Quad/Graphics, Inc.
Q1 2021 Earnings Call Transcript

Published: 5 May 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to Quad's First Quarter 2021 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 on in the earnings release. Alternatively, you can access the slide presentation in the Investors section of Quad's website under the Events & Recent Presentations link. Please note that, this event is being recorded. I would now like to turn the conference over to Katie Krebsbach, Quad's Investor Relations Lead. 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 Dave Honan, Quad's Executive Vice President and Chief Financial Officer. Joe will lead off today's call with a business update, and Dave will follow with a summary of Quad's first quarter 2021 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, free cash flow 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. We are very pleased with our first quarter performance. Our team achieved a third consecutive quarter of improvement in the net sales trends since the height of the pandemic. We also recorded several new wins in our agency and print segments that will drive long term growth. When combined with our disciplined approach to cost management and ongoing productivity improvements. We increase our adjusted EBITDA margin and drove higher cash flow as compared to the first quarter of 2020. This strong performance helped us continue to pay down debt to protect the health of our balance sheet. On slide 3, we show our competitive advantages that are further accelerating our position as a marketing solutions partner and creating more value for our clients. These advantages reflect our commitment to integrated marketing platform excellence, innovation, and culture and social purpose. Our integrated marketing platform is unique and continues to resonate with clients as it helps them reduce the complexity of working with multiple agency partners and vendors. Increase efficiencies through process optimization and content production, and improved marketing spend effectiveness across all media channels, especially through our leading data analytics capabilities.

[Dave Honan:]

Thanks, Joel, and good morning, everyone. Slide 8 provides a snapshot of our first quarter financial results. As Joel mentioned, we delivered strong operational and financial results to start the year. We achieved a third consecutive quarter of improvement and the net sales decline rate, since the height of the pandemics impact on our business in Q2 of 2020, including new business wins for our agency and print segments. These wins, combined with our disciplined approach to cost management and ongoing productivity improvements drove higher adjusted EBIT margin and higher free cash flow compared to the prior year. The strong free cash flow generated in the first quarter, in combination with proceeds from asset sales enabled us to reduce net debt by $61 million, which included $11 million of cash generated from the sales of vacant facility. The ongoing review and realignment of our manufacturing platform allows us to redeploy capital to further accelerate our transformation as a marketing solutions partner and reduce debt. Net sales were $706 million in the first quarter, down 14% from the same period in 2020, primarily due to the economic impact of the COVID-19 pandemic and ongoing print industry volume pressures. However, the first quarter decline represents the third quarter of sequential improvement in our net sales decline rates since Q2 of 2020. Adjusted EBITDA was $66 million in the first quarter, as compared to $75 million in 2020, while adjusted EBITDA margin improved to 9.3% in the first quarter, as compared to 9.2% in 2020. The variance and adjusted EBITDA to prior year reflects a 14% net sales decline, and $18 million of non-recurring benefits realized in 2020, including a $12 million benefit from a change in vacation policy, and a $6 million benefit in the cost of workers compensation claims from improved production safety procedures. These impacts were partially offset by savings from cost reduction initiatives. Adjusted EBITDA margin improved 15 basis points from cost savings initiatives, more than offsetting the relative percentage decline in net sales. Free cash flow was $56 million in 2021, an increase of $40 million from 2020, primarily due to higher net cash provided by operating activities driven by working capital improvements, and a $12 million decrease in capital expenditures. Slide 9 includes a summary of our debt capital structure as of March 31. We reduce net debt in the quarter by $61 million and as a result, our debt leverage improved to 3.24 times compared to 3.35 times at the end of 2020. While this leverage ratio is above our long term targeted leverage range of 2 times to 2.5 times, we expect to further improve our debt leverage ratio to be at or near 3.0 times by the end of 2021. As of March 31, our blended interest rate was 4.9%. And we maintained our strong liquidity position with up to $463 million in unused borrowing capacity under our revolving credit agreement and $81 million of cash on hand.

[A - Katie Krebsbach:]

Thank you, Dave. We compiled questions in advance of today's call, and therefore, we will not ask for callers to enter the queue. Thank you to everyone who submitted questions in advance. We have three top questions that were submitted. The first question relates to what we are seeing in our core end markets. Specifically it asks, can you speak to the trends you were seeing in Quad's business segments and end-markets as the economy reopens? And as a follow-up, which of those end-markets are fully back, and which are still slower to come back, if any?

[Joel Quadracci:]

Thanks, Katie. And I'll start with retail resets, and we've been pretty consistent over time referring to this segment as the one that's had the greatest decline and one that has experienced for resets and probably will continue to experience some resets. But we're, right now the industry seeing above a negative 30%. In the first quarter versus last year, we're both in line with that. And maybe a little bit better. But I will also remind people that, the retail industry provides a lot of revenue upstream and downstream, throughout our whole portfolio product lines, as evidenced by a couple of examples I shared, whether that's in-store signage, up to media planning and placement, to social media, et cetera. And so while, we deal with the decline of newspaper inserts, which has a little bit to do also with the carrier being the newspaper that also got hit pretty hard this past year. We do offer a lot of other opportunities to grow business with the retail insert group, and are seeing that the retail industry in general. Publications, we're actually right now, it looks like for the quarter, the industry is off about 12% overall it's only about 2% in volume. And that's heavily due to segment share winds that we've been experiencing. And when I turned to the Catalog market, the industry right now as the reason Catalog forecasts suggest is off about 11% for Q1. We're actually up 3%. And again, much of that comes from, having some clients that are performing better than most, as well as segment share gains. Our direct mail and our commercial division is about in line with the industry trends, which is about off about 11%. But that we'll continue to see its comeback, as we get into the next several quarters, based on some of the pipeline and some of the conversations that you hear out there in the marketplace. And then, packaging, and is actually a great bright spot for us, as we continue to build the strength there. We referenced the example of helping packagers with analytics to better figure out, how to display their brand in stores. But we're actually up about 8% of that segment, which is, fairly in line with the rest of the industry. And so, I'd say that, to the question about which ones kind of fully come back, obviously, we can see that the Catalog world has done well for us, again, because some of the clients we have, have fared better than many sorts of quality of clients that we have. But also I think you're going to start seeing more-and-more direct-to-consumer folks, entering the waters in direct mail and in Catalog. And of course publications there's a lot of true titles out there. And you do see a decline in the area. But again, we have from a segment standpoint we've done a nice job with that. Katie?

[Katie Krebsbach:]

Great, thanks, Joel. Appreciate the detail there. Okay, our second question is for Dave. Dave, can you provide an update on, Quad's plan for the 2022, senior unsecured notes? And do you plan to start a refinancing process this year?

[Dave Honan:]

Sure, absolutely, Katie. Our continued financial focus on margin improvement and cash flow, as we talked about in our prepared remarks, as well as this substantial and ample liquidity that we have, whether it's through unused revolver capacity or significant cash on hand it continues to give us a lot of flexibility and optionality, as it relates to these upcoming notes. And again, as a reminder, there is $239 million that's coming due for these notes in May of 2022. So we're continuing to look at a number of options, which would include refinancing those notes, or simply just paying them off at or before maturity. And so we'll continue to work on that optionality and we'll let you know, as shareholders, our decision on that as that gets made.

[Katie Krebsbach:]

Okay, great. Thanks for the update. Dave. Our final question is regarding Quad’s outlook for the remainder of the year. It reads, how should we think about Quad’s participation and the economic recovery and do you expect to see top line start to rebound as the year progresses?

[Dave Honan:]

Sure. And Joel, let me just start off just again, just reiterating our guidance because we tried to address some of this economic recovery in the guidance. We not only gave for the full year, but specifically for Q2. We expect to continue to see further momentum in our net sales trend, as our clients continue further embrace our marketing solutions. And as the economy gets closer to its pre-pandemic level, especially for agency companies like ourselves. So as I've mentioned in my prepared remarks, we expect to see the full year of 2021 net sales to continue to improve and end the year between flat and download single-digits, as compared to 2020. And we continue to see really nice sequential improvement, as we talked about from the height of the pandemics impact on our net sales in Q2 of last year, where we were down 38%. And it's improved sequentially until this last quarter, where we were down only 14%. And then as we give guidance for Q2, we expect to see an increase in net sales for our second quarter somewhere between 10% and 13%. So that's just a reminder of our guidance, Joel.

[Joel Quadracci:]

Yes. And as the year has progressed here, clearly the economy has heated up quite a bit with expectations in the 6 plus percent range for GDP growth. And a lot of clients are rekicking in traditional marketing as stores open up, but have also really accelerated their use of all different mixes of media. And I think you got to think about things kind of getting thrown out into a little bit of disarray this past year, as people who stayed at home and companies were trying new ways to market and now the pendulum is going to try and swing and find a new medium. Where that ends? We don't know, but certainly other things are playing out, such as Apple's new implementation of their privacy technology, where cookies really go away. So, the long story short is, you know, businesses we are seeing have comeback, and we expect to continue to help them with how they can sell more stuff using the analytics work that we can provide them along with executing on their plans in an integrated way. So while that may not, for instance drive a huge retail insert program come back, we do think that there'll be some comeback there. But we're seeing a lot of demand in all the different other areas. So we expect that through the rest of the year, we'll see some pretty interesting things, especially as it relates to what we formerly called our 3.0 strategy, which is really helping marketers of all sorts to market their product in all channels combined. So you know, with that, I feel pretty good about our position in the industry, as well as our position within the marketing mix in terms of helping these clients navigate these new waters.

[Katie Krebsbach:]

Great. Thank you both. Well, this concludes the Q&A portion of today's call. And now I would like to turn the call back to Joel for closing remarks.

[Joel Quadracci:]

Thank you, Katie. And thank you everyone for joining today's call. I want to close by reiterating my thanks to our employees for their continued hard work and agility. I'm confident in our team, in our strategy and in our future as a marketing solutions partner that helps our brands and marketers solve their marketing and process challenges. We will continue to closely monitor the pandemic and its impacts on our clients. And we'll adjust our priorities to support our financial objectives that made quite a compelling long-term investment. Thank you and have a good day. We look forward to speaking with you again next quarter.

[Operator:]

And the conference has not concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.