It was one client at a time, creating sustainable, very involved, and very trusted partnerships. And so we see that as an opportunity.

So I'm -- whatever the economy does here, I'm very comfortable with not just how the platform is sustainable, but the fact that we're bringing an overall offering now and being able interact at the highest levels in our customers' organizations to help them manage costs and opportunity.

Got it. Okay and then two quick ones and then I'll let you go. Do you have any -- what's the latest and greatest on kind of the postage, USPS? Was there -- I think there were -- it's supposed to be more benign. I just wondered what's happening there. I think there's (multiple speakers)

We usually refer to it as the latest, not necessarily the greatest. But no, actually there's a lot of positive stuff going on right now. In fact, it's all live as we speak. Chaffetz and the House side has really led the charge on getting the Postal Reform Bill through that we all tried to focus on last year, and right now, on the House side, there's total bipartisan support for this.

There's support across all four unions, which is a big deal. We know that when Chaffetz had his meeting with the President that he put it on the President's -- on his radar. Right now, they're targeting about the second week of March to sort of get through it and really get it into committee, and then from there, it will take its process.

But, nothing's perfect but what it does, it does a lot of the things that had a huge amount of costs associated with it, such as the pre-funding of the retirement health care. I mean this is billions and billions of dollars of costs that can appropriately get removed and so there's even been strong support in all the -- what the PRC had said. And their point is if something like this doesn't happen, their only thing they can operate by is rate increases. And so you do that, you end up talking about significant rate increases again, whereas this bill, we'll be able to really manage that down. It's not going to be increase free but it's going to be at a manageable rate. So I'm bullish on where we're at with this.

If I understood that, there's a bill in place that is going to reduce the likelihood of another exigent. Is that what you're getting at?

What it's going to do is it's going to help manage what the process goes through in terms of what the future rates will be. It will include sort of adding back half of the exigent case of the past, just over 2%, but -- and so there's a little bit of a rate increase there, but hopefully, by removing literally north of $5 billion a year in costs, that allows them then to act more rationally in terms of what the rate structures in the future will be.

No, 2%'s better. I was thinking of the trauma of a couple of years ago where I think it was at like 6%.

Remember, some of what they did, some of the trauma in the past was still when they did a rule change with unintended consequences which caused a spike in rates even though it wasn't necessarily -- technically a rate increase, and that got fixed. So now we're just going to add back a little bit of the exigent case and most parties are aligned, and it's not perfect, but it's a long way to getting to some sustainability here.

Okay. And last one, kind of a tough one, so I don't know. It's been kind of exactly two years since you ended the discussions with Courier. Lots has changed, just industry topography. Just overall, just on the book business, how have your views changed on demand to zero inventory. I understand the value proposition but how far can this go? Like what's the tail of this interesting kind of bucket in the commercial printing landscape?

Actually, it's a great story, and we loved Courier, and obviously Courier's with LSC now, a great acquisition, but -- and they have a digital platform as well. We -- if you remember, we already had -- were on our way to building our digital platform. And so I think that the more, we, as the vendors, really help impact the book business in terms of their challenges because they got a lot of waste in the system with inventory and the way that they have to manage it. Where we're just in time is great so I see a long runway of the book industry continuing to convert to a much more efficient industry and as we all know, the demise of books was way overplayed and has actually been on a growth trajectory.

Yes. Yes. I agree, I think there's still some Barnes & Nobles in New York City, so that's a good thing.

Well, there are but you're seeing a whole resurgence of the neighborhood bookstores and you see -- who would have guessed that Amazon.com is building bookstores, right?

Got it, exactly. Great, that's it. Thank you very much. Have a fantastic day.

The next question is a follow-up from Jamie Clement with Macquarie.

It's the same way that e-tailers are mailing catalogs, right?

Yes, well, I think I've mentioned this in the past. With the offering we've done, we've converted over 80 e-tailers to become print consumers, whether that's catalog or direct mail, and what's kind of fun about it is you go in and they're typically millennials working there, and we get to go in as a printer and say, hey, we can help drive traffic. We've got this new technology. It's called a catalog. And they're like, wow.

So we actually have seen a lot of traffic driven as a result of that because the even -- back to my point about overindexing and sort of the confusion in digital marketing, they still need to drive traffic and they're realizing that traditional does help drive a lot of traffic. And so that's been a pretty powerful message.

A question I did have for you, Joel, we have heard a little bit through this earnings season from some other consolidating industries, that as companies look at their acquisition pipelines, some of the businesses they've been talking to, just because of the changes in Washington DC, that sellers may be a little bit more on hold waiting to see kind of what tax policies might be, that kind of thing. I assume, I mean, you've always got a pipeline that you're looking at. Have you noticed the same thing?

I wouldn't say that, I've noticed sort of an on hold. I think I've seen in specifically like places like packaging multiples go up, but no, I think that people -- there is a wait and see of what's the impact of a new administration. It always takes time to flush it out whether it's on the antitrust side or whether it's on regulation, but I can't tell you, I've seen people say I'm on hold because of it.

But I will tell you that we're very disciplined in what we look at and any acquisition takes a lot of effort. It takes capital, and it's got to be the right thing, and to my point before, there's two ways to consolidate. There's acquiring things and then there's also acquiring customers.

All right. Thank you all for your time. Appreciate it.

You're welcome. Operator, any more questions?

There are no further questioners in the queue. This concludes the question-and-answer session. I will now turn the conference back over to management for any closing remarks.

Actually, just one other question that I have been asked more on a one-on-one basis but would love to cover here just to give some clarity, is I think you've probably seen myself and some of the family doing some stock sales as of late. Really, what's happening there is we lost my mother, second to die [in an estate] three years ago.

And we've hit a pretty good milestone in terms of closure to the estate, which has allowed now the family to take advantage of some opportunity for diversification as we've pretty much stayed all in and will continue to, but you will see over time, me and some other people in the family do some sales but not a lot. We continue to be very bullish about this Company and very committed and passionate about it.

And so with that, we had a great 2016. I think that we're very happy with how we're managing the Company for 2017 regardless of some of the lack of visibility and we're ready to manage for whatever comes our way, and so with that, thank you all for joining us, and we'll see you next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.