Thank you all for joining us for this afternoon session on the Midwest IDEAS Conference, hosted by Three Part Advisors. My name is William Schelmire, and I have the pleasure of introducing Quad Graphics, trading on the New York Stock Exchange under QUAD. Presenting on behalf of the company today is Investor Relations Manager, Katie Krebsbach, and Tony Staniak, who's the CFO. Tony?
Thank you. Yeah. Glad to introduce you all to Quad today. So let's get right into the slides. First, we'll read-- No, just kidding. We're gonna skip by the forward-looking statements. So what-- Yeah, I wanted to talk about Quad. So Quad's a company that's been now 54 years, coming up on 55 years in business, started in 1971 . The roots of Quad are as a commercial printing company. Magazines, retail inserts, i.e., coupons in the Sunday newspaper, catalogs, direct mail, that's where the company started, and for those first 40 years, building a print platform through greenfield growth. So we'd build a number of million-plus sq ft facilities, started in Wisconsin, branched out to other geographies, as I'll show, a little bit later in the deck, all through greenfield growth.
But as we got into two 2008 , recessionary factors at that point, the industry really started to consolidate, and a choice of whether to be the acquirer or be the acquired. So we decided to acquire a $3 billion company named World Color Press in 2010 , and as a result of that acquisition, what was a 40-year private company went public at that point, so that our shareholders would have liquidity if they wanted to leave the stock. So Quad has been a public company since 2010 through that merger process. We continued in the early 2010 to do some acquisitions in the print space, bought a company called Vertis, bought another one called Brown Printing. We started to acquire other kinds of print, in-store signage.
We bought a few packaging companies to do folding carton, and then as we got to the later part of that decade, we started to build our agency offerings. And so how could we expand more into services? So we acquired three companies, one called Ivie, one called Rise, a digital marketing agency, one called Periscope, a creative agency. As we started to build on an offering of marketing experience, as the last part on the right-hand side shows, how can we help the chief marketing officer have an easier experience of reaching their end consumers? And that's what we've tried to build our offerings around. So Quad, high level, 2,700 customers.
I'll show a slide in them in a little bit, but it's kind of a big who's who of customers, $3 billion in net sales, 13,000 employees, 40+ plants, and then 70 client-dedicated teams. And that's one thing we got from the Ivie acquisition, was they had marketing people that were on-site at clients like Walmart, helping do their marketing procedures. And so we've now have that and continue to expand these on-site presences. So again, what is marketing experience? Our job... You've heard of customer experience or client experience, right? You're trying to make it easier to reach the consumer. We're at the level above that. How do we help the Chief Marketing Officer and the business most effectively and efficiently reach their target audience? So here's what we've built with the Marketing Solution Suite.
We believe this is one of its kind. The company's roots in commercial printing are kind of in the middle, the blue circle that says MX Print Production or Production, but we've now augmented that with a number of skills. It starts with intelligence. We have a unique data set in that Quad prints 10% of the mail that ends up in the U.S. Postal Service system. So we have a unique perspective on what all households' preferences are, and through that data, can help our clients market more effectively, spend their marketing dollar to reach you the way that you want to be marketed to. The creative agency we acquired, now called Betty, helps design campaigns, so we've got the capabilities of an advertising agency now in-house.
We can then do the production, whether that's TV ads, print production, and ultimately, through the MX Media offering, placement of that media within newspaper, TV, et cetera. So kind of a one-stop shop to be able to get your marketing from beginning creative all the way through the placement of it, which is the most efficient way as compared to if you go to some of the large advertising agencies like IPG or Omnicom, you're gonna end up with a series of subcontractors after they develop the creative, with markup charged on top all of that. So we can bring that all in one fell swoop. Large base of 2,700 clients, many big clients on the list. You know, we like to talk about Amazon. It's been a really nice success story for us.
You might not guess that Amazon is one of the top catalogers in the United States, but toy catalog, fashion catalog, back-to-school catalog, you know, catalog. You wouldn't think of Amazon as marketing through a printed product, but it helps drive people to the site to order. People can scan on QR codes, order on the spot. We've got other large clients, Walmart, significant client of ours that I mentioned earlier, and kind of a who's who list that we're now working with them to say, "Okay, you, you've come to know us over the years through our print offerings. Here's all the other things that we can do for you." So it gives us quite a big revenue opportunity.
If I were to now talk about the sales breakdown a little bit more, a lot of numbers on this slide, but I'll try to go kind of higher level on it. We have portions of our revenue that are in decline, portions that are growing. So if I start in the upper left with that integrated solutions, that's an area that we've seen as part of the mix has grown, and specifically, there's a part of it called agency solutions. That's some of the stuff that I was just talking about with the digital offerings and creative campaigns that we can bring, has grown from 7% - 10% of the revenue mix. As you come across the clock, going clockwise, targeted print is an area that has grown considerably for us.
We call it targeted print because in those type of printed products, we can make it tailored to the specific end consumer. So the catalog that we print for Cabela's can be different for Katie, because she likes fishing, and she gets that on the cover, than for me, who I like hunting, and I have that on the cover, right? So we can tailor the print, direct marketing, the piece of mail that you get, it can be changed, each image that goes through in the order that the mailman walks throughout. It can be one different image after another. That targeted print has been, you know, more effective in generating revenue dollars for our clients, so it's grown as a percentage of the mix.
At the bottom, the large-scale print, those are the areas that are under the most organic decline. In particular, at the bottom, you'll see retail inserts in 2018 was 20% of net sales. Now it's 12% of net sales. Retail inserts, coupons in the Sunday newspaper, less newspapers, less coupons, right? And so we're printing less of that than we used to, and that's an area that we expect to continue to see decline in the future. And then lastly, making my way up to about nine o'clock on the dial there. The international print, we've got operations in Poland. We've also got operations in Mexico, Peru, and Colombia that have grown in the past few years, and we think, you know, should continue, especially in Mexico, to show nice growth rates.
Mexico is an extension of our U.S. platform. As less and less is coming in from China, more is getting printed down in Mexico. The top product that we print in Mexico and ship into the U.S. are educational workbooks, so things where kids can write on a page, and they rip it out, and they hand it into their teacher. We print a lot of that down in Mexico, ship it into the United States. Okay, I think I'm passing off here.
Thank you.
Katie?
Hi, everyone. Next, I'm going to share several business updates that we are very excited about. The first is the launch of our In-Store Connect offering. So we've all heard about retail media networks, online on retailers' websites, but this offering takes it in the store. So we recently completed a acquisition of a company called DART, and we launched our in-store screens, first in Save Mart. They are one of the largest regional grocers on the West Coast. These are actual pictures from Save Mart stores, and then we are launching with Homeland Stores. They are a grocer based in Oklahoma, in October. We are also actively in discussion with a dozen other potential clients for this in-store network offering, and we're actively selling CPG inventory, and we're also able to help CPG clients create the advertisements as well.
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Yes, we do own the boards. It's a way for us to work with the clients more easily if we purchase them. The next update we wanted to share is on our creative agency, Betty. We previously acquired a creative agency that Tony mentioned called Periscope, but we also had different creative groups within Quad. Now they are all united under the new name, Betty. It's named after one of the founders of our company, Betty Quadracci. She led one of the original creative groups within Quad. So this unites all of our brand strategy, offerings, pre-media, and content creation, and it's also supported by a global platform. We have teams in Europe, Hong Kong, and Delhi as well, supporting the creative offering. Next, we wanted to share some recent awards we have received.
We're really excited that our MX Solutions suite is getting recognized in the marketplace. So the first one was with Ad Age. We were ranked number 19 on their list of global ad agencies in terms of revenue. The next was an award called the SAMMY Award for our Rise agency. That's our media agency. They have a proprietary platform called Connex that allows our clients to view their media spend in real time and make adjustments live. And so that's a great award for them to win. The next one was a new ranking for us to participate in. It's the MM+M Agency ranking for healthcare related marketing firms. So we debuted at number 22 with over $150 million of healthcare-related revenue from clients, including Abbott, Humana, and UnitedHealth, for example.
Healthcare is a great growth vertical for us, so we're continuing to be placed on different industry lists to raise awareness of our offering, and then the last was from Communication Arts. They are a large creative magazine. Some of our Betty work was recently recognized in their magazine, and that included this example from Summit Brewing Company. They are based in Minnesota. We helped redesign the packaging for several of their beverages, including their Twins Pils beer. After we redesigned the packaging, they noted that sales increased by 3.5x , 12 months following the campaign. That's a really great example we like to share because not only did we do the creative, but we also manufactured the packaging as well. So that's an end-to-end example of our offering. The next one is from Stanley Steemer.
Our Rise media agency conducted a brand lift study. They created several YouTube ads for them, and they noted that the ads increased searches by over 100% and reduced cost per thousand impressions by 28%. I have a couple more case studies. This next one is from Raw Sugar Living. They are a beauty brand. You can find their products in stores like Target and Kohl's, for example. We were named their creative agency of record. We completed many digital assets for them as part of their campaign, and a unique thing about this relationship is we also launched a pop-up market for them at our offices in New York City. We have an event space there at our office. And I also want to plug that that will be the location of our Investor Day on November 20th.
It's a great way we can use our space for clients and for investors as well. Again, in this example, we're doing the creative as well as the media strategy and different in-person events for the client. Then lastly, we wanted to share some new work. We have one with a national grocery chain. We can't share the name just yet, but our Betty creative agency has a team called Favorite Child. They specialize in packaging redesign, and we just were awarded work for this grocer. They have over 2,000 stores. It's a multimillion-dollar contract to redesign their private label brands as well as their organic private label brands. We will be working on all of the design and photography and content creation for them.
So that's all I had on the recent client examples, and I'll turn it back to Tony for the financials.
Okay, time for some fun with numbers. So, you know, if you checked out the Quad stock yet, QUAD ticker, you'll see that we're a pretty cheap stock right now, right? And the reason that is, is because of the top-line trend that you see in net sales. For the year so far, our sales are down 12% in the quarter, -10% quarter- over- quarter. We're seeing pressure from increases in postal rates with the U.S. Postal Service. As those rates continue to increase, less and less volume gets mailed through the system and printed by Quad. Post Office rates are the majority, two-thirds of the cost of someone to mail and print something and get it to the home. And so as postal rates increase, it's got a significant impact.
We are working on solutions that can help mitigate that, so we already do co-mailing, where we can sort all of the items we print in the order that the postman walks the route so that it's the most discounted with the U.S. Postal Service. They don't have to do anything with the mail other than literally put the poly wrap bag in the truck that it's going to go in. That gets the deepest amount of discount, but we're still battling these revenue headwinds. Also, with interest rates being higher, as you know, and hopefully lower to come here, but with them being higher recently, we had quite a bit of mail, direct mail, that was with lending, so personal lending, and there's less refinancing activity going on as the rates are higher, so we've battled some revenue decline.
At that investor day that Katie talked about, we're going to give more color on what we see in the future 5 years, so that we can show an inflection point for revenue growth. When we look at Adjusted EBITDA and Adjusted EBITDA margin, we've been very focused on, while being a smaller company, a more profitable company. In the quarter alone, the Adjusted EBITDA margin is up 100 basis points. We take the appropriate restructuring actions that we have to as demand decreases, and that's resulted in more adjusted earnings per share, and more and more earnings overall.
When you look at the statement of cash flows, I'll have a slide later on that talks about the seasonality of our cash flows, but overall, we're a strong cash provider, and that's enabled us to buy back, over the past two years, 11% of the Quad shares, at a pretty good price. We'll continue to opportunistically look at when we can buy back shares. So this is the cash generation, basically since COVID, $745 million of cash generated by the end of this year when we achieve our guidance, and it's a mix. The light blue color is free cash flow, the dark blue color is cash from asset sales.
We need to look at them together because as we take restructuring actions with, some of that print pie that I showed before that is shrinking, we sell those facilities, and that more than offsets the one-time cost of the restructuring actions that's sitting within the free cash flow. So we look at the cash generation in total, $745 million of cash generated in the last 5 years. Some of that cash has been generated through sales of manufacturing facilities. So this shows our U.S. platform. There's also, in the words in the middle, mentions of Latin America and Europe as well. And what you'll see is that 70% of our square footage is owned. 12 million sq ft is of owned capacity.
And as we have closures, which are signified on the map by the circles with the kind of white or the blue stripes through them, I should say, Sacramento, California, Effingham, Illinois, Saratoga Springs, New York, we will sell those facilities, and that will provide proceeds that will provide eventual additional benefits against what you'll see in guidance, 'cause I didn't put these in guidance, not knowing exactly when they would sell. But significant opportunity here to continue to monetize. From a seasonality standpoint, we always have our best free cash flow quarter in the fourth quarter, so we're a seasonal business in that we ramp up for production coming into the holiday season, a lot of print campaigns, a lot of advertising campaigns.
We're putting a lot of working capital on the books that we finance with our revolver, and then the fourth quarter comes, we pay off the revolver from the strong cash flows, and you can kind of see our, you know, throughout looking at all the year ends, you know, from 2.4 to 2.2, to 2.0, to 1.8 in debt leverage. We're a relatively low-levered company now. This slide shows the amount of work we've done on the debt. We were a little over $1 billion of debt at the beginning of COVID, but all of that cash that I showed you on the previous slide, we've taken the vast majority of that and put it to debt reduction, and we'll be at about $400 million of debt or 1.8 leverage at the end of the year.
Our leverage range is 1.75 - 2.25, our targeted leverage range, so we'll be near the low end of that range, and I still think you'll continue to see us work on debt as a top priority for capital allocation going forward. This is the debt capital structure. A few key points on this. Our Term Loan A and revolver, headed up by J.P. Morgan, a syndicate of 11 banks, not due until November 2026. Plenty of liquidity on hand with $222 million, and a blended interest rate of 7.6%. The revolver and Term Loan A are floating, but we do have interest rate collars and a swap that convert 41% of that into fixed rate debt through those derivative instruments.
The guidance range, so 5%-9% decline. We said in our last earnings call that we expect to be more towards that 9% of the decline range, but we did not, you know, provide any color on the other, guidance ranges other than, you know, reaffirming the guidance, and thus implying that we're still looking at the middle of those ranges, you know, when we look at the Adjusted EBITDA, free cash flow, CapEx, and we're still on track for 1.8x by the end of the year. So all of the operating efficiencies we've been able to generate and the restructuring actions we've done, all the benefits of those cost savings are more than offsetting the impact of the sales change.
I think this is our last slide, kind of our conclusion slide on key investment highlights. Why invest in Quad? One through three talk about the top line and the revenue that we think we can generate as we look forward. 2,700 clients that we can bring all of these new offerings to. In addition, we continue to win new clients that come to know us as an agency that then has the ability to execute through this one-of-a-kind platform that no one else in the U.S. has the ability to create the campaign, as well as then execute all of it in-house in the same house. And then on four and five, strong cash generation that we've used to reduce debt.
So strong balance sheet foundation that would give us the dry powder if we wanted to do anything, but I think you won't see big acquisitions. You'll continue to see us maybe do small items and get small acquisitions and hire talent to add to it. But other than that, we think we have the platform to scale from what we've built. And that, I think, is it. Can I take questions from the audience about Quad? Yes.
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About 52 million shares outstanding. The stock has a dual class structure to it. We have the Class A shares that trade on the New York Stock Exchange, but we're also a family-controlled company, and so the CEO is the second generation of the founder, and through those higher vote shares, the Class B shares, the family's got 30% of the economic value of the company, 80% of the voting rights of the company.
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Yeah, and that I didn't touch on as part of capital allocation. Thank you for that question. We restarted a dividend this year, $0.05 per quarter per share, $0.20 per year, about a 4%-5% yield, depending on where the stock is trading. We feel comfortable in that dividend going forward. We'll continue to look for opportunities to increase it. Also balance that with some share buybacks at the same point. Free cash flow per share, you know, if you take 60 million of free cash flow at the midpoint of the range, divide it by 52 million shares, you're at a little over $1, you know, a share there. And then, you know, we're trading at $4.50-$4.75, something like that.
So it's a pretty strong cash flow equation when you look at that.
Do you get any pushback on dividend? Because, like, with the family controlling the, you know, certain shares, like, is there a separate dividend on their shares?
There's not. There's not a separate dividend. So the Class A and the Class B get the same dividend. It's been interesting, as we brought back the dividend, opinions that we received from different investors. Some that they only invest in companies that pay a dividend, so that, you know, increases our possibilities of new investors coming into the stock. Some who want to see us put it all the debt in stock buybacks and not dividends, so you've got diversity of opinion. But we feel that we wanted to show to the market that we believe, at this point, a dividend is sustainable. We did a lot of work to get debt down to 2.0 leverage, which was a benchmark for us to be able to restart that dividend.
When do you think you're gonna close on those, the sales of those plants?
That, that's a great question, and I'm not exactly sure. I mean, we've got all of them being actively marketed. I'm not counting on any of them to hit the 2024 guidance, so if anything did happen to come through, it would even make the debt leverage look better than what I showed. Yeah? Yes.
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We do have covenants, but at the leverage level that we're operating at, we have no restricted payments at that level. If we were over two and a half leverage, when we used to be over two and a half leverage, at that point, we were limited in restricted payments, such as how much on acquisitions, how much on dividend, et cetera. But now that we're down at that lower debt level, no bank restrictions. Yeah?
The question is, what would be the proceeds from the warehouse sales roughly, and what [audio distortion]
Okay. Yeah, good, good question. So on the proceeds from asset sales, you know, when we look back at some previous plants we've sold. And maybe I'll just go back here a little bit. Yeah, that one. When we look back at some previous plants we've sold, like we sold a plant in Oklahoma City, for instance, 3 years ago, about a 1 million sq ft plant that netted $40 million for us. So that Saratoga Springs plant, those dots are to scale, right? So Saratoga is a 1 million sq ft plant up in New York, upstate New York. You know, we'll see, right? The timing changes, the market changes, but that's, you know, kind of what I look at is some of the past history that we've had. So, you know, Saratoga Springs is 1 million sq ft.
Effingham, Illinois, is 500,000 sq ft. Sacramento is very small, under 100,000 sq ft. So there is some potential for decent-sized cash flows to come from this. And then on the question on the postage rates, so if I were to just look at the chart on the right, the 2023 chart, I think, you know, magazines, catalogs-
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Direct mail.
Special interest publications.
Yeah, and then the 4% special interest publications, so that's, let's see, 29, about 40%-45% is sensitive to postal rates.
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Yeah, so, like, the catalogs that are in there, that you... You may not be able to see that. It's probably small print, but up here, where the 18% of catalogs and the 12% of direct mail, this goes through the mail system. So yeah, that's part of the equation. Magazines and special interest publications are magazines, but to a very limited audience. You know, I like Garden & Gun monthly or Amateur Railroader or something, you know, something that's a very targeted audience. Yes.
The facilities that you're considering selling, are they equipped with enough energy sources and HVAC [audio distortion]
I believe they are. Yeah, I mean, a lot of them have historically become Amazon warehouses. That's some of our previous ones that we've sold, but I think that's also a possibility. Yes.
So they said that, I think you said 10% you're trying to get to in every household. Do you have, like, data coming out that, like, reaches and who's reading that stuff, doing that stuff, age-wise?
Did you hear the question?
They're tracking demographics [audio distortion]
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Oh, for the mail that we send?
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Do you know that question?
The-
Largest age group for the mail we send?
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Yeah.
We can track it, because it is based on the household. So that's how we are able to track demographics of who we send the mail to.
Yeah, good question. I'm not, I'm not sure on that one. Hmm. Yes.
How does the post office or do you know what route the postal carrier takes to deliver that mail that you have sequentially? Is it, you're supplied with the route data?
That-
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That's correct.
And do they, does it change by carrier? The carrier [audio distortion] ?
Fortunately, I've not heard that complaint before. Again, not the area of the business I'm in, but I think as long as the houses continue to stay next to each other, you know, it's relatively safe. Yeah, yeah. Yep. Right. Yep.
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Yep.
You know, you might go down one street as opposed to another or go backwards or-
Fair enough. My understanding is we get the route information, and then we're able to put that into the sorting machines, and, and-
You know, yeah, you'll get your Sports Illustrated, and the woman next to you gets her Redbook, and it, you know, it goes, goes-
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Right.
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That's right. That's right. The more, the less sorting that the post office has to do, the lower the rate, and then Quad and our clients split in that, whatever additional savings can be generated.
Yeah.
Yeah?
You're selling a bunch of assets and buildings and whatnot. I'm curious about the amount of investment that you need just to be able to grow sales again. Is this something where you can reinvest that capital back into the business? Or is it really just, you know, you're selling it to-
No, we continue. So we put, you know, in our capital expenditures, 2% of sales every year back into CapEx. Let's say about half of that is either growth or automation, CapEx-driven. So maybe automating the plant floor further so that we need less labor and can get recurring benefits from that, or growth, like when Katie showed the screens in the grocery stores, that type of CapEx, you know, that'll generate revenue. And then the other half of the CapEx is maintenance. So this year, $60 million-$65 million of, I think, capital expenditures for the year. So we do continue to invest in growth, and like that, the screens, if we do have to do a small acquisition like that to invest in growth, we'll consider it.
If it gets us a new capability like that one in an area that we think is growing, and it gets us to market faster because they already had it built out to be able to procure the screens, put the right software on it, and be able to manage those screens and change the ads instantly from their home base in North Carolina.
[audio distortion] you know, would allow for you to grow, you know, better than the market? Or is this really just kind of trying to keep up?
No, we do. I mean, we do continue to look at some of that CapEx and even operating expenditures in what we think are growth opportunities for us. So, it's, you know, I don't want to go specific, you know, like, okay, we're relying on this one or not, but the in-store signage is one of them.
Now, the reason why 2% of sales doesn't sound like a huge amount of money to go back into the business. So I'm just trying to see how do you grow [audio distortion]
Fair enough. I mean, we think a lot of it, you know, in those agency offerings is through the talent that we've been able to put together, and that we'll continue to work with our, the data stack offering that we have, take that out, and that should help us be able to generate growth looking forward, without having to put a ton there into additional CapEx.
Yeah. Thank you.
Okay. Well, good timing. We have a minute left, according to the timer here, so... Yes?
How would you assess whether your agency solution, your investment there, have been a success? Have they grown on their own? Have they driven another-- have they pulled revenue to other parts of the business? How do you assess that? Because you have such a wide solutions-
Mm-hmm.
And you wonder... It's unusual too. When something is unusual, you wonder, you know, why are you doing it?
Yeah, we do see revenue that either originates in print, customers that originate in print, that go over to our agency offerings or vice versa, so there is cross-selling that occurs. The agency offering has had growth both through some of the acquisitions we've done, as well as organic growth over the period that we're listing here. But it's an area that we think as we continue to put a finer point on these offerings, and we've invested in marketing to be able to scale them more, we think we can see more growth than even what we've seen so far. All right, and that's... I'm in the red zone. Thank you, everyone.