Q3 2022 Quad/Graphics Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Quad <unk> third quarter Conference call.
During today's call all participants will be in a listen only mode excuse.
Should you need assistance at any time, we see no 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 in the earnings release. Alternatively, you can access the slide presentation on the investors section of Quad website under the events and recent presentations link.
Please note today's event is being recorded.
At this time I'd like to turn the conference call over to Claire Ho Quad Director of corporate Communications Claire. Please go ahead.
Thank you operator, and good morning, everyone with me today are Joel Couture, Archie Quads, Chairman, President and Chief Executive Officer, and Tony stand, He actually Quanta Chief Financial Officer.
Joel will lead off today's call with a business update and Tony will follow with a summary of Quad <unk> third quarter 2022 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.
Wind 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.
Adjusted EBITDA adjusted.
Adjusted EBITDA margin.
Adjusted diluted earnings per share free cash flow net debt 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 com shortly after our call concludes today.
I will now hand over the call to Joel.
Thank you Claire and good morning, everyone I'm pleased to report that in the third quarter, we delivered better than expected net sales of $830 million, an 18% increase.
This was the sixth consecutive quarter of sales growth for Quad and reflects continued print segment share gains increased pricing in response to inflationary cost pressures and increased sales in our international locations.
Our focus as a marketing experience company is driving segment share gains and new client wins and as a result, we are raising our full year net sales guidance range from 3% to 7% growth to 8% to 10% growth.
We've also narrowed our other guidance within the previously provided ranges to reflect our results through the first nine months of the year, which Tony will cover later in the call.
I'm pleased to share that the proactive investments we've made in labor inventory and equipment. During the first half of 2022 are paying off now during our seasonally high production period.
As a result, we achieved higher adjusted EBITDA in the third quarter on both a year over year and sequential basis.
Notably we are positioned to achieve higher year over year earnings in the fourth quarter as well.
Despite ongoing challenges from macroeconomic headwinds, we continue to monitor and take action to mitigate inflationary cost pressures and supply chain constraints, including an inflationary offsetting price increase that will become effective January 1st 2023.
Overall, we remain nimble and ready to adjust our operations as necessary to enhance our financial strength, while continuing to serve our clients well.
Slide four shows how we continue to diversify our revenue with the higher value and higher margin offerings.
On a year to date basis, that's helped us grow net sales by 14% when excluding the impact of the Quad Express divestiture.
Net sales grew in our targeted print and international segments, while large scale print decreased as a percentage of total net sales due to expected organic declines primarily in retail inserts.
The increase in our international segment is primarily driven by stronger sales in Latin America. For example, Mexico sales have been bolstered by higher exports into the U S and Mexico has proven to be a high quality low cost alternative to Asia.
Turning to slide five we are proud of the effectiveness of our business strategy to sustain our leadership and career most martial printing while also transforming it into a marketing experience or Amex company.
The world's best brands increasingly recognized the unique value we provide through our holistic multi channel through the line marketing solutions.
And X company, we guide brands through every effort intended to drive an action from consumer awareness and trust to brand preference and purchase.
We will continue to give our clients a more streamlined flexible and frictionless way to go to market and reach consumers, while enhancing our competitive position to drive profitable growth.
Slide six we highlighted our three key competitive advantages.
Integrated marketing platform excellence innovation and culture and social purpose.
We continued to strategically invest in our platform, including creative analytic print and production capabilities.
Recent investments include advancements in depth data signals insights and analytics and nextgen printing capabilities with 100% variable print.
We also continue to invest our talent, bringing aboard experienced professional support our integrated offering and accelerate sales growth.
In addition, we just opened a new location at 30 Irving place in New York City right in the heart of Union Square District. The location is a strategic investment in our brand and will not only serve our local talent, but provide a space to boost clients marketing experience through conversation collaboration and sales interaction.
As a marketing experienced coffee, we're making investments in brand marketing, including introducing lots of new and expanded audiences as shown on slide seven.
In October we participated in advertising week in New York and the Masters of marketing annual conference in Orlando to strengthen existing client relationships and uncover new partnership opportunities for applying our unique technology and scalable solutions.
During the quarter. We also facilitated thought leadership discussions amongst senior brand marketers from Fortune 500, and other leading companies within the brand innovators community.
This week, our Chief Marketing Officer, Josh Golden is speaking at the annual Forbes CMO summit in Miami, where he will provide insights about the marketing industries need for a differentiated through the line offering to help us close the persistent gap between creative and production.
Next week, we will host our quad packaging sustainability symposium for clients, where we will address sustainability trends.
And installation about Greenwashing and product Recyclability.
And perspectives from Quad clients, including C. D E Health Corporation, and the Kodiak cakes Brown.
As part of the symposium attendees will be able to tour our packaging insight location in Greenville, South Carolina, and learn how we touch brand packaging performance consumer attention and shelf impact and a simulated shopping environment using advanced biometric technologies.
Turning to slide eight we are growing our presence with brands and the critical expansion categories of finance health care retail consumer packaged goods and direct to consumer.
For example, a large and complex legacy brand insurance and financial services company.
Jos to expand our relationship to include integrated creative and media solutions.
The company was looking for fresh ideas to Accretively bring its brand story to life across all business lines as it transforms from an institutional agent first model to a digitally savvy direct to consumer model.
The company also wanted to make better use of the data in order to connect more effectively and authentically with consumers.
We were already exceptionally familiar with the company having successfully partnered with it on direct mail production for more than 15 years.
We presented an integrated strategy propelled by audience insights and consumer connections planning for driving peak performance through data driven orchestration of the bright brand actions and the right moments for the right audience as.
We also introduced the clients, where our solutions for advanced measurement and accountability to quantify and predict the impact of its marketing efforts.
While our work for this client is only just getting underway. We are proud to be the digital agency for three of its most important business lines.
We successfully competed against some of the largest agency holding companies for this war.
On slide nine we show how we drive business results for our clients through a relentless focus on innovation, even on things as standard as mailing envelopes.
Knowing that marketers face a new set of challenges with the cookie less future. We spearheaded a campaign for Sirius XM that fully integrated both digital marketing with traditional mail and data capture and a focused target market.
Wonder one flow codes on a highly designed engaging alder envelope increased customer interactions by 30% and deliberate first party user scan data for the client to better identify audiences and their passions.
This innovation is just one more way we are helping our network of brands publishers and direct marketers monetize their offline and online media more effectively.
On slide 10, we highlighted our third competitive advantage commitment to culture and social purpose.
We continuously create a better way for our approach to environmental social and governance matters.
In fact quasi ESG strategy has been validated by trusted third parties, such as Echo Vitez, which recently awarded quite a bronze medal for the quality of our ESG strategy and its Wisconsin sustainable business Council with just awarded US Green Master status for a sustainable business actions.
We also just released our 2022, ESG update which details progress on our commitments to create positive sustainable change.
The update is available for viewing I am download on quad Dot com or you can scan the flow cold shown on slide 10 of today's presentation.
When it comes to be environment, we have multiple initiatives in place to reduce our environmental impact.
We're also committed to environmental education and are pleased to share. We are featured on a new episode of the Emmy Award winning video series into the outdoors, which regularly airs on P. B S.
We were selected to be part of the programming for our commitment to environmental sustainability and stewardship, including our work to galvanize. The next generation of environmental stewards.
To see the episode scan the other floor gold on slide 10.
In the social space, we are advancing on our goal to build a more comprehensive and sustainable dei strategy that not only benefits our employees, but also our industry and the communities we call home.
<unk> task forces, taking action implementing projects that foster a culture of inclusion with measurement and monitoring to hold ourselves accountable.
While we still have work to do quite as advanced on several social commitments, including improving the representation of women and people of color among our U S employee base and U S management team.
In particular, our agency solutions group has made gains in attracting more diverse talent since implementing more inclusive hiring practices.
We also just opened a new recruiting and training how based in Milwaukee Central City.
We are working with the community to remove barriers to employment, such as training and transportation and create greater awareness around career opportunities with growth trajectories.
Dislocation builds on the momentum established with trusted community partners, such as running rebels and the brand.
Turning to slide 11, before I turn the call over to Tony I want to recognize our very own Kelly Burke, Vice President of sales and business development for in store for being recognized among the 2022 women of excellence by the path to purchase Institute.
Kelly, who was lauded for excellence in business management, including drawing new business and market share with integrity and creativity was recognized along with leaders from other large brands such as Pepsico and Albertsons. So congratulations Kelly.
On a more personal note I was honored to see my late mother, and Quad cofounder Betty quarter Archie recognized for advancing inclusive leadership in the Wisconsin business community.
In October Milwaukee Women, Inc. Celebrated Betty for her role in founding their organization, which is focused on achieving balanced representation of women on boards of directors.
I'm proud of my mother's lasting legacy to maximize the performance of Wisconsin businesses.
I will now turn over the call to Tony for a financial review.
Thanks, Joel and good morning, everyone. Slide 12 provides a snapshot of our third quarter 2022 financial results as Joe highlighted we continue to be pleased with our consistent net sales growth compared to 2021, and excluding divestitures, we achieved 9% growth in the first quarter of 2022.
14% girls in the second quarter and 18% growth in the third quarter. This now represents six consecutive quarters of year over year net sales growth going back to the second quarter of 2021.
In addition, the proactive investments we made during the first half of the year and hiring and training laborer proved effective during the third quarter driving strong operational performance very high client satisfaction with on time deliveries and increased adjusted EBITDA from the prior year, we expect adjusted EBITDA growth.
In the fourth quarter also.
We are closely monitoring the economy, and we'll remain disciplined with our capital allocation.
Our primary focus heading into the fourth quarter remains debt reduction.
Our debt leverage ratio increased to three point below seven times as of September 30th 2022.
To remind our audience that the third quarter is traditionally our annual high point for working capital. Thus, we believe that with the seasonally strong fourth quarter free cash flow. We have projected we will achieve the year end debt leverage guidance of approximately 2.25 times.
We also repurchased three 1 million shares of class, a common stock, which represents more than 5% of quads outstanding shares for $10 million year to date.
We'll continue to pursue opportunities with our share repurchase program at times in the future.
Net sales were $830 million in the third quarter up 18% from 2021 on.
On a year to date basis net sales were $2 3 billion.
Up 11% from 'twenty to 'twenty one.
After excluding the 2021 quite express divestiture net sales increased 14% for the nine month period compared to the same period in 2021.
Net sales growth was achieved due to print segment share gains increased pricing in response to inflationary pressures and increased sales in our international locations.
We will continue to be nimble with our pricing to mitigate the negative impacts of supply chain disruption and cost inflation.
Adjusted EBITDA was $69 million in the third quarter of 2022 as compared to $55 million in the third quarter of 2021, when excluding a $13 million nonrecurring gain from a property insurance claim in 2021.
The adjusted EBIT to increase them over 25% was driven by continued sales growth and proactive investments made in labor inventory and equipment. During the first half of 2022 to increased production efficiency in the second half of 2022 during our seasonally higher production period on a year to date basis adjusted EBITDA.
$173 million in 2022 as compared to $201 million in 2021 the.
The decline in the year to date period was primarily due to cost inflation investments made in hiring and training labor in the first half of the year the.
The negative impact of supply chain disruptions on our productivity.
And a $13 million gain from a property insurance claim in 2021, which were partially offset by increased earnings from net sales growth.
Adjusted diluted earnings per share was 32 cents in the third quarter of 2022, 78% increase compared to 18 cents in the third quarter of 2021.
This increase was primarily due to increased recurring earnings and was also benefited by a recent stock buybacks.
Year to date adjusted diluted earnings per share was 49 cents consistent with 50 cents in the same period last year.
Free cash flow decreased $60 million to negative $80 million for the first nine months of 2022.
Primarily due to higher working capital driven by inflationary cost increases supply chain disruption and higher net sales.
We also invested $50 million year to date capital expenditures consistent with our long term automation strategy well.
We will continue to invest in our business to seize opportunities, including accelerating our growth winning additional segments chair and 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 13 includes a summary of our debt capital structure.
Net debt increased by $91 million to $715 million at September 30th 2022, as compared to $624 million as of December 31st 2021, and the debt leverage ratio increased 68 basis points to 3.17 times at the end of the third quarter.
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.
When removing the impacts of seasonality over the past 12 months net debt decreased $84 million, representing a reduction of over 10% in our net debt.
Our long term target leverage range is two to two and a half times and with the expected seasonally strong fourth quarter cash flow. We continue to believe we will achieve the midpoint of 2.25 times by the end of the year.
During the third quarter, we maintained our strong liquidity with up to $245 million of availability under our revolving credit agreement and $14 million of cash on hand.
Our nearest significant debt maturity is $88 million occurring in January 'twenty, 'twenty, four and the vast majority of the debt maturities are not until late 2026.
Our 2022 guidance has been updated as shown on slide 14.
Our annual net sales growth range, which was originally 3% to 7% growth is now projected to increase to 8% to 10% growth.
As we are now three fourths of the way through the year. We are also narrowing our other guidance ranges all of the following updated guidance is within the ranges. We previously provided.
Adjusted EBITDA guidance range is $235 million to $255 million free.
Free cash flow guidance range of $70 million to $90 million.
Year end debt leverage guidance is unchanged at approximately 2.25 times.
Our financial objectives include accelerating our business as a marketing experienced company to fuel net sales growth.
Driving profitability through sales growth effective cost management and productivity improvements.
Maintaining a strong balance sheet with a primary focus on reducing debt through the generation of strong free cash flow.
As well as a balanced approach to capital allocation, including pursuing opportunities to return capital to shareholders through stock buybacks or dividends.
These efforts will further strengthen our balance sheet and 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 Claire for questions.
Thank you Tony because we compiled questions in advance of today's call, we will not ask our callers to enter the queue.
Thank you to everyone who has submitted a question.
We have four questions that were submitted.
Our first question relates to industry and segment trends and asks you highlighted print segment share gains and increased international sales as two contributors just strong sales growth can.
Can you provide some additional commentary on those areas.
And also comment on any trends, you're seeing across the other industries and segments.
Reagan.
Yeah clear. Thank you. Thank you for the question Yeah International sales as I said in the script was a good contributor again, what we're seeing in our Mexican operations, especially and we think will spread into the other areas in South America is that it's a great strong alternative to a lot of printed products that work.
<unk> supplied out of Asia, and so we're seeing that.
Market increased dramatically and really help us kind of changed the product mix, but then if you look at sort of our core product lines that we talk about in print. So people can understand where's decliner Where's growth, yes, we are.
Please look at large scale print as being made up of retail inserts publications retail inserts for the quarter were off about 20%, which has been expected. We've consistently talked about the expectation of continued decline as people kind of shift away from a product that is distributed through the newspapers to the consumer as newspaper circulation.
That's come down, but even in that you have to bifurcate retail inserts into sort of big box retail versus grocery grocery stand that tends to be a little bit more stable, but all in all that that decline we expect to continue but keep in mind, we're doing a lot of other products and service for the services for retailers.
So as they sort of see the decline in retail they still need to get to the consumer and so that's where we have an uptick in efforts with direct mail sales or we're doing a lot of in store signage that continues to grow and so it's a it's an area that's important to us.
In terms of the retail clients, because oftentimes, they're ones, who really can benefit from our products and services to drive you know.
Their sales publications is another area that we've seen you know regular decline and expect more and it was off about 15% in the quarter.
But about.
About 6% of that decline was made up of a sort of a rejiggering of some portfolios due to a change in ownership with one client making up the bulk of it. So you saw some titles like Instyle and Martha Stewart and shape. The parents that were around for a long time suddenly seize production and.
And then on top of that pressure.
Pressure on the advertising climate, but publications, we believe for the long term will continue to play a role, but we know how to manage it.
When you flip to targeted for them, which is catalog direct mail packaging and in store is a different story.
And catalog.
Catalogs books that we do.
We're actually up 10% in the quarter and number of pages up over 3%.
Much of that was from organic growth from some of our customers who are growing with us, but also segment share gains that we've had throughout the year.
On the direct mail side the.
Industry was off about 11% in the quarter, which sometimes could be a sort of a bellwether for a slowing economy.
Our Q RDM volume was actually off only about 1%.
But the revenue from that volume was up 18% because of inflationary cost increases increased paper sales as well as product mix to more complicated targeted direct mail.
And on the packaging side, we were up.
Over 15% for the quarter, which is an interesting story as well because we started to look at all of the products that we produce and where can we add the most value and our platform is best game towards and that's where we started doing some higher end COVID-19 tests.
From what happened with the pandemic and we've been very successful at creating a whole new relationship there and we expect to expand into other types of kids in the future, but continue on with Covid, just because they're not.
You know going to disappear anytime soon and that sort of we used that as an opportunity to get out of some product lines like pasta boxes that are very low margin and really shouldn't.
Shouldn't be holding up the capacity when we can create value in other marketplaces and so then in store. The final one was up 19% in the quarter and that's from new client wins and bring in saying the chair in that area. So when you look at it again, we look at large scale and targeted print a little bit differently, we have.
To offset the decline that happens at large scale, but we've done that through the same relationships and new relationships into targeted print.
And then on top of that you look at clients, we're bringing in on the agency solution side and in many of these other clients who are expanding into the agency solution side for us and so that kind of rounds out what we saw in the quarter.
Thank you Joe. Our next question is regarding the current economy and its impact on retail clients. It asks can you comment on any areas of the business that may be starting to see some impact from the recent economic downturn.
How much of your business is tied to retail and apparel customers that our noting slowdowns.
It's a mixed bag and you know we saw retailers grappling with things all year from having too much inventory because past supply chain, making bets on the raw ending up with the wrong inventory, but I think one of the noticeable things that where we're seeing is just in the fall kind of a look at a change in how they view.
Last Friday, which typically drives a lot of volume in a short amount of time, we've seen a lot of retailers sort of announced backing off from that and so that's one noticeable thing that we've seen but we're not sure and we're watching to see if that's a trend or or a one time thing and I think a lot of people are still trying to figure that out.
So yeah, we're watching everything closely but I think between you know the segment share gains that we've been experiencing and our ability to act really quickly and we are as you know historically shown that we're prepared for whatever the economy throws at us.
Thank you. Our next question is regarding supply chain constraints.
It asks can you provide some commentary on any supply chain constraints experienced during the quarter how.
How it's quad positioned itself to ensure it has the necessary paper inventory and labor to fill its peak demand. Yeah. So there's two questions. There one is supply chain and one is labor and I think the biggest supply chain issue that this industry has been dealing with this paper shortages.
That's because although it just disruption in the available capacity as some of the capacity has shifted to other parts of the industry in packaging or or have shot based.
Based on you know what demand is done, but we we ended up navigating it pretty well this year, because we were able to buy ahead and work with mills and customers and that's one of the reasons for our increased working capital, but it was to make sure. We had the the paper to print on but we also worked with a lot of our clients to make.
Stack and so I'd say that paper will continue to be something we have to navigate and but we're well positioned for it and then you know all the other sort of stuff that supply chain that people are seeing are being managed the world, it's not easy, but it's not as bad as it was and I think that we're in good shape there.
Labor was the other thing we've been talking about when we talked about a lot last year with the low unemployment rate and what we did based on what we're seeing.
With with where things are at as we started hiring much earlier, so that we could really take advantage of the timeframe to gear up for the busy season as opposed to starting out at our typical time and that involved the wage increases, but also a very holistic approach to attracting labor as well as retaining labor and I think.
That's an important note because in the la unemployment environment. You also would have high turnover and that's a place where we're working very hard on but we're happy to say that you know in this busy season.
We were 700 people sure when we were looking at it from last year, and we actually are where we need to be and we've actually slowed down some of the hiring based on our success. So very very pleased with that which has allowed us to get through this busy season with very few hiccups and I'll tell you our on time delivery is like well above.
You know, where we expected it to be based on those challenges from last year.
Thank you Joel our last question is regarding stock buybacks.
It asks with the increasing share repurchases as you have done as a blade.
Just speak continuing these levels of repurchase activity in the near term.
Any additional insight you can provide on how you're thinking about repurchases and your capital allocation priorities going forward.
Yep. Thanks, Thanks, Claire now as we said last quarter, we're going to pursue opportunities to repurchase shares. We did that recently based on where the share price was we felt that there was good value there and it was a compelling use of capital and.
And we will do that in the future when we feel there is a compelling use of capital.
We purchased over 5% of our outstanding shares repurchased dilution that had taken place over the years on the equity grants and again as part of a balanced capital allocation, we will look for opportunities in the future when it makes sense.
Thank you Tony.
This concludes the Q&A portion of today's call and now I would like to turn the call back to Joe for closing remarks. Thank.
Thank you Claire and thank you everyone for joining today's call I just want to close by reiterating my thanks to our employees for their continued hard work, especially during our peak demand for products and services.
So I remain very confident in our team and our strategy and in our future as a marketing experience company that helps brands re imagine their marketing to be more streamlined impactful flexible and frictionless.
With that thank you again and have a good day, we look forward to speaking with you next quarter.
Ladies and gentlemen that does conclude today's conference call. We do thank you for joining you may now disconnect your lines.