Q2 2022 Quad/Graphics Inc Earnings Call
Good morning, ladies and gentlemen, welcome to Quad second quarter Conference call. During today's call all participants will be in listen only.
So.
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A slide presentation accompanies today's webcast and participants are invited to follow along advancing the slides themselves.
Yeah access the webcast follow the instructions posted in the earnings release. Alternatively, you can access the slide presentation on the investors section of Quad slap site under the events and presentations.
Please note. This event is being recorded I would now.
Like to turn the conference over to Katie Krebsbach, well Investor Relations manager Katie. Please go ahead.
Thank you operator, and good morning, everyone with me today are Joel QUADRA, Archie Brown, Chairman, President and Chief Executive Officer, and Tony stand here quite a chief financial Officer.
So I'll lead off today's call with a business update and Tony will follow with a summary of quiet second quarter 2022 financial results followed by Q&A.
I'd 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.
<unk> adjusted EBITDA adjusted EBITDA margin adjusted diluted earnings per share free cash flow net debt and debt leverage ratio.
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 Com. Shortly after our call concludes today I will now hand over the call to Joe.
Thank you Katie and good morning, everyone.
Beginning on slide three I am pleased to report our results were in line with our expectations delivering a fifth consecutive quarter of sales growth.
Leaving a 14% increase in net sales when excluding divestitures.
This strong growth included print segment share gains and net sales growth across all of our offerings.
Throughout the quarter, we continued to face macroeconomic headwinds such as the ongoing supply chain constraints that impacted productivity.
Cost inflation on labor and other areas we.
We worked diligently to mitigate these impacts including implementing an additional price increase in mid day in response to inflationary cost pressures, while continuing to make investments to prepare for our seasonally busier second half of the year <unk>.
Including increasing inventory levels for paper and other key manufacturing materials and hiring and training employees for our manufacturing operations.
Earlier than usual.
As a result, our net earnings and adjusted EBITDA during the quarter were negatively impacted.
However, we are poised to grow sales and profitability in the second half of the year due to these proactive measures.
High inflation ongoing supply chain disruptions geopolitical tensions and other factors are creating economic uncertainty, we remain nimble ready to adjust our operations if necessary, while continuing to serve our clients well.
Slide four shows how we continue to diversify our revenue into higher value and higher margin offerings, while growing net sales 14% for example, our integrated solutions and targeted print segment grew from the second quarter of last year to the second quarter of this year at.
At the same time, we continue to manage for expected organic declines in large scale print.
Turning to slide five we are proud of our company's transformation and continue to evolve how we operate and communicate our unique value as a marketing experience company.
We help brands re imagine their marketing to be more streamlined impactful flexible and frictionless.
We do this through a disciplined but integrated marketing platform that includes business strategy insights and analytics technology solutions managed services agency studio solutions media print in store and packaging.
On slide six we highlight our three key competitive advantages.
Integrated marketing platform excellence innovation and culture and social purpose.
We continued to strategically invest in our platform, which includes creative AD creative analytic print and production capabilities.
These investments include advancements in data signals insights and analytics, including solutions that account for new data privacy restrictions and regulations.
Nextgen printing capabilities with 100% variable print at the speed and scale required by today's marketers and expanded cost saving solutions like our merge mail program. This unique solution combines multiple marketers direct mail piece production into a single broad it.
It delivers postal savings, while maintaining content personalization.
To strengthen our brand as the market experienced company, we continue to make investments in how we market ourselves, including introducing quarter, new and expanded audiences as shown on slide seven.
In June we attended the Cannes Lions International Festival of creativity, where we conducted more than 50 meetings in three days sure her expertise and through the line marketing.
We strengthened existing client relationships and uncover new partnership possibilities for applying our unique technology and scalable solutions to help drive and support any brands growth agenda.
Also in June we sponsored and presented at Commerce next 2022 in New York City, a two day event for retailers and direct to consumer brands.
What media is performance marketing agency rise interactive presented ways to maximize marketplace dollars focusing on Amazon the biggest E Commerce engine.
Rise laid out exactly how marketers can understand the truly value of their digital spend and an increasingly complex landscape.
During the quarter. We also continued to facilitate thought leadership discussions amongst senior brand marketers from Fortune 500, and other leading companies.
For example, we recently participated in the talks for the brand innovators community about challenger brands at Nextgen deep to seek up.
Turning to slide eight through our disciplined of led approach we are growing our presence with brands and critical expansion categories such as technology.
Health care retail consumer package goods and direct to consumer.
Burnham admired for their excellence in the loyalty they have built with their customers have placed their trust in us to help market their products and services to targeted personalized channels.
Moving on to slide nine quite creative advertising agency Periscope recently launched a brand design practice called favorite child the.
The mission of this practice is to make brands a favorite through inspired consumer action and reaction enhance connections and growth phase.
Favorite child services include brand positioning design strategy brand identity systems packaging, experiential and adaptive design retail environments and content services, such as cross channel content creation.
Favorite child, just helped mostly made a provider of meal starter kits updated brand look and packaging because as they prepare to move from the grocery freezer aisle to the refrigerated Deli case.
We created the brand strategy refresh the brand Mark and design, new packaging created that structure.
We also engaged our package insight research team, which specializes in brand packaging performance to test concepts with consumers and our stimulated shopping environment and then printed the final product.
Follow up research shows that this brand work is generating tremendous results.
Tumors are noticing the new packaging design twice as fast as the former design looking at it twice as long and buying mostly made Neil starter kits, two and a half times more frequently.
On slide 10, we show how we helped a large food retailer with more than 2400 U S. Supermarkets, streamline weekly signage kits for communicating with central pricing and promotional information.
The retailer stands out more than 100 unique in store signage displays each week across 19 different brands and in more than 160 different configurations.
We invested in the state of the art Landa Digital press that enables our in store team to take friction out of this complex implementation, increasing speed to market and customization options by region and store.
Despite aggressive timelines and distress supply chain environment, we are delivering high quality signage on time across the country each and every week.
This client is praised us for a seamless transition.
Another way in which we are helping our clients re imagine the marketing experiences through their sustainability efforts.
As momentum behind extended producer responsibility grows and as consumer demand and regulatory requirements multiply product manufacturers increasingly will be held responsible for reducing waste and creating a more efficient circular supply chain.
Quad believes retailers in their own brands programs will be the tipping point of this movement and we are committed to helping retailers rewrite the rules of engagement.
With capabilities from grant brand creation through packaging printing quad is uniquely equipped to help retailers league game changing sustainability initiatives.
For example, a national home improvement retailer that we have a 25 year relationship with recently engaged us to help improve the sustainability of its private label packaging as shown on slide 11.
Our work for this client started with collecting data on the different types of materials used in more than 3200 skus of its private label packaging.
Our analytics team interviewed approximately 100 global vendors and conducted multiple store visits.
And then organize the data into an easy to access repository and provided insights, including trended intelligence and ideas on how to design a waste from a variety of packaging.
With this information the retailer was able to make high impact changes.
We look forward to growing this relevant and profitable area of our business.
On slide 12, we address our commitment to culture and social purpose, which includes an enduring focus on ESG matters.
When it comes to the environment, we are uncompromising in our focus to reduce our impact.
For example, when it comes to printed products and packaging, we choose suppliers with care looking for reliable tens of custody and challenging ourselves to discover more sustainable materials and responsible sources.
In the social space, we are advancing on our goal to build a more comprehensive and sustainable DTI strategy that not only benefits our employees, but also our industry and the communities we call home.
Just last month, our <unk> task force kicked off the implementation phase of our multiyear action agenda.
This agenda features multiple projects that continue to promote and foster a culture of inclusion at Quad and includes measurement and monitoring to hold ourselves accountable.
Several projects are tied to attracting and retaining new talent with diverse social identities and experiences.
For instance, our commitment to the brand lab, an organization committed to changing the face and voice of the marketing industry is thriving.
This summer the brand Lantana place 30 High school and college students from diverse ethnic and socioeconomic backgrounds and internships at agencies and corporations throughout the Milwaukee area, including several here at Quad.
Next year the organization seeks to double the number of placements in Milwaukee, while also continued to grow its existing programs in Minneapolis, and Kansas City.
I also want to recognize our very own carry buchi, who is president of periscope for recently being named one of AD weeks women trailblazers for elevating and empowering underrepresented voices.
According to adweek carrying leads with empathy and flexibility emphasizing a people first approach that empowers employees to do their best work. So congratulations Carrie.
I'm also proud of our employees, who have given generously to the quad community fun for Ukraine relief and internal fundraising campaign to help individuals and families ravaged by the ongoing war in Ukraine.
Together with a dollar for dollar company match, our employees don't have nearly $75000, which will be directed to humanitarian relief efforts in Ukraine, and Poland, where we have a major operation.
I sincerely, thank everyone, who opened their hearts and walls to help those in need.
I will now turn over the call to Tony for a review of our financial results as well as share our financial objectives, including how we're providing long term shareholder value through share repurchases Tony.
Thanks, Joel and good morning, everyone.
Slide 15 provides a snapshot of our second quarter 2022 financial results as Joel mentioned, we achieved net sales growth of 14%, excluding divestitures, representing our fifth consecutive quarter of net sales growth.
We are anticipating continued sales growth and increased profitability in the second half of 2022.
We're closely monitoring the economy and are prepared to adjust as necessary to continue acting on our financial objectives, including reducing debt and driving shareholder value.
During the second quarter.
Actions included paying off the remaining $209 million of our unsecured 7% senior notes and thereby lowering our blended interest rate by over 80 basis points to three 8%. Additionally.
Additionally, we demonstrated quads value as an investment by repurchasing one 7 million shares of class a common stock for $5 million through August one 2022, which we believe represents strong value at today's prices.
We were also pleased to be added to the small cap Russell 2000 index in June .
We will remain disciplined with our capital allocation by focusing on debt reduction to continue enhancing our financial strength, while making investments to accelerate our growth as a marketing experience company.
Net sales were $758 million in the second quarter up 9% from 2021.
Excluding the June 2021 divestiture of Quad Express a third party logistics company that was a small part of our overall logistics business net sales increased 14% from 2021 on.
On a year to date basis, net sales were $1 $5 billion up 7% from 2021, and excluding the quite express divestiture net sales increased 12% compared to 2021.
Net sales growth was achieved across all of our offerings due to increased pricing in response to inflationary pressures.
<unk> segment share gains and Onboarding, new clients and agency solutions.
Adjusted EBITDA was $56 million in the second quarter of 2022 as compared to $63 million in the second quarter of 2021, and adjusted EBITDA was $105 million in the first half of 2022 as compared to $133 million in the first half of 2021.
These declines were primarily due to the negative impact of supply chain disruptions on our productivity.
Investments in hiring and training labor in advance of the peak production season during the second half of the year and cost inflation.
Which were partially offset by net sales growth.
In response to increasing cost to service our clients, we implemented an additional price increase effective may 15th 2022.
Adjusted diluted earnings per share was <unk> 13 cents in the second quarter of 2022, consistent with the second quarter of 2021.
Year to date adjusted diluted earnings per share was <unk> 17 cents compared to 31 cents in the same period last year.
A decline in a year to date period was primarily due to the supply chain challenges investments and cost inflation previously mentioned, partially offset by net sales growth.
Lower depreciation and amortization and lower interest expense due to the debt reduction.
Free cash flow was negative $57 million in the first half of 2022.
Our $119 million decrease compared to 2021, primarily due to higher working capital and lower profitability in the first half of the year.
We also invested $34 million year to date and capital expenditures consistent with our long term automation strategy.
We will continue to invest in our business to seize opportunities, including accelerating our growth or reducing our costs.
As a reminder, the company historically generates the majority of its free cash flow in the fourth quarter of the year.
Slide 14 includes a summary of our debt capital structure.
Net debt increased by $60 million to $684 million at June 32022, as compared to $624 million as of December 31, 2021.
And the debt leverage ratio increased 56 basis points to 295 times at the end of the second quarter the.
The increase in net debt and the debt leverage ratio was primarily due to the investment in working capital in preparation for our peak production season.
As a reminder, our long term targeted leverage range is two to two five times and with the seasonally strong fourth quarter cash flows we plan to achieve 225 times by the end of the year.
During the second quarter, we paid off the remaining balance of $209 million of our unsecured 7% senior notes, resulting in a lower blended interest rate of three 8% as of June 30th compared to four 6% as of March 31.
We also maintained our strong liquidity with up to $286 million of availability under our revolving credit agreement.
And $12 million of cash on hand.
Our nearest significant debt maturity is $88 million occurring in January 2024.
With the remainder of the significant debt maturity is not due until late 2026.
Our 2022 guidance is unchanged as shown on slide 15, our annual net sales growth has the potential to exceed the guidance range. However, we remain cautious in the current macroeconomic environment and are not increasing the net sales guidance range at this time.
We anticipate our adjusted EBITDA and free cash flow in the second half of 2022 will be higher than the first half of the year as well as compared to the second half of last year due to the strategic proactive investments we have made in working capital talent and equipment to drive higher profitability during our seasonal peak.
Duction period.
We will also continue to be nimble with our pricing to mitigate the negative impacts of supply chain disruption and cost inflation.
Our financial objectives remain unchanged and include driving earnings through sales growth effective cost management and productivity improvements.
Investing in our business to fuel growth.
Reducing debt through the generation of strong free cash flow.
As well as driving shareholder value by continuing to pursue opportunities with our share repurchase program.
All of these efforts will further strengthen our balance sheet liquidity enhancing our financial flexibility to accelerate and scale our strategy as a marketing experience company, while driving shareholder value.
With that I'd like to turn the call back to Katie for questions.
Thank you Tony because become proud questions in advance of today's call, we will not ask for college to enter the queue.
To everyone, who has submitted a question.
We are forced to have questions that were submitted our first question relates to the industry and segment trends. It asks can you discuss what trends youre seeing across the business and are there certain segments that might be seeing an impact from a slowdown in consumer spending due to the current macro environment.
Yeah, Katy what ill.
I'll walk through our different segments and I, usually start with the most challenged.
Segments of retail inserts magazines, that's our large scale print.
A portion of our business and retail inserts as we've said, we expect to continue to be under pressure and decline because of the carrier of the newspaper declining as well. However, I'd also remind people that the retailers are the ones, who buy our heavy users and by a significant amount of the rest of our product lines.
Beyond the retail winter, so that was off about 90% for the for the quarter and about 18% trailing 12 months.
Which again was expected on the magazine side, we were offered the trailing 12 months about 8% and about 12% for the quarter. This was actually due to some partially due to some significant titles being closed.
Companies have been acquired and have reshuffled their decks, but also continued pressure on ad pages.
However, if you look at the catalog side for the quarter were actually down 10%, but that's misleading because we've had the pressures from a shortage of paper supply and so some of this volume didn't go away. It just moved and so if you actually look at the 12 month trailing 12 month of catalog were up 5%.
On the direct mail side, we're up about 3% in line with the industry, our packaging were up significantly 22% for the quarter. Some of this due to picking up some great work and producing the COVID-19 packages that are all out there for the test kits.
In store due to a significant client wins were up over 46% for the quarter and then our agency solutions group is up 4%.
Based on new client wins, and so those are the different segments and I'll just remind people that yes. There is some of the pressures that we felt last year and everyone felt were due to a paper shortages that the industry is dealing with and we feel that we're managing that relatively well I'll remind you that about 50% of the paper that goes through quad is supplied by us.
The other 50 is supplied by our customers.
So we're doing a lot of work this year to make sure that we supply.
<unk> is available and doing well and the other part that's been a challenge in the pressures for us in getting these product lines is labor last year, everybody just about everybody I talk to an industry with struggling from a shortage of labor.
The low unemployment environment, but also due to COVID-19 of this year, we're doing much better and so that's really kind of a look at the different segments here and some of the pressures we've talked about.
Thanks Joel.
Our next question is regarding peak production in the second half of the year and asks are you doing anything differently to prepare for the second half of the year this year compared to previous years to maximize productivity given the current state of the economy and headwinds <unk> had to deal with.
Just you touched on the headwinds, which is it was the pay for shortage in labor not dimension inflation, which everyone's dealing with and we dealt with that we've had to pass on surcharges to our clients just to keep up with it.
And feel that we're managing as best we can on the paper side again, we've had to order paper earlier for the FERC, we supply for a lot of our customers because the industry is just quite frankly out of capacity and so it has caused us to kind of have to shift the buying having more cash tied up in inventory.
Earlier on before things are printed but we feel very ready for the for the second half in terms of paper availability for the clients that we supply and then on the again on the labor side, we started hiring much much sooner than ever and so there was a lot of investment in paying people earlier coming on board because we're very second half busy.
And not to mention we had to invest a tremendous amount in training to make sure that they're up to speed by the time. The busy season comes and I'm very happy to report that we feel very very good at the labor, we have been able to hire through all the various programs. We have done so my hats off to everybody that we are ready.
For the busy season and ready for our customers. This even with the segment share gains that we've had and then finally, we did we continued to invest in other things to kind of offset some of these challenges the long term, especially labor with more investments in automation.
Thanks again Joel.
Our next question is on free cash flow.
Given that you've had negative $67 million in free cash flow in the first half of the year. What gives you the confidence that you will still be able to hit your guidance of $70 million to $100 million.
Yeah. Thanks, Katie I'll take that one so we're at we're a seasonal business are our highest sales in most production or from August to November . So we have to ramp up inventory levels, leading into that period to be able to meet the client demand.
And so then as the fourth quarter comes we're reducing those inventory levels were also then collecting.
From the invoices, we send the customers and that ends up being strong free cash flow in the fourth quarter and then John just talked about how we ramped up paper and inventory levels, even more this year due to the supply chain disruption. So that means that the first half of our year is more negative, but then we're going to have stronger free cash flow at the end of the year.
When we realize the collections from all of that inventory and that's how we'll meet the guidance range for free cash flow great. Thanks, Tony.
Our last question is regarding stock buyback. It asks this is the first quarter you executed against the buyback program. That's been in place for many years can we take this as a new signal that you'll use this program more often to drive value moving forward, yes, you're right. We've had we've had an outstanding.
Back program that we haven't used as of late.
Just now we looked at the value and one of the efforts. We're trying to do too is be able to buy back some of the dilution that we've incurred over the years.
By making sure we attract the best management team in using equity because we believe that.
Great way to motivate people for the long term, so you'll see us over time.
When we see the right opportunity and feel with a great use of capital Youll see us do some of this.
Thanks Joel.
Concludes the Q&A portion of today's call and now I would like to turn the call back to Joe for closing remarks, Thanks, Katie and thank you all for joining US today I want to close by reiterating my thanks to our employees for their continued hard work and ability to adapt and adjust to change.
I'm confident in our team and our strategy and our near future as a marketing experienced company that owns brands re imagine their marketing to be more streamlined impactful flexible and frictionless.
With that thank you again and have a good day and we look forward to speaking with you again next quarter.
The conference has now conclude.
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Thank you.