Quad/Graphics, Inc.
Q4 2017 Earnings Call Transcript

Published: 21 Feb 2018

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics' Fourth Quarter 2017 Conference Call. During today's call, all participants will be in listen-only mode. [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 Quad/Graphics' website under the Events & Recent Presentations link in the left-hand navigation bar. Following today's presentation, the conference call will be opened for questions. [Operator Instructions] Please note this event is being recorded. I will now turn the conference over to Kyle Egan, Quad/Graphics' Senior Manager of Treasury and Investor Relations. Kyle, please go ahead.

[Kyle Egan:]

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 a more detail discussion of our announcement today on the acquisition of Ivie & Associates. Dave will follow with a more detailed review of our fourth quarter and full-year 2017 financial results and the summary of our 2018 outlook 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 Investors 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.

[Joel Quadracci:]

Thank you, Kyle, and good morning, everyone. I am pleased to report that our fourth quarter and full-year 2017 results were in line with our expectations and showed consistent execution of our strategic priorities. As we move forward, we will continue to generate consistent earnings and strong sustainable free cash flow to further strengthen our balance sheet, provide long-term shareholder value and accelerate our transformation in Quad 3.0. We describe our company's history in terms of evolutions with each successive evolution strategically building on the strengths of the previous one. As we evolve, we continue to expand our offerings. In this way, no single evolution replaces the next, but layers on greater value for our clients across all product offerings. Quad 1.0 covered a period of tremendous organic growth that began with our company's founding in 1971. Over time, we established ourselves as innovators and formed a company culture based on strong values that remains in place today. Quad 2.0 began in 2010 and continues today with our ongoing role as a disciplined industry consolidator. In this evolution, we have added talent and expanded our product offering while also consolidating operations to create our industry leading, highly automated, and efficient manufacturing and distribution platform. Quad 3.0 has evolved over the past many years along with the seismic shifts in the multi-channel marketing environment, which provided the opportunity for Quad to expand its offering as a marketing solutions provider. In Quad 3.0, we continue to leverage our strong print foundation built over the past 47 years as part of a much larger and more robust integrated marketing platform. Today's marketers and content creators face incredible marketplace disruption. And they need a trusted partner to help them create, integrate, deploy, and measure that content more efficiently and effectively across all media channels, both online and offline. In many cases, clients will outsource these marketing functions to create efficiencies and better align their internal resources to focus on growing their business. Our integrated marketing platform helps clients decrease their reliance on multiple agencies, reduce cost, and more effectively execute marketing campaigns. To fuel our Quad 3.0 transformation, we have a strong and engaged workforce backed by state-of-the-art technology to drive continued productivity improvements. Our goal, as always, is to remain industry's high quality low cost producer, so we can generate the earnings and cash flow necessary to support value creating opportunities that further advance our transformation. The Quad 3.0 conversation is about addressing our clients' marketing challenges by building the appropriate offering to help solve their problems. Key to our success in Quad 3.0 is our ability to expand our capabilities quickly and have the appropriate resources to scale in a significant way. To accomplish this, we take a disciplined build, partner, acquire approach to accelerate our transformation. In some instances, we hire the talent and build the capability from within. For example, we have been investing in talent with extensive marketing experience in multiple verticals. In 2018, this investment will approximate $10 million. We are hiring professional who will help fast track our understanding of our clients’ business needs and help us move the conversation beyond the role as a critical commodity vendor to a trusted marketing solutions partner. In other instances, we partner with companies whose expertise helps us fill a specific gap in our offering. Rise Interactive is one such close partner where we also hold a financial investment. The digital marketing agency specializes in media, analytics, and customer experience. Our partnership capitalizes on Quad’s expertise in optimizing our clients’ marketing spend in offline channels with Rise's expertise in online channels to create more integrated powerful marketing campaigns bridged by the expertise already in place with our BlueSoHo business. And in other cases where it makes strategic sense, we acquire expertise to scale what we already have in place. Just this morning we made a major announcement about the acquisition of Ivie & Associates, a leading marketing service provider, to further augment our integrated marketing platform. Ivie is on Inc. Magazine's annual list of fastest growing privately held companies in the country, and serves a long list of iconic brands in grocery, athletic, home, beauty, and specialty retail. We are honored to welcome everyone at Ivie to our team. With this powerful combination of talent, expertise, and technology, we will provide clients unmatched skill for onsite marketing services, integrated execution, and expanded subject matter expertise in digital, media, and creative. Ivie is a leader in customized marketing and business process outsourcing. And Quad together with our BlueSoHo team is a leader in content, production, and workflow process optimization. With the addition of Ivie, we more than doubled the number of employees in locations dedicated to onsite content creation and marketing execution. Combined, we now have more than 1200 professional working at more than 70 client locations serving as an extension of our client's internal marketing department. Together we are creating a stronger, more powerful marketing solution that we believe is unmatched in the marketplace. Not only are we able to fulfill traditional rate agency roles but also own the marketing execution of the creative assets. In this way, we make more possible for our clients by helping them reduce complexity and increase process efficiency and marketing spend effectiveness, so they can focus on what they do best which is sell amazing products, services, and content. For our investors, our newly expanded offering provides stickiness and associated strong recurring revenues as our team is working side by side with clients each and every day. We are building momentum and our strategy is working. Quad 3.0 generated significant incremental new business in 2017 helping to offset ongoing industry volume and pricing pressures. Slide 7 shows pro forma 2017 net sales including Ivie by product line and geography. The acquisition of Ivie alongside BlueSoHo further diversifies our offering and grows our media solutions from 3% to 8% of revenue. Further, it will positively impact the revenue in all other product categories. In closing and before I hand the call over to Dave, I would like to extend a warm welcome to all the associates at Ivie. I am thrilled to have you onboard and I look forward to greeting many of you personally very soon. Together, we have a bright future. I'd also want to thank the Ivie family in company leaders, Warren, Kate, Brandon, and Rene for all they've done and will continue to do to help those on the strong foundation already in place. I would also like to extend my sincere thanks to our Quad Graphics' employees for their ongoing dedication, determination and hard work. You are the reason that we had another strong year which helps us continue to invest in our future. To that end and in keeping with our longstanding company philosophy of taking better care of our employees, I'm pleased to announce that we're making a special return in contribution of approximately $22 million in the form of Quad Graphics' stock contributed to employees' retirement accounts. This contribution made possible by Tax Reform Legislation complements our 2017 401(NYSE

[Dave Honan:]

Thank you, Joel, and good morning everyone. We're pleased to report another solid year of financial performance in 2017. We executed well on our strategic objectives and continue to see a positive impact from Quad 3.0. Our financial performance was in line with our expectations and guidance including net sales, adjusted EBITDA and free cash flow. Additionally, we've reduced debt by $166 million or 15% during 2017 and lowered our debt leverage ratio below our long-term stated goal of 2 to 2.5 times leverage. This strengthens an already healthy and flexible balance sheet. The strength provides us the ability to invest in our employees, transforming Quad 3.0 and provide a healthy 5% dividend to our shareholders. Slide 8 provides a snapshot of our full-year and fourth quarter 2017 financial results as compared to 2016. Net sales in the quarter were $1.2 billion down 2.8% from 2016 and organic sales for the quarter also declined 2.8%. Full-year net sales were $4.1 billion down 4.6% from 2016, organic sales decline 3.5%. After excluding a 1.1% negative impact from past through paper sales with no net impact on sales from foreign exchange the Quarter and full-Year organic sales declines were due to ongoing industry volume and pricing pressures and where within 2017 guidance ranges. As Joe noted, our Quad 3.0 expanded integrated marketing services offering help offset some of the organic print revenue declines. Adjusted EBITDA in the fourth quarter declined as expected by $15 million to a $125 million as compared to $140 million in 2016 and our adjusted EBITDA margin decline to 10.7% due to reduced overall net sales and incremental investment in hiring marketing services talent for Quad 3.0. Adjusted EBITDA came in as expected at the midpoint of our guidance range for the full-year at $459 million representing a 4.5% decrease from $480 million in 2016. Due to the diligence of our employees and driving sustainable cost reductions and I'm going productivity improvements. Our adjusted EBITDA margin remains flat year-over-year at a 11.1%. Our team continues to focus on proactively matching our cost structure to the realities of the revenue pressures we face in the printing industry. As we've stated on previous calls our goal is to drive sustainable continuous improvements to reduce cost by a minimum of at least $60 million annually. We have however we invested some of these savings back into the business to fund transformation. During 2017, we increased our investment in SG&A to hire the necessary marketing services talent and build infrastructure to support our Quad 3.0 transformation. We're pleased we've been able to hold our margins flat while also investing in our transformation. We generated $258 million of free cash flow in 2017 we're just at the top end of our guidance range. This represents a $12 million or 5% increase from $246 million in 2016. The year-over-year increase in free cash flow was driven by higher net earnings. Sustainable ongoing improvements in working capital levels and lower capital expenditure requirements due to previous investments we've made to create our industry leading, high automated and efficient manufacturing and distribution platform. Free cash flow is the foundation of our disciplined capital deployment strategy and we believe we had an industry leading free cash flow conversion rate. Free cash flow conversion represents the amount of free cash flow generated from every dollar of adjusted EBITDA which in our case is over $0.50 of free cash flow for every dollar of adjusted EBITDA. On Slide 9, you will see that we ended 2017 with $965 million in debt and capital lease obligations and a 112 million of a net underfunded pension liability. Our strong free cash flow generation enables us to reduce that debt by $166 million or 15% during 2017. We reduced our net underfunded pension obligations by $50 million or 31% during 2017. All in we've reduced debt and pension obligations by more than $450 million or nearly one-third since 2015. Slide 10 provides a snapshot of our capital structure, which is highlighted by a improving debt leverage ratio. We finished 2017 with a debt leverage ratio of 2.1 times. However, we also finish the year with $64 million in cash. This is $54 million higher than our typical year-end cash balance and we use that $54 million of excess cash to further pay down debt. Our debt leverage ratio ended the year at 1.99 times, which is well below or which is below our long-term and consistent policy of targeting 2 to 2.5 times leverage. This represents the lowest debt leverage in Quad's history. We continue to believe that operating in the 2 to 2.5 times leverage range over the long-term is the appropriate target. However, it's a reminder we may operate outside this range depending on the timing of compelling strategic investment opportunities. Our debt capital structure is 67% fixed and 33% floating with an advantageous blended interest rate of 5.2%. We have no significant maturities until January of 2021 and available liquidity under our $725 million revolver with $686 million as of December 31. Slide 11, summarizes our 2018 financial guidance, which includes the impact of the Ivie acquisition announced today and reflects continued investment of approximately $10 million in SG&A for hiring marketing services talent and building infrastructure to further support Quad 3.0 transformation. The Ivie acquisition in all cash transactions drives scale and capabilities in our Quad 3.0 offering. The purchase price was $92.5 million before earned up potential above to an additional $16 million in purchase price when certain financial metrics are achieved post integration. Ivie's revenue is approximately a $175 million of annual net sale and generates approximately $15 million of annual adjusted EBITDA. We've included approximately a $150 million of that revenue and approximately $10 million of the adjusted EBITDA in our 2018 guidance for the portion of the year that we will own Ivie. Initial pro forma debt leverage will increase to 2.12 times from 1.99 times as a result of the acquisition still well within our leverage guide rails. We anticipate 2018 net sales to be in the range of $4 billion to $4.2 billion, which is flat to 2017 as a midpoint of the guidance. Our consolidated net sales assumptions include approximately a $150 million of net sales from the Ivie acquisition but also include continued downward pressure from price declines of 1 to 1.5% in organic volume declines of 1 to 4%. The 2018 net sales guidance also includes an improved mix in our organic net sales trends from incremental Quad 3.0 revenue. Beginning in 2018, we will also report adjusted EBITDA without pension income due to change in U.S. gap that requires pension income to be excluded from operating income and by the both non-GAAP adjusted EBITDA. As a result of this change, we've also made a pro forma adjustment to reduce 2017 adjusted EBITDA of $459 million down to $448 million to exclude $11 million of pension income that was previously reported and allowed for easier comparisons to 2018s guidance. We expect 2018 adjusted EBITDA to be in the range of $410 million to $450 million representing a 4% decline very 2017 at the midpoint of our guidance range. 2018 adjusted EBITDA guidance reflects a $10 million contribution from the Ivie acquisition offset by approximately $10 million in higher SG&A cost from continued investment and talent and infrastructure for our ongoing Quad 3.0 transformation. As always, we will continue productivity improvements and sustainable cost reduction efforts to help offset lower net sales resulting from print industry pressures. We expect free cash flow in the range of $200 million to 240 million. This represents a $38 million reduction from 2017 at the midpoint of guidance from early due to lower adjusted EBITDA, higher cash taxes and less contribution from the benefit of lower controllable working capital. The remainder of our guidance includes depreciation and amortization in the range of $215 million to $225 million, interest expense in the range of $65 million to $75 million, restructuring cash expenses in the range of 35 to 45 million, capital expenditures in the range of $85 million to $95 million. Pension cash contribution of approximately $15 million and cash taxes in the range of $15 to $25 million. As it relates to taxes, recent U.S. reform provides a significant benefit to Quad as we primarily operate in the United States. The impacts of tax reform on Quad are fourfold, first; we estimate our effective tax rate will decline by 14 points in 2018 to a normalized rate of 25%. Two; we realize the $29 million income tax gain in 2017 from revaluing our net deferred tax liability position at this new lower tax rate. This did not have impact adjusted EBITDA but did increase our 2017 net earnings. Three; we will have no transition tax on unremitted foreign earnings and finally fourth; we estimate our 2018 cash taxes will increase by approximately $10 million at the midpoint of our guidance. The increase is primarily due to the impact of lower deductions in 2018 from limitations placed on in interest expense carryover deduction; we inherited from the 2010 World Color acquisition. While we won't lose this deduction, we will not be able to take the deduction at the same level as we did as in past years. As a result of the net benefit of the tax reform, we will continue to look at ways to redeploy the savings to drive our Quad 3.0 transformation and create more shareholder value. A key way in which we will drive transformation is to continue to invest in the growth, development and retention of our greatest assets, our employees. Part of the benefit of tax reform will be invested back into our employees to a especial retirement contribution of approximately $22 million in Quad/Graphic stock. This represents roughly 1 million shares. The special contribution represents 3% of eligible employee's base pay and alliance their financial interest with that of our shareholders through stock ownership. We've excluded this charge from 2018 adjusted EBITDA guidance as this is non-cash and as a reinvestment of our benefit created by lower income taxes, which is also not a component of adjusted EBITDA. We will also continue to be opportunistic in repurchasing shares as part of our $100 million share repurchase program to help offset the dilution impact from this especial retirement contribution. Slide 12, shows our continued commitment to our dividend, which is a key way in which we return value to our shareholders. Our next quarterly dividend a $0.30 per share will be payable on March 30, 2018 to shareholders of record as of March 19, 2018. We consistently paid a quarterly dividend and our annual dividend of $1.20 per share is yielding approximately 5% or represents only 28% of our free cash flow at the midpoint of our guidance. We are excited about Quad's future as we continue to transform Quad to create more value for our clients to integrated marketing platform that reduces complexity, increases process efficiencies and improves marketing spend effectiveness. As we move forward in 2018, we remain focused on our goal to manage cost and productivity to hold the line on adjusted EBITDA margins. This allows us to maintain our position as the industry's high quality, low cost producer and continue generating consistent earnings and strong free cash flow. And with that, I would now like to turn the call back to our operator, who will facilitate taking your questions.

[Operator:]

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Dan Jacome of Sidoti & Company. Please go ahead.

[Dan Jacome:]

Hey, good morning guys. How are you?

[Joel Quadracci:]

Good morning.

[Dan Jacome:]

Okay. Thank you for the time. So, just a couple of questions, first one housekeeping, the adjusted -- I think you said it, but I may have missed it, the adjusted EBITDA outlook for '18 factors in the change that you expect in pension income, is that correct?

[Joel Quadracci:]

Yes, it does. So, we've historically had $10 million to $12 million of pension income in our adjusted EBITDA. That's been pulled out of our guidance for '18. And on a pro forma basis, we also pulled it out of 2017.

[Dan Jacome:]

Okay. And those are regulatory changes from the tax reform or something different? I missed that as well.

[Joel Quadracci:]

No, it was the change in accounting pronouncements that really just pulled out that pension income out of operating income and put it below operating income going forward.

[Dan Jacome:]

Okay, all right.

[Joel Quadracci:]

So we've -- this is the same-store [ph] operating income. We pulled it out of adjusted EBITDA too.

[Dan Jacome:]

Okay. I'll brush up on my FASB accounting going forward. Yes, next question. Just the Ivie business, I was trying to dig up some information on them before the call, couldn't find a lot. Can you give us at this juncture what you could as much color and flavor for their margins or at least, if you can't discuss numbers, how they stack up versus what you guys have been computing in the last couple of years. A little bit more color on their customer base. I think you mentioned retail, just curious like how much retail, what segments, or what customers that they have that you are really excited about. And then lastly, you mentioned Ivie was going to positively impact other revenue streams from Quad. So if you could answer those that would be great. So three little questions in there.

[Dave Honan:]

Thanks, Dan. I'll start out and I'll turn it over to Joel as we talk more about the scope of this Ivie acquisition. But from a financial perspective, initially Ivie would come in a little dilutive to our margins. However, this is not the typical acquisition we've made in the past where you've seen us make a consolidating acquisition within our industry space where the key driver of an acquisition, like that, is to improve margins through cost reduction. This is very much a growth acquisition for us, driven by the top line. And so what we're going to look for is revenue synergies coming out of this business, which would ultimately, we believe, improve margins well beyond our fleet averages right now as we put the combined power of the two companies together.

[Dan Jacome:]

Okay.

[Joel Quadracci:]

And so kind of getting to the rest of your questions, this is Joel. 3.0 is about helping our clients market more efficiently and effectively. And that's why people ask about, well, what are the revenues going to be in 3.0? You have to take into account that there's going to be revenues, and better margin in the services sector of how we help our clients. But also as a part of that media spend, because we also helped them deploy execution of campaign, whether it's online and offline, it does create more incremental print. And we saw that in '17. And the print revenue typically has a lot more zeros attached to it. So it does impact things. But that's the whole plan, is to continue to get embedded with our clients, not as a vendor, but as a partner. Take and replace a hole that's been created through how the agencies have really operated over time and really help consolidate it. Many of our customers, just for like a back-to-school campaign, will use as many as 16 to 20 different agencies to execute on their campaign, and so, that will include TV, radio, it'll include print, in-store signage, it will include online search, et cetera. And so what we're doing as we kind of come in as that partner, we can help them get rid of all those different agencies because the problem with having that sort of approach is the measurement of how your overall marketing spend is hard to understand of what's working where, why, and when. Because we come through with actual execution, and really look at the full circle of all medial channels, we could actually help them streamline and really measure what works and what doesn't work. There is a tremendous amount of waste in media spend today. And digital is where a ton of it exists. We love digital, we think it's a very effective medium. There is many different ways to use it, as you know. But the lack of measurement because of such a disintegrated approach to it is creating a lot of waste and therefore a decline in ROI. And so for example, we have one nice sized retailer who has over 100 stores, so not one of the big guys, but not one of the small guys. We came in through media planning and placement. We helped them place traditional ads, whether it's in newspapers, retail inserts, et cetera. We'd showed them the 3.0 capabilities and we, in very short order, became the agency of record. They went from about 16 agencies down to one. And guess what, in the next generation we are now the printer of choice for both regular retail in-store type of work to in-store signage, and then often many more things, all the while proving that we increased their sales when their sales were flat to down in the pervious years. So the power of this is really important to understand because what we're seeing when you look at the different product lines we're in, whether it's magazines or retail, that are under extreme pressure from being disrupted. That when people are being disrupted, yes, we have to deal with volumes that might be under pressure and as they have been, and will continue to be. But that disruption is also the key opportunity in 3.0 to come in and help them. When people are being disrupted they look at how they do things today and realize that there's got to be a better way. And that's where this whole concept of, wow, I have a whole staff managing 16 different agencies, I can't figure out what's working or not working. Ivie can come in and take care of taking over my creative staff or my marketing staff, be in-house with us, but I don't have to manage them. And they get plugged into a greater network with Quad/Graphics of further execution. Now we have scalable resources at play within your four walls that don't all have to be in your four walls. Although being in there is really important because there's a lot of communication that goes on. And so the beauty of Warren and his family have done -- and by the way, Warren Ivie is just gentleman of a person, as well as the rest of the family are just quality people, is that they've proven that they can come in and be a true partner. And they've gone from just, "Hey, let's take over production or do creative for you" all the way to media buying. So they're doing media planning and placement just like we are in traditional, but they also buy broadcast, they buy digital, they buy radio. And then they even do things like public relations or communications. They'll get involved in packaging concepts. And so I think that the opportunity we see with the disruption is that whether you're inside someone's four walls or not they need a lot of services on the marketing front that's really important to them to become more effective and win the war. Retail is not going away, magazines are not going away, but marketing is being disrupted. And the ones who will win are the ones who are going to streamline the cost of content creation, but then become effective at content deployment so that you could truly measure what works and doesn't work, and not overspend on channels that have a measurement that has nothing to do with anything. I'm a very traditional marketer. I believe clicks are maybe a measurement. But ultimately what rings the cash register is the most important measurement for all our clients. And as we talk about this it is very much resonating, which is why I have to spend $10 million on more assets, and so that's that sort of build versus buy. We need more people from the agency set. We need more people from the customer world who understand that the customer is going through. But then because of the demand, we needed to scale even further. And we've done business with Ivie for over 20 years. We've been the print partner for many of their accounts. And so this is not a new relationship, it's one we understand each other very well. We have very straightforward cultures that are based on people and strong values. And there's a sense of urgency in our client base, and we need to keep up with the demand. And so we're very excited about this acquisition because this is not just an add-on acquisition, this is a strategic long-term part of our concept of print staying around, but also becoming much stronger as a marketing solutions company who just happens to own print.

[Dan Jacome:]

Okay, got you. I appreciate it. There's a lot in there.

[Joel Quadracci:]

Yes.

[Dan Jacome:]

But like for prospecting new customer on the Ivie end, is there a sales cycle, like any dramatically different from what you guys see on your already digital marketing business in place? Like I'm just trying to think of like Rise versus Ivie, is there anything that we need to know or is it like…

[Joel Quadracci:]

Yes. So, no, they'll typically be long-term relationships because you're putting staff within someone's four walls.

[Dan Jacome:]

Right.

[Joel Quadracci:]

I'd say that they've grown mostly organically thorough word of mouth because of their successes. So as people experience in them and then there's movement within the industry of talent going to other companies and other brands, they've actually been able to do their incredible growth through a lot of word or mouth. On our side, we have a huge list of logos of markers not just from retailers or magazines but cataloguers and CPGs and I think that the whole packaging world or the CPG opportunity is going to be huge in this as well as they're looking for the same integration whether they note or not of all the media channels. And so, I think what we bring to the table for Ivie's concept is a strong sales front to actually be much more aggressive without leveraging it to all the various logos we already have relationships with.

[Dan Jacome:]

Okay, fantastic. And I just saw on the deck that you do provide the revenue contribution from the acquisition on Slide 11 I missed that terrific.

[Joel Quadracci:]

Yes.

[Dan Jacome:]

Okay, yes, so it's more meaningful than I expected, last question here the book business digital book business -- I know don't want to hop too much on this but one of your peers continue to invest in heavy dollars on that side and I know it is a pocket of the industry that you kind of looked on, looked upon favorable. Do you have any high level of thoughts there? Anything you can share will be good, anything you can share will be good.

[Joel Quadracci:]

Yes, no, I love it. We made a significant investment in WordPress this past year and the Kentucky plant which is really helping traditional print compete with digital because it's very automated length of runs that we could produce there effectively has gone down because we need both the digital assets and the traditional assets to do what our publishers need today and so big push is about getting rid of inventory in the book industry and that's why we made such a significant investment in digital presses over the past several years. So we have a huge digital sell that is really sometimes getting down to versions of one but the most important thing is we totally bridge the gap from being able to do pay like you've got an initial order with strong demand, we have the traditional assets to do the high volume but the ability to do low volume on traditional has gotten even more effective but then we have the digital assets all within the same cell, so we can seamlessly send products to either one depending on the economics for our client without them having to worry about it. And so, we see the book world is obviously it's I think over the years everyone thought they're going away, they're certainly not when you look at the growth and but the importance is that we make it efficient for our clients, so that they can get rid of inventory and quite frankly also be able to start bringing in more customization and personalization.

[Dan Jacome:]

Okay, fantastic. I think I'm out of questions for now, so thank you very much.

[Joel Quadracci:]

Okay, Dan. Thank you.

[Dave Honan:]

Thanks, Dan.

[Joel Quadracci:]

Operator?

[Operator:]

Our next question comes from Bill Mastoris of Baird. Please go ahead.

[Bill Mastoris:]

Thank you very much. Hey, how are you, Dave? I'd like to start out with now that you've kind of fill that gap with iv what type of additional M&A activity might we see out of you given the fact that you're still at the very low end of your target leverage ratio. And one of the things I guess to kind of plays into this a little bit with rates raising our sellers a little bit more realistic about price and maybe multiples that they can sell their businesses for that's my first question.

[Dave Honan:]

Yes, this is Joel. Let me answer a little bit of that. Look, we will continue to look for strategic opportunities that help fill the 3.0 gap. We think we've pretty much we spend a lot of it now but I think depending on the demand will continue to either build buyer partner. So you'll see more of that out of us and then secondarily I'd like to make the point that Chapter two is about consolidating acquisitions and Chapter two is not over we will continue to look at opportunities for consolidation as a more opportunistic that where we can really strengthen that platform. We know how to do it. We know how to do consolidating acquisitions but we also know how to evaluate them. I would say to the point about multiples out there and I think that there's still a lot of people looking to deploy capital and so I think that multiples continue to be on the 3.0 side probably very healthy but I think on the consolidating side they've probably come down. So I think we're very pleased with the balance sheet I think Dave and his team have done an excellent job and as we've talked over time when we've done acquisitions we always like to say that we do it and we're okay with going above our range is long as we feel that there's a row back down and so I'm very pleased that we are proving out that we've consistently done that. And then, now being basically we need considering the cash at the year-end being at the lowest point in the history of our company, which is a capital incentive industry gives us so much opportunity or flexibility to do what we want to do depending on what's the marketplace demands and what your options come up, Dave?

[Joel Quadracci:]

That's well said. And I think, what we try to be is very balanced in our capital deployment Phil you heard us in the script talk about not only the acquisition we had just did with Ivie, which really comes at a great opportunity for us with a lot of disruption happening in this industry. But also what we do with our dividend and our opportunistic ability to repurchase shares and so during 2016 and 2017 despite all that debt reduction we talked about. We were also in the market buying shares opportunistically at times. So I think, we will – you will continue to see out of this as a consistent policy of maintaining that balance sheet in very disciplined and balanced on our capital deployment.

[Bill Mastoris:]

Okay. Thank you. That's very helpful. My second question also relates a little bit to Ivie. If you heard you correctly, Ivie seems as though at least over the long half, you are going to have better future margins and it's going to actually supplement all right many of your print products. But if we turn to print and kind of wondering in sub segment such as books, which seems that curve, that decline curve seems to be flattening out. If you could give us some color maybe on some of the major categories that you outlined on slide number seven maybe the top four retail and research magazines catalogs and direct mail. How, we might expect some type of organic decline or is that just going to flatten out and maybe with Ivie, we might even see some top line that would be study to maybe even up.

[Joel Quadracci:]

Yes, so that is augmented print operations and again like we said it's scaling within the services that we offer in 3.0, but also scaling with incremental print revenue down the stack as we show people the of what works and what doesn't work. But again a point to the two major areas that continue to be of concern, which is and it's pretty obvious retail inserts and magazine ad pages. Retail inserts, you are going to see, you continue to see a shakeout there. Retail will not go away, but there is a lot of I guess disruption underway where people are closing stores, other people are opening them. I think you are going to have a bifurcation and if you have a crappy experience at a retail store, you are not going to survive. Those who are really transitioning to a great experience, I think will. But on and off like you continue to see the downward pressure in both of those areas including magazines you see in consolidation in the magazine industry, which I think will help long-term, short-term we've seen some people change frequency or you may see with the timing narrative feel, will there be combining of some of the tittles or not. But we built this all into our guidance and we don't have a crystal ball, but we always plan or decline and specifically those are the areas that focus. When I look at catalogs, they have some pressure on them just from a cost standpoint, with paper increases and some uncertainty on the postal front as we try and get some postal reform bills through, which we are working on every day. But the book area is actually growth, so it was up 2% I think if you look at 2017 and within our book pages we are up almost 5%. And then, I'd say that DM space, it's also an area of growth that you will continue to see, because there is a lot of effectiveness of DM specifically when people start to use data to personalize direct mail. I say, you will continue to see pressure on sort of the down direct mail, which is the same thing to everybody. But when you start to use data as the effectiveness is really quite incredible. So we are seeing a lot of people reinvest in the direct mail segment. And then, obviously we continue to be in the packaging space in a smaller way, but some place that we are happy within one, we will go grow long-term. Does that -- is there anything there?

[Bill Mastoris:]

No, the only thing that, I would kind of follow-up to you, care to actually throw a forecast there may be for the retail inserts and catalogs?

[Dave Honan:]

You know what, if I could forecast the world today of disruption, I'd probably be in Vegas right now. So we are very cautious about that. So I think we gave pretty detailed guidance on top line, and we talked in general and split what we think the impact of pricing is from volume across the whole fleet of our business units. So, to go into each product line and give those elements of forecast, I just think that's too much detail, especially in an industry like ours, but overall what we talk about is volume declines of 1% to 4%, you know, on a net basis. So what's going on across kind of the long run…

[Joel Quadracci:]

And I think another thing to point to, is the way we run our plants. We don't specialize plants as much as possible; we actually use the different product lines with each other, because they all have different requirements, and when they hit the equipment. And so, as we have consolidated and closed outdated plants, you see suddenly plants that magazine catalog have retail on capabilities put in place. And so, to Dave's point, we kind of look at a portfolio view of it, because that's actually how we manage the plants and manage the capacity to offset decline that might happen in one versus the other.

[Bill Mastoris:]

Okay, fair enough. I really do appreciate all the color.

[Joel Quadracci:]

You're welcome. Thank you. Operator, next question?

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Joel Quadracci:]

Okay. Well, thank you all for joining us today, and specifically you know, thank you to the Quad employees and to the IV employees and management team for creating such a great asset. I'll actually be down at your headquarters in a couple of hours in Texas. And so with that, we will see you all next quarter. And enjoy today. Thank you.

[Operator:]

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