Operator: Alternatively, you can access the slide presentation on the Investors section of quad.com under the Events and Presentations link. After today's 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 note this event is being recorded. I will now turn the conference over to Julie Fraundorf, Quad's Executive Director of Corporate Development and Investor Relations. Julie, please go ahead.
Julie Fraundorf: Thank you, operator, and good morning, everyone. With me today are Joel Quadracci, Quad's Chairman and Chief Executive Officer, and Tony Staniak, Quad's Chief Financial Officer and Treasurer. Joel will lead today's call with a business update, and Tony will follow with a summary of Quad's Q3 and year-to-date financial results and updated financial guidance, followed by Q&A.
Julie Fraundorf: 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.
Julie Fraundorf: Quad's financial results are prepared in accordance with generally accepted accounting principles. However, this presentation also contains non-GAAP financial measures, including EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share, free cash flow, net debt, and net debt leverage ratio.
Julie Fraundorf: We have included in the slide presentation reconciliations of these non-GAAP financial measures to GAAP financial measures. Finally, a replay of the call 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.
Joel Quadracci: Thank you, Julie, and good morning, everyone. I will begin with key highlights shown on slide 3. Quad's Q3 results were in line with our expectations. Driven by strong year-to-date results and continued new business momentum, we are updating full year 2026 guidance, including improving our adjusted annual net sales change guidance range.
Joel Quadracci: Our strong balance sheet continues to provide financial flexibility, enabling us to return $23 million to shareholders during the first three quarters of 2026, including $15 million in regular cash dividends and $8 million in share repurchases.
Joel Quadracci: We continue to convert our integrated marketing capabilities into new and expanded client relationships. During the quarter, we saw particularly strong momentum across our direct marketing, in-store, and retail media solutions. As shown on slide 4, Quad's MX offering connects solutions across creative, production, and media, supported by intelligence and technology.
Joel Quadracci: Our unified marketing platform helps clients simplify complex workflows and improve marketing effectiveness across physical and digital channels. This integrated suite of solutions powers Quad's growth flywheel. Successful execution in one area earns us the opportunity to expand into additional services. As we deliver a broader range of marketing solutions for our clients, we deepen relationships, generate repeat business, and create additional growth opportunities.
Joel Quadracci: For Quad, this expands our share of clients' marketing spend and diversifies our revenue sources. Clients benefit from a strategic partner who understands their business, seamlessly connects services, reduces handoffs, accelerates speed to market, and delivers measurable results.
Joel Quadracci: Transitioning to slide 5. During the quarter, we announced Direct, Quad's newly branded full-service direct marketing agency. As marketers seek greater efficiency and accountability, Direct unifies audience intelligence, strategy, creative, execution, and measurement into a cohesive offering focused on delivering results. These connected capabilities reinforce Quad's growth flywheel.
Joel Quadracci: Results generate insights that we use to refine strategy, audience targeting, and creative, leading to improved performance and increased client investment. As clients expand their direct marketing programs, we gain opportunities to provide additional agency services and increase print volumes.
Joel Quadracci: Our integrated approach has helped our direct mail business steadily grow over the past two years, leading to work with clients such as Valvoline Instant Oil Change, Heartland Dental, and Monogram.
Joel Quadracci: Slide 6 highlights one of Direct's newest partnerships with a national financial services firm. The client engaged Direct earlier this year to help restart its direct mail student loan acquisition program after a multi-year pause. As the client rebuilt its direct marketing capabilities, it sought a single accountable partner to help increase booked loans among undergraduate and graduate students.
Joel Quadracci: The client chose Direct for our integrated approach, rapid pre-market testing, focus on innovation, and ability to execute seamlessly across strategy, creative production, and distribution. Through pre-market creative validation of Direct's newly designed pieces, we provided a data-driven foundation for the campaign, helping the client make more informed decisions before launch. Our print and postal expertise then helped optimize costs and supported efficient and timely execution during the critical fall lending window.
Joel Quadracci: The insights generated from these mailings will help inform a larger program planned for the peak 2027 student loan application season. This new relationship demonstrates how Direct's integrated agency model and deep industry knowledge are helping Quad win new clients, expand our role beyond execution, and create opportunities for incremental print volume and long-term profitable growth. Moving to Slide 7.
Joel Quadracci: As marketers work to engage consumers across an increasingly fragmented media landscape, it is more important than ever to understand how different channels influence consumer behavior. Our latest Return of Touch research, conducted with The Harris Poll, reinforces a trend we have discussed before. Consumers continue to value physical shopping and brand experiences alongside digital interactions.
Joel Quadracci: In fact, 70% of Americans say seeing how a brand shows up in physical space helps them understand it better, and 71% say in-store experiences deepen their connection and loyalty to that brand. Product packaging also plays an important role. 84% of Americans say they have greater trust in a brand when it pays attention to packaging details such as texture and finishing, and 55% say packaging has influenced a purchase decision.
Joel Quadracci: Through our capabilities in direct mail, packaging, retail displays and signage, and in-store media, Quad helps marketers meet this consumer demand for physical brand interaction while connecting physical and digital channels to create a more effective and cohesive customer experience. For Quad, these insights help shape client strategies while reinforcing the relevance of our integrated MX platform.
Joel Quadracci: On Slide 8, our in-store brand activation services are increasingly leading to larger, more strategic client relationships. Brands looking to enter retail or expand their in-store presence need a partner who can take an idea from concept to shelf quickly and at scale.
Joel Quadracci: By integrating design, production, and distribution from the start, Quad helps clients move efficiently from concept to execution. These services contribute to Quad's growth flywheel in two important ways. First, a successful display program builds trust and often leads to repeat business, additional retailers, and larger programs.
Joel Quadracci: Second, as those relationships grow, clients often turn to Quad for other marketing solutions, allowing us to capture an even larger share of their marketing spend. We have seen this pattern with growing brands such as LMNT, AG1, and Momentous. Each relationship began with a quick-turn display project and expanded into additional services, including pre-market testing, packaging, or direct mail.
Joel Quadracci: FlavCity is a recent example of this strategy in action. As shown on Slide 9, what we began as a single end-cap display project earlier this year has expanded across five product lines and three major retailers, Target, Walmart, and Meijer. As we have consistently delivered at scale and met each retailer's unique requirements, we have earned the client's confidence and expanded our relationship.
Joel Quadracci: Most recently, FlavCity selected Quad to manage its resale display and signage fulfillment business, and we are now growing into agency services with both Betty and Rise supporting an upcoming product launch. FlavCity illustrates how we can turn a single project into a broader multi-service relationship. It is a repeatable model that allows us to deepen client relationships, cross-sell additional solutions, and generate revenue across more of our portfolio. Turning to Slide 10.
Joel Quadracci: We continue to make meaningful progress expanding In-Store Connect by Quad, our in-store retail media network. We are currently deploying the network across more than 100 additional stores, demonstrating strong retailer adoption and continued progress in building a scaled platform for CPG advertisers. Part of this momentum is driven by a large national discount store chain, which recently agreed to deploy In-Store Connect in initial 30 stores in Florida this winter.
Joel Quadracci: Screens will be placed in high-traffic aisles featuring cereal, salty snacks, and soft drinks, categories where CPG brands already advertise across our network. The new partnership establishes In-Store Connect's presence in the Southeast US and supports our strategy of building a valuable network for CPG advertisers and regional grocers. With thousands of stores nationwide, the retailer also represents a meaningful long-term expansion opportunity as we demonstrate value through the initial deployment.
Joel Quadracci: Another growth driver is our recently announced partnership with Chedraui USA, which will deploy In-Store Connect in 25 Smart & Final stores in California this fall. The agreement builds on our long-standing relationship with the client, providing print and production support for weekly circulars across its grocery banners. Like the integrated support we highlighted with Wakefern last quarter, this example demonstrates how our connected retail solutions work together.
Joel Quadracci: Allowing us to expand existing client relationships into broader, higher value marketing partnerships. Looking ahead, we remain focused on expanding our footprint, attracting more advertisers, and deploying capital with discipline, with the goal of growing In-Store Connect into a more meaningful contributor to Quad's long-term growth and revenue diversification strategy. As we pursue growth and deliver client work, we continue to navigate a dynamic macro environment as shown in Slide 11.
Joel Quadracci: Ongoing conflict and geopolitical instability in the Middle East have contributed to supply chain volatility, particularly for certain petrochemical-based materials. We continue to proactively manage these pressures through disciplined operational execution, included diversifying our supplier base, optimizing inventory planning, and implementing pricing actions where necessary. Additionally, postage remains a significant challenge for many clients as it represents the single largest marketing expense for mailers.
Joel Quadracci: The US Postal Service implemented its most recent rate increase for market dominant mail in early Q3. As a reminder, the Postal Regulatory Commission issued a rule earlier this year, limiting the Postal Service to one rate increase per year. The next rate increase impacting marketing mailers will occur in July 2027. As elevated postage costs persist, we continue to deploy the same two-pronged approach we have for decades, which focuses on maximizing postal cost savings while improving response rates.
Joel Quadracci: By connecting postal optimization with better targeting, creative, and measurement, we help clients pursue a lower cost per acquisition and sustain effective investment in mail. Additionally, Quad's postal affairs team remains actively engaged with policymakers in Washington, the Postal Service, and the Postal Regulatory Commission, working on behalf of our clients in supporting a healthy, sustainable mailing ecosystem.
Joel Quadracci: Before I turn the call over to Tony, I would like to recognize several recent industry honors shown on slide 12, which reflect the strength of our integrated marketing solutions and the outstanding work for our teams. Our Betty Creative Agency and Rise Media Agency earned a Silver Jay Chiat Award at their work with Jelmar CLR Brands, recognizing the effectiveness of their brand transformation strategy.
Joel Quadracci: Rise was also named as an AdExchanger Award finalist for its work with Dairy Management Incorporated, highlighting its innovative approach to helping brands improve visibility in AI-powered search. Last, Quad received a Path to Purchase Institute OmniShopper Award for our endcap design that launched Pura Smart Home fragrance products in Target nationwide. These recognitions underscore our ability to help clients strengthen their brands, connect with consumers, and drive growth.
Joel Quadracci: Combined with the client success stories I mentioned earlier, these recognitions demonstrate how our growth offerings are gaining momentum and helping us mitigate organic print decline. With that, I will turn the call over to Tony.
Tony Staniak: Thanks, Joel, and good morning, everyone. On slide 13, we show our diverse revenue mix. Net sales were $587 million in Q3 2026, consistent with $588 million in Q3 2025. Lower large scale print volumes and lower agency solution sales were offset by higher logistics sales.
Tony Staniak: Net sales were $1.7 billion in the first 9 months of 2026, a 1% decline compared to the first 9 months of 2025, when excluding a 1% impact of the 28 February 2025, divestiture of our European operations. On a year-to-date basis, the decline in net sales was primarily due to lower large scale print volumes and agency solution sales, partially offset by higher logistics and paper sales.
Tony Staniak: Comparing our net sales breakdown between the first 9 months of 2025 and 2026, our revenue mix as a percentage of total net sales increased 2% in our targeted print offerings, driven by direct mail, packaging and in-store, and also increased 1% in our logistics business due to fuel surcharges during 2026 and increased volume and additional list services provided through our enhanced co-mail operations.
Tony Staniak: These increases were offset by a 2% expected organic decline in the large scale print product lines due to magazines and retail inserts, and also a 1% decrease in agency solutions. Turning to slide 14, we show our progress on our revenue diversification strategy. Between 2018 and 2025, integrated solutions and targeted print increased as a portion of total net sales, growing from 54% of net sales in 2018 to 69% of net sales in 2025.
Tony Staniak: Our integrated solutions include agency offerings through our Rise Media Agency and Betty Creative Agency, as well as our logistics and QuadMed services. Targeted print comprises catalogs, direct marketing, packaging, in-store signage and displays, and special interest publications.
Tony Staniak: By 2028, we expect integrated solutions and targeted print will represent 76% of total net sales as we further diversify our revenue and clients in the higher margin offerings through our flywheel approach, as discussed by Joel earlier on the call. We will also continue to tightly manage organic declines in large scale print, specifically retail inserts and magazines, to drive free cash flow.
Tony Staniak: Finally, for international print, we expect stable revenue contribution from our business in Latin America with growth in Mexico, which is a strategic extension of our US print platform, partially offset by the February 2025 divestiture of our European operations and the September 2026 closure of our Peruvian operations. Slide 15 provides a snapshot of our Q3 2026 and year-to-date financial results.
Tony Staniak: Adjusted EBITDA was $51 million in Q3 2026 as compared to $53 million in Q3 2025, and adjusted EBITDA margin declined from 8.9% to 8.7%. The decrease in adjusted EBITDA margin in Q3 was primarily due to the mix of net sales. On a year-to-date basis, adjusted EBITDA was $138 million in 2026 compared to $141 million in 2025, while adjusted EBITDA margin was consistent at 7.9%.
Tony Staniak: The decrease in adjusted EBITDA on a year-to-date basis was primarily due to the impact of lower net sales, as well as the mix of net sales, partially offset by lower selling general and administrative expenses from the benefit of efficiency initiatives.
Tony Staniak: Adjusted diluted earnings per share was $0.35 in Q3 2026 as compared to $0.31 in Q3 2025, an increase of $0.04 or 13%. Year-to-date adjusted diluted earnings per share was $0.84 in 2026 compared to $0.65 in 2025, an increase of $0.19 or 29%. The increases are primarily due to higher adjusted net earnings, including lower interest expense due to reduced debt and lower depreciation and amortization, and also benefited by share buybacks.
Tony Staniak: Since 2022, we have repurchased 8.4 million Quad shares at an average price of $4.63 per share, representing 15.1% of our total outstanding common stock as of that time. This includes 1 million shares repurchased year-to-date for approximately $8 million. Quad's Board of Directors authorized a share repurchase program of up to $100 million of our outstanding Class A common stock in 2018. As of 30 September 2026, there was $61.1 million of authorized repurchase remaining under the program.
Tony Staniak: Year-to-date free cash flow was -$100 million in the nine months ended 30 September 2026, compared to -$87 million in 2025. The decline in free cash flow is primarily due to an increase in working capital and the timing of payments, including a Q3 payment of $12 million to the Mexico tax authority and an increase of $1 million in capital expenditures in 2026.
Tony Staniak: As mentioned on our Q2 earnings call, the company received an adverse income tax and value-added tax litigation ruling related to a 2011 audit assessment of a Mexican subsidiary obtained through the World Color Press acquisition. As of 30 September 2026, we had accrued $17 million as an estimate of the amount to be paid. During Q3, we reached a resolution with the Mexico tax authority that resulted in paying a lower amount of $12 million.
Tony Staniak: We show the seasonality of our free cash flow and net debt leverage on Slide 16. As a reminder, we typically generate negative free cash flow in the first 9 months of the year, followed by large positive free cash flow in Q4 with higher collections after our production peak, resulting in reduced net debt at the end of the year.
Tony Staniak: For the remainder of 2026, we anticipate a similar seasonal pattern for our free cash flow and net debt, and we expect free cash flow in Q4 to be in the range of $145 to $155 million. When removing the impact of seasonality, we have reduced our net debt by $43 million or 9% from 30 September 2025 to 30 September 2026. As previously reported, we divested our European operations to Capmont in February 2025.
Tony Staniak: The total sales price included a three-year note receivable. As of 30 September 2026, we have not received payment of principal and interest for the first annual installment of the note receivable due February 2026, totaling approximately $6 million. Given the amount of time that has passed since February without collection, we recorded a reserve of $11 million on the total note receivable in Q3.
Tony Staniak: Slide 17 presents our balanced capital allocation strategy, which is fueled by our free cash flow and our ability to generate proceeds from asset sales. On 30 September, Quad sold its building in Lima, Peru after ceasing all operations in Peru on 20 September. Equipment has also been sold, and the clearing of the building will be complete by the end of the year. We received proceeds of over $17 million in Q3 from selling the building and equipment.
Tony Staniak: We expect to generate future cash proceeds from buildings we currently have for sale in Waukee, Iowa and Thomaston, Georgia. With this strong cash generation, we intend to continue investing to drive growth as a marketing experience company, maintain low debt balances, and return capital to shareholders through our quarterly dividend and share repurchases.
Tony Staniak: This year, we increased our quarterly dividend by 33% to $0.10 per share or $0.40 per share on an annual basis. Our next quarterly dividend is payable on 4 December. We are pleased to return capital to shareholders through the quarterly dividend and opportunistic share repurchases.
Tony Staniak: Slide 18 includes a summary of our debt capital structure. At the end of Q3, our debt had a blended interest rate of 6.6%. Our next significant debt maturity of $205 million is not due until October 2029. Given uncertainty regarding interest rates, we hold four interest rate swaps with notional value of $130 million, and as of 30 September, one interest rate collar agreement with notional value of $75 million, which matures at the end of October 2026.
Tony Staniak: Including these interest rate derivatives, we have 48% of our interest rate exposure capped if interest rates rise, and with the interest rate collar, we would pay lower interest expense on 69% of our debt if interest rates decline. During October, we entered into 2 new interest rate collars with total notional value of $60 million to replace the maturing interest rate collar agreement.
Tony Staniak: We update our 2026 guidance, as shown on slide 19, and are pleased that our guidance represents another step on our way to our 2028 outlook for revenue growth. For net sales, we are improving our guidance range. We now expect net sales to decline 1% to 3% compared to 2025, when excluding $23 million of 2025 net sales from the divestiture of our European operations.
Tony Staniak: The 2% sales decline at the midpoint of our updated guidance, even with winding down operations in Peru in Q3, reflects an ongoing improvement trend from a 10% net sales decline from 2023 to 2024 to a 5% decrease from 2024 to 2025, excluding the European divestiture. We are also narrowing adjusted EBITDA and free cash flow within our original guidance ranges.
Tony Staniak: Full year 2026 adjusted EBITDA is now expected to be between $185 and $195 million, compared to previous guidance of $175 to $215 million. Free cash flow is now expected to be between $45 to $55 million, as compared to our previous guidance of $40 million to $60 million, despite the Mexico tax payment of $12 million.
Tony Staniak: The midpoint of the free cash flow range is essentially equal to 2025 reported free cash flow of $51 million, even with an additional week of payroll payments for a total of 53 Thursday weekly paydays falling in the 2026 calendar year. We will have a year-over-year benefit of approximately $9 million as we return to 52 weekly payrolls in 2027, and the next time we will pay 53 payrolls in a calendar year will not occur until 2032.
Tony Staniak: Capital expenditures are now expected to be approximately $55 million compared to previous guidance of $55 million to $65 million. This spend supports what we believe is the industry's most technologically advanced platform, including investments in robotics and automation on the plant floor and in our postal optimization solutions.
Tony Staniak: It also allows us to continue investing in growth in our targeted print platform, such as the equipment for our new Salt Lake City packaging facility, as well as in our integrated solution services lines, including expansion of In-Store Connect by Quad. From a net debt perspective, the net proceeds from the sale of assets in Peru exceeded the Mexico tax payment during Q3.
Tony Staniak: With the resolution of these items, we reaffirm our year-end net debt leverage ratio is expected to be approximately 1.5 times by the end of 2026, achieving the low end of our long-term targeted net debt leverage range of 1.5 times to 2.0 times. As a reminder, we may operate above this range at certain times of the year due to the seasonality of our business.
Tony Staniak: We are closely monitoring uncertainties in the macroeconomic environment and will continue our disciplined approach to how we manage all aspects of our business, including treating all costs as variable, optimizing capacity utilization, and maintaining strong labor management to mitigate the impact of rising costs on our business and our clients. These initiatives continue to fuel strong manufacturing operations and drive productivity gains.
Tony Staniak: Slide 20 includes a summary of our 2028 financial outlook and long-term financial goals as we continue to build on our momentum as a marketing experience company. We continue to expect the rate of net sales decline to improve as it has since 2024, and then reach an inflection point of net sales growth for full year 2028 with a sales mix of higher targeted print, integrated solutions, multi-mail, and paper sales.
Tony Staniak: In addition, during 2028, we continue to expect to see increased adjusted EBITDA margin over our current margin. Regarding free cash flow, we expect to improve our free cash flow conversion as a percentage of adjusted EBITDA from approximately 26% in 2025 to 35% by 2028, primarily due to lower interest payments on decreasing debt balances and lower restructuring payments.
Tony Staniak: Finally, we expect to maintain our long-term targeted net debt leverage ratio in the range of 1.5 times to 2.0 times as part of our balanced capital allocation strategy. As we look ahead, we believe the combination of improving revenue trends, resilient cash generation, low debt leverage, and targeted investments in higher growth and higher margin offerings positions Quad well to create long-term shareholder value. With that, I'd like to turn the call back to our operator for questions.
Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. 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 Steinke with Barrington Research.
Tony Staniak: Morning, Kevin.
Kevin Steinke: Hey, good morning, everyone. Good to see the momentum on the sales side. I wanted to start off by talking about that a little bit. You really highlighted what you think is a repeatable model for expanding with clients, and you noted that they are increasingly using more of your services.
Kevin Steinke: Can you just talk a little bit about that model and how it works? If you are out there actively discussing all your offerings with the client base, maybe how it differs with a new client versus an existing client in terms of penetration or any more color on that model that seems to be working for you.
Joel Quadracci: Yeah, I thought you were opening up with the momentum on the Brewers, but we will take that anyway. Yeah. I refer to this as sort of the growth flywheel because when you look at our pie charts and you see targeted print, large-scale print, and then industry solutions, they all kind of work together.
Joel Quadracci: If you think about even in the large-scale print area where we have the biggest decline, the big decline is in the retail inserts, which are very much used by every retailer out there, but less and less so. They end up demanding our services to help them manage away from it into other areas. That gets us a lot of interest in our solutions up in the agency space to try and figure out how do you find audience when you are replacing channels. They really work together.
Joel Quadracci: Once you get in that advisory role of finding audience and how you spend your money, what we are finding is it is driving significant targeted print sales. I would like to remind people that when you sell a dollar up in agency, you are probably resulting oftentimes in $3 down in targeted print of revenue. You go from small invoice to large invoice, higher margin to slightly lower margin, but great free cash flow.
Joel Quadracci: That is why I say, as these parts of the pie kind of change in percentage, you have to remember that they are all interrelated in a big way, and it is okay that targeted print grows as a result. I think when you see some of these wins we have, it is literally get $1 million and win $10 million worth of targeted print. Not small numbers.
Joel Quadracci: I would say that we have seen an acceleration of this working because marketers are under a lot of pressure. The disruption continues to happen, AI being the newest, but they are still dealing with the constant push to try and figure out what the mix should be. They have less resources to do it with.
Joel Quadracci: This integrated approach is super important and super hard to pull off. I would say we have internal measurements that we use in terms of new sales. We talk about total revenue in these calls, but the way we focus is when you have some declining revenue in some of the large-scale print, we have to really outpace it with new sales. We define new sales internally by new logos that we do business with and existing logos where they bring us a new line of revenue from a new product or service.
Joel Quadracci: We are seeing an acceleration of both, and it is working the way we like. Sometimes that means your margin may be a little bit lower if you are having more success in driving targeted print. We like that because it drives a lot of free cash flow. All in all, Kevin, this is what we have been talking about for a long time. The fact that we have got the process so dialed in is really helping us see a lot of success in both segment share wins, but also in growth of existing clients.
Kevin Steinke: That sounds great. I wanted to ask too, just a little bit about the creation of Direct as the direct marketing agency, and the thought process into formalizing that. Again, I guess that ties into the momentum you are seeing on the direct marketing side.
Joel Quadracci: Yeah. I would say it is no different than we talk about the overall flywheel of products and services. This is packaging up some of those agency solution stuff specifically for direct marketers. The difference here is that oftentimes when you win direct mail, the product that direct marketers use, they are doing all the work. They are just sending you the list, and you are winning the print part.
Joel Quadracci: We really excel when we can actually advise them how to use the direct mail. It is very specific to this product line because it has got a lot of nuances to it versus other sort of media spends. The Direct launch is really because it is what we have been doing, but we formalized it so that we are packaging up those products and services specific to the direct mail line or direct marketing line.
Joel Quadracci: Oftentimes it is really, really focused on audience and how you hit our data stack and really do a lot of the pre-market testing to sort of advise them on what that direct mail product line will look like. When we do that, you start a flywheel of analytics because we do the pre-market testing, go ahead and do the physical piece, prove it out that it has got the responsiveness you want, and then iterate and go again. So it continues to demand all the services through that sort of flywheel effect.
Kevin Steinke: Okay, great. I also wanted to ask about In-Store Connect and the new relationship with a national chain. I think to this point, the relationships have mostly been with kind of the smaller regional, mid-market type chains. So what kind of got a national chain on board, and do you think there are opportunities to add more national type chains in the future?
Joel Quadracci: Yeah, there is a lot playing out in this space because it is a new space really for marketers. Our approach was hit the mid-tier and the lower tier because the big ones, like a Walmart, are going to do it themselves, and they are national. This one is a unique take on national brands. They have well over 1,000 stores, which is what is really important, nationally.
Joel Quadracci: So what our network was, is tying together a whole bunch of regional approaches to create a national opportunity for the CPG to define what audience they want to go through by hitting all those different regional stores. Now, with a national player in place, we believe it will help fill a lot of empty spots, but also create a lot of momentum here.
Joel Quadracci: In the competitive set in this space of people we are watching who may want to play in the same sort of category, we are seeing a lot of shakeout there. One is fumbled, and they have kind of gone by the wayside. Another big thing that is going on is this acquisition of Instacart. Instacart was trying to push sort of in-store media with these carts that you put your product in, it has a screen on it starts to measure, and then it goes through checkout.
Joel Quadracci: Well, it looks like they may be discontinuing that whole approach. So, I think we have a very good product here because it is very integrated with the analytics, the content creation, and the screens. We are not just a screen supplier. So, we are very excited about it. Again, could we have done more than 30 stores for them? Yes.
Joel Quadracci: But remember, we are fronting the capital, and we are very much about testing and learning and proving before we expend the capital on more stores. So I think it is going to be a great relationship.
Kevin Steinke: Excellent. Maybe just a couple questions just related to the macro, some higher interest rates. Have you heard any hesitation among your clients due to some of that going on? Maybe relatedly, Tony, just on the fuel surcharges, how they have trended. Obviously diesel is still quite high, and how they have been contributing here in Q3 and into the H2.
Joel Quadracci: Yeah, I would say it is sort of the same thing everyone continues to talk about, which is the consumer keeps spending, but it is very bifurcated. You have the lower part of the economic stratification where they are really getting hit with inflationary costs, although they are still spending.
Joel Quadracci: When we talk to our clients, I think that is just the concern is how does that play out, and what kind of stability can we see going into 2027? I think the world would love to have some stability, some stabilization in inflation, stabilization in just about everything. That creates consumer confidence. As we talk to our clients, we have not seen a big pullback because of those concerns. If anything, I think people are still investing in the brand.
Tony Staniak: Kevin, on the second part of your question on fuel surcharges, we have continued to have fuel surcharges in Q3, as well as here in Q4. We have automatic provisions in our contracts that adjust the pricing that we bill fuel at based on where diesel rates are.
Joel Quadracci: That is weekly, so we get protected pretty well.
Tony Staniak: Yes. We are covering those cost increases. It does have a dilutive impact on our margin that we are seeing in the services offering, but pleased to maintain the EBITDA dollars.
Kevin Steinke: Okay. That is helpful. I appreciate it. I will turn it over for now. Thanks for taking the questions.
Joel Quadracci: Thanks, Kevin.
Tony Staniak: Thanks, Kevin.
Joel Quadracci: Operator?
Operator: The next question comes from Barton Crockett with Rosenblatt Securities.
Joel Quadracci: Good morning, Barton.
Barton Crockett: Good morning. Thanks for taking the questions. I guess a couple of things I am curious about. One is, in terms of the updates to your guidance, taking up the lower end of the revenue guide and the EBITDA range being narrowed, and the EBITDA impact this quarter you described to be partly attributable to revenue mix.
Barton Crockett: Could you just give us a little more clarity on how much of an impact pass-through revenues are having on both your guidance and what kind of impact they had on EBITDA that we saw in the quarter and flesh that out, if it would be helpful?
Joel Quadracci: Yeah. I think one thing to start with is one of our strategies is to get more control of the supply chain as it relates to paper. As the industry has changed and paper mills have adjusted, supplying more paper is important to us. But it is largely pass-through. We do get paid for the services, but it is a big dollar amount. It helps us better manage the supply chain because we manage those inventories much tighter than client-supplied paper and allows us to really work with the mills to manage their capacity, which is good for our industry. Tony?
Tony Staniak: Yeah. I would say, just following up to that, so the paper sales, we have seen increases in paper sales in 2026. That runs at a lower margin profile than what the print does. In addition, the fuel surcharges and the ink surcharge, we put in a temporary ink surcharge back in April just to cover those costs. So we have seen dilution in our EBITDA margin due to that. We continue to focus on how we are growing top line looking forward in those areas and print as well.
Barton Crockett: Okay. Is there any rough ballpark of how much of the revenue is pass-through this year versus the year ago?
Tony Staniak: Yeah. I think you can attribute the majority of the 1% improve in the guide to that. On the EBITDA side that you asked about, a $5 million decrease in EBITDA, that is partially the Peru divestiture. We announced that earlier in the year, and we started to reduce our sales there accordingly as we phased out. The rest is due to these factors we have been talking about with pass-through.
Barton Crockett: Okay. Right. Thank you for that. Tony, you also mentioned a lot of puts and takes around cash inflows, outflows. I just want to make sure I understand what is in the end of quarter balance sheet, and what is not between the tax thing in Mexico, the Lima, Peru sale, Capmont writing off the receivable. How much is in the financial statements that we saw at the end of the quarter?
Tony Staniak: Okay. For Peru, we have sold the building and equipment for over $17 million. That was all collected in the quarter, so that is all in the financials. We are cleaning out the building for the rest of the year. From a financial standpoint, on the sale of the building and equipment, that is going to be the extent of the proceeds.
Tony Staniak: In Peru, we are still collecting receivables that will benefit free cash flow in Q4. From a Mexico standpoint, we have reached resolution on that tax matter. We have paid the $12 million, and that is all in our Q3 numbers. The reversal of the extra reserve, we have settled it at $5 million better than what we had reserved. That has come back through our results outside of adjusted EBITDA between tax line, interest line, restructuring.
Tony Staniak: Lastly, on Capmont, that continues to remain on our balance sheet. It is a note receivable. We did, as disclosed in my prepared remarks, record a reserve of $11 million against that, given the amount of time that has passed without collection. We received very small payments in Q3. For the most part, it all exists still on the balance sheet at the end of September.
Barton Crockett: Okay. I was curious about In-Store Connect. You guys talked about 100 stores in process. I think that is a meaningful uptick from the footprint that you have disclosed before, but I want to make sure I understand the magnitude. I think you had previously, like last quarter, suggested something like 60 stores up and running and maybe 130 planned.
Barton Crockett: That would have been maybe 70 in process. Maybe that is a 30 increase or so in the in process. That is one question. The other question is, do you still think that around an 800 store footprint is really the north star in terms of getting a large enough footprint to be very meaningful in kind of market or budget allocation?
Tony Staniak: Hey, Barton, I will start that one. From a store standpoint, with the 100 stores that we talked about in the call, that would bring us in total to near 160 stores that we would have for In-Store Connect at that point. You are right in saying that last quarter we were 130. Now we have added some more, the national discount retailer that we have talked about on our way to near 160 stores by the end of the year.
Joel Quadracci: I think as it pertains to the 800 stores, we have used that number to compare what an audience size would look like. I think we are still testing what the number is to be meaningful. I think it will be earlier than that.
Joel Quadracci: What we are learning, too, is it depends by retailer, what they are set up for in terms of selling the inventory in partnership with us because it is partly us, it is partly them. In one of the new set of stores, one of the early ones that is coming up where we have come close to selling out the inventory, that is because I think the approach that the customer took was a great one.
Joel Quadracci: I think that as the whole space continues to understand the measurability of this, which by the way, we continue to show it works by not just selling the advertising, but showing that the advertising increases the cart size, selling more products or selling new products both for the CPG and retailer.
Joel Quadracci: I think you will start to see sort of a flywheel effect there. Again, I think trying to measure what the right number is also depends on that national footprint and how it sort of evolves here. Because you want to get into those where, in a lot of cases, we are in the regional budgets for those CPGs.
Joel Quadracci: We want to get in that national budget too, where they can kind of define what that audience looks like nationally because they are managed separately. I think we are still testing that, but I think 800 will clearly be a great milestone, but my belief is that the momentum will happen earlier than that.
Barton Crockett: Okay. All right. That is helpful. Thank you guys very much.
Joel Quadracci: You are welcome.
Tony Staniak: Thanks, Barton.
Operator: The next question comes from Mark Zgutowicz with StoneX.
Joel Quadracci: Morning, Mark.
Mark Zgutowicz: Morning, guys. Very positive commentary surrounding your agency business, and congrats on the latest accolades there. Curious, though, why that's not helping on the adjusted EBITDA growth side of the equation. Perhaps there's maybe some overshadow there by the pass-throughs that you just talked about. Then also noticed that you reduced your 2028 mix of your agency and logistics business roughly 6% to 25%. I was just hoping you could maybe discuss those two agency dynamics separately. Thanks.
Joel Quadracci: Yeah. Again, I think it's go back to the flywheel effect and how this thing works, where we're getting the higher margin, lower invoice size business, which puts us in the advisory role, which then leads to the lower margin, higher invoice size print side of the world. That's a part of it.
Joel Quadracci: Then also, as Tony said, some of the mix of the passthrough. When you take on paper sales, that's a big number. Paper is the second-largest budget item for our customers outside of postage. We're actually number three. When you take on that revenue and get paid for it at a lower margin, it has an impact. But you'll continue to see, again, we're seeing the momentum of the pickup of the flywheel effect of the relationship between agency and targeted print. Tony, anything to add?
Tony Staniak: Yeah. I would just say from when we updated the numbers, Mark, we originally, in our November 2024 investor day, published the numbers that you first noticed with the 31% of integrated solutions. We felt as we get closer to 2028, it was time to do a comprehensive refresh. That's what we did and included in our earnings call at this time.
Mark Zgutowicz: Okay. So at the 25% level, what does that imply in terms of 2027 and 2028 EBITDA margins? At that level, do you still think you can see margin expansion at least into 2028?
Tony Staniak: Yeah, I think we still remain on track for that. I will remind that we like to say here, not all print is necessarily created equal. Targeted print runs at a higher margin profile than the large scale print. As the agency is in turn driving more targeted print, that will come in at a higher EBITDA margin than what the large scale print does. So we would still expect EBITDA margin accretion going forward.
Joel Quadracci: I would also speak to the strength of the print product lines. The way that our manufacturing team manages this platform is nothing short of astounding. If I would have told you how they are managing variable costs, making all costs variable in a traditionally heavily fixed cost platform, what they are able to do today versus only a year ago is pretty amazing.
Joel Quadracci: We have literally been able to increase the variability of our labor costs, which is the biggest cost, to a point I have never seen. That is important because while it is a very seasonal business, H2 strong, the peaks and the valleys have become almost weekly, because of just the environment of how marketing has changed and become very instantaneous.
Joel Quadracci: They are managing peaks and valleys within weeks now, and they have done just an unbelievable job of managing the variability of those costs and making them variable through those peaks and valleys. That makes me feel good about continued strong performance and margin on the print side.
Mark Zgutowicz: Yeah, I heard and saw that, Joel, tangibly on the campus tours, so I get that. The last question I have is just on the in-store. The 30 that you are sort of subsidizing now and testing, how long do you think that takes for you to see returns and whether you reinvest there? If you maybe compare that to others that you have tested, what is the timetable to get there?
Joel Quadracci: I think we are still exploring the timetable, and it is at a customer-by-customer event. We do not think we are subsidizing. We are making the upfront investment capitalized to make it easy for customers to put these screens in. It is a whole new media space, but we get paid back as we sell the media itself.
Joel Quadracci: Which is a split depending on the involvement of the customer. Again, I think it is a new media channel that people are learning how to adopt. I think as we go forward, we have been making good deals to get people into the fray. Quite frankly, as more volume comes, we can see the CPMs go up as we start to fill up these programs.
Joel Quadracci: Like I said, we are seeing it differently in different pockets depending on the customer, with a very new customer suddenly having great success with filling up the volume early on, while others are starting to get that flywheel going. Again, you are sort of in this game of, you have to have the eyeballs to get the programs going on a larger scale, and you get on a larger scale if you have the eyeballs.
Joel Quadracci: So it is which comes first, the chicken or the egg? We are in that phase of trying to prove out, does it work and do people see the adoption? I think we are in that phase where people get it. This is here to stay, and now it is a matter of continuing to prove out the measurement of it and push forward with more stores.
Joel Quadracci: Remember our first customer on the West Coast, which we are well into for a while, is already going on to the next phase of doubling the number of stores. That is the trick. When they start adding more stores, they are doing it because it works.
Mark Zgutowicz: How long did that take, just to close on that, before they started expanding, maybe as a precedent or baseline?
Joel Quadracci: Yeah, that one was, again, I'd say the early adopters took longer. It's about 18 months for that one. But I see now that some of the newer ones are already talking about expansion in a much shorter time range. So again, we'll continue to monitor it. It's still early days, but that decision timeframe is coming rapidly down.
Mark Zgutowicz: Got it. That sounds great. Thanks, guys.
Joel Quadracci: All right. Thank you. Operator?
Operator: This concludes our question and answer session. I would like to turn the conference back over to Joel Quadracci for any closing remarks.
Joel Quadracci: Okay. Thank you everyone for joining today. I am proud of the progress we are making across Quad. We continue to expand our higher value marketing capabilities and deliver a broader range of integrated solutions for existing clients. This deepens the relationships, which helps us earn repeat business and grow our share of clients' marketing spend.
Joel Quadracci: We continue to improve our revenue trajectory, and with expected strong cash flow generation and a healthy balance sheet, we plan to continue investing for growth while creating long-term value for shareholders. Thank you for your continued interest in Quad, and I look forward to updating you on our progress next quarter. Finally, go Brewers.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
