Quad/Graphics Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 3, 2023

There are 3 speakers on the call.

Operator

Good morning, and welcome to the Quad's First Quarter Conference Call. During today's call, all participants will be in listen only mode. 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 Slide presentation on the Investors section of Quad's website under the Events and Recent Presentations link.

Operator

After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Katie Krebsbach, Quad's Investor Relations Manager. Katie, please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. With me today are Joel Quadracci, Quad's Chairman, President and Chief Executive Officer and Tony Staniak, Quad's Chief Financial Officer. Joel will lead today's call with a business update and Tony will follow with a summary of Quad's Q1 2023 financial results followed by Q and 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 slide presentation on Slide 2, Quad's financial results are prepared in accordance with generally 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.

Speaker 1

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.

Speaker 2

Thank you, Katie, and good morning, everyone. Beginning on Slide 3, I am pleased to report we continue to in the quarter due to higher print product sales in the United States and in Mexico and also increased agency solution sales as clients continue to embrace Quad's unique integrated We also grew adjusted EBITDA by $11,000,000 or 24% in the quarter due to increased profitability from net sales growth, Improved manufacturing productivity and savings from cost reduction initiatives. Economic uncertainty has prompted some clients to take a more conservative approach offering such as national magazines, while leaning into growth opportunities and other offerings like agency solutions, Packaging and in store, we have flexibility and agility to pivot and meet changing client needs. In the current economic environment, we continue our long standing disciplined approach to managing all aspects of our business, including treating all costs as variable and aligning our cost structure with revenue opportunities. At the same time, we are aggressively pushing forward on our growth strategy as a marketing experience or MX company that services marketers' needs from end to end, solving their biggest marketing challenges.

Speaker 2

Turning to slide 4, our leadership as an MX company was validated once again last week through our ranking on the world's largest agency companies list Compiled annually by Ad Age, this year Quad ranks number 14, up 2 spots from our number 16 ranking in 2022. We are also proud to share that once again Quadris received top tier designation as a Microsoft Elite Agency Partner At Google premier partner through our digital marketing agency, Fry's Interactive. On Slide 5, we show Quad's Three key growth drivers, delivering integrated service excellence, accelerating market penetration, and evolving our culture as an MX company. Integrated service excellence is at the core of who we are and what we do. We continue to build on our uniqueness as a marketing experience It helps brands reimagine their marketing to be more streamlined, impactful, flexible and frictionless.

Speaker 2

Our integrated offering provides all the resources our clients need to plan, create, deploy, measure and optimize their marketing efforts across All media channels, offline and online. As a result, we reduced the complexities of working with multiple agency partners and vendors and increase the efficiencies of marketing processes. We do all this while maximizing the effectiveness of our clients' marketing efforts Through our ability to target and reach the right audiences, scale resources efficiently, increase speed to market and optimize media performance. Turning to slide 6, to accelerate market penetration, we are focused on growing awareness that better marketing is built on Quad. We're gaining visibility with new brands and new verticals, including blue chip companies through our participation in industry events.

Speaker 2

For example, we recently participated in Shop Talk Retailers and SPC Impact, the Sustainable Packaging Coalition Spring Event, where we connected with brands and marketers about their marketing challenges and how Quad can In June, we will return to the Cannes Lions International Festival of Creativity, where we'll showcase our better marketing is built on Quad, share our innovation story and strengthen relationships with bargaining decision makers from around the world. Amid these efforts, we also continue to host events focused on specific timely topics of interest to our clients. For example, last week, we hosted our 23rd Postal Conference with approximately 300 clients participating. The event focused on knowledge sharing and solutioning around delivering print cost As we evolve our culture as an MX company, we are leveraging our long standing maker culture as a distinct talent advantage. At Quad, our employees are empowered to not only envision solutions, but also create or Make them in support of our work to expertly guide brands through every effort intended to drive action from consumer awareness and trust to brand preference and purchase as shown on Slide 7.

Speaker 2

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. Turning to slide 8, We show an example of how we're helping brands and marketers successfully solve their marketing challenges with our integrated marketing offering. Gelmar, a respected leader in the household cleaning products industry and well known for its CLR and Tarnex brands, Recently, we're seeking a trusted partner for brand building work. The company wanted us to review and enhance its strategy for engaging consumers, Our team presented a comprehensive creative and media strategy for engaging audiences across channels, including linear TV, over the top streaming, Programmatic search, social and CLR's website. Our work is just now getting underway to provide consumer strategy, A key feature of our digital media solution is our proprietary Connects technology, which will allow Gelmar to not only be able to uncover performance trends audience, creative, production and location, but also identify specific growth opportunities and take immediate actions minute by minute To accelerate media performance, we are pleased to be supporting Gelmar's efforts to ignite its brand and drive demand as its marketing agency of record.

Speaker 2

On Slide 9, we show another example of how better marketing is built on Quad. Recently, a senior care services provider invited our RISE Interactive digital marketing agency to bid on 3 Separate RFPs for media planning and placement, search engine optimization and web development. The company was surprised and to learn we could expertly address all these needs through our integrated offering and to not have to coordinate efforts with multiple vendors, something the company did not believe was possible. As we engaged with the company, we learned it also needed help with branding and creative execution and we won that work too, along with niche services such as talent management rights. With our assistance, the client is benefiting from our ability to audiences within specific zip codes using hyper local media strategy and find the right message and media to connect with geographically and culturally different audiences using our proprietary connections planning tool.

Speaker 2

Our client is extremely pleased with our results, which include driving more leads than it has ever before experienced. We are glad to be a trusted partner to this client and look forward to introducing our other integrated services, including direct marketing and expanded audience targeting. As we move forward with our strategy, I have great confidence in our team and continue to be enthusiastic about our growth opportunities as an MX Company provides a better way to sell marketers' biggest challenges, which drives revenue across all of our offerings. Before I turn the call over to Tony, I'd like to thank our employees for the continued hard work and commitment to performing well for our clients, While we proactively manage all aspects of our business for long term strength and stability, I will now turn the call over to Tony for the financial review. Thanks, Joel, and good morning, everyone.

Speaker 2

On Slide 10, we show our diverse revenue mix. During the Q1, Our net sales increased 3% from the Q1 of 2022, driven by growth in our Mexico operations, catalogs and our Agency Solutions offerings. These increases were partially offset by expected organic declines in large scale print, as well as reduce sales from the December 2022 divestiture of our Argentina operations. Despite the organic decline in large scale print, We continue to gain segment share, including winning Reader's Digest, the 4th largest circulation magazine in the United States. Slide 11 provides a snapshot of our Q1 2023 financial results.

Speaker 2

We started the year strong with adjusted EBITDA of $60,000,000 2, and adjusted EBITDA margin improved from 6.5% to 7.9%. The increase in adjusted EBITDA was due to increased profitability from net sales growth, improved manufacturing productivity and savings from cost reduction initiatives. Adjusted diluted earnings per share increased to $0.15 in the Q1 of 2023 as compared to $0.04 in the Q1 of 2022, primarily due to higher adjusted net earnings. Earnings per share were also benefited by the company's repurchase of more than 5% of our total outstanding common stock since the Q2 of 2022 for $10,300,000 Free cash flow was negative $79,000,000 in the Q1 of 2023, A $43,000,000 decrease compared to 2022, primarily due to the timing of working capital and $29,000,000 in capital expenditures to invest in our platform for further sales growth and automation efficiencies. As a reminder, the company historically generates the majority of its free cash flow in the Q4 of the year and expects $50,000,000 to $90,000,000 of free cash flow in 2023.

Speaker 2

Slide 12 includes a summary of our debt capital structure. Net debt increased by $87,000,000 to $632,000,000 at March 31, 2023, as compared to $545,000,000 at December 31, 2022, and the debt leverage ratio increased 23 basis points to 2.39 times at the end of the Q1. The increase in net debt and the debt leverage ratio was primarily due to the investments in working capital, talent and equipment to enable continued sales growth. We are expecting to achieve the low end of our long term targeted debt leverage range of 2 to 2.5 times by the end of 2023. As of March 31, our blended interest rate was 6.6%, a 2 point increase from 4.6% a year ago.

Speaker 2

To mitigate the impact of the rising interest rate environment, we entered into 2 interest rate collar agreements Effective February 1, 2023, including interest rate swaps, our debt is 53% floating and 47% fixed. We maintained our strong liquidity with up to $321,000,000 of availability under our revolving credit agreement, as well as $9,000,000 of cash on hand. Our nearest significant debt maturity is $88,000,000 occurring in January 2024, With the majority of our debt maturities not due until late 2026, we reaffirm our 2023 guidance as shown on Slide We are pleased with our Q1 net sales growth as clients continue to embrace our innovative and integrated marketing offering. However, due to continued macroeconomic concerns, we expect lower print volumes during the remainder of the year. Adjusted EBITDA and free cash flow will be lower in the first half of twenty twenty three compared to the second half of twenty twenty three due to the seasonality of the business and increased capital expenditures.

Speaker 2

The majority of our capital expenditures will occur in the first half of the year, so we can benefit from these investments in the second half of the year during our peak seasonal period. Slide 14 includes our key investment highlights as we continue to build on our growth momentum as a marketing experience company. We believe that Quad is a compelling long term investment and we remain focused on growing net sales and driving Profitability through continued diversification of our revenue and clients in the higher margin offerings. 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 also generate strong free cash flow and use it to reduce net debt to achieve the low end of our long term targeted leverage range of 2 to 2.5 times by the end of 2023.

Speaker 2

We expect net debt to be approximately $470,000,000 by the end of the year, representing a $564,000,000 or 55 percent reduction in debt since January 1, 2020, When our debt was over $1,000,000,000 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, such as Agency Solutions and Targeted Print, while returning capital to shareholders to drive 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.

Speaker 2

Sorry, operator, do we have any Questions in the queue?

Operator

We do not have any questions in the queue at this time.

Speaker 2

Okay, operator, it looks like people are making it easy on us today. And so with that, this is Joel. I just want to thank everyone for joining today's call. And I want to close by reiterating my confidence in our team and our strategy and our future as a marketing experience company. Our integrated marketing offering continues to be a competitive differentiator and a key driver behind our company's overall organic growth.

Speaker 2

With that, thank you again and have a good day. We look forward to speaking with you again next quarter.

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Earnings Conference Call
Quad/Graphics Q1 2023
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