Q2 2021 Quad/Graphics Inc Earnings Call
Good morning, and welcome to the Quad second quarter 2021 earnings conference call for analysts and investors all participants will be in listen only mode should you need assistance. Please signal of what conference specialist by pressing the star key followed by zero. Please note. This event is being recorded I would now like the.
I turn the conference over to the Quad management team. Please go ahead.
Yes.
Thank you operator, and good morning, everyone with me today are Joel QUADRA Chi quite the chairman, President and Chief Executive Officer, and Dave Honan quite as 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 quiet second quarter and year.
To date 2021 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 2 quite financial results are prepared in accordance with generally accepted accounting principles wherever the 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.
We are very pleased with our second quarter operating and financial performance, which exceeded our expectations net sales increased 19% driven by higher print logistics and the agency solution sales, which rebounded compared to the pandemic period in Q2 of 2020.
Our services offerings alone, we're up 33% in the quarter and 15% year to date.
These positive trends, which included organic growth as well as print segment share gains from new clients reflect our employees hard work and agility the strength of our business strategy and the success of our integrated marketing offerings is having in the market place.
Sure. Thanks to the strong performance on higher cash flows we were able to significantly reduce net debt by approximately 25% over the past 12 months.
We will continue to continue to focus on maintaining a healthy balance sheet.
Simultaneously, making strategic investments in talent technology products and services to accelerate our position as of marketing solutions partner.
On slide 3 we highlight key competitive advantages that distinguish quad is the leading marketing solutions partner and create more value for our clients.
These advantages reflect our commitment to innovation.
The greater marketing platform excellence and culture, and social social purpose.
I will spend some time today discussing these advantages starting with how we are driving innovation and growth through new talent, we're bringing on board.
Turning to slide 4 and July we welcome Josh Golden former President and publisher of AD age as our Chief Marketing Officer, Josh has incredible insight into what is important relevant to marketers and as an advocate for uncomplicated approach to addressing those challenges the.
The energy and expertise he brings to quad is key to highlighting our singular place in the market, where we offer through the line marketing solutions with the ease of engagement of the specialized agency.
Josh will work closely with me, Eric Ashworth, our executive Vice President of product and market strategy and president of the agents from solutions and Julie <unk>, Our chief revenue officer to accelerate our visibility and drive growth across our entire solutions portfolio.
This includes continuing to position quad as a strategic industry partner with deep expertise in helping brands and marketers create big ideas, along with reducing complexity, increasing efficiency and improving marketing spend effectiveness.
We are excited about the future with Josh as part of our team.
Turning to slide 5 we continue to invest on our long term growth platform, which includes martech solutions that help clients optimize their marketing efforts.
Rise interactive our tech enabled performance marketing agency just won product of the year for its on innovation connects at the prestigious sales and marketing awards or sami's.
Codexis of cross channel media optimization platform that helps marketers know where to allocate their digital marketing budget to achieve their business goals.
This type of March ex solution has become increasingly important as the number of marketing channels expand.
Each with its own ROI measurement, leaving brands with Siloed technology, and without a solution that informs where to spend the next dollar based on which investments are driving the performance.
With the sheer volume of data marketers need to know which opportunities to focus on and be able to take immediate action.
<unk> brings cross channel media management of life at scale with performance transparency on available anywhere else.
This innovation of eliminates the noise of disparate datasets and helps marketers identify the specific value driving actions they need to take in real time to drive revenue and grow their business.
As an example of the power of this platform rise recently helped a national retail chain secure more co op budget from its brand partners by identifying real time opportunities to capitalize on strong sales performance.
By focusing digital AD spend on times when demand for particular brands and the products are performing well, we help the retailer drive incremental sales while also positioning it as a proactive Parker.
This was a win win win brands 1 by getting proactively notified when their products were selling well information that was historically more challenging the gift from the retail partners.
The retail on 1 because it could do more advertising with co op dollars and we won by demonstrating our value as a true partner for integrated marketing solutions.
Turning to slide 6 the retail on E comm spaces of the ball dramatically in recent years, exposing significant workflow challenges from marketers.
Additionally, the pandemic and work from home requirements have forever shifted the whole marketing teams collaborate on the daily basis.
Light of these disruptions clients are increasingly demanding a more automated approach to managing the marketing efforts. This is where quad quads client technology team excels, our team of software developers and UX expert to help our clients optimize the processes with highly configurable and scalable workflow solutions.
Designed to address their unique challenges.
Currently more than 200 clients leverage our technology with more than 150000 users.
Our client technology experts on presently, helping a leading global retail and E Commerce company optimize the deploy highly regionalized the advertising and in store promotion signage as it expands its grocery foot print of over the next year.
We deployed our content management workflow solution to centralizing the organized all of his clients in store marketing efforts and simplified regional complexity of.
Our team is also assisting with the business process implementation and change management.
As a result of our integrated solution. The client is transitioning its in store signage production to our platform.
We also introduced this client to our analytics solutions to dynamically track the effectiveness of each campaign.
It is true of these types of innovations that we were able to extend and grow client relationships beyond limited the engagements and create additional revenue for our clients and our company.
We also continue to strengthen our commitment to platform excellence to align with our holistic strategy is the marketing solutions partner.
At the end of June we divested our 3 PL brokered freight business Quad Express for a total consideration of $40 million to the Mullen group of leading Canadian logistics provider.
This divestiture, which represented a small portion of our global logistics business supports of our established strategy to optimize our product and service portfolio and invest in those parts of our business that accelerate our position as of marketing solutions partner and create more value for our clients and other stakeholders.
We are pleased to have found a great home for the Quad Express team.
Given the recent nationwide labor shortages combined with increased volumes at our print manufacturing facilities, we have intensified our focus on attracting and retaining employees through a holistic approach to designed to ensure we have the talent needed to support our platform and offering and growth objectives.
While I continue to be concerned about labor shortages I am pleased with the traction we're getting with our recent hiring efforts, especially as we continue to ramp up for the historically busier back.
Half of the year.
These hiring initiatives complement robust retention efforts that include our accelerated career training program and the expansion of of quads business resource groups, which connect employees with shared backgrounds interest in issues and create a more inclusive environment.
We continue to be of strong and dependable employer and are well regarded in the industry and among the clients for operating stability reliability and agile performance.
Turning to slide 7 through our commitment to innovation and platform excellence, we continue to attract new clients from existing verticals, while simultaneously growing our presence in critical critical expansion categories like technology consumer packaged goods and direct to consumer.
These brands admired for the excellence of the loyalty of the adult with their customers to place their trust in us to help solve their most urgent marketing challenges.
As the AD market and broader economy continued to recover and return to growth. We will continue to focus on attracting new clients as well as growing share through our expanded marketing services offering.
On slide 8 we address our commitment to culture and social purpose of commitment that goes back to our company's founding 50 years ago.
Our strong culture and values include an enduring focus on environmental social and governance matters.
For example in the social space, we are building, a more comprehensive and sustainable dei strategy, which not only benefits of our employees, but also our industry and the communities we call home.
When it comes to the environment, we have always sought to minimize the impacts of our business operations by conserving raw materials, minimizing waste and recycling and reusing whenever possible.
In 2020, we recycled nearly 300000 tons of paper, along with 3000 tons of metals and 500 tons of plastics.
Currently we recycled 98% of all material byproducts from our manufacturing processes and of multiple initiatives in place to increase debt amount to 99, 5%.
We take seriously our role in creating a better way to our social environmental and economic contributions.
Before I turn the call over to Dave I want to thank our employees for the continued hard work and dedication and congratulate them on our 50 year milestone anniversary, which we marked on July 13th.
The team has been resilient in the face of a truly dynamic environment and unprecedented challenges and I. Thank them for supporting each other and managing through disruption and its many forms to continue to serve our clients well.
I am proud of how we've been navigating the pandemic and with AD spending on the wider economy now recovery, we are focused on growth.
And as always we will remain nimble so that we can adapt to changes in the demand landscape.
With that I'll now turn the call over to Dave Thanks, Joel and good morning, everyone. Slide 9 provides the snapshot of our second quarter financial results as Joel mentioned, we delivered strong operational and financial results that exceeded our expectations for the quarter.
Our business is clearly building momentum and our clients are growing more confident in the wrong recoveries and as a result, we are raising and expanding our financial outlook for 2021 net sales adjusted EBITDA and debt leverage.
Net sales were $694 million in the second quarter, an increase of 19% from 2020 significantly better than our previous outlook for the quarter of 10% to 13% net sales growth.
Net sales increased by $109 million year over year, which included gains across all of our businesses.
Logistics and agency solutions, which rebound as compared to the pandemic impacted second quarter of 2020 as well as print segment share gains from new clients.
As importantly, we converted the net sales growth into strong free cash flow and in combination with proceeds from asset sales, we've reduced net debt by $120 million in the first 6 months of 2021.
Our focus on our balance sheet has resulted in approximately a 25% reduction in net debt over the past 12 months, despite challenging business conditions.
On a year to date basis net sales were $1.4 billion down 1% as compared to 2020, primarily due to the impact from the COVID-19 pandemic in the first quarter, which represented the final quarter of annualized the pandemic impact on our net sales.
The net sales growth in the second quarter of 2021, nearly offset the first quarter's net sales decline due to strong rebound in growth in print logistics and agency solutions sales and new client wins.
Adjusted EBITDA was $60 million in the second quarter flat with 2020, primarily due to higher earnings from the 19% net sales increase offset by nonrecurring benefits in 2020, primarily related to 2 of approximately $30 million on temporary cost reductions implemented in 2020.
In response to the pandemic of Brooks impact on our net sales.
Adjusted EBITDA margin was 8.6% in the second quarter as compared to 10, 2% in 2020.
This was in line with our expectations as we noted during our first quarter earnings call. The second quarter margins would be somewhat pressured due to the nonrecurring nature of the temporary cost savings measures implemented in the second quarter of last year, which included initiating furloughs temporary wage reductions and hiring freeze.
And temporarily suspending production at several of our manufacturing facilities.
We've worked diligently over the past year to convert a majority of these temporary cost savings in the permanent savings. However, some of these temporary cost savings were subsequently reinstated in the back half of 2020 to support the recovery of net sales from the pandemic peak impact during the second quarter of 2020.
Year to date adjusted EBITDA for the 6 months ended June 32021, with a $126 million of $9 million or 7% decrease as compared to a $135 billion in 2020.
Adjusted EBITDA margin was 9% in 2021 as compared to 9.6% in 2020.
The strong second quarter net sales growth and related adjusted EBITDA impact, partially offset the full year impact of nonrecurring benefits in 2020, primarily related to approximately $30 million of temporary cost reductions and the $12 million benefit in 2020 from a change on vacation policy.
Free cash flow was $62 million in the first half of 2021, an increase of $33 million versus the same period in 2020.
Primarily due to higher net cash provided by operating activities driven by working capital improvements and lower costs restructuring costs and $11 million decrease in capital expenditures.
Slide 10 includes a summary of our debt capital structure as of June 30th we've reduced net debt by $120 million since the end of 2020.
And over the past 12 months, we've reduced net debt by 225 billion or nearly 25%.
This is the outcome of our continued disciplined approach to managing our balance sheet to allow for stability during uncertain times as well as to provide more capital allocation flexibility to take advantages of opportunities.
During the past year, we divested 2 of our business units our book printing business in 2020 at our Quad Express 3 PL brokered freight business in this past quarter.
These divestitures are part of our established strategy to optimize our product and service portfolio and invest in those parts of the business that accelerate our position as the marketing solutions partner and create more value for our clients and other stakeholders.
The Quad Express <unk> logistics business had approximately $135 million in revenue. It represents a small part of our global logistics product offering and was sold for $40 million, representing an attractive price with the multiple of over 8 times adjusted EBITDA.
In addition, during the second quarter, we also completed a sale and leaseback of our shelf on the Pennsylvania production facility for $20 million all in over the past 12 months, we've realized approximately of $100 million in proceeds from asset sales and of generated $160 million of trailing 12 months of free cash.
Flow from our business operations. The result was $260 million of cash to a lot more focus on transformational strategy better capital allocation and further debt reduction on <unk>.
Net leverage improved to 3.0 times compared to 335 times at the end of 2020, while this leverage ratio is above our long term targeted leverage range of 2 to 2.5 times, we will continue to significantly reduce debt during 2021, as we expect to further improve our debt.
Leverage ratio to be approximately 275 times by the end of 2021.
As of June 30 of our blended interest rate was 4.9% and we maintained our strong liquidity position with up to $463 million of availability under our revolving credit agreement and $98 million of cash on hand.
Quite the nearest debt maturity is our 7% senior unsecured notes due may of 2022, which has $239 million outstanding.
As it relates to the senior unsecured notes upcoming maturity. We believe we are well positioned to address the notes at or before the maturity in 2022 with our ample liquidity.
As we review our financial outlook for 2021 on Slide 11, we remain optimistic and confident we have strong sales momentum heading into the second half of the year and we are increasing our full year of net sales outlook for organic growth of 1% to 3% in 2021, which excludes the impact of.
Of our June 30 of the Quad Express divestiture for the back half of the year.
In addition, we expect full year adjusted EBITDA to be in the range of $240 million to $260 million.
Finally, we expect to generate strong free cash flow from operations in combination with proceeds from asset sales to further reduce our debt leverage to be at approximately 275 times by the end of 2021, which is significantly below our previous outlook of 3.0 times.
Our clients continue to embrace our integrated marketing offerings, which is helping us to meet our financial objectives of driving earnings and increased margins through revenue growth.
Fact of cost management and productivity improvements as well as reducing debt through the generation of strong free cash flow and cash generated from asset sales. All of these efforts will continue to strengthen our balance sheet and liquidity to ensure we have the financial flexibility to continue to accelerate and scale, our strategy and drive shareholder value.
With that I'd like to turn the call back to Katie who will review questions compiled in advance of today's call.
Thank you, Dave because we compiled questions in advance of today's call. We will not ask for colleagues to enter the queue. Thank you to everyone who has submitted a question.
We have 3 tough questions that were submitted the first question is on printer segment revenue.
You have been highlighting print segment share wins more often than you have in the past.
What are you seeing from a competitive standpoint.
Katy I'll take that.
Clearly as it has been a lot of disruption in the past year on pretty much every business, but specifically in the legacy print business.
There's been a lot of challenges, but I'm very proud of how we've managed through this and as we've just shown you and actually continue to shore up our balance sheet in a very positive way and so what we're seeing now is just a lot of people looking for stability and so we've seen an uptick of whether its current clients asking us to do more.
Or new logos coming into the fold looking for stability and what's great about that.
As we've been able to do to bring on those clients is that they get exposed to all of the other stuff. We're doing just like our current logos that have relationships with us we show them that not only can we be efficient and reliable and putting their workout.
But also that we can actually work with them to help them sell more product and so we look forward to not only the.
On the work we are picking up as part of this sort of disruption from existing clients, but the new logos coming in I'm very excited about because we can prove to them that we can be that partner and not only provide the stability of the legacy platform, but actually help them grow their business and so we're very excited about what we're seeing and again.
Then I think we've always done a very good job of managing through tough times.
To be able to come out on the other side stronger than we were.
At the beginning.
Thanks, Joel that's great to hear Okay. Our second question is regarding cloud Xpress.
And asks can you give more detail on why Quad Express was sold and how does the quad express differ from the broader logistics business. The Quad will continue correct. Thanks.
Thanks, Katie it's Dave I'll take that 1 are quite express.
On this as a reminder was the non asset based third party broker of logistics services for customers that we acquired as part of the World color acquisition.
Back in 2010, so over time, we've really grown that business nicely with the combination of expanded services. They can offer an innovative technology, including the development of our Silver Express transportation management system. So the technology was a key part of growth for this business.
However, you'll quite expresses the much smaller part of our overall logistics offering we're not selling our logistics business. We're just selling the brokered freight portion of it on us.
As part of our established strategy to optimize our product and service portfolio as we position ourselves as a marketing solutions partner and create more value for our clients. The shareholders. So we're going to continue to operate of much larger and broader and.
In House Global Logistics business, which includes Quad transportation services, and our trucking group do Plainville transport to provide logistics services directly to our clients as compared to the more brokered model of what Quad Express was and I think the final thing I would say is we're really we're pleased by the outcome.
Of the sale process.
We realized a really attractive sales price of $40 million as I said before that represents over an 8 times multiple of adjusted EBITDA and I think as importantly, we found a buyer who can strategically grow in the nurture the business like we had in the past and take it to different levels. So that's really good for the business.
For our employees of who are part of the quarter expressed so we really think of those employees of 4 over the past decade of service to Quad had really been successful for US I think it's a great outcome for quite express I think it's a great outcome for those employees and for Quad and we can better now allocate that capital to accelerate growth on our <unk>.
Our kitting solutions group and a further decrease debt.
Great. Thanks for that additional detail day, absolutely. Okay. Our final question relates to the 2021 outlook.
Can you speak more to client trends and what you are seeing going into the second half of the year that gives you confidence in raising your target I think confidence is the key word here I think what we saw building throughout the last few quarters that we've been exiting out of the peak impact of the pandemic is growing confidence.
The growing improvement rebound in demand for advertising and marketing products and services of our business and as our clients have been improving so have we and so we're we have a lot of confidence coming out of the second quarter, where we were significantly above our net sales at 19% growth versus what we thought of 10 to 13.
Heading into the quarter, so really that strength gives us a lot of confidence in and how we.
Put out the decreased guidance for the rest of the year and again a reminder, the guidance for the back half of the year of the fully in the full year guidance excludes the impact of the cloud Xpress divestiture just walked through.
And so increasing organic net sales growth from.
Like down to flat to increasing in the out of 1.1% to 3% of growth in 2021.
Really good really important for the momentum of our business adjusted EBITDA in the range of $2.40 to $2.60, So thats new guidance for us and Thats also takes into consideration the EBITDA on the back half of the year that we lose from the sale of the Quad Express So I think and also in particular, what we're really pleased about is the tremendous.
Progress we've made on the debt side.
We've essentially in the first half of this year of accomplish what we thought we could accomplish at the back at the end of the year, So getting to 3.0 times levers.
The big deal for US and was earlier than we thought we could do it because we have previously guided we thought we could get there by the end of the year.
We're happy you're early on that and what's great is the momentum of the business is carrying of forward aided by some additional asset sales, where we think we'll get to 2 and 3 quarter of times leverage by the end of the year at the $250 million midpoint of our adjusted EBITDA guidance, So really positive developments on the balance sheet.
For our business, where it puts us in excellent position to continue to strengthen that balance sheet, which we believe is 1 of the healthiest in the industries and the product segments in which we compete on many of those and provides further capital for accelerating our transformation.
Let me, let me add some commentary because we do like to walk through the various categories. We're in and just to give you some color.
But using sort of 6.5% GDP growth in the second quarter of sort of the context of the backdrop.
The retail inserts were actually flat for us that will that has been and will continue to be the more challenged part of the portfolio, primarily due to the carrier of newspapers et cetera, but if you look at the rest of the categories. We really exceeded our market segment metrics in every category of what the dose the specific.
We're doing as a whole.
So if I look at publications.
<unk> volume for the U S. P. S. In the quarter was down like 5%, we were actually up 7% in line.
The press pages for the publication market and so that's a combination of I'd say the.
The quality of the clients that we have but also continued on our segment share wins as people look for stability on the catalog side the industry as a whole lot of nice bounce back of about 19% in the quarter of quad was up over 26%.
And again, what we're seeing there is segment wins that we've been accumulating but also there's quite a few clients who have been increasing counts.
Even several of them too.
Above pre pandemic volumes as the health of their business and the health of print as a part of the overall marketing mix proves itself.
Mail the industry had a nice rebound of about 39% we were up 41% and then packaging, which saw a pretty healthy growth through the pandemic because of the change in a lot of the habits of how people were purchasing the.
The industry was up between 5% and 10% are packaging sales were up 11% in the quarter.
I'm excited by that and 1 of things I'm very proud of is that in the second quarter, our entire services offering the place we've been investing in a lot of the agency solutions and things <unk> been talking about from all.
A long time were up 33% in the quarter on 15% year to date.
So again that really.
Adds to my comment about building momentum for any mobile as we have and showing them that we are very capable of helping them become even better as brands.
Despite this momentum I do remain cautious about the Delta variant, we talked about the labor shortage, we've done a good job of being in the higher people and retain people, but we're keeping an eye on the impact of the Delta variant is it kind of goes through all of this country.
The other thing that's interesting is many of you know that the the post office is increasing the rates pretty dramatically.
Here in August.
The good news is we haven't seen much of an impact yet.
And hopefully we won't but a lot of times when it gets announced and those increases come in you'll see the immediate reduction.
But because of the comments I made before about the segment share and rebounding and all of that.
Haven't seen a big impact from that yet, but we'll keep an eye on it and so despite of all of those headwinds we're very confident in our outlook and very excited about what we're doing.
And we will continue to be very focused now on on growth and true growth and so.
With that we will continue to update you on on how we see the world play out.
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 Joe on for closing remarks.
Thank you everyone for joining today's call I again want to congratulate our employees on our company's milestone 50th anniversary at our legacy of creating a better way every day I'm confident in our team and our strategy and on our future as the marketing solutions partner that helps brands and marketers solve their marketing of process challenges as the AD market and broader E.
We continue to recover and return to growth our innovative team remains committed to creating new revenue from our expanded marketing services offering. Thank you and we'll talk to you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.