Quad/Graphics Inc (QUAD) 2014 Q1 法說會逐字稿

(Audio in progress) -- will be in listen only mode, following the speakers' presentation the conference will be open for questions. (Operator Instructions). I will now turn the conference over to Mr. Kelly Vanderboom, Vice President and Treasurer for Quad/Graphics. Kelly, please go ahead.

Thank you, operator, and good morning, everyone. With me today are Joel Quadracci, our Chairman, President and Chief Executive Officer, and Dave Honan, our Vice President and Chief Financial Officer. Joel will lead off today's call with an overview of our financial highlights and then provide a summary of our strategic goals. Dave will follow with a more detailed review of our first quarter 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.

Our 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.

The slide presentation can be accessed through a link on the Investor Relations section of the Quad/Graphics website. There are also instructions on how to access the slide presentation in our first-quarter earnings news release issued last evening. A replay of the call will also be posted on the Investor Relations section of our website after today's call. I will now turn the call over to Joel.

Thanks, Kelly, and good morning, everyone. I am pleased to report that our first-quarter results were in line with our expectations. We continue to focus on ways to grow market share, improve productivity and implement sustainable cost reduction initiatives while maintaining a strong balance sheet, invest in our business and pursue compelling acquisition opportunities.

Two recent events that I would like to highlight include the completion of our $1.9 billion debt financing and our announcement to acquire Brown Printing. Attractive credit markets made it an ideal time to refinance, extend and expand our Company's $1.6 billion senior secured credit facility as well as complete a $300 million high-yield bond offering.

As a result we have extended and staggered the Company's debt maturity profile and further diversified our debt capital structure while maintaining a very attractive weighted average cost of capital of 5.2%. Dave will share additional detail about our new debt capital structure later in the call.

We remain confident in the strength of our balance sheet and the cash generating power of our Company, two areas of that allow us to be flexible and opportunistic in terms of our future plans for capital deployment, including investing in our business and pursuing value driven consolidation opportunities like Brown.

The Brown acquisition is consistent with our ongoing strategy to transform Quad/Graphics and create value for our clients and shareholders. Brown serves premier magazine publishers and catalog marketers with printing, distribution and integrated media solutions. The Company has three print production facilities in the United States and employs approximately 1,800 people.

The combination of our two companies will enhance the many ways in which we help publishers and marketers drive top-line revenue while better controlling their overall total cost of print production and distribution, especially through volume driven postage savings programs like co-mail.

We take a disciplined approach to reviewing acquisition opportunities like Brown, focusing on four key criteria. First, the Company has to be a good strategic fit. Second, the economics need to make sense and accrete value. Third, that the integration plan is executable in a timely manner. And fourth, that after the acquisition we will retain the financial strength and flexibility we had prior to the acquisition.

We are purchasing Brown for $100 million and intend to use a combination of cash on hand and our revolving credit facility to finance the transaction. Brown expects to generate approximately $350 million in annual revenues. We anticipate that this acquisition will be accretive to earnings, excluding any nonrecurring integration costs, and that the purchase price multiple will be less than four times adjusted EBITDA after taking into account anticipated synergies.

Further, I would like to point out that we will not inherit any pension obligations or debt as a result of this acquisition. The transaction is subject to customary regulatory clearances and is expected to close later this year.

We look forward to welcoming Brown employees and clients into our family. Brown is a well respected printer focused on delivering superior quality and impeccable customer service and employees share a similar corporate culture with us including a can do work ethic.

Slide four shows a summary of our four strategic goals. They are -- to transform Quad/Graphics and the industry; maximize operational and technological excellence; empower, engage and develop employees; and enhance financial strength and create shareholder value.

Last quarter I shared with you the reorganization of our US leadership team to better support the needs of our client base and expanding Company. This new structure recognizes and gives appropriate focus to the unique characteristics of each product line while also making it easier for marketers and publishers to take advantage of the entire continuum of our integrated offering in a cohesive approach.

While many of our product lines are going through vary degrees of transformation, it is important for you to understand that we strive every day to be a trusted partner to our clients, one that helps navigate the cyclical and secular pressures of today and in the future. For it is from these challenges that we find our inspiration to further innovate, automate and expand our product offering.

Our go to market strategies are tailored by product line but driven by the common purpose to create client value in two essential ways. First, by maximizing the revenue our clients derive from their print spend by helping them connect content across channels for improved performance. Second, by minimizing our clients' overall total cost of print production and distribution.

We believe our consultative approach to creating client value will help retain and grow market share over the long-term. We are able to help our clients connect content in a meaningful way across multiple channels. We capitalize on data to deliver the right message to the right person at the right time via the most effective combination of channels, print, digital and mobile.

For today's marketers and publishers it is not enough to have a multichannel presence, they must use the unique strengths of each channel in combination with each other to connect the content that connects to their customers.

Print remains one of the most effective marketing and communications channels and studies have shown that it works even better when used in combination with other non-print channels. As a printer and innovator we are ideally suited to bridge the traditional world of print with the constantly evolving worlds of digital and mobile technologies.

Over the years we have innovated solutions that logically connect content created for print to other channels from workflow solutions and streamlining clients' upfront production processes to a host of creative and interactive print solutions that heighten brand visibility and improve response. Let me share a brief example to support this point.

Recently we were pleased to sign an agreement with L.L. Bean, that extends and expands our partnership to print millions of L.L. Bean catalogs each year for the next several years. Beginning in January 2015 we will become L.L. Bean's exclusive catalog printer and exclusive imaging services provider while continuing to furnish 100% of L.L. Bean studio photography services such as product and model shots and room sets.

Further, we are working with this esteemed multichannel retailer on ways to further enhance its revenues building from a strong trusted foundation in print.

As I mentioned earlier, another key way in which we create value for our clients is by minimizing their overall total cost of print production and distribution, something we expect to be of great value to Brown Printing's clients.

Finding cost savings opportunities has become more important than ever given the recent 6% postage rate increase that went into effect in January. Quad/Graphics has proven solutions for helping our clients offset escalating postage costs. In essence, the rate increase has created new opportunities for us to share our robust mailing and distribution solutions and we are working more aggressively than ever to help clients take advantage of them.

Our co-mailing and co-mingling solutions are extremely effective at combating the postage rate increase. We merge multiple magazine, catalog and direct mail pieces into a single mail stream that then qualifies for reduced postage while also improving delivery efficiencies.

During the quarter we announced a multimillion dollar investment in our East Coast commingling center that includes six new state-of-the-art letter sorters and expanded new space. This investment is strategic as direct mail remains one of the most effective channels for engaging consumers and driving response. Our expanded co-mingling platform helps marketers optimize delivery of the powerful print channel to achieve their business goals.

As always we remain committed to enhancing our Company's financial strength to retain the financial flexibility we need to strategically allocate and deploy capital. With that I will hand over the call to Dave Honan who will provide a detailed financial review of the quarter as well as additional information on our recent debt refinancing.

Thanks, Joel, and good morning, everyone. Slide 5 is a snapshot of our first-quarter 2014 financial results as compared to our first-quarter 2013. Net sales were $1.1 billion representing a 2% decline which was consistent with our expectations. Cost of sales was $893 million as compared to $910 million.

SG&A expense was $104 million as compared to $106 million. Depreciation and amortization was $84 million as compared to $89 million. Restructuring, impairment and transaction-related charges for the first quarter were $12 million representing a decrease of $14 million from 2013.

Excluding non-cash impairment charges, cash restructuring charges were $11 million also representing an $11 million decrease from 2013. Interest expense was $21 million as compared to $22 million. Our adjusted EBITDA was $107 million as compared to $114 million and our adjusted EBITDA margin was 9.7% versus 10.1%.

The variance in adjusted EBITDA and margin reflects ongoing industry volume and pricing pressures as well as $3 million of favorable gains recorded in 2013 that did not repeat in 2014 primarily related to a gain on the sale of the Company's business in Recife, Brazil. These decreases in adjusted EBITDA were partially offset by cost reductions mainly from lower employee-related costs.

Moving to slide 6, free cash flow was also in line with our expectations. We define free cash flow as net cash provided by operating activities which include pension contribution less purchases of property, plant and equipment.

Free cash flow was a negative $13 million in the quarter as compared to a positive $93 million in the same quarter in 2013. The variance was primarily attributed to a roughly $70 million benefit realized in 2013 from the restoration of working capital levels for the Company's January 2013 acquisition of Vertis, which was acquired without normalized levels of accounts payable and accrued liabilities.

The remaining variance primarily reflects an $18 million increase in capital expenditures in 2014 primarily related to carryover projects in 2013 as well as $15 million in higher working capital.

On slide 7 you will see that our interest coverage ratio at March 31 remains unchanged from December 31 at 6.7 times. Our quarter end debt leverage ratio increased to 2.55 times for the trailing 12 months ended March 31 as a result of a $43 million increase in debt in the first quarter to fund higher capital expenditures, acquisitions and strategic investments such as our recent UniGraphic acquisition and seasonal working capital purposes.

However, since the close of World Color acquisition on July 2, 2010, and after the funding of the Vertis acquisition in 2013, we have reduced debt by a total of $345 million through March 31. We continue to anticipate operating and the 2 to 2.5 times leverage ratio over the long-term, but may operate outside of this range at times due to compelling investment opportunities.

As it relates to our pension, postretirement and multi-employer pension liabilities, we continue to make progress in reducing the underfunded liability that was acquired as part of the World Color acquisition. We have reduced the underfunded liability by $377 million since the acquisition with a remaining liability of $170 million as of March 31.

Slide 8 is a summary of our $1.9 billion debt financing completed in April 2014. Through this new debt capital structure we have enhanced our Company's financial flexibility by extending and staggering our debt maturity profile, further diversifying our debt capital structure and providing more borrowing capacity to better position Quad to execute on our strategic goals. This is consistent with our ongoing disciplined approach to maintaining a strong and flexible balance sheet from which to create value for all stakeholders.

We amended, extended and expanded our $1.6 billion senior secured credit facility. This facility consists of an $850 million revolving credit facility with a five-year term maturing in April 2019 priced with a floating interest rate of LIBOR plus 2%.

It also includes a $450 million term loan A with a five-year term also maturing in April 2019 and also priced with a floating interest rate of LIBOR plus 2%. And a $300 million term loan B with a seven year term maturing in April 2021 priced with a floating interest rate of LIBOR plus 3.25% subject to a LIBOR floor of 1%.

In addition to our $1.6 billion senior secured credit facility we completed our inaugural high-yield bond offering of $300 million of eight-year unsecured senior notes at a fixed 7% interest rate. We used and will use net proceeds from the debt financing to repay our previous senior secured credit facility and an international term loan to fund the pending acquisition of Brown Printing Company and for other general corporate purposes.

Slide 9 is a comparison of our new debt capital structure to our previous debt structure as of March 31. For comparative purposes the new debt capital structure is treated on a pro forma basis as if it were in place at March 31 rather than our actual April 28 issuance date.

Our new debt capital structure extends our weighted average duration by two years to 6.3 years as compared to 4.3 years under our previous structure. The blended interest rate increases to a relatively low rate of 5.2% from 4.5% of our previous debt as we are able to achieve a more balanced fixed to floating-rate debt profile at an attractive blended rate.

Total debt outstanding balances are now a 48% floating rate and 52% fixed rate as compared to 64% floating and 36% fixed under a previous structure. We believe this shift to a more balanced fixed versus floating rate debt structure will provide us with better financial flexibility over the long-term.

Finally, availability under the new revolver increased by $261 million and is now $806 million of availability as compared to $545 million under the former revolver. We accomplished our debt financing objectives by extending and staggering maturities, moving to a more balanced fixed to floating rate debt structure and increasing debt capacity to provide capital for our strategic initiatives.

In closing, slide 10 summarizes our 2014 financial guidance. As a result of our new debt financing we have updated guidance for interest expense. We now estimate interest expense to be in the range of $90 million to $95 million, which is increased from our prior guidance of $80 million to $85 million due primarily to our shift to a more fixed rate debt structure.

We are also updating our guidance for cash taxes with 2014 cash tax payments now expected to be in the range of $30 million to $35 million which is reduced from our prior guidance of $40 million to $45 million due to greater utilization of tax carry-forwards than we originally estimated.

The reduction in estimated cash tax payments combined with free cash flow trends consistent with our original guidance allows us to offset the additional interest expense and as a result free cash flow guidance remains unchanged at a range of $155 million to $165 million. All other 2014 financial guidance remains unchanged.

As we move forward in this challenging industry environment we continue to be disappointed in how we manage all aspects of our business, especially driving improved productivity and sustainable cost reduction initiatives to remain a low-cost provider.

We will continue our focus on maintaining a strong and flexible balance sheet to adjust to changing industry conditions while also investing in our business, including compelling acquisition opportunities like Brown, and returning capital to our shareholders as demonstrated through our $0.30 per share quarterly dividend which we plan to announce subject to Board approval and consistent with the timing we have historically followed for our first-quarter dividend declaration following our annual shareholder meeting on May 19.

And now I would like to turn the call back to our operator who will facilitate taking your questions. Operator?

(Operator Instructions). Haran Posner, RBC Capital Markets.

Maybe just turning with the Brown acquisition. I was wondering just firstly with whether you can share with us maybe some of the sales trends that existed at Brown just before your acquiring them. I believe that they have lost some business with time. Just a little more color on that would be helpful.

Yes, I mean I think that was something that everyone knew about which was one of their largest customers when we went through the bid process with them Time had decided to do something that they hadn't done before which is really do more of a single sourcing model with us.

And so, yes, that was a loss to Brown, but I would say they have done a nice job of holding their client base because Brown is a very good printing company, they do a very nice job for their customers and have a pretty diversified client base. So, yes, other than the Time, Inc. thing we don't expect that there are any major underlying issues from a sales standpoint, it is a great company.

Okay and that is great, Joel. And you have highlighted the three plants that you are acquiring. I was wondering if you can share with us any plans that you have -- I guess the three plants will continue to operate at this point. Are you planning to shift any production or anything like that?

Well, whenever we do in acquisition it is not just about what are we going to do with that acquisition, we constantly look at the entire network of plants that we have and see, okay, well what opportunities are there as a result of enhancing our business with this type of acquisition.

Obviously we can't comment on what those specific plans will be because we're actually still going through the Hart-Scott-Rodino process. But we do expect that the deal will close sometime later this year. But again, they are great plants and just a comment about it too.

In our previous large acquisitions you have to remember that these assets were from companies that went through financial difficulty whether it was World Color or Vertis. And in that process you run into a situation where the platform deteriorates a little bit because of cutting back on things like maintenance, etc.

What is great about Brown is being owned by a very strong parent in Gruner + Jahr and Bertelsmann in Germany, we haven't run into that. I was able to go see their Waseca plant last week, which is their headquarters. And I was just very impressed with not only the people but the state of the platform was well-maintained. And so, for us it is an exciting opportunity to add to what is already a very strong network and continue to enhance it.

Thanks for those comments, Joel. Maybe just one for Dave on this one. I guess, you commented in your release that based on the multiple less than 4 times, I guess that would imply EBITDA with synergies North of $25 million. I was just wondering, can you give us a little bit more detail there? Is it materially more than $25 million? And maybe if you could share with us kind of how much of that is run rate versus synergy?

Yes, nothing more materially to share with you on that. I mean we feel pretty good about this acquisition, as Joel had mentioned. Adjusting for the loss of their largest customer, Time Inc., we have talked about an estimated $350 million in annual revenues. And once we complete the integration we do believe we will be less than a 4 times EBITDA multiple on this.

Okay, thanks very much. And then maybe just lastly for me, maybe back to Joel. Joel, I mean when you think about the pricing environment out there for printing you normally give us very good color. I obviously don't expect this to change on a quarterly basis, but I think on your last conference call I guess you had sounded a bit more optimistic just given the trend excluding some of your contract renewals. I'm just wondering, how did that play out into Q1?

Yes, I think just to remind everybody that we talked about in 2014 when you look at our guidance, in 2013 we had twice the number of contracts come due than we normally do. So it was a huge year for resetting some pricing, marking it to market. So that is all embedded in the guidance.

But if you took out the noise of that, we had seen some stabilization in pricing and I think we continue to see some stabilization depending on the category. But we are not changing what we say that it is typically we are expecting 1% to 2%.

But again, between -- pricing is a couple things, it is also mix of product and what you do for people. So we have seen some change in mix that has been positive and -- but other than that not a significant change from my previous comments.

All right, thanks very much, that is all for me.

Jamie Clement, Sidoti.

Joel, a follow-up question there about synergies with Brown. And Brown obviously in a lot better condition than the other two large acquisitions you've done over the last couple years. Historically and with those two deals a lot of your discussion around synergies was related to the platform, which in those two cases it obviously deteriorated for fairly obvious reasons.

In this particular situation, a little bit different in that obviously the platform is in better shape. So where do you focus your attention from a synergy perspective?

Well, I mean it is -- again, it is we look at the entire platform of Quad and we look at how do all the parts work together. One of the opportunities for our customers, and Brown's customers in this case, is that we get to enhance I think their experience from a distribution standpoint.

Brown Printing and a lot of these smaller printing companies, to be able to help offset postage and do it effectively, tend to use third-party co-mailers to create more volume. And they do a nice job of it. But we have created just such a huge scale of that as a Company that we will focus on opportunities for bringing that to their customers.

And so, yes, we look at the total platform, we look at what is going to have the most efficient result for us, whether it is size of presses of some older presses that are narrower and no longer function, we try and shift things to the wider presses, which Brown has a good stable of.

But again, it is a process, it is an iterative process, it is something that we review every time we do an acquisition is what is the overall pie going to look like and how do we -- how is the result the most efficient platform in the industry.

And so, we will focus on further automation where maybe there isn't automation, we will focus on certainly the whole cultural aspect of making sure that our employees at Brown know how to navigate within the Quad culture. Because I have to tell you my experience at Brown, and new from an outsider looking in, is that it is a fairly similar culture on the floor level and that was definitely backed up by my visit at Waseca.

And by the way, unfortunately the day after I was in Waseca I saw on the national news about a horrendous event where this kid was arrested for wanting to re-create Columbine. I mean Waseca is a town of 9,000 people, it was just shocking that I was there that week and suddenly I see it in the national news. So think God that someone caught them early.

But again, we have a really good methodology for integration. We have honed it over time, we've put a lot of work into it, we keep improving it. And so, I have no doubt that we will end up with continually having the best platform out there.

Thanks very much. And, Joel, if I could switch gears just talking about the quarter. This is an earnings season, which I guess we are sort of towards the tail end of, where even some of your best-performing retailing customers really had an issue. Some talked about the storms, some mentioned other things.

But can you share with us, as you think about inserts and catalogs and magazines and direct mail, how much did you see that in your business as just reflecting the performance of your customers? I mean was this a rough quarter?

Well again, I think we were pleased with how our quarter came in, it came in as we expected. That being said, I mean I have been bouncing between New York and Wisconsin during this whole weather season and it is like pick your poison, do you want a nor'easter in the northeast or do you want 7 below in Wisconsin where it is so cold you want to just drink a vodka or something?

And the reality is that retail did get hit. We thought it in ad pages -- the industry saw it in magazine ad pages -- the two leading impacts of a 4% decline for the industry was really retail and technology. So not really surprising, and I don't think it should be surprising to anybody.

And catalogs, we saw some softness there, but again, it didn't come in unexpected for what we thought. And retail inserts, they still need to drive the traffic. So some weakness there. But again, I think we are very pleased with how things came in for us. And hopefully we start to see signs of growth from pent up spend due to the weather.

And, Jamie, I would just add onto that that from a top-line perspective there were puts and takes with what went on with the weather and retail. That also impacted from a cost structure what we saw in utility costs, what we saw in freight costs as freight costs were very high given some weather conditions and also some changing industry conditions with freight.

But there were the puts and takes in the quarter and it goes back to the sustainability of the cost reduction and productivity initiatives to be able to offset those types of things as they come through. So we feel really good about how we came out of the quarter given all the headwind that came out of retail.

Okay, that is good color. Thanks very much. And, last question, Joel, I know you think about capital allocation with a long-term view, but considering where your borrowing costs are and what your dividend yield is, at some point do you think -- does the Board think about getting active from a repurchasing standpoint?

Well, as you know, we have an outstanding authorization already. It was originally a $100 million authorization with no sort of end to it. And we had taken only about $8 million of that, Dave? But I would say it is a balancing act. I mean we clearly continue to manage I think for what is best for the business.

We have told you that if we can put money to work we like to do that. And that is proven by I think a very disciplined purchasing process we had with the likes of Brown. And remember that we also had some other small acquisitions with Unigraphics which really is a great commercial operation that is already paying dividends for us as well as into the packaging world.

So I think that, Jamie, we are always going to kind of look at this on an ongoing basis in a very balanced fashion. We feel very good about our consistent dividend plan. And, as Dave said, we will be getting approval from the Board for the next dividend after our shareholder meeting.

So, yes, I mean it is out there if it makes sense. It will be one of those things we look at. But again, right now we focused on paying down debt and making sure that we could pull off a great acquisition here at the right price and be able to maintain good financial metrics. I mean we are up a little bit on the [2.55] but clearly we expect to be between the 2 and the [2.5] in pretty short order.

Yes, yes -- I didn't mean to sound like I was pressuring at all. It's just the number of companies out there that are worth $100 million is seriously, seriously, seriously dwindling over the years.

Well --.

Anyway, thanks very much. You don't need to respond to that. But I -- anyway, thanks for much for your time.

Bradley Tesoriero, CRT Capital.

My first question just concerns the Vertis acquisition, it closed January 16 in 2013, so you had about 16 extra days for the Vertis here in 2014. Did that have any meaningful impact on revenues or EBITDA in terms of comparability quarter over quarter for the year?

Our quarter came in as we were guiding the full year from a top-line perspective, as Joel had talked about. We had talked about pricing being down 1% to 2% which was exacerbated by higher than normal renewals last year and that impact coming in in 2014.

Also from a volume standpoint it was down 1% to 3%. All of this net of the impact of acquisition so that they have -- the two weeks of Vertis contribution really left us within the guidance that we went from the -- for the full year of basically flat revenue to down 3% and we came in at down 2.4% for the quarter.

Got you. And then if I could switch gears just on the private placement notes. If all goes according to plan you guys should have a significant amount of cash on and by the end of the year. Can you use any of this cash to redeem any of the PPMs ahead of maturity? And any sort of color you could give on what the call provisions look like or even the maturity schedule beyond the average maturity 10 years that I think you guys have discussed in the past?

Yes, we have stated publicly that our intent for the -- because this new debt financing will temporarily put some cash on our balance sheet, but that will be used to fund the Brown acquisition as we move forward. And then under the term of general corporate purposes that would cover any other uses we have for that cash. It could mean we could look at our debt structure from a private placement perspective, but we have not publicly commented on that.

We like to have a multiple layered debt capital structure which includes private placements in there. So now we have a strong revolving credit facility and a bank facility, we have the private placement debts and now we have entered into that third new deep market of public bonds, which we registered our -- we have our 144-A offering that we will be registering publicly in the next year.

So we feel pretty good about having that three deep channel for our debt capital structure and we tend to continue to use that going forward.

There are no further questions I will now turn the call back over to the speakers.

Okay, well, thank you, everybody, we are pleased with where we are at for the quarter and we look forward to talking to you again next quarter. Thank you.

Thank you again for participating in today's call, you may now disconnect.