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Valassis Communications (NYSE:VCI)

Q3 2012 Earnings Call

October 25, 2012 11:00 am ET

Executives

Robert A. Mason - Chief Executive Officer, President and Director

Robert L. Recchia - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Director and Member of Executive Committee

Analysts

Townsend Buckles - JP Morgan Chase & Co, Research Division

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

William G. Bird - Lazard Capital Markets LLC, Research Division

Sam Knezevic - Northcoast Research

Daniel Salmon - BMO Capital Markets U.S.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Neal Shah

Operator

Welcome to the Valassis Third Quarter 2012 Earnings Conference Call on the 25th of October 2012. [Operator Instructions]

I would like to remind you that the discussions during this conference call will include forward-looking statements and that Valassis' actual results could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to be materially different from those expressed or implied by such forward-looking statements are discussed in the risk factors and other sections of the 2011 annual report on Form 10-K and in the reports on Form 10-Q and Form 8-K, filed or furnished with the SEC. Also, the discussions during this conference call will include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the press release furnished with the current report on Form 8-K dated today, which is also available on Valassis' website at www.valassis.com in the Investors section.

I would now hand the conference over to Robert Mason. Please go ahead.

Robert A. Mason

Julie, thank you, and good morning, everyone. I'd like to thank you for joining us for our third quarter 2012 earnings call. And as usual, with me this morning is Bob Recchia, our Chief Financial Officer. After I provide some comments on our results and segment highlights, Bob will share some additional information on financial insights and metrics, including an update on our use of capital and progress of our cost-saving efforts.

As always, after our prepared remarks, both Bob and I look forward to answering your questions.

So looking back at our overall Q3 results, we delivered solid performances in both adjusted EBITDA, up 7.7% versus prior-year quarter, and achieved 55% year-over-year growth in diluted earnings per share. Some key drivers that contributed to these positive results were double-digit increase in segment profit from our Shared Mail business and a strong performance within our FSI segment. We also experienced continued momentum within our Digital business during this quarter, and are very pleased with the results of our effort to reduce costs, which resulted in a year-over-year reduction in third quarter SG&A of almost 9%.

Finally, our Q3 results were positively impacted by our share repurchase plan and a reduction in our effective tax rate. Taking a closer look at Shared Mail. We were able to generate a 13.2% increase in segment profit versus prior-year quarter despite flat top line growth. While I'm disappointed in our revenue performance, it's important to recognize there was a 3.8% year-over-year increase in pieces per package, which is the largest increase we've seen since first quarter of 2011. The increase in pieces per package was primarily driven by our continued efforts at package optimization. While fewer packages create a revenue drive, the focus on optimization had a positive impact on profitability within our largest and most profitable segment.

We continued to be encouraged with our innovation in Shared Mail, specifically the growth of our variable data postcard and the upcoming test of RedPlum's free, the consumer facing brand name of our new late week Shared Mail package for national retailers. The goal of our innovation efforts is to tap in the new revenue streams and client segment that will help fuel the growth of our Shared Mail business.

Moving on to the Neighborhood Targeted segment. There is not much new news to report in this segment. Revenue was down 1.4%, which is a sequential improvement from the second quarter of this year. During this quarter, we saw a revenue increase from the combination of Newspaper Inserts and ROP, which was offset by the impact of exiting the sampling business and a market-driven change in the way that Newspaper Insert placement business is contracted.

Bob will provide more details on the impacts caused by these changes. We're also continuing to work toward increasing our share of the Newspaper Insert market, focusing on segmentation to identify our best prospects and revitalizing our new business development efforts, while we continue to make infrastructure and cost improvements.

A real bright spot for the quarter was the performance of our FSI business. On our Q2 call, we indicated that we were expecting a meaningful improvement in this business, and I'm happy to report that we got it. This quarter marks an $8.4 million improvement in FSI segment profit year-over-year. And while third quarter 2012 FSI segment revenue was down $1.3 million, it is worth noting, this includes the absence of over $14 million of low margin, custom co-op business that ran in Q3 of 2011.

As you will recall, this is the last quarter that custom co-op's will negatively affect our year-over-year comps. While I would very much like to categorize Q3 as a turnaround for FSI segment, the consumer package goods industry is still experiencing some revenue and profit pressure. However, there's no denying, our FSI's performance was impressive this quarter, and we are now projecting FSI industry pace growth to be in the low- to mid-single-digit range in the back half of 2012.

Just like Shared Mail, the FSI business has considerable operating leverage as our average page counts increased, a significant portion of the revenue from incremental volume flows through to the bottom line.

Next, I'd like to discuss our IDMS segment and focus on our in-store, NCH and Digital businesses. Within our in-store business, we have yet to see the rebound in CPG spending. This is not a Valassis-specific phenomena but something that is apparent across the industry. While CPG in-store spending is not where we'd like it to be, we are excited about the addition of Rite Aid and Family Dollar to our in-store retail network, and the opportunity they represent. These 2 national retailers will increase our retail footprint by approximately 12,000 stores when they join our network in January of 2013.

Coupon volumes at NCH continue to run double-digit below 2011 levels, but we believe they will bounce back once increased FSI page volumes work through the traditional 8- to 10-week redemption cycle.

As many of you may recall, during our second quarter earnings call, we placed considerable focus against detailing our investments and plans for growing our Digital business. We continue to approach Digital with speed and a true sense of urgency, devoting significant time, resources and effort toward innovating and growing this business. Q3 revenue from our Digital business grew by 118.4% on a year-over-year basis, which includes 47% of organic growth.

Quarterly operating losses associated with our Digital business are consistent with our previous projection. In addition to highlighting organic growth and product development, we announced 2 Digital acquisitions on our second quarter call, Brand.net and Circle Street. We now have expanded our Digital capabilities to offer our clients to access to an online display network, allowing national brands and regional clients to speak to their consumers at a very targeted level. We are encouraged with our clients' response to these new offerings and our sales organizations increasing engagement in the Digital business.

Our point of differentiation in Digital is very clear. When you combine our sales force of over 400 strong and the relationship with 15,000 clients in a wide range of industries, the expanded agency relationships offered by Brand.net, superior data, insights and targeting expertise and our proprietary ability to integrate Digital with the scale, targetability and proven performance of our print portfolio, we believe we are in a strong position to win greater share of client budgets as the migration of advertising and promotional dollars continues toward Digital.

That wraps up our segment discussion. And at this point, I'd like to turn the call over to Bob.

Robert L. Recchia

Thanks, Rob. As Rob mentioned, I will provide updates on our cost savings initiatives and uses of capital, and I also have a couple of accounting-related items which will need further explanation. The cost saving initiatives we announced at the second quarter earnings and put in place during the third quarter have produced the desired results as evidenced in our nearly 9% reduction in SG&A. Furthermore, we saw improvements in our cost of goods sold due to headcount reductions and further optimization efforts across all product lines. We see the evidence of this in our Shared Mail results where we're able to grow segment profits by 13.2% on just 3/10 of a percent increase in revenue.

We reduced the number of packages by 2.3%, that's driving up our pieces per package, a key profitability metric. This optimization reduced overall revenues by approximately $2 million, but improves profitability in those markets. We will continue to monitor costs and look for more opportunities. But the plan we spoke about last quarter is producing the results we anticipated.

With regard to the uses of capital, during the quarter, we repurchased 838,000 shares of stock for a total of $21.2 million. Year-to-date, we have repurchased 4.1 million shares for $87.1 million, for an average price of $21.08. And over the past 21 months, we have purchased 13 million shares for a total of $302.2 million. This represents a reduction of approximately 26% of our share base.

As previously stated, it has been our intention to use a minimum of 50% of 2012 free cash flow per share repurchases. We have surpassed the 50% mark at the end of the third quarter, but as always, we reserve the right to use additional dollars for share repurchases. Our fully diluted share count as of September 30, 2012, was approximately 40.9 million shares, a reduction of 3 million shares or nearly 7% from December 31, 2011. Our expected income tax rate for the quarter came in at 28%, 10 percentage points lower than our normal run rate as a result of the expiration of certain tax reserves during the quarter. These reductions in our reserves produced an additional $0.12 in earnings per share during the quarter, which is reflected in our updated guidance. We will continue to use an estimated tax rate of 38.5% going forward.

The last item relates to our Neighborhood Targeted business. Over the past year, the business has changed considerably, especially as it relates to media placement revenues. In the past, media placement revenues were contracted for and recorded in our books on a gross basis. That practice has changed across the industry, and most of our larger media placement business is being contracted for on a fee-only basis. Therefore, a piece of business that might have been $10 million of revenue with a 3% gross margin is now recorded on a net basis at $300,000 of revenue. This change had the effect of reducing revenue in our Neighborhood Targeted segment by $3.3 million during the quarter and will have an even larger effect on the fourth quarter.

I'd point this out because it's important to distinguish between the change in how business is being contracted and real lost business. This change will continue to have an impact going into 2013, which we will quantify for you in our guidance call in December 2012.

With that, I will turn it back to Rob.

Robert A. Mason

Bob, thank you. And Julie, I think at this point, we're ready to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Alexia Quadrani from JPMorgan.

Townsend Buckles - JP Morgan Chase & Co, Research Division

This is Townsend Buckles for Alexia with a few questions. First, a nice turnaround in the FSI business. It looks like it was about up about 17% excluding P&G. You noted higher volume, was pricing pressing also a positive impact? And with your stronger second half outlook, do you think you've seen an inflection point here with the CPG segment coming back to the channel?

Robert A. Mason

Good morning, Townsend, it's Rob. I'm not going to comment on pricing within the FSI business. And actually, we're going to avoid any commentary on pricing going forward. We've -- I think, talked a lot about it in the past and we're going to kind of pull back on discussions of pricing. In terms of what we see within the FSI, within the CPG category, I said in my prepared remarks that we'd like to think of this as a turnaround. What I would tell you is, is that the CPG vertical, in terms of their approach, is standing with the FSI still inconsistent, some are up, some are down. But we see more positive trends than negative at this time. And I think the other very positive component is the fact that we are projecting continued increases in industry page volumes in the back half this year. In Q4, specifically, we see growth even though there or 2 less industry dates. So we really look at that as a pretty positive sign.

Townsend Buckles - JP Morgan Chase & Co, Research Division

And on Shared Mail, can you talk about your performance for the quarter, was September and the back-to-school season a disappointment for you? And how should we think about Q4 and the contrast of your 3% growth target. You obviously have a tough comparison there to last year's growth.

Robert L. Recchia

Yes. We do have a tough comp in Q4. As it relates to Q3, Townsend, I think there are really 4 things going on in the quarter that kind of suppressed our ability to generate revenue growth. One was the optimization that both Bob and I touched on. While it's the absolute right thing to do for the business to take on profitable on profitable packages and boost the profitability of Shared Mail, it does have the impact of putting a drag on revenue. We saw some lightweighting in the quarter. I would tell you there's no evidence at this time that, that's any kind of a pattern or a trend. But we did see clients who still wanted to remain in front of their consumers with promotional messaging, pullback in terms of either the number of page counts or the size and weight of the pieces they were distributing with us. And so that was a negative drag. We saw a change too in terms of the new business in the mix of it. There was a migration to more single sheets. And while I would tell you that I would take 2, 2-pagers over a single 4-pager in terms of the revenue they generate and the profitability, we didn't get enough of that new activity to drive revenue to where we wanted it. And I've talked about new business, I think I addressed that on our last quarter call. But that scenario, we've got significant focus on right now. It unfortunately takes some time to climb that pipeline, but I think we've made the right moves and we'll see that improve as we go forward. I think the last element that influenced Q3 was the decline in terms of our specialty retail and discount business. It's down about just a little shy of 3 points for the quarter, and that also was a negative as it relates to Q3 revenue. You asked about Q4, and we are up against some tough comps, we've got a bunch of going to do to get to the 3% growth in that quarter. But I'll also tell you that we're in a very similar situation that we were in 12 months ago. At that time, the retailers were kind of sitting on the sidelines because of the uncertain conditions in the economy, what we're seeing is those retailers are continuing to be very reactive to the conditions with their consumer base, with their business, make decisions in a very, very tight timeframe. That's a very similar phenomenon to what we saw last year before they got off the sidelines and engaged in the package in the fourth quarter, which is their make it or break it season. So I think they are key to our fourth quarter success. And I'd like to give you more visibility into their plans, but it's just isn't there right now.

Operator

The next question comes from Mark Zgutowicz from Piper Jaffray.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Maybe just a follow-up to that last question on Shared Mail. Rob, you provided a lot of, I guess, nice clarity in terms of where that -- the different buckets, I guess, that you're seeing, some of the impacts on Shared Mail. And I guess, if you look at the business model in Shared Mail today, every year, obviously, you guys tweak some things, every year you take out unprofitable packages, et cetera. I was wondering if you can maybe just put some weight into those sort of 4 buckets that you talked about in terms of its impact on Shared Mail growth? And maybe talk about the cuts that you're making on the SG&A and sort of, are those temporary short-term cuts is -- if you look at sort of long-term here, is Shared Mail at a percent of sales, 14%, is that realistic? Could it go lower? So I guess just trying to get a sense of how differently you're looking about the Shared Mail business model as a whole going forward.

Robert A. Mason

Sure. Mark, I'll take the first part of that question, and I'm going to turn it to Bob for the second. As it relates to those 4 elements, I can't give the specifics on how they influence. I would say they're pretty balanced, but I don't have specifics in terms of how they impacted. Bob called out some of the numbers behind optimization, and the other 3, I think, pretty equally, in fact, that the revenue and growth in Q3. Bob, can you talk to the...

Robert L. Recchia

Yes. As it relates to the SG&A, I'm not sure if you're asking, are these sustainable cuts, but when do we do make the cuts, they are sustainable. I think what you'll see in Q4 will be a similar type of reduction year-on-year as you saw on Q3 because Q4 typically has a little more yearend stuff in it in terms of SG&A. With regard to the Shared Mail business and continued what I'll call optimization or improvement in the performance of it, that sort of an ongoing expectation both of our general manager in terms of him coming up with ways to improve the overall profitability of the business with his team, and our manufacturing group, who is challenged every year to figure out how to produce these packages more efficiently and ship these packages more efficiently. So I would tell you that, that's not going to change. We've -- I think some of the low hanging fruit is gone. But you can see by this quarter that we continue to find ways to optimize that business and make more money out of it. It's a lot easier when we get a quarter with 3% or 4% of revenue gain, but that doesn't mean we can't do it on the cost side as well. So I think you can continue to look for improved performance on the cost side of the business as we go forward.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

That's helpful, Bob. Maybe just a follow-up there. I mean, if you think about the SG&A impact or potential future impact to top line, I guess, that's what I'm getting at here is -- do you still have 100 bps of SG&A cost to cut out before you start to see an impact to top line? I mean, obviously, it's benefiting you, near term, here on the margin front. But at what level do you need to maintain sort of the operating costs or expenses to maintain a certain level of top line growth?

Robert L. Recchia

Well, I think, where we're at today, with the cuts that we made are not designed to slow us down from a revenue standpoint. They have to -- we've still got to grow the business. So -- but what I could tell you those things change. When we were able to cut SG&A, a lot of time is because we've automated something and we've figured out from a profit standpoint how to improve the operation and that allows us to cut heads. We aren't cutting a lot of people out of the sales organization because we do have to be in front of customers and we do have to grow the business. So I could tell you, where it's at today, we think it is at a sufficient level to grow the business and achieve our objectives.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. And then one last quick one. Was the data postcard business contribution similar in Q3 as it was in Q2?

Robert A. Mason

Yes, it was -- it is pretty much in line with Q2.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. And any indications of that continuing on a -- over the next couple quarters?

Robert L. Recchia

Yes. I think we're looking at the VDP as something that will grow in terms of the prominence and really contribute to our innovation effort.

Operator

The next question comes from William Bird from Lazard.

William G. Bird - Lazard Capital Markets LLC, Research Division

Could you talk a little bit just about how you think about the NSA opportunity and when that could begin to impact revenues?

Robert A. Mason

Sure, Bill. We're excited about the launch of RedPlum's free [ph], which is the NSA opportunity that you referred to. We have a very clearly defined prospect list, we are in a very focused conversations with those prospects, retailers today and those conversations are focused on launching a Q1 test in 2013. And we are excited about the potential that, that NSA gives us to tap into really a class of retailer that isn't broadly represented in the package today.

William G. Bird - Lazard Capital Markets LLC, Research Division

And there was clearly a good deal of noise in the numbers, right? You had a couple of acquisitions, you had some discontinued businesses, change in revenue recognition. I guess when you roll it all up, how do you think about what the organic growth rate was in the quarter?

Robert L. Recchia

I think when you roll it all up, revenues were pretty near flat, relative to when they came out. We've had -- we had a few things going against us. We have a little bit of revenue from Brand.net. Circle Street didn't really contribute anything. And I want to point out one keyword that you said, there's no change in revenue recognition in terms of the way things are flowing through the Neighborhood Targeted business. This is a change in the way business is being contracted. So I just want to point that out because we are recognizing revenue the same way we have historically recognized it.

William G. Bird - Lazard Capital Markets LLC, Research Division

Got you. And just following up on Shared Mail. I just want it to be clear. As you go through these optimization efforts, is the growth profile for that segment likely to be lower for a few quarter period? Or do you see it kind of resuming to normal, sooner?

Robert A. Mason

Yes, Bill. I don't see those optimization efforts putting a damper on our ability to grow that business. They did have a role in influencing the quarter results, and we will continue to look for opportunities to trim unprofitable packages out of our profile. But you shouldn't be thinking of those efforts as being a long-term governor on our ability to grow this business.

Operator

The next question comes from Chuck Cerankosky from Northcoast Research.

Sam Knezevic - Northcoast Research

This is Sam Knezevic on today for Chuck. Just a quick question. I saw in the release, you guys no longer are using diluted cash EPS, you're no longer issuing any guidance on that. What made you guys decide to stop issuing that?

Robert L. Recchia

Yes. We've got a letter -- a comment letter from the SEC last quarter, and we had several discussions with them. Today, we're not comfortable with how we were essentially calculating that measure. They had some suggestions on how we could use cash EPS. The main objection is we're using capital expenditures as a proxy for depreciation and amortization because there's such a big difference in the 2. They have not seen that before, we're not in favor of it. After 2 or 3 discussions with them, we just agreed with them that we'd no longer provide that information.

Operator

The next question comes from Dan Salmon from BMO Capital Markets.

Daniel Salmon - BMO Capital Markets U.S.

One question for Rob and one for Bob. Rob, could you just tell us a little bit -- update us, you've made a couple acquisitions in the Digital business and you've been pretty straightforward before that. That business is still generating a loss. But give us an update, maybe, on your outlook on the sort of path to profitability for that business. And then for either you or for Bob, I'm just interested to hear any update on your opinion around the dividend versus continued share buyback.

Robert A. Mason

Dan, as it relates to the Digital businesses, we're very encouraged by the engagement we've got from both Brand.net and Circle Street. As it relates to Brand, right now, we're very focused on fortifying Brand.net in 3 areas: one, from a people standpoint, they were really sales starved. When we acquired Brand, we're very focused on building out their sales organization and capabilities. Need to do some work on the engineering side, a little bit there. One of the other things we're very focused on right now is fortifying the pipeline. When we went through the acquisition of Brand, that was a distracting period to them -- for them. And right now, we're focused on getting that sales pipeline back to where we want it to be, where we need it to be. And unfortunately, getting into -- back into the agency, and there are fee processes, the processes takes a little bit of time. But overall, it's kind of running how, from a sales standpoint, the way we thought it would be. And then also there's a little bit of technology work that needs to be done on the platform there, but we're in a very good position because of the talent of Jim Parkinson and his team of engineers. So we're very pleased with that acquisition, and we think it's headed in the direction that thought we it would be. Circle Street is something that we're also very pleased with. There has been great engagement with clients. We've got a couple hundred locations in test mode with this right now. You recall the Circle Street is really focused on hyper local franchise-type businesses. And what's so exciting about, kind of, where we are from a test standpoint is those 200 locations represent franchise organizations that could quickly expand, easily, fivefold beyond that. And so we like the recent activity from the client. The results are performing kind of how we thought they would be, and we're excited about Circle Street. You talked about an update in terms of where we see profitability and revenue growth on q -- on our Q2 call. I think I referenced that we saw by the end of 2013 we would be on a run rate where our Digital business could generate somewhere in the neighborhood of $100 million in terms of revenue. And depending on how that growth comes through, under which products generated, that run rate would put us kind of on a breakeven path. So we continue to be pleased with that, and consistent in our viewpoint going forward in terms of revenue growth and profitability.

Robert L. Recchia

With regard to the dividend question that you had, we will be taking that up at our December Board meeting. We'll talk to you about it when we do the guidance call. And we're kind of waiting right now to see what happens with the tax law changes, so that's going to have some influence on that process.

Operator

[Operator Instructions] The next question comes from Edward Atorino from Benchmark.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Could you remind that $100 million in Digital, was that for 2013 or is that a longer-term target?

Robert A. Mason

Edward, that $100 million is where we see that business from a run rate by the end of 2013. So if you look at the fourth quarter of 2013, we think we'll be on a run rate to generate $100 million in Digital revenue at that point.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Do you need any more pieces for Digital? Do you want to sort of build it out somewhat? Or just...

Robert A. Mason

You know what, we -- like we have in the past, we look at a lot of things. But really Jim Parkinson and his team, is they can do a phenomenal job at developing things, in-house products that we can take to the market. I talked earlier about our efforts to integrate and get Brand.net kind of fully running on all cylinders. We're not anxious to do another acquisition certainly in the near term. And if we look at something in that space, it will be kind of a tuck-in thing, Ed.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

On the NT pricing, could you run that for me again? I sort of still don't quite get it.

Robert L. Recchia

Okay. So on the -- you're talking about revenues?

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Yes. You're going to get a different revenue number because of the way you're saying it. Will you give me a net number?

Robert L. Recchia

Yes. The way the business is being contracted today is on a fee basis. It used to be that it was all grossed up. So if we did $10 million of business at 3%, it was $10 million of business on a revenue standpoint, $300,000 on a gross margin standpoint. Today, the way it's being booked, this is Newspaper placement revenues, it's all fee-based. So just the $300,000 is revenue, it's obviously margin as well. You're looking at a customer that a year ago was $10 million, this year it's $300,000 in revenues. So it is impacting our Neighborhood Targeted's top line, and it will impact it next year. We're going to quantify that for you on the guidance call.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Okay. Looking at it a little bit, without spending much on CapEx, will depreciation sort of fade away down the line somewhere?

Robert L. Recchia

Well, it doesn't fade away but it starts to come down quite a bit next year. I don't know what the number is exactly, but there's a big jump down next year.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Yes. That was -- I said fade away, that's what I meant. Will it be under $3 million a quarter?

Robert L. Recchia

Under $3 million a quarter in -- no, no, no. I mean it jumps down from where it's at this year, it starts to slide down the next couple of years. But it won't be under $3 million a quarter, not even close to...

Edward J. Atorino - The Benchmark Company, LLC, Research Division

No, I'm sorry -- I'm looking at -- let's use the depreciation and amortization number which is, what's that, $12 million? Anyway, it comes down. I'll talk -- we'll talk to some of that.

Robert L. Recchia

Okay.

Operator

The next question comes from Neal Shah from Royal Capital Management.

Neal Shah

Just had a couple of quick questions. So going through the math, cash flow from operations was $41 million in the quarter and CapEx was $4 million. So -- and then I'm seeing our working capital being a use of cash of $12 million, which seems to be typical for the third quarter. And historically, it seems to have reversed in the fourth quarter. So by my math, it looks like you guys generated about $45 million to $50 million of free cash flow in the quarter x the capital swing because, is that directionally right?

Robert L. Recchia

I think that -- I think you have the math right.

Neal Shah

Okay. Okay. So just taking at a step back here. At the current stock price, it seems like the business is trading close to a 20% forward free cash flow yield, that's growing. And I can't think of a business in a market that's trading at this kind of free cash flow yield. So what do you think the market is missing here? Is there an issue around dividend policy or capital allocation? Could you -- I think someone asked this earlier, but could you pay a 10% dividend yield to current stock pricing and still have cash leftover to buy back shares? Just what can you guys do to fix this valuation? It seems to me that you guys are delivering great numbers, providing good forward-looking guidance and the stock still seems to be trading at huge discount compared to where it should be.

Robert L. Recchia

Right. So -- and that's exactly what we....

Neal Shah

Just got to hear your thoughts.

Robert L. Recchia

There's a lot of things we could do. Could we pay a 10% yield? I supposed we could. I could tell you we won't, but we could pay a dividend. I think that, that's potentially part of the solution. We all realize here, we've got to get our revenue numbers growing, that's a key part of the solution for us. And I think that's one of the things that hurts us at the end of the day. And I think the capital -- from a capital allocation standpoint, we've spent $300 million in the last 21 months. We have kind of put our money where our mouth was on share buyback. And I think the stocks reacted favorably to it, but it trades for a trade. We can't get into trying to figure out where the stock ultimately is going to trade. If we do the stuff that we're supposed to do in terms of growing the business and growing profits and use capital wisely, we think we'll be valued at some point in time, we're going to have a fair value, whatever that might be.

Robert A. Mason

Yes, this is Bill on Bob's comment. When we went in to 2012, we had just gone through a significant change in terms of leadership here at the company. And as we gave guidance, we kind of said '12 was a year where we'd get our legs under us and kind of create a foundation for growth going forward. We clearly believe we can grow this business both on a top line and bottom-line perspective going forward, and we think if we do that combined with the average we've made and will continue to make in terms of capital allocation, we're in a position where we can get a more accurate and fair valuation.

Operator

The next question comes from Patrick Wang [ph] from Robert W. Baird.

Unknown Analyst

This is Patrick Wang [ph] for Dan Leben on Robert Baird. Just a quick question on the capital expenditures. Why is -- what's the reason behind the reduction? Is this just changes in projects or maintenance CapEx coming below expectations?

Robert A. Mason

Yes, Patrick. I think it's the former. We're very thoughtful in terms of taking on projects and very, very focused on those things that will provide a very positive rate of return. We don't see anything in front of us right now that justifies the expenditure. And but -- we will carefully look at projects that will improve our ability to improve the profitability and grow revenue across the business.

Robert L. Recchia

Our infrastructure costs from a manufacturing standpoint are very, very low. Maintenance CapEx for manufacturing is surprisingly low in this business. So we're not starting the business with capital, if somebody has a good project, we're more than happy to do it. We just haven't seen a lot of stuff. We've got one issue that we're working on right now in terms of a capital project that we thought was going to come this year that will probably come next year, that will take some dollars. But the 25 kind of the 30 number that we put out there gives us all kind of room to do what we need to do.

Operator

We have a follow-up question from Edward Atorino from Benchmark.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

I apologize, I couldn't find the right number. There's 2 parts of depreciation amortization. One is the depreciation, which is right about $10 million or so. Is that -- that's going to sort of trend down. And I guess the other part stays same at about $3 million or so?

Robert L. Recchia

Right. So for the quarter, amortization was $3.2 million, that will stay about the same. And then depreciation will start to come down pretty significantly next year. I don't have the number, but when I give you the guidance call in December we we'll give you that number. But it has to do with the -- some of the ADVO assets that are now -- that will be fully depreciated at the end of the year.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Right. And the CapEx dropped off as well, is that going to stay in this current vicinity going forward?

Robert L. Recchia

I think we've said probably $20 to $22 million for this year, it might pack up -- pop up back up to $25 million this next year. I don't have a number yet. But it's going to be $25 million to $30 million is a good number for us.

Operator

There appear to be no further questions. Are there any further points you wish to raise?

Robert A. Mason

Yes, Julie. I would like to make some closing comments, please. In closing, we'd like -- we continue to work through what we would categorize a very uncertain economic environment. While we're disappointed that we did not deliver the expected revenue growth in Shared Mail this quarter, we're pleased at our overall performance, including a strong quarter from our FSI segment, the powerful operating leverage demonstrated by Shared Mail, the continued growth of our Digital business and the significant additions to our in-store network. I think this quarter's performance highlights the strength and versatility of our broad product portfolio and our ability to continue to generate impressive gains and operating results. While we're looking at a very solid pipeline of sales opportunities ahead of us, there's no question that we've got a lot of work to do in the fourth quarter to deliver our 2012 annual adjusted EBITDA and diluted earnings per share cards. As you leave this call, you should be confident that we are 100% committed to maximize profitable revenue opportunities and continue to aggressively manage the cost side of our business. We appreciate, as always, you taking time to joining us this morning. We look forward to following up with you all soon. Go Tigers, and have a great day.

Operator

Thank you. This concludes the conference call. Thank you for participating. You may now disconnect.

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