Q2 2023 Quad/Graphics Inc Earnings Call
Good morning, and welcome to Quad second quarter Conference call.
During today's call all participants will be in a listen only mode.
Should you need assistance at any time, please signal a conference specialist by pressing the Starkey 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 presentations link.
After todays presentation, there will be an opportunity to ask questions.
To ask a question. Please press Star then one to withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Katie Krebsbach Quads Investor Relations manager Kevin. Please go ahead.
Thank you operator, and good morning, everyone with me today are Joel QUADRA actually quite as chairman, President and Chief Executive Officer, and Tony stand, yet quite Chief Financial Officer.
Joel will lead today's call with a business update and Tony will follow with a summary of quad second quarter and year to date 2023 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 call.
The presentation on slide two.
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 adjusted diluted earnings per share free cash flow net debt and debt leverage ratio. We have included in the slide presentation reconciliations.
<unk> 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.
Thank you Katie and good morning, everyone.
On slide three our second quarter 2023 results were in line with our expectations.
Net sales were lower in the quarter compared to the same period in 2022, primarily due to lower paper and print sales as well as the 2020 2022 divestiture of our Argentina operations.
We were pleased to have generated $34 million of free cash flow in the quarter, which we have used to further pay down debt strengthen our balance sheet and return value to shareholders through additional share repurchases.
We are reaffirming our full year 2023 financial guidance.
Well, so marketers have reduced print volumes due to economic uncertainty and postage rate increases we continue to innovate solutions to help clients better manage costs, including our industry differentiating postage savings programs.
For example, our unique merge mail solution combines multiple marketers direct mail piece production into a single run.
Delivering postage savings, while maintaining content personalization.
<unk> Dong trumped direct solution provides an innovative alternative to the U S. Postal service delivery, bypassing the mailbox and delivery delivering magazines catalogs direct mail and retail pieces directly to recipients from doors.
Our clients always have depended on our quality on time performance and we have the right platform and expanded capabilities.
Bill our clients immediate marketing needs as we enter the seasonally busier back half of the year.
As always and especially in the current economic environment. We continue our long standing disciplined approach to managing all aspects of our business, excluding trading wall cost is variable and aligning our cost structure to revenue opportunities.
At the same time, we continue to advance our unique offering as a marketing experience IMAX company that brings together all the resources brands need for frictionless execution as shown on slide four.
Further our integrated marketing platform easily support shifts in our clients marketing spend to maximize growth and results.
On slide five we show Quad three growth drivers.
Liberating integrated service excellence accelerating market penetration and evolving our culture as a pay backs coffee.
Integrated circuits excellence is at the core of who we are and what we do.
Well connects every facet of the marketing journey efficiently and at scale, providing innovative data driven offerings from strategy and consulting to data and analytics technology solutions.
Mhm services, creative and content solutions and managed services.
As a result, we help companies reduce the complexities they experience from working with multiple agency partners and vendors increase their marketing process efficiency and maximize the effectiveness of their marketing efforts.
We are continuing our partnership with Forrester research, a leading global research and advisory firm to better understand the demand for walk holistic marketing solutions at a time of accelerating marketing complexity dwindling budgets and rising customer expectations are perhaps.
With survey of 355 marketing decision makers at mid to large sized U S companies Forrester confirmed and quantified brands ongoing need to deliver growth with either fewer resources and greater results.
<unk> 75 per cent of brands have started consolidating some services their efforts are keeping pace with the expanding complexity, resulting in disconnected teams and workflows wasted time in body and missed customer opportunities Forrester finding further validate our multiyear transformation towards Amex company that makes them.
Marketers job easier through an efficient and effective platform built for integrated execution.
Turning to slide six we continue to evolve how we communicate that value to accelerate market penetration, we launched a new brand campaign in the second quarter called built onboard which is giving us wider visibility within our current client base as well as with companies in our targeted growth verticals.
We debuted the campaign in June in conjunction with the Cannes Lions International Festival of creativity, the Premier gathering of the global advertising and creative communications industry.
While we can we shared our innovative story and strengthened relationships with marketing decision makers from around the world who are looking for scalable solutions to help drive their brand squirrel.
Our uniqueness is an amex company resonates with brands and marketers because we provide a better marketing experience for our clients. They can focus on delivering the best customer experience.
Turning to slide seven we show how we are growing our presence with well known brands in our targeted verticals of consumer packaged goods finance and insurance health direct to consumer retail and publishing these.
He is well respected and well known brands include Red Bull Sirius XM, Albertsons and C. B S L and all admired for their excellence and the loyalty the adult with their customers.
We take great pride in not only being a trust us to help unlock their marketing full potential.
On slide eight we show an example of how consumer packaged goods company Nielsen Massey Vanilla ice is taking advantage of our integrated marketing offering there.
They chose to partner with Quad due to our great reputation for delivering breakthrough creative and brand growth in saturated markets, especially in CPG categories, along with our robust data insights and media capabilities.
It's the creative agency of record, we're now providing brand strategy creative campaign development media, social and more to build awareness and loyalty among home quotes as well as professional chefs.
Also helping the client to reach its most compatible customers by our award winning cross channel shopper targeting tomorrow approach as well.
Well as managing media planning and buying.
Worked for Nielsen biopsy panels is underway and will be launched in the fourth quarter of this year. This is yet. Another example of how we're creating a better way for our clients to re imagine marketing experience that is more streamlined impactful flexible infliction malls.
On slide nine we show. Another example of how we help clients build better marketing and this incident, how we created the consumer brand from inception, including a product launch at select Costco warehouse stores. This summer.
Our client created an innovative freeze dried raw super food for dogs, we not only helped our client position a name it's bread heckuva, but you use the power of our integrated solutions offering to deliver eyecatching packaging and promotion.
We drew on our deep expertise in consumer research designed strategies packaging experiential and adaptive design contact services and retail environments.
We also seamlessly incorporated the services of our own photo studios, including digital creative designed and printed the packaging and the in store for the products stood up an appealing and interactive website and provided comprehensive marketing services, including promotional campaigns for digital and social channels and engaging social media Influencers.
The quiet as thrilled with our efforts and the speed and ease with which we helped them launch brand.
In fact, our client told us numerous times that they never could have gotten the product launched set on store shelves and promoted in the span of 10 months. It did not work with what we.
We continue to be a trusted partner to Heckuva supporting our efforts to launch additional Super foods, and providing campaign work as they expand our retail footprint and began direct to consumer sales. This fall.
The client also will engage our package insight tool for brand package performance research using the latest biometric technology, such as mobile eye tracking.
Turning to slide 10, even as we expand into growing areas of the market experienced printing continues to be a core part of our business and a clear competitive differentiator from traditional agencies, our reputation for quality on time production ongoing investments in automation and equipment and well trained skilled workforce enabled us to.
Continued to gain segment share across all categories of brink.
Recently, we expanded our print relationship with AARP the organization that delivers information.
The advocacy and service the people age 50 and older.
Under a new multi year contract. We are now the exclusive partner of the AARP Bolton and AARP magazine.
Largest circulation publications in the United States.
Four years AARP as trusted QUADRA production of its direct mail advocacy program, along with our postage savings co mingling services and logistics expertise.
We will begin production on these two publications in August and September respectively. Additionally.
Additionally, ERP has engaged us for prepress services, including page processing, improving imagery, touching and archiving and traffic management mailing list management and distribution to U S. Postal service processing facilities for expedited in home delivery.
ARLP also will leverage two of our proprietary software as a service workflow solutions publisher studio for issue mapping and agile for streamlining the planning receipts and execution of advertising.
Our excellent track record with its clients direct marketing campaigns combined with our commitment to continuous innovation in our industry standing at a strong stable provider submitted this client expansion.
Before I turn the call over to Tony I would like to thank our employees for their continued hard work of daily commitment to providing the highest levels of service for our clients, while we proactively manage all aspects of our business for long term strength and stability.
Regularly receive feedback from clients, who share their deep appreciation for our team of innovators and problem solvers as we move forward with our growth strategy, a great confidence in our team.
We will continue to capitalize on all aspects of our distinctive maker culture to differentiate quad as the workplace for the marketing industry's best talent.
We also will continue to innovate the ways. We attract talent for example last month, we unveiled our new recruiting a trading hub and walk in central City as shown on slide 11.
The Talbot known as quite empty. He is focused on removing barriers to put families sustaining careers by providing the tools training and transportation necessary to attract individuals looking to improve their employment situation.
Quad M. K E is an important way to tangibly show our commitment to the community and it's consistent with our values, especially that are believing in people.
With that I will now turn over the call to Tony for the financial review.
Thanks, Joel and good morning, everyone on Slide 12, we show our diverse revenue mix net sales were $703 million in the second quarter of 2023, 7% decline compared to the second quarter of 2022.
For the first half of 2023 net sales were $1 $5 billion, a decline of 2% compared to the first half of 2022, well within our financial guidance with sales growth in our Mexico operations and in our catalog packaging and in store offerings more than offset by lower print and paper sales primarily.
In direct mail as well as reduced sales from the December 2022, and divestiture of our Argentina operations.
Slide 13 provides a snapshot of our second quarter 2023 financial results adjusted EBITDA was $50 million in the second quarter of 2023 as compared to $56 million in the second quarter of 2022, and adjusted EBITDA margin declined slightly to seven 2% in the second quarter of 2023.
Compared to seven 4% in the second quarter of 2020 chisel. The decline was due to lower sales, partially offset by benefits from improved manufacturing productivity and savings from cost reduction initiatives in the first half of 2023, adjusted EBITA was $111 million compared to 100.
$5 million in the first half of 2022, and adjusted EBITA margin improved from seven point all per cent.
5% consistent with our long term focus on increasing profitability.
Adjusted diluted earnings per share was <unk> in the second quarter of 2023 as compared to 13 sales in the second quarter of 2022 year to date adjusted diluted earnings per share was consistent at 17 sets. The decline in the second quarter was primarily due to lower adjusted net earnings and was partially offset by the positive impact from.
Share repurchases, we were active in the market again this quarter repurchasing our class a shares beginning in the second quarter of 2022, we have repurchased approximately 8% of our total class eight a M. B outstanding common stock at a weighted average price of $3 32 per share for a total purchase.
$15 million.
Free cash flow was negative $45 million in the first half of 2023 at $12 million improvement compared to the first half of 2022, primarily attributable to lower inventory needs as supply chain challenge has improved and we experienced strong receivables collections.
It was achieved despite a $12 million increase in capital expenditures as we continue to invest in our automation initiatives.
As a reminder, the company historically generates the majority of its free cash flow in the fourth quarter of the year and expect $50 million and $90 million of free cash flow in 2023.
Slide 14 includes a summary of our debt capital structure.
Net debt increased by $59 million to $604 million at June 30 of 2023 as compared to $545 million at December 31st 2022, and the debt leverage ratio increased 18 basis points to 234 times at the end of the second quarter of 2023.
Increase in net debt and the debt leverage ratio was primarily due to the negative $45 million of free cash flow in the first half of 2023. However, we are pleased to have reduced debt by $80 million over the last 12 months that will increase in the third quarter.
Working capital requirements as we enter our production peak from August through October and then it will decline in the fourth quarter with seasonal reduction of inventory and collections of receivables.
We're on track to achieve the low end of our long term targeted debt leverage range of two to two five times by the end of 2023.
As of June 30th a blended interest rate was six 7%, which is up from three 8% a year ago.
To mitigate the impact of a rising interest rate environment, we entered into two interest rate collar agreements effective February one 2023, including interest rate swaps, our debt is 52% floating and 48% fixed we maintained our strong liquidity with up to $340 million of availability under our revolving.
Having credit agreement as well as $11 million of cash on hand.
Our nearest significant debt maturity is $88 million occurring in January 2020 for which we will fund with cash on hand.
And our revolving credit agreement the.
The majority of the debt maturities are not due until late 2026.
We have reaffirmed our 2023 guidance as shown on slide 15.
We are progressing on our growth strategy as clients continue to embrace our innovative and integrated marketing offering. However, as we discussed last quarter due to ongoing macroeconomic concerns and increasing postage rates. We expect to we continue to expect lower print volumes during the remainder of the year.
<unk> adjusted EBITDA and free cash flow will be higher in the second half of 2023 compared to the first half of 2023 due to the seasonality of the business.
Most of our capital expenditures already occurred in the first half of this year. So we can benefit from these investments in the second half of the year during that seasonal peak.
Slide 16 includes our key investment highlights as we continue to build on our growth momentum as a marketing experience company.
We believe that quad is compelling long term investment and we remain focused on growing net sales and driving higher profitability through continued diversification of our revenue in clients with our expanded offerings. There is a significant addressable revenue opportunity with both our large base of existing clients as well as new clients.
We will reduce debt with strong free cash flow generation augmented with proceeds from selling noncore assets, we expect to achieve the low end of our long term targeted leverage range of 2% you would have times with net debt of approximately $470 million by the end of the year. This will represent a $564 million.
55% reduction in debt since January one 2020, what our debt was over $1 billion.
And with the significant debt reduction we will further strengthen what we believe is an industry leading financial foundation that provides us the flexibility to strategically deploy capital, including scaling the growing parts of our business.
Returning capital to shareholders to drive shareholder value.
With that I'd like to turn the call back to our operator for questions.
We will now begin the question and answer session to.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Kevin Spanky with Barrington Research Associates. Please go ahead.
Hi, good morning, everyone and Kevin.
Good morning.
I wanted to start off by asking about just the.
A pattern of sales as you know as it relates to the second quarter and then also how are you.
The second half to play out and maybe how.
You know any segment share gains or new business wins might play.
Play into your outlook for the for the second half of the year.
Sure, Kevin and I think we've put out guidance earlier in the year, we had seen as our customers put forth. Their budgets. There was definitely some trepidation about economic concerns and the other thing that somewhat impacted volumes for the year was a known significant postal increase that just happened a couple of weeks ago and so often.
Times, our clients you know look at that and in the short term, we'll do a little bit of pullback.
That being said I'd say you know, we always talk about large scale print, which encompasses retail inserts publications is their biggest declining area.
Quite frankly year to date that was virtually flat certainly decline in retail inserts as we always expect and some closures in the publication side, but also offset by some segment share gains and then in the targeted print, which is early catalogs direct mail packaging and in store catalogs again impacted by some of the.
Trepidation was about flat year to date.
With you know because of some volume pullback, but also some segment share wins offsetting that and direct mail I'd say, it's probably the one that was the most challenged so year to date, it's off about 19%.
But that's you know strongly due to the fact that we had some significant.
Exposure in the financial alone vertical that was heavily impacted by the drastic increase in interest rates.
Well as one large client banking client.
Pulled out of the consumer banking business.
We expect direct mail, though in the long term to continue to be a great growth opportunity and then on the bright side packaging was up 4% year to date in store, which is a vastly growing marketplace continued that were also up 17%.
Agency relatively flat for the year impacted by some of the economic concerns, but I think it's important to remember to.
To your point about seasonality. The first half is the lowest part of our year with the second quarter being the.
Starting at the bottom of the of the year with everything now starting actually this week, becoming our busy season, and we alluded to in the segment share gains that are happening in the future here with what we spoke about ERP, which isn't publication space, but we expect several other things to kick in as a result of that.
So again I think you really look at full year and how that those trends will play out and we feel good about the guidance we have given on the top line based on what we saw our clients doing.
Tell me if I'm missing anything no no I think it is.
If I understood stand out if our earnings a little bad we we take actions in the first half of the year, whether those be restructuring actions to get our cost structure, where we want it to be or capex from a cash perspective, where we do the majority of the first half of the year that all positions us for a great second half of the year as the volumes increase we are ready for those volumes.
Yeah.
Okay, Great that's very helpful.
And Tony you mentioned there the.
The the the cost actions and can you just speak to what you've accomplished a you know on the <unk>.
First half of the year here and maybe how we should think about expenses are trending in the second half of the year.
Yes, I mean, we did close some capacity in the first half we announced three plant closures that we completed in the first half of the year that puts our capacity right, where we needed to be as we enter a busy season to keep our on time deliveries high and meet customer needs. We always look at that.
Administrative side of the house to make sure that whereas efficient as we can be to remain the low cost provider and all of that I think positions us well for a second half from the restructuring standpoint, the majority of the cash payments have been in the first half of the year.
You'll see less of that as we go into the second half, which will help you know free cash flow metric and just to add to that on the manufacturing side, which is a huge platform. The productivity that we've been able to achieve is pretty massive this year and that's because.
In the previous years, when everyone's struggling to find people, we really doubled down on hiring and really double down on advanced training and really trading off a significant number of people and so as we source saw some of the economies are sort of slowdown happened, while we had to do some reductions the percentage that were.
Much more training than in the past has resulted and wonderful productivity and I can't tell you how proud I am of enough about how the team has performed and that's really important because now the ramp up is really significant in the second half, which gives us that operating leverage because you've got fully trained people versus when you're trying to bring on people.
They're not trained on very complicated equipment.
Okay great.
And then you did mention there you know the postage rate increases.
There's an additional factor leading to some pullback in print spend but you also alluded to the fact that that's.
Yeah, usually short term.
The impact.
So would you expect.
Clients do you know.
Just to that over time and you also mentioned your solution to bypass the U S Postal service.
Is that something that can be gained more traction going forward as well.
Yeah, you remember that postage is like over 70% of Theres, a big cost to get you know mail into the consumers' hands now.
And we wish that the post office would take a different tack, but it is what it is.
It's really incumbent upon the printer to try and offset those increases through through work sharing programs with the post office and allows us to do in other words, the more we skipped the post office the bigger the discount and a lot of our references about some of the products. We do has helped our clients over time do that in addition.
Rolling out some new concepts that will further help offset a fairly significantly so some of the postage costs are going to increase so while they pulled back in the short term they still have to market product.
And typically you know they are trying to adjust their budgets for the increased spend but we do as much as we can on the innovation side to kick in and trying to help offset that decline and so we feel good about what we're gonna be able to do for our clients, but postage increases we will continue to be a concern, but that's nothing new in the last 20 years.
Okay understood Yep.
Can you just speak to the progress you made in the quarter on inventory reduction and you know free cash flow generation, you're at 34 1 billion of free cash flow in the second quarter, which was you know.
Really no.
And if you are an uptick over a year ago quarter. So you.
You know, maybe just speak to that a little bit more if he could.
Yeah. Thanks, Kevin I mean, we were happy with the free cash what we produced in the second quarter that that positive 34 million. You mentioned, we were able to reduce inventory levels that the supply chain environment is easier than what we saw last year I still won't say, it's you don't completely easy, but it is eased some.
And that has allowed us with a very conscious actions on our part to make sure that we're having paper levels and other inventory levels at the right quantities.
Two of them to realize that benefit for free cash flow also we've been very focused on receivables collections and our portfolio is in great shape and that is also coming through the free cash flow.
Okay I'll ask one last one here and then jump back in the queue, but just.
Also can you speak to.
Your your priorities.
Capital allocation you continue to do a good job of reducing leverage year over year.
And you're also starting to buyback shares so.
How do you think about the mix I know you have a target of two point of leverage by the end of year are.
Do you expect you will continue to look for opportunities to repurchase shares as well.
Yeah I mean.
It's been a long term strategy of really being disciplined about how we work with our capital allocation and clearly the priority since 2019 was to really focus on debt Paydown, which we've done massively.
Regardless of the pandemic is hitting us and affecting the whole world and so very proud of that because we did that while still investing appropriately in the platform on the print side as well as an innovation.
But yeah, we saw the trajectory this year and felt very comfortable with it.
<unk> stock buybacks and as Toby said since last year, we bought back about 8% of the company for pretty cheap price in our estimation and we will continue to look at those opportunities and at some point, we'd love to you know when you look at the possibility of some sort of sustainable dividend.
But that's something the board will review with you around which we do every year and so I think you'll you'll continue to see us being disciplined there that will continue to be a good focus but also we feel that with what we're doing in the transformation of this company and the scaling of what we have that you know it's a good investment to continue to look at buying back stock.
When the opportunity arises.
Okay. Thank you for taking the questions.
Thank you Kevin.
Operators.
This concludes our question and answer session I would like to turn the conference back over to Joe <unk> for any closing remarks.
Great. Thank you operator, and thank you everyone for joining today's call I just want to close by reiterating my confidence in the team in our strategy and our future as a marketing experience company, our integrated marketing offering continues to be competitive differentiator and a key driver behind our companys overall organic growth at the same time, we'll continue to manage for the time.
It's both financially and as well as for creating shareholder value. So with that thank you again have a good day, we will look forward to speaking to you again next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
[music].
Yeah.
[music].
Yes.
[music].