Quad/Graphics, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to Quad's Fourth Quarter 2020 Conference Call. . 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 fourth quarter and full year 2020 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.

[Joel Quadracci:]

Thank you, Katie, and good morning, everyone. I am pleased to report that our consistent and strong operating performance delivered solid year 2020 results. We achieved increased adjusted EBITDA margin and cash flow despite unprecedented challenges from the pandemic that significantly impacted sales. We drove these results through segment share growth, disciplined cost management and productivity improvements across our organization. At the same time, we continued to pay down debt, protect the health of our balance sheet and enhance our competitive position. Turning to Slide 3. Our team demonstrated incredible speed and agility in 2020. Early on, we took swift action to offset the impacts of the pandemic so we could maintain our focus on running the business well, including maintaining the health and well-being of our employees; providing high-quality, on-time delivery for our clients while continuing to innovate marketing solutions; and ensuring the long-term financial health and stability of the company through operational excellence and realigning our cost structure. Over the last few years, we have focused on our Quad 3.0 transformation as a marketing solutions partner. We strengthened and expanded our existing marketing, consulting, creative and technology capabilities and added experienced talent within the marketing and consulting expertise. Having achieved our Quad 3.0 transformation, we are focused on advancing our competitive position as a worldwide marketing solutions partner on a go-forward basis. Our integrated marketing platform is unique in that it helps brands and marketers reduce the complexity of working with multiple agency partners and vendors, increase the efficiencies through process optimization and content production and improve marketing spend effectiveness across all media channels through solutions that identify and segment key target audiences, strategically plan and constantly measure marketing spend effectiveness and strategize to create and activate holistic campaigns.

[David Honan:]

Thanks, Joel, and good morning, everyone. Slide 9 provides a snapshot of our fourth quarter and full year financial results. We faced unprecedented challenges head-on in 2020 with great agility to improve our adjusted EBITDA margin and drive higher cash flow and debt reduction. We were unwavering in our commitment to find new ways to drive segment share gains, improve productivity, reduce fixed and variable costs and maintain liquidity, while keeping our employees safe and serving our clients well. We also optimized our product portfolio by completing the divestiture of our book platform. This divestiture supports our strategy as a marketing solutions partner to shift from stand-alone product lines that don't lend themselves to an integrated marketing solutions offering for our clients. The result is a more focused approach to our transformational strategy and better capital allocation.

[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 is regarding client trends. Can you speak to recent customer trends you've seen through the fourth quarter and in early 2021?

[Joel Quadracci:]

Yes, Katie, thank you. Yes. As everybody knows, it was a crazy year to try and track customer trends. And as Dave said, with the bulk of our hit when the pandemic happened, we sort of got to the trough across all markets in the second quarter, somewhere around April, May. But if I kind of look at the fourth quarter and project forward, when we look at retail inserts, as Dave said, is the one that got most heavily impacted. I'd say that, by the way, since we hit that trough in the second quarter, we had seen incremental gains in all areas of our business. Retail inserts, to start with, which was the hardest hit, was off about 42% in Q4, which is fairly in line with overall retail inserts. I think we'll continue to sort of see some ebbs and flows on this because retail inserts will continue to be very sensitive to how we come out of this pandemic. And we also look as people had cut back on how they will readjust their future trends. And so more to come on that. Catalog, which was the next one that was most affected, is off double-digit, in the teens. So call it about somewhere in the mid 15 percentage, which is in line with the industry. Again, we saw incremental improvements through the year. And I think that as the pandemic kind of runs its course here, we'll see that continue to settle down. The third one is publications. Again, I think a lot of people got hit with number of pages in terms of advertising pages or even some titles going out of business and circulation trends. But because of market segment share wins, in fourth quarter, we were only off about 4% versus an industry average of about 15%. And so again, we've got a great platform for publishers and we've been able to really continue to perform for them. When I look at direct mail, that's a great story. We're actually in the fourth quarter up a couple of percent with -- I'd say the USPS DM estimate for fourth quarter was off about 4%. So we're actually up 2%. And this is important. There is definitely some tailwind from political mailings and things like that. But the way that we're approaching direct mail is really about more of a value added. So trying to go from non-personalized, non-data-intensive and driven to data-driven as well. And so when we look at direct mail, it continues to be a place that we think will grow. And then finally, when I look at packaging, we were up as well, about 3% in the fourth quarter, which sort of follows trends that have happened in packaging. And also the other areas of growth have been in-store. And so still a lot of challenges in seeing the future and very hard to predict. But again, we expect to see continued incremental improvements.

[Katie Krebsbach:]

Thanks, Joel. That was a great overview. Okay. Our second question is for Dave. Dave, you mentioned Quad's 2022 senior unsecured notes earlier in the prepared remarks. Can you please expand further on Quad's plan to address this maturity?

[David Honan:]

Sure, Katie. And just as a reminder, those senior unsecured notes, there's $239 million outstanding as of December 31, and those will come due in May of 2022. Our continued focus on margin improvement and free cash flow as we showed despite the pandemic in 2020 that we can continue to perform well with that as well as just a significant amount of liquidity that we have. At the end of the year, we had nothing drawn under our $500 million revolver. We had $55 million in cash on hand. So we have significant liquidity in which to have flexibility and optionality regarding what we plan to do with this upcoming tranche of debt that will be due in May of 2022. At this point, we're considering all options. And as I walked through in the script, those options are

[Katie Krebsbach:]

Okay. Thanks, Dave. Our final question relates to noncore asset sales. Dave, you also mentioned that Quad will continue to focus on noncore asset sales in 2021. Can you and Joel give more detail on what types of assets those might be?

[David Honan:]

Sure. I guess, Joel, if you don't mind, I'll start, and you can build off of what I have to say. We had a really productive year in 2020 in addressing our product portfolio, and I walked through the divestiture of our book plants. That was done in 2 separate transactions. We sold 3 facilities, and we also sold a packaging facility in Omaha, Nebraska. These transactions as well as selling other noncore assets such as vacant facilities and real estate helped generate $69 million of debt reduction during 2020. This is really consistent with how we've managed the business and the balance sheet. In fact, I think over the past 4 years, this has provided us about $150 million -- a little bit over $150 million of cash from asset sales in order to deploy to reduce debt. So it's been very successful for us, and we'll continue to look at ways in which we can manage the balance sheet well from that standpoint.

[Joel Quadracci:]

And Dave, sort of adding on to that. I mean, keep in mind that as we've transformed this company -- and I will tell you that we've talked about this 3.0 transformation. We're really saying that the transformation is done. We've made investments, where we've had to round it out in terms of other capabilities, such as with Periscope, Rise Interactive, et cetera. And as we look at our portfolio of assets, it's really about where does the customer need us to be and where are they willing to go. And when I look at the book segment, I look at the one packaging plant we had, in both those cases, it wasn't really the customer base that could really use our expanded services and offering. And so we saw that we're not going to be able to add that much value there. They were underperforming. And so that's where we parted ways. But a lot of -- since our transformation is done and we've kind of built out these offerings, we'll continue to go where the client asks us to go. And right now, because of the success of the transformation that slowly will be showing you in offsetting print's decline, there's a big demand for us to bring in really top level talent. And so we're actually investing a lot in new talent heavily into the analytics and in the creative and campaign planning and all the things that kind of enhance the rest of the product lines. But so -- watch us continue to look at it. And of course, we'll always look at other assets that could be sold. If we're managing the platform -- because of volume decline, we'll have real estate to get rid of and things like that. But that's how we view it. And really, as we look forward post transformation and in sort of the new Quad, it's really going to be about making sure that we go where our clients, who depend on us for being more than just a product supplier. That's where we'll go.

[Katie Krebsbach:]

Okay. 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:]

Yes. Thanks, Katie. And thank you, everyone, for joining today's call. I want to close by reiterating my thanks to our employees for their hard work and sacrifices during 2020 and their commitment to continue performing well in 2021 as we focus on managing what is within our control. We know our clients are depending on us and we are here to help them with a unique integrated marketing platform that helps them solve their marketing and process challenges. Again, to all my employees, from the bottom my heart, from my family, from the Board of Directors, thank you so much for all the hard work that you did. And to everybody else, have a great day. We look forward to speaking with you again next quarter. Take care.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.