Q4 2020 Quad/Graphics Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Quad <unk> fourth quarter 2020 conference call.
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A slide presentation accompanies today's webcast and participants are invited to follow along advancing the slides themselves.
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Please note that this event is being recorded I would now like to turn the conference every day, Katie Cribbage quite Investor Relations lead Katy. Please go ahead.
Thank you operator, and good morning, everyone with me today are Joel QUADRA Chi quite chairman, President and Chief Executive Officer, and Dave Honan, Executive Vice President and Chief Financial Officer J.
Joel will lead off today's call with a business update and Dave will follow with a summary of Quad <unk> fourth quarter and full year 2020 financial results followed by Q&A I.
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 two.
<unk> 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 and the slide presentation will be available on the investors section of Quad Com. Shortly after our call concludes today I will now hand over the call to Joel.
Thank you Katie and good morning, everyone.
Pleased to report that our consistent and strong operating performance delivered solid year 2020 results.
We achieved increased adjusted EBITDA margin and cash flow despite unprecedented challenges from the pandemic significantly impacted sales.
We drove these results through segment share growth disciplined cost management and productivity improvements across our organization at.
At the same time, we continued to pay down debt protect the health of our balance sheet and enhance our competitive position.
Turning to slide three our team demonstrated incredible speed and agility in 2020.
Early on we took swift action to offset the impacts of the pandemic. So we could maintain our focus on running the business well, including maintaining the health and wellbeing of our employees provide.
Providing high quality on time delivery for our clients, while continuing to innovate marketing solutions.
And ensuring the long term financial health and stability of the company through operational excellence and realigning our cost structure.
Over the last few years, we have focused on our quad three <unk> transformation as a marketing solutions partner.
We strengthened and expanded our existing marketing consulting creative and technology capabilities and added experienced talent within the marketing and consulting expertise.
Having achieved our quad three <unk> transformation, we are focused on advancing our competitive position as a worldwide marketing solutions partner on a go forward basis.
Our integrated marketing platform is unique in that it helps brands and marketers reduce the complexity of working with multiple agency partners and vendors increased efficiencies through process optimization and content production and improved marketing spend effectiveness across all media channels through solutions that identify and Sigma.
Key target audiences strategically.
Strategically plan and constantly measured marketing spend effectiveness.
And strategize to create and activate holistic campaign.
Our success is driven by five strategic priorities as outlined on slide four our first priority is to walk in the shoes of our clients, we listen to their needs and then develop solutions that address their marketing and process challenges are.
Our second priority is to grow our business profitably by expanding existing account relationships through our integrated marketing marketing offering.
Expanding in key growth vertical industries, including consumer technology consumer packaged goods finance insurance health care and direct to consumer growing print segment share through dependable on time performance and ongoing investments in our manufacturing capabilities, and making disciplined investments, including continuing to hire.
Our net further differentiates our offering.
Slide five shows that our revenue diversification strategy to defend against print industry headwinds is working.
As you can see integrated solutions increase from 21% of net sales in 2019% to 24% as a portion of our net sales in 2020. This.
This includes an increase in agency solutions from 8% of net sales in 2019% to 10% in 2020.
Targeted print now represents 38% of our net sales in 2020 versus 37% in 2019.
Our direct marketing packaging and in store product lines increased as a portion of net sales and partially offset the decline in catalogs.
The combination of integrated solutions and targeted print now represents 62% of our net sales versus 58 per cent in 2019 as a result of our integrated marketing platform.
The category largest decline is large scale print, which includes retail inserts magazines and directories.
This category declined from 32% of net sales in 2019% to 28% in 2020.
The decline was primarily due to weakening demand for retail inserts. The print product line that has experienced the most secular decline over time and has been most impacted by the COVID-19 pandemic.
Retail inserts now represent just 15% of our net sales in 2020 as compared to 20% from 2019. However, large scale print remains core to our business strategy as it provides the scale and cash flow necessary to support future value, creating products and services.
It also provides opportunities for clients looking to flexibly adjust their media mix to include high performing personalized print.
Our third priority is to strengthen the core we will continue to leverage our unique platform to deliver integrated solutions from marketing strategy to creative solutions immediate deployment across offline and online channel.
Our fourth priority 40 is empowering our employees to create a better way from incremental productivity improvements to product service and technology innovations that address clients' marketing and process challenges.
And last of all we manage all aspects of our business to enhance financial strength and create shareholder value over the long term and.
In 2021, we will continue to prior or ties revenue growth deleveraging, the company's balance sheet through debt reduction and retain financial flexibility for changing circumstances.
Turning to slide six we show the three key competitive advantages that distinguish us as a marketing solutions partner commitment to integrated marketing platform excellence commitment to innovation and commitment to culture and social purpose.
Through our integrated marketing platform, we help clients strategically plan produce deploy manage and measure content across multiple channels rapidly at scale and without the handoffs that compromise quality consistency and timeliness.
Our client on site and near site locations Act as the gateway to our platform with Quad employees, serving as a natural extension of our client's internal marketing Department.
Another distinguishing feature of our platform is our industry, leading printing and distribution capabilities for a wide range of consumer facing products, including retail inserts catalogs direct mail consumer packaging in store displays and signage.
No other agency holding company or organization offer these capabilities integrated with digital mobile and broadcast channels.
Due to our commitment to platform excellence and innovation.
We're winning work from some of the world's most valued and valuable brands across consumer technology health care finance consumer packaged goods and more of.
These brands as minor for the trust they have built with their clientele that place their trust in us to help solve their marketing and process challenges.
As a result, we have been able to expand into higher value areas of our clients' businesses, which also have higher margins.
For example, we recently helped a 25 year print client validate the effectiveness of its catalog and marketing spend efforts.
This client a well known international toy Brown has long used catalogs to drive traffic online and brick and mortar stores.
It wanted analytics to support its seasonal strategy.
We engaged our data analytics team to build a series of dashboards for reporting campaign performance geographic distribution solicitation history quantity and type of items purchased and performance by audience segment.
These dashboards that enabled the client to see the results of this program in a more comprehensive interactive way.
The client was thrilled, saying I love. It. This is the kind of data we need to support our business growth across stores E Com CRM and brands team and illustrates the importance of our catalog to our business.
As a result of our data analytics work the client asked us to participate in its annual strategic planning summit to share our insights on the future of marketing.
Turning to slide seven one to one personalization is another area in which we continue to innovate.
Brands and marketers know that personalization drives consumer engagement and we continue to leverage our leadership in print personalization into all forms of media.
One personalization innovation I want to highlight is <unk> ex the quad direct marketing exchange, we launched <unk> ex last fall to deliver 100% personalized direct marketing campaigns at a fraction of the cost and with greater speed to market.
<unk> is a real game changer not.
Not only for our clients who regularly use direct mail is a part of their marketing mix, but just as important to the next generation of great brands that are looking for alternatives to the overly saturated online channels.
To increase the effectiveness of <unk> ex we pair it with another renovation quads accelerated insights and online for per proprietary virtual testing platform.
Clients that a lot.
Our clients rapidly test creative formats, and identify precisely what combination will be most successful regardless of media channel.
Accelerated insights takes targeting and personalization to new levels based on demographic cultural and emotional factors among others and continues to drive significant number of new client engagements.
On slide eight we shared information about quads commitment to culture and social purpose.
<unk> goes back 50 years to our company's founding.
We have always sought to conduct business with meaningful purpose, knowing it's possible to do well as a company while doing good in our communities and for the environment.
For example, at this time of heightened awareness about social issues, we have elevated our commitment to diversity equity and inclusion in 2020, we launched most of the multifaceted learning and development program for leaders employees on this important topic.
We also continued to support the expansion of employee led business resource groups. These groups provide a safe space for personal support and professional development.
We also rely on our Brg's to guide us on company policies and practices.
As we look to the future we are focused on operationalized diversity equity and inclusion into everything we do.
We not only want the Cadillac catalyze change within quad, but across the marketing and advertising agencies as a whole.
<unk> last week Quad and my family's foundation the window her foundation announced a three year $1 billion commitment to the brand lab, an organization dedicated to changing the face and voice of the marketing industry by creating opportunities for young people from diverse ethnic and socioeconomic backgrounds.
This partnership will enable the brand lab to expand into the Milwaukee community and bring the region's marketing advertising agencies together with local students.
We could not be more proud to make this investment which aligns directly with our longstanding purpose to create a better way while also enhancing closet long term talent pipeline.
Our partnership with brand lab builds on our recent contribution to the brand Center at Virginia Commonwealth University.
Which is dedicated to developing the next generation of creative talent.
Our contribution supports a new scholarship program that provides needs based assistance to diverse students looking to make an impact in the fields of advertising marketing branding and communications.
In 2021, we also look to enhance our narrative around corporate social responsibility, including how we are advancing our work as a good corporate citizen and proactive environmental steward.
Before I turn the call over to Dave I want to recognize and thank all of our employees for their tremendous efforts and many sacrifices they made in 2020.
We asked a lot of them and they continue to be resilient in the face of unprecedented challenges.
They have my sincerest appreciation for the work they do each and every day.
As we enter 2021, our milestone 50th anniversary year, we will continue to build on our established track record of navigating change and disruption.
We have faced challenges before and know how to manage through adversity.
We are confident in our team our strategy and our future as a marketing solutions partner to our clients.
With that I'll turn the call over to day. Thank you.
Thanks, Joel and good morning, everyone.
Slide nine provides a snapshot of our fourth quarter and full year financial results. We faced unprecedented challenges head on in 2020 with great agility to improve our adjusted EBIT margin and drive higher cash flow and debt reduction we were unwavering in our commitment to find new ways to drive segment share gain.
<unk> improve productivity reduce fixed and variable costs and maintain liquidity, while keeping our employees safe and serving our clients well.
We also optimized our product portfolio by completing the divestiture of our book platform.
This divestiture supports our strategy as a marketing solutions partner to shift from Standalone product lines that don't lend themselves to an integrated marketing solutions offering for our clients.
The result is a more focused approach to our transformational strategy and better capital allocation.
Optimizing our products and service to support portfolio helped generate $69 million in cash from divestitures of noncore assets.
When combined with our strong operating and cash flow performance, we reduced debt by $184 million in 2020.
Our significant liquidity and balance sheet focus helps ensure we have the financial flexibility to navigate the pandemic and continue to advance our strategy as a marketing solutions partner.
Net sales were $843 million in the fourth quarter down 21% from 2019.
For the full year net sales were $2 9 billion down 25% from 2019, both the quarter and full year variances are primarily due to the economic impact from the COVID-19, pandemic as well as ongoing print industry volume and pricing pressures.
Our fourth quarter net sales trend, while a 21% decline represents the second straight quarter of sequential revenue improvement during the pandemic as compared to a 28% decline in the third quarter and a 38% decline in the second quarter at the height of the pandemic impact on our net sales.
Adjusted EBITDA was $64 million in the fourth quarter of 2020 as compared to $96 million in 2019, the adjusted EBITDA variance primarily reflects the impact from the decline in net sales, partially offset by savings from cost reduction initiatives.
Adjusted EBIT for the full year ended December 31, 2020 was $260 million as compared to $335 million in 2019, while adjusted EBITDA margin improved to eight 9% as compared to eight 5% in 2019, the adjusted EBIT of variance to primary to prior year.
<unk>, primarily reflects the impact from a 25% decline in net sales of $12 million decrease in paper byproduct recoveries and an $11 million increase in hourly production wages due to strategic investments, we made to increase starting wages that helped favorably impact productivity throughout our platform.
These impacts were partially offset by savings from productivity and cost reduction initiatives.
$15 million net reduction in workers' compensation expense from improved production safety performance and a $9 million net non cash benefit from a change in vacation policy.
Adjusted EBIT margin increased by 35 basis points due to our cost savings initiatives.
Free cash flow was $129 million in 2020, an increase of $23 million from 2019, primarily due to a $50 million decrease in capital expenditures, partially offset by a $27 million decrease in cash earnings free cash flow benefited from the cares Act in 2020.
Including $40 million in income tax refunds received during the third quarter as well as a $28 million deferral of social security tax payments of which we will repay $14 million in 2021 and the remainder in 2022.
Slide 10 includes a summary of our debt capital structure as of December 31, we.
We ended the fourth quarter with debt leverage of 335 times as compared to 3.09 times in 2019, while this leverage ratio is above our long term targeted leverage range of two to two five times, we were able to reduce debt by $184 million during 2020 despite the.
Economic headwinds caused by the pandemic.
As of December 31st our blended interest rate is four 9% and our debt capital structure was 70% fixed and 30% floating.
While its nearest debt maturity is our 7% senior unsecured notes due may of 2022, which has $239 million outstanding.
We are reviewing whether we will pursue refinancing this amount during the coming year or choose to pay it off at at or prior to maturity with our ample liquidity under our $500 million revolving credit agreement, which matures in January of 2024 and.
Available cash on hand.
We believe our significant liquidity strong lender relationships, our agile approach to cost management and our ability to help clients now and after the pandemic as a marketing solutions partner will help provide substantial financial flexibility.
Slide 11 shows our commitment to debt and pension liability reduction.
Regarding our pension obligations the company assumed various frozen pension plans as part of the acquisition of World color Press in 2010, we've improved the funded status of those frozen plans by $470 million since the acquisition and the pension plan is now 89% funded this includes a third.
$1 million liability reduction during 2020, due primarily to higher than expected asset returns and pension cash contributions despite a historically low discount rate.
In total we reduced debt and pension obligations by $215 million during 2020 I'm extremely.
<unk> proud of the Quad team for all of their efforts to ensure our strong financial position.
As we look forward into 2021, we will continue to prioritize the use of cash to reduce debt and further strengthen our balance sheet.
As it relates to the financial outlook for 2021 as shown on slide 12.
Given the ongoing lack of full year visibility due to the pandemic, it's not practical to provide specific financial guidance. At this point. However, we expect to see continued sequential improvement in our quarterly net sales trends in the first half of 2021 due to the improving impact of the pandemic impact on net sales.
And print segment share gains, we expect free cash flow to decrease in 2021 as compared to 2020 due to the nonrecurring nature of the cares Act income tax refund received in 2020, we expect this to be partially offset by improvements in working capital lower pension contributions.
And lower capital expenditures.
We'll use our free cash flow and cash generated from asset sales to reduce debt and we expect to end 2021 at a lower debt leverage ratio than we ended 2020.
As always we will continue to serve our clients well advance our strategy of Mark as a marketing solutions partner drive productivity improvements and sustainable margin improvement all of which will generate strong free cash flow to further fuel quad.
And now I'd like to turn the call back to Katie who facilitate our question and answer session.
Thank you Dave.
<unk> questions in advance of today's call and therefore, we will not ask for colleagues to enter the queue. Thank you to everyone who submitted questions in advance.
We have three questions that were submitted.
The first question is regarding client trends.
Can you speak to recent customer trends, you've seen through the fourth quarter and in early 2021.
Yeah, Katy thank you.
As everybody knows it was a crazy year to train.
Customer trends and as Dave said with a bulk of our hit when the pandemic happened, we sort of got to the trough across all markets.
In the second quarter somewhere around.
April may.
But if I kind of look at the fourth quarter and project forward you know when we look at the retail inserts as the as Dave said is the one that got most heavily impacted.
I would say that.
By the way since we hit the trough in the second quarter, we had seen incremental gains in all areas of our business.
Retail inserts to start with which was the hardest hit was off about 42% in the in the <unk>.
Q4, which is fairly in line with overall retail answers I think we will continue to sort of see some.
Ebbs and flows on this.
Because retail entrance will continue to be very sensitive to how we come out of this pandemic and we also look as people had cut back on on holiday will readjust their future trends and so more to come on that.
Catalog, which was the next one that was most affected is off double digit in the teens so call. It about somewhere in the mid 15 percentage is which is in line with the industry.
Again, we saw incremental improvements through the year and I think that as the pandemic kind of.
Runs its course here, we'll see that continue to settle down.
The third one was publications.
Again, I think a lot of people got hit with number of pages in terms of advertising pages or even some titles going out of business in circulation trends, but because of market segment share wins in fourth quarter, we were only off about 4% versus an industry average of about 15% and so.
Again, we've got a great platform for publishers and we've been able to really continue to perform for them.
When I look at direct mail, that's a great story, we're actually in the fourth quarter up a couple percent.
With I'd say, the USPS DM estimate for fourth quarter was off about 4%. So we were actually up 2% and this is important there was definitely some some tailwind from political mailings and things like that but the way that we're approaching direct mail is really about more of a value added so trying to go from non <unk>.
<unk> non data intensive and driven to data driven.
As well and so when we look at.
Direct mail it continues to be a place that we think will grow.
And then finally, you know when I look at packaging, we were up as well about 3% in the fourth quarter, which sort of.
Followed trends that have happened in packaging and also the other areas of growth had been in store and so still a lot of.
Challenges and seeing the future.
And very hard to predict but again, we expect to see continued incremental improvements.
Great. Thanks, John that was a great overview.
Okay. Second question is for Dave Dave You mentioned <unk> 'twenty 'twenty two senior unsecured notes earlier in the prepared remarks can you. Please expand further on quite as planned to address this maturity.
Sure Katy and just as a reminder, the senior unsecured notes there is $239 million.
Outstanding as of December 31, and those will come due in may of 2022.
Our continued focus on margin improvement and free cash flow as we showed despite the pandemic in 2020 that we can continue to perform well with that.
As well as just a significant amount of liquidity that we have.
At the end of the year, we had nothing drawn under our $500 million revolver, we had $55 million in cash on hand, so we have significant liquidity in which to have flexibility and optionality regarding what we plan to do with this upcoming.
Tranche of debt that will be due in may of 2022 at this point, we're considering all options.
And as I walked through in the script those options are we could refinance.
That tranche of debt, we could we could wait to maturity and pay it off then or we could just pay it off early so we're just going to continue to watch.
As the year unfolds and determine what's the best option for the company.
For the debt holders as we move forward and we'll make sure we took a pretty balanced approach at that.
Okay. Thanks, Steve.
Our final question relates to noncore assets sales.
Steve You also mentioned that Quad will continue to focus on noncore asset sales in 2021.
Can you and Joel I'll give more detail on what types of assets those might be.
Sure I guess, Joe if you don't mind I'll start and then you can build off of what I would I have to say.
We had a really productive year in 2020 and addressing our product portfolio in it I walked through the divestiture of our book plants that was done in two separate transactions. We sold three three facilities and we also sold a packaging facility in Omaha, Nebraska.
These transactions as well as selling other noncore assets, such as vacant facilities and real estate.
Help generate $69 million of debt reduction during 2020, and this is really consistent with how we've managed the business in the balance sheet. In fact, I think over the past four years. This is provide us about $150 million a little bit over $150 million of cash from asset sales in order to dip.
Floyd to reduce debt. So it's been very successful for us and we'll continue to look at ways in which we can manage the balance sheet well from that standpoint.
I'm, Dave sort of adding on to that I mean keep in mind that as we've transformed this company and I will tell you that we've talked about this three point on transformation, we're really saying that the transformation is done we've made investments where we've had to round. It out in terms of other capabilities, such as with periscope horizon or.
Active et cetera, and as we look at our portfolio of assets, it's really about where does the customer need us to be and where are they willing to go and.
When we when I look at the book segment I look at the one packaging plant we had both in <unk>.
Both those cases, it wasn't really that.
The customer base that.
Could really use our expanded services and offering and so we saw that we're not going to be able to add that much value. There. They were underperforming and so that's where we parted ways, but a lot of since our transformation is dominant we've kind of built out. These offerings will continue to go where the client assets to go in.
Right now because of the success of the transformation that slowly we will we'll be showing you an offsetting price decline.
A big demand for us to bring in really top level talent and so we're actually investing a lot in new talent.
Heavily into the analytics and the creative and campaign planning and all the things that kind of enhanced the rest of the product lines, but so watch us continue to look at it and of course, we'll always look at other assets that could be sold if we're managing the platform because of volume decline will have real estate to get rid.
And things like that but that's how we view it and really as we look forward post transformation and sort of the new quad, it's really going to be about making sure that we go where our clients who depend on us for being more than just a product supplier.
That's where it will go.
Great. Thank you both well this concludes our Q&A portion of today's call and now I would like to turn the call back to Joe for closing remarks, yes. Thanks, Katie and thank you everyone for joining today's call I want to close by reiterating my thanks to our employees for their hard work and sacrifices during 2020.
And their commitment to continued performing well in 2021 as we focus on managing what is within our control.
We know our clients are depending on us and we are here to help them with a unique integrated marketing platform that helps them solve their marketing and process challenges again to all my employees from the bond My heart from my family from the board of directors. Thank you. So much for all the hard work that you did.
And to everybody else have a great day, we look forward to speaking with you again next quarter take care.
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