Q1 2021 Quad/Graphics Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the club's first quarter 2021 conference call.
During today's call all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
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 on in the earnings release. Alternatively, you can access the slide presentation in the investors section of clubs website under the advent and recent presentations link. Please note that this event.
Is being recorded I would now like to turn of the conference every day Katie Club book clubs Investor Relations lead Katy. Please go ahead.
Thank you operator, and good morning, everyone with me today are Joel QUADRA, Archie quite the chairman, President and Chief Executive Officer, and Dave Honan quite the executive Vice President and Chief Financial Officer, Joel will lead off today's call with the business update and Dave will follow with a summary of what's the first quarter 'twenty.
'twenty one financial results 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 two quad 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. Finally, a replay of the call and the slide presentation will be available on the investors section of Quad Dot com. Shortly after our call concludes today I will now hand over the call to Joel.
Thank you Katie and good morning, everyone.
We are very pleased with our first quarter performance our team achieved a third consecutive quarter of improvement in the net sales trend since the height of the pandemic. We also recorded several new wins in our agency and print segments that will drive long term growth.
When combined with our disciplined approach to cost management and ongoing productivity improvements, we increased our adjusted EBITDA margin and drove higher cash flow as compared to the first quarter of 2020.
The strong performance helped us continue to pay down debt to protect the health of our balance sheet.
On slide three we show our competitive advantages that are further accelerating our position as the marketing solutions partner and creating more value for our clients.
These advantages reflect our commitment to integrated marketing platform excellence innovation and culture and social purpose.
The integrated marketing platform is unique and continues to resonate with clients as it helps them reduce the complexity of working with multiple agency partners and vendors Inc.
Kris efficiencies through process optimization and content production.
And improved marketing spend effectiveness across all media channel, especially through our leading data analytics capabilities.
We provide our clients with unmatched scale for onsite services and expanded subject matter expertise in marketing strategy, such as customer insights and data analytics creative solutions media deployment, including industry, leading printer distribution capabilities and marketing management services, our dedicated client service teams make.
It easy to access or 24, seven always global platform.
Our strategic transformation is the marketing solutions partner was validated again of this week through a ranking as number of 15 on the world's largest agency companies list.
Sales of annually by average.
We continue to strengthen and expand our marketing consulting creative technology and data analytics capabilities.
The continuing to add talent, including expertise in consumer research and engagement.
Further optimizing our sales structure to accelerate revenue growth, including the expansion of new verticals like consumer technology.
And making ongoing investments in innovative solutions that drive client value.
For example, we recently expanded our partnership with package inside an organization that uses data and analytics to help better understand the drivers of consumer engagement and their purchasing journey.
Now quad clients have the ability to test brand creative concepts and quantitatively assess their impact on consumer interactions in the real life retail setting at our lab in Greenville, South Carolina.
We will help expand package insights current research and brand packaging to include digital in store direct marketing and all brand channels.
Another way, we innovate is through leading analytics capabilities that help our clients confidently allocate every marketing dollar where they matter most.
For example, our award winning digital agency rise interactive helps clients to increase the effectiveness of their marketing spend to connect our proprietary technology that provides on demand cross channel insights proactive intelligence and automated optimization.
With the click of a button clients can view campaign response in real time and rise team members can make immediate adjustments across channels to maximize budget allocations of business outcomes.
Through this innovation, we were able to help of mature e-commerce retailer using paid search to scale revenue at three times the rate of spend.
Through our commitment to platform excellence and innovation, we now perform work for leading brands across foundational and high growth market verticals as shown on slide four the.
These brands and mindful of the trust and loyalty of adult with their customers.
They're trusting us to help solve their most urgent marketing challenges.
As a result, we have been able to expand our relationship into higher value of higher margin areas of their businesses.
This is particularly important as these brand shift their efforts to emerge from the pandemic from a position of strength.
I would like to share some examples that illustrate how clients have come to rely on us as their trusted marketing solutions partner.
The first example is shown on slide five reinforces how we're able to help brands and marketers produced at the speed of scale required to compete effectively in today's fast changing market.
A leading global apparel company found itself in the situation, where it needed an entirely new approach the photo and video content towards broad of worry of product lines due to an increase in demand as people started spending more time at home during the pandemic.
The company wanted to capitalize on the market shift of comfort clothing, not only to meet increased demand from existing customers, but also to reach new customers at the time they were seeing a five ex increase in online search traffic.
The company constantly turned the quad, knowing our integrated marketing platform had the necessary depth and breadth of talent creative vision and flexible execution to fulfill its needs.
We perform against the highly truncated timeline that included capturing hundreds of new images and video content for four different brands in just 25 days.
Due to the resounding success of our work we were able to renew an existing agreement for related services and are now in position to expand the scope of our agency services with this high growth well known brand.
The second example, I'd like to share with you today illustrates how we have become the trusted partner to retailers, both online and offline.
To help carry out their most important strategic initiatives.
In the wake of the pandemic. This includes initiatives by brick and mortar retailers to engage customers through experiences.
As shown on slide six the large national retailer charm to us to execute at the launch for a new high profile of beauty shopping experience of store within the store concept featuring dozens of Premier beauty brands, all of which needs of the revision represented consistently and on brand within the dedicated space.
The retailer was familiar with quad the ability to manage complexity and leveraged our integrated marketing platform to deliver hundreds of thousands of high quality in store signage and displays quickly.
As our client experience is critical strategic effort or across the U S. We expect to grow our relationship helping it to refinance vision for the experience.
Produce assets for execution among other areas of opportunity.
An ancillary benefit of this level of trust from this leading retailer is we now have direct relationships with the beauty brands involved in the program and are actively working to expand our relationships with each of them.
In fact, several brands that already have engaged us for a variety of marketing solutions, including strategy creative and digital services and direct mail production.
On slide seven we circle back to commitment to culture, and social purpose, our commitment that goes back to our company's founding 50 years ago.
Our strong culture and values include an enduring focus on social and environmental matters and the benefit that this focus brings to the company and the communities we serve.
For example, we have always focused on reducing the environment.
The environmental impact of our business operations, including significant efforts to improve the energy efficiency of our manufacturing operations.
Our Onboarding work recently garnered of Wisconsin focus on Energy Excellence award for driving down carbon emissions through energy savings upgrades to facilities and operations.
In addition at this time of heightened awareness of both social issues, we have elevated our commitment to diversity equity and inclusion not only because it is the right thing to do.
It is also a business imperative that will ensure we attract and retain the talent we need to successfully compete and growth.
In 2020, we launched the learning and development program for employees as part of the more comprehensive and sustainable strategy.
We also expanded our employee led business resource groups.
As we look to the future. We are focused on further operationalize the diversity equity of inclusion into everything we do of quad as well as across the marketing advertising industries as a whole for example, quad and my family's foundation. The window of her foundation are making the three year $1 billion commitment to expand the brand lab to the Milwaukee.
The community.
Through this investment we will introduce local students from diverse ethnic and socioeconomic backgrounds to career opportunities in advertising and marketing and generate jobs.
<unk> interactive our digital agency, just announced its partnership and the new strategic effort to bring more diverse talent to Chicago's texting.
<unk>, who will lead the charge for our personnel and our digital marketing campaign for this important effort called destination 312.
Before I turn the call over to Dave I want to thank our employees for their continued hard work and dedication.
<unk> been resilient in the face of ongoing and unprecedented challenges and thank you for being there for each other and managing through disruption and its many forms to continue to serve our clients well.
As the economy continues its recovery Quad will remain nimble so that we can adapt to changes in the demand landscape.
We are confident in our team our strategy and our future is of marketing solutions partner to our clients.
With that I'll now turn the call over to Dave.
Thanks, Joel and good morning, everyone slide.
Slide eight provides a snapshot of our first quarter financial results as Joel mentioned, we delivered strong operational and financial results to start the year.
We achieved a third consecutive quarter of improvement in the net sales decline rate since the height of the pandemic impact on our business in Q2 of 2020 include.
Including new business win for our agency and print segments.
These wins combined with our disciplined approach to cost management and ongoing productivity improvements drove higher adjusted EBITDA margin and higher free cash flow compared to the prior year.
The strong free cash flow generated in the first quarter in combination with proceeds from asset sales enabled us to reduce net debt by $61 million, which included $11 million of cash generated from the sales of vacant facility.
The ongoing review and realignment of our manufacturing platform allows us to redeploy capital to further accelerate our transformation is the marketing solutions partner and reduce debt.
Net sales were $706 million in the first quarter down 14% from the same period in 2020.
Primarily due to the economic impact of the COVID-19, pandemic and ongoing print industry volume pressures. However, the first quarter decline represents the third quarter of sequential improvement in our net sales decline rate since Q2 of 2020.
Adjusted EBITDA was $66 million in the first quarter as compared to $75 million in 2020, while the adjusted EBITDA margin improved to nine 3% in the first quarter as compared to nine 2% in 2020.
The variance in adjusted EBITDA to prior year reflects a 14% net sales decline and $18 million of nonrecurring benefits realized in 2020, including of $12 million benefit from a change of vacation policy and the $6 million benefit in the cost of workers' compensation claims from improved.
The production safety procedures.
These impacts were partially offset by savings from cost reduction initiatives adjusted.
Adjusted net adjusted EBITDA margin improved 15 basis points from cost savings initiatives more than offsetting the relative percentage decline in net sales.
Free cash flow was $56 million in 2021, an increase of $40 million from 2020, primarily due to higher net cash provided by operating activities driven by working capital improvements and of $12 million decrease in capital expenditures.
Slide nine includes a summary of our debt capital structure as of March 31.
We reduced net debt in the quarter by $61 million and as a result, our debt leverage improved to three to four times compared to 335 times at the end of 2020.
While this leverage ratio is above our long term targeted leverage range of two to two five times, we expect to further improve our debt leverage ratio to be at or near 3.0 times by the end of 2021.
As of March 31 of our blended interest rate was four 9% and we maintained our strong liquidity position with up to $463 million in unused borrowing capacity under our revolving credit agreement.
And $81 million of cash on hand.
Quads nearest debt maturity is our 7% senior unsecured notes due may of 2022, which has $239 million outstanding.
We are currently reviewing whether we will pursue refinancing of the unsecured notes during the coming year or choose to pay off the balance at or prior to maturity with ample liquidity under our $500 million revolving credit agreement, which matures in January of 2024 and available cash on hand.
As we consider our financial outlook for 2021, we are both optimistic and confident.
We expect to see further positive momentum in our net sales trend as our clients continue to embrace our marketing solutions and a strengthening economy.
We expect full year net sales to continue to improve and end the year in a range of flat to down the low single digit percentage as compared to 2020 and as previously mentioned, we expect to generate strong cash flow from operations and asset sales to further reduce our debt leverage to.
At or near 3.0 times by the end of 2021.
For the second quarter, we expect to increase net sales by 10% to 13% as compared to Q2 of 2020. However, we anticipate that margins will be somewhat pressured in the second quarter compared to the previous year as Q2 of 2020 represented of the quarter with the most temporary costs.
The reductions implemented to partially offset the 38% net sales decline at the height of the pandemic impact on Q2 of last year.
During the second quarter of 2020, we took swift action to implement significant temporary cost reductions and cash savings, resulting in temporary cost savings, which ultimately reached approximately $325 million on an annualized basis. These cost reduction activities included initiating furloughs.
Temporary temporary wage reductions and hiring freezes and temporarily suspending production at several of our manufacturing facilities.
We worked diligently over the past year to convert a majority of those temporary cost savings into permanent savings.
As a result, the second quarter of 2021 will benefit from the earnings impact of the 10% to 13% increase in our year over year net sales, but that increase will be offset by the nonrecurring nature of the temporary cost savings initiatives for which those costs were subsequently reinstated to support increased claw.
The demand.
As the as the acceleration in client demand for our marketing solutions continues we remain focused on our financial objectives of driving earnings and increased margins through revenue growth as well as effective cost management and productivity improvements.
In addition, we expect to generate strong free cash flow along with cash generated from asset sales to further reduce debt.
All of these efforts will help strengthen our balance sheet and liquidity to ensure we of the financial flexibility to continue to accelerate and scale. Our strategy is of marketing solutions partner, while driving shareholder value.
With that I'd like to turn the call back the Katy who will facilitate the Q&A session.
Thank you, Dave we compiled questions in advance of today's call and therefore, we will not ask for colors to enter the queue. Thank you to everyone who submitted questions in advance we.
We have three top questions that were submitted the.
First question relates to what we are seeing in our core end markets specifically it asks.
Can you speak to the trends you were seeing in quad business segments and end markets as the economy reopens and as a follow up which of those end markets are fully back and which are still slower to come back if any.
Thanks, Katie and I will start with retail inserts and we've been pretty consistent over time.
Referring to this segment is the one that has had the greatest decline.
And one debt.
<unk> has experienced resets and probably will continue to experience some resets, but we're right now the industry is seeing about a negative 30% in the first quarter versus last year were about in line with that.
And maybe a little bit better, but I will also remind people that the retail industry provides a lot of revenue upstream and downstream through all of our whole portfolio of product lines as evidenced by a couple of examples I've shared whether that's in store signage up to media planning and placement too.
Social media et cetera, and so while we deal with the decline of newspaper inserts, which has a little bit to do also with the carrier being the newspaper that also got hit pretty hard this past year.
We do offer a lot of other opportunities to grow business with the retail insert group and are seeing that the retail.
The industry in general of publications were actually right now it looks like for the quarter of the industry's off of about 12%, but were off only about two percentage volume and that's heavily due to segment share wins that we've been experiencing and when I turned to the catalog market the.
The industry right now is as the original catalog forecast suggests is off of about 11% for Q1 were actually up 3% and again much of that comes from having some clients that are performing better than most as well as segment share wins.
The mail and our commercial division is about in line with the industry trends, which is about off of about 11%.
But that will continue to see it come back as we get into the next several quarters of based on some of the pipeline and some of the conversations that you hear out there in the marketplace and then packaging and is actually a great bright spot for us as we continue to build the strength there.
Referenced of the example of helping packagers with.
Analytics to better figure out how the display their brand in the stores, but we're actually up about 8% of net segment, which is.
Fairly in line with the rest of the industry.
So I would say that you know to the question about which ones if the kind of fully come back obviously can see that the catalogue world has done well for us again, because some of the clients we have fared better than many sorts of quality of client that we have of.
But also I think youre going to start seeing more and more direct to consumer folks.
Entering the waters in direct mail and in catalog and of course publications. There is a lot of tried and true.
Titles out there.
And you do see decline in the area, but again, we have from from it.
The segment standpoint, we've done the nice job with that.
Katy.
Great. Thanks, Joel I appreciate the detail there.
Okay. Our second question is for Dave.
Steve can you provide an update on clients plan for the 2022 senior unsecured notes and do you plan to start of refinancing process. This year.
Sure absolutely Katy.
Continued financial focused on margin improvement and cash flow as we talked about in our prepared remarks.
Well, it's substantial and ample liquidity that we have whether it's through unused revolver capacity or significant cash on hand continues to give us a lot of flexibility and optionality as it relates to these upcoming notes and again as a reminder of this $239 million that's cut.
<unk> do for these notes in May of 2022, So we're continuing to look at a number of options, which would include refinancing those notes or simply just paying them off at or before maturity and.
And so we will continue to work on that Optionality and we'll let you know as shareholders. Our decision on that as that gets made.
Okay, great. Thanks for the update Dave.
Our final question is regarding quad the outlook for the remainder of the year.
It reads, how should we think about quads participation in the economic recovery and do you expect to see top line start to rebound as the year progresses.
Sure Joe Let me just start out just again, just reiterating our guidance because we tried to address some of this economic recovery and the guidance, we not only gave for the full year, but specifically for Q2 as we expect to continue to see further momentum in our net sales trends.
Of our clients further embrace our marketing solutions and as the economy gets closer to its pre pandemic levels, especially for agency companies like ourselves. So as I mentioned in my prepared remarks, we expect to see the full year of 2021 net sales to continue to improve and.
And end the year between flat and download single digits as compared to 2020 and.
And we continue to see really nice sequential improvement as we talked about from the height of the pandemic impact on our net sales in Q2 of last year, where we were down 38% and it has improved sequentially until this last quarter, where we were down only 14% and then as we give guidance for Q2, we expect to see an increase.
Net sales for our second quarter of somewhere between 10 and 13%.
So that's just the reminder of our guidance Joel.
Yeah and.
As the year has progressed here clearly the economy of heated up quite a bit with expectations into the 6% range for GDP growth.
And a lot of clients are re kicking and traditional marketing of stores open up but have also really accelerated their use of all different mixes of media and I think you've got to think about things kind of getting thrown out into a little bit of a.
Disarray this past year as people, who stayed at home and in companies were trying new ways to market and now the pendulum is going to try and swing and find the new medium where that ends we don't know, but certainly other things are playing out such as Apple's new implementation of their privacy of technology, where we're cookies really go away. So.
The long story short as businesses are seeing the comeback and we expect to continue to help them with how they can sell more stuff using the analytics work that we can you can provide them along with executing on their plans in the integrated way so while that may not for instance.
<unk> drive a huge.
Retail insert program come back and we do think that there'll be some comeback there, but we're seeing a lot of demand in all of the different other areas. So we expect that through.
Through the rest of the year, we will see some pretty interesting things, especially as it relates to what we formerly called the three point of the strategy, which is really helping.
Marketers of all sorts to market their products in all channels combined.
So with that I feel pretty good about our position in the industry as well as our positioning within the marketing mix in terms of helping these clients navigate these new waters.
Great. Thank you both.
This concludes the Q&A portion of today's call and now I would like to turn the call back to John for closing remarks.
Thank you Katie and thank you everyone for joining today's call I want to close by reiterating my thanks to our employees for their continued hard work and agility I am confident in our team and our strategy and in our future as the marketing solutions partner that helps our brands and marketers solve their marketing of profit challenges we will.
To closely monitor the pandemic and its impacts on our clients and we will adjust our priorities to support of financial objectives that makes quad a compelling long term investment.
And have a good day, we look forward to speaking with you again next quarter.
And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.