Quad/Graphics, Inc.
Q1 2023 Earnings Call Transcript

Published: 3 May 2023

[Operator:]

Good morning, and welcome to the Quad's First Quarter Conference Call. [Operator Instructions] 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's website under the Events and Recent Presentations link. 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.

[Katie Krebsbach:]

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 first quarter 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 slide presentation on Slide 2. Quad's 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 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.

[Joel Quadracci:]

Thank you, Katie, and good morning, everyone. Beginning on Slide 3, I am pleased to report we continue to experience positive momentum in our business, achieving an eighth consecutive quarter of top line growth. Net sales increased 3% in the quarter due to higher product sales in the United States and in Mexico, and also increased agency solution sales as clients continue to embrace Quad's unique integrated marketing offering. We also grew adjusted EBITDA by $11 million, 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 to the start of the year and, in many instances, reallocate where they invest their marketing dollars. Our integrated marketing offering easily supports these shifts in marketing spend to maximize results. We are able to offset softness in offerings such as national magazines while leaning into growth opportunities in 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. 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 two spots from our number 16 ranking in 2022. We are also proud to share that, once again, Quad just received top-tier designation as a Microsoft Elite Agency Partner, a Google Premier Partner through our digital marketing agency, Rise Interactive. On Slide 5, we show Quad's three key growth drivers

[Anthony Staniak:]

Thanks, Joel, and good morning, everyone. On Slide 10, we show our diverse revenue mix. During the first quarter, our net sales increased 3% from the first quarter 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 reduced 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 fourth largest circulation magazine in the United States. Slide 11 provides a snapshot of our first quarter 2023 financial results. We started the year strong with adjusted EBITDA of $60 million in the first quarter of 2023, a 24% increase as compared to $49 million in the first quarter of 2022, 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 first quarter of 2023 as compared to $0.04 in the first quarter 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 second quarter of 2022 for $10.3 million. Free cash flow was negative $79 million in the first quarter of 2023, a $43 million decrease compared to 2022, primarily due to the timing of working capital and $29 million 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 fourth quarter of the year and expects $50 million to $90 million of free cash flow in 2023. Slide 12 includes a summary of our debt capital structure. Net debt increased by $87 million to $632 million at March 31, 2023 as compared to $545 million at December 31, 2022, and the debt leverage ratio increased 23 basis points to 2.39x at the end of the first quarter. 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 2x to 2.5x 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. To mitigate the impact of the rising interest rate environment, we entered into two 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 million of availability under our revolving credit agreement as well as $9 million of cash on hand. Our nearest significant debt maturity is $88 million 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 13. We are pleased with our first quarter 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 2023 compared to the second half of 2023 due to the seasonality of the business and increased capital expenditures. 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 2x to 2.5x by the end of 2023. We expect net debt to be approximately $470 million by the end of the year, representing a $564 million, or 55%, reduction in debt since January 1, 2020, when 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, 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:]

[Joel Quadracci:]

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

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.