Quad/Graphics Inc (QUAD) 2015 Q2 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by, and welcome to the Quad/Graphics second-quarter 2015 conference call.

(Operator Instructions)

Please note that today's event is being recorded. At this time I would like to turn the conference call over to Kyle Egan, Quad/Graphics Manager of Treasury and Investor Relations. Kyle please go ahead.

Good morning everyone. With me today are Joel Quadracci our Chairman, President and Chief Executive Officer; and Dave Honan our Executive Vice President and Chief Financial Officer. Joel will lead off today's call with key highlights for the quarter, and Dave will follow with a more detailed review of the financial results followed by Q&A.

I would like to remind everyone that this call is being web cast 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. Replay of the call will be available on the investor section of our website shortly after we conclude. The slide presentation will remain posted on Quad/Graphics website for future reference. I will now hand the call over to Joel.

Good morning everyone. As you saw in our news release, issued last evening, a key narrative for the second quarter is our continued solid cash flow generation. Free-cash flow is the foundation of our strong balance sheet, and enables us to deploy capital in ways that generate value for our company and our shareholders, including, pursuing compelling investment opportunities, deleveraging the balance sheet through debt and pension liability reductions, and returning cash to our shareholders.

We believe Quad/Graphics will continue to be a significant free-cash flow generator. And accordingly, reaffirm full-year 2015 full cash flow guidance in the range of $180 million to $200 million. In addition we are narrowing our guidance for net sales and adjusted EBITDA, due to ongoing industry head winds, including a sluggish advertising environment for publishers and a less than robust retail environment. All of which impacted our sales.

As we continue our journey to transform Quad/Graphics and our industry, we remain focused on creating value for our clients through a full complement of integrated solutions across print and digital channels, to advance their marketing programs. We accomplish this objective through our strategy to walk in the shoes of our clients, one of our five long-standing strategic goals that we believe will allow us to be successful, despite ongoing industry head winds.

When it comes to strengthening our core print operations, another one of our primary strategic goals, we are focused on reducing our overall cost structure by maximizing the productivity of our platform through technology, automation, and process improvement programs. And increasing the capacity utilization of our most efficient plants, and equipment to continue to be the industries low-cost provider.

For example, we are currently in the process of installing a significant number of automated guided vehicles and automatic palletizers to perform basic tasks and our finishing department. This technology not only improves productivity, but allows us to reduce labor costs associated with work in process and finished goods.

As always, we continue to invest in our mail preparation and distribution programs. In May, we expanded our Midwest commingling operations near our direct mail production facility in Pewaukee, Wisconsin.

Like co-mailing for publications and catalogs, the commingling process merges individual letter-size mail pieces from multiple clients, into a single mail stream that then qualifies for US Postal Service pre sort discounts and drop ship savings. Our company's massive commingling and co-mailing volumes drive the greatest postal savings for our clients, while speeding up in-home delivery and preserving product quality.

Beyond strengthening the core, we continue to focus on transformative growth opportunities. In this next chapter of our company's history, we remain focused on serving our clients well, while profitably growing our business by adding new products and services, and reinventing our current product lines. Recently, we entered and expanded our presence in the growing packaging industry.

We bolstered our in-store and large-format marketing solutions for the global marketplace. And now for the strategic repositioning of Blue Soho, our integrated marketing and brand activation firm, that helps retailers, publishers, and Fortune 500 companies deliver their brand consistently across multiple media channels. Including print, in a very integrated way.

In addition, our three-year plan to transform our book platform is well underway. The plan, which includes an investment in 20 or more high-speed color digital web presses, is quickly gaining attention and momentum. We are realizing increased demand for our digital book printing capabilities. A number of high profile book publishers are choosing to take advantage of our digital press platforms to deliver variable quantities of high-quality books faster and more cost effectively.

As we continue installing color digital web presses, we see tremendous opportunities for this platform to support multiple product lines, including publications direct mail and commercial and specialty. We will continue to build our digital press platform, and related data driven marketing capabilities, to create revenue generating and cost saving opportunities for multiple product lines for our clients.

We are proud to be printers. And proud to be a trusted partner in helping our clients find a better way to solve their marketing challenges. Whether that is through innovative solutions that help them reduce their mailing and distribution costs, stand out on the news stand, in the mailbox or in the store, or connect their printed content to other channels such as mobile, digital, video, and social media to increase engagement, emotional connection and overall performance.

Print continues to be foundational to successful marketing programs. And remains a large component of overall marketing spend. What is happening with our offering today, is a natural evolution of services based on the changing needs of our clients. And the conversations taking place in the marketing world, given the explosion of new media.

Our goal is to position Quad not only is a proud printer, but as a printer who helps our clients market better in ever-changing media landscape. To that last point, we are seeing an increased number of e-tailers who have not traditionally used print, reach out to us to help them launch their first ever printed catalog and direct mail. They understand that in this fragmented digital world, print is a highly effective medium for driving consumers online to shop and purchase.

It is all about multiple marketing touch points, and the integration of channels. Even big digital advocates, including top executives at ad agencies WPP and Saatchi & Saatchi are publicly backing the print.

In brief, they are saying that the death of print is over-played, and that the advertising community needs to consider print in the marketing mix. Because it delivers high levels of engagement. At Quad, we have always believed that print delivers high levels of marketing ROI, especially when used in combination with other media channels.

No channel is an island. Each influences and impacts the other. Yet much of marketing is still siloed, which has created a crisis in measurement. How do marketers successfully measure the impact one channel has on another? This is not a question of the strength and power of print. But rather a question of measuring true ROI across and between all channels both online and off-line.

As we move forward, both as a printer and media solutions provider, we will continue to listen to our clients and look for ways to make it easier for them to understand and measure true ROI using our integrated solutions. Before I hand over the call to Dave, I would like to take a brief moment to recognize and thank all of our employees.

Together, we are writing a exciting new chapter in our company's history. Thank you for all the heavy lifting you have been doing to increase productivity, reduce waste, and control cost. While at the same time delivering an excellent client experience.

With that I will hand over the call to Dave, who will provide a detailed financial review of the quarter and year-to-date. Dave?

Thank you Joel. And good morning everyone.

Slide four is a snapshot of our second-quarter 2015 financial results, as compared to 2014. Net sales for the second quarter of 2015 were $1.1 billion, down 1.8% from 2014. Excluding the impact of acquisitions and pass-through paper sales, organic sales declined by 5.2%. The decline was reflective of a 4% volume and pricing decline, primarily within publications and retail inserts. And a negative 1.2% from foreign exchange due to the strengthening dollar in our international sales.

Adjusted EBITDA was $90 million for the second quarter of 2015, as compared to $102 million in 2014. And our adjusted EBITDA margin was 8.4% versus 9.3% respectively. The decrease in adjusted EBITDA and margin primarily reflects ongoing industry volume and pricing pressures, partially offset by additional earnings on sales from recent acquisitions.

On slide five you will see that we have updated our 2015 annual guidance. Reflective of the recent economic trends in publications and retail product lines, and the corresponding impact on our revenue outlook. We believe it's an appropriate time to update and narrow our guidance ranges for net sales and adjusted EBITDA.

We anticipate full-year 2015 net sales to be in the range of $4.8 billion to $4.9 billion, narrowed to the low end of our previously disclosed guidance range of $4.8 billion to $5 billion. And adjusted EBITDA to be in the range of $500 million to $520 million, narrowed from our previously disclosed guidance range of $500 million to $540 million.

Our 2015 free-cash flow remains unchanged at $180 million to $200 million, reflecting our strong free cash flow generation, as we continue to drive sustainable improvement in our cash conversion process. Primarily through reduced working capital. We remain confident in our long-term ability to generate sustainable future free cash flow, and create value for our shareholders.

As we move along to slide six, you can see the impact of our focus on free-cash flow. As we generated $40 million of free-cash flow through the first six months of 2015, representing a $45 million increase over 2014. We define free-cash flow as net cash provided by operating activities, including pension contributions, less purchases of property, plant and equipment. We remain confident in our long-term ability to generate a significant sustainable amount of free cash flow, which provides us with the resources to drive our strategic plan, and create value for our shareholders.

In fact, we speak with many of our investors about our ability to generate significant sustainable free-cash flow. We continue to expect that we will see reduced cash needs and pension and capital expenditures, and that working capital reductions will continue to be a source of cash for us into the future to allow for a strong sustainable level of free-cash flow. This allowed us to increase our annual free-cash flow by over 20% in 2015 versus 2014, at the midpoint of our guidance.

One measure that is often mentioned by our investors is our free-cash flow yield on our stock price. As of close of business yesterday, our free-cash flow yield was approximately 24%, which is significant in today's market and in our industry.

On slide seven, you will see that we ended the first quarter with $1.5 billion in debt in capital leases, an increase of $75 million from December 31, 2014. And our quarter-end debt leverage ratio increased to 2.82 times versus 2.57 times. The increase in total debt and debt leverage ratio, is due primarily to increased debt to fund the Marin's and Copac global packing acquisitions, as well as impact lower adjusted EBITDA.

We continue to believe that operating in the 2 to 2.5 times leverage range over the long-term, is the appropriate target. But we may operate outside of this range at times, due to compelling investment opportunities like the Marin's and Copac acquisitions.

We will remain diligent and reducing debt and pension liabilities going forward. In fact, since the close of the World Color acquisition on July 2, 2010 we have paid down $601 million in debt and pension liabilities through June 30 of this year.

Slide eight is a summary of our debt capital structure. Availability under our $850 million revolver was $641 million as of June 30. We have no significant maturities until April 2019. The weighted average duration under our debt capital structure is 5.3 years with a blended interest rate of 4.7%.

Our fixed-rate debt is at an average interest rate of 7.2%, and our floating-rate debt is at an average interest rate of 2.9%. Our debt capital structure is 59% floating versus 41% fixed. We believe this fixed versus floating rate debt structure provides us with the financial flexibility we need over the long-term to balance our key priorities, to pay down debt and pension liabilities. [Invest in our business pursuit future growth opportunities and return value to our shareholders].

Slide nine shows our commitment to our dividend, which is a key way in which we return value to our shareholders. In continuation of our commitment to our dividend, our next quarterly dividend of $0.30 per share, will be payable on September 18, 2015 to shareholders of record as of the September, 7. We have consistently paid out a quarterly dividend, and based on our stock price at the close of business yesterday, our annual dividend yield was 7.2%, representing $1.20 per share on an annual basis. This represents only 30% of our current free-cash flow.

As we move forward in this challenging industry environment, we will continue to serve our customers well. And be disciplined in how we manage all aspects of our business. Especially driving improved productivity and sustainable cost reduction initiatives to remain a low-cost provider and to continue to generate a significant amount of free-cash flow.

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 and returning capital to our shareholders, through our robust quarterly dividend. And now I'd like to turn the call back to the operator who will facilitate taking your questions. Operator?

(Operator Instructions)

Jamie Clement, Macquarie Research

Good morning.

Joel, I was wondering if I could get a little bit more detail on comments about the retail environment as you see it? Oftentimes, we get a little bit confused about your customers who are retailers, who are using various product lines, versus the discussion of retail inserts as one of your product lines. Can you help us out a little bit there in terms of what you are seeing here in the first half of the year, and what you saw in the second quarter?

That is a good point. If you think about retailers, it is a pretty broad scope. In fact, a lot of our catalog customers are retailers also. When we refer to softness in the retail environment, it is more specifically the bigger retailers. I will tell you what we've seen is not necessarily an across-the-board. We have had a couple of customers where we saw more softness than others. If you look at the retail environment, there is a lot of different stories out there. But we saw enough of a pullback -- and generally, in the first and second quarter, just economically, you've seen a lot of caution out there. Which also speaks to the advertising climate. I mean, this is not just print advertising. There was a pullback in overall advertising across most channels. Of course, print is not going to be immune to that.

Jumping into that, it is also a tale of different categories. You have to look at what categories are getting hit. In advertising, the biggest hit category we saw in terms of individual titles, is really the technology titles, where you saw a double-digit decline. If you go to the women's fashion publications that you have, it is more like a 1% decline. So it's certainly not across the board, but you have other things playing out, like P&G reinventing itself, and in the process did a major pullback of all advertising spend.

The theme is -- and it's a theme you're hearing across the spectrum in many places, is that, while there is improving economic numbers, there was sort of a cautionary attitude everywhere that I have seen, mostly in Q1 and Q2. And we felt that.

Joel, just out of curiosity -- magazine ad pages are what they are. As you look -- as you talk to publishing customers, and when they talk to their advertising customers, what do we all need to start seeing? Or what needs to happen for that level of ad page decline to start to [drop], in your opinion.

In my opinion, it is getting much more aggressive about the power of marketing in general. And I talk about it a lot these days because it is really playing out as we have conversations with our different publishers and catalogers. We get involved more upstream with the CMO of the companies or the advertising groups. With our different various publishers, we do days where we come in and show the whole gamut to their advertisers. And you are seeing people start doing more interesting things with covers. We have a really sweet poly program that allows you to not only co-mail your magazines, but also be able to offer things within the poly bag itself, whether it's samples or things like that.

And I also noticed -- made the point; and I think I may have made the point before, that early this year you had Sir Martin Sorrell, who was always the big digital advocate out there on the big agencies' side, basically make a pretty vocal comment about the power of magazines. And that we have probably gone too far away from them, as they started to get the data about engagement -- all of these sort of algorithms that show you what you should use or not use in terms of digital spend. Don't include the human element. It is hard to build the human element into things, and that's really about emotional connection. And his comments, he said, we're starting to see data that the depth of engagement in print -- and he was actually, he even mentioned newspapers -- is much stronger than they thought.

It is something I am a broken record about. Look, I am not trying to tell you it's print or that. I'm trying to tell you print is a great deliverer of brand activation across the other channels. What we are seeing and hearing is that the big agencies are still about the big ideas. But not necessarily about the big data and execution on big data across different media channels for brand activation. Because we are still one of the biggest spends in a lot of our clients' budget, and we are naturally already talking to them about campaigns because we are part of the campaigns; we are getting involved in cross-channel campaigns now, where we're starting to show measurement.

What the world is seeing is a crisis of measurement, because it's great that you have a mobile campaign, and even within the mobile campaign that involved tweets, it involves all different categories. So mobile is a catch-all phrase for a whole lot of things. It is not just one channel. When you look what's inside a lot of our customers -- and actually it was true in our company -- you have different people responsible for different spends in advertising. You have your print people in one place; you have your online people in another. Within online, then you have mobile that maybe even separate from that. And they are all measured differently.

A perfect example is, an early measurement was the number of clicks. Well, who cares how many clicks to get if the customer does not do anything? And by the way, where were the clicks starting from? And what people are starting to realize -- they are coming from somewhere, and oftentimes it is coming from print. That is why we have over 10 e-tailers: these are pure e-tail digital plays, who are now doing print with us, because they are finding the response rates of driving the brand to get them to those websites, to get them to their mobile site, is very effective by using print.

It is a long-winded way of saying, is the whole marketing community has to look at themselves, de-silo their approach, and say, when I spent $1 on advertising, how do I spend it across the channels, based on true measurement and ROI of the impact of one channel to the next? And if, in certain cases, a direct mail piece does not drive traffic the way you want it to, to your mobile device, make sure it's not actually driving traffic in retail in the actual stores before you make a decision. We actually reorganized our entire Company to get rid of the silos from how we sell across channels, which has allowed us to become much more integrated.

Our in-store people are helping sell direct mail, which are helping sell retail inserts. As we talk to the clients, they are saying that's exactly what they are looking for: is someone to tell them what combination do we use, and prove it to us, and show us measurements. That is where were really spending a lot of time and effort. I see companies starting to reorganize themselves and think differently. New CMOs who are coming into many of the retailers, are coming with that sort of overall approach. It's working. The places we're doing it -- they are seeing upticks, they're increasing quantities. The places that aren't doing that are cutting costs in all the wrong areas.

Joel, if I could ask a quick follow-up, and I will let someone else ask a question -- as you think about the traditional product lines you have been strong in, now you bought Copac, obviously not a big deal. It would seem that there would be a natural link from what you have done historically to packaging. It seems that's an acquisition and an idea that's been well received by both your customers and your shareholders. Is packaging an area that you would continue to focus acquisitions spending on, going forward?

Absolutely. We have been focused more on [folding carton] because it's very close to our knitting. The other things that people forget is, we have this wonderful Quad tech business -- our R&D arm that has developed a lot of technology for the industry. Their fastest growing space is helping packagers bring more process and color control and things like that. So if you have a brand color that needs to be the same on every package across the world, we have the tools to be able to help them do that.

But furthermore, imagine instead of having a soda package or the thing that a six pack of beer comes in -- instead of it being the same everywhere, imagine us supplying digital presses to it so that retailers could become much more micro in their marketing strategies. You are here in Sussex, Wisconsin, the local owner of a national food franchise can actually, we can start to market packaging directly to that and tie it into a direct mail program that announces that. And also pull in mobile activation as it goes to walking down the aisles, and finding out a story about that beer and how it was made and things like that.

It is very much not -- hey, let's go into packaging because we think there's more growth there. It's let's go into packaging because A, it's growing, but also it fits really well with this concept that you have got to be using everything to market your product. And data is behind it. Everyone uses the word, big data; most people still don't understand what it means. It comes down to making sure that whatever you know about your potential customer or existing customer, that you're using that data to put in front of them what they're interested in, at the right price at the right time in the right channel, that they may be interacting with you.

Joel, thank you. I have taken too much time for now. I do have some more questions, but I will get back in the queue.

Katja Jancic, Sidoti & Company

Good morning.

Joel, you mentioned that the first half was weak because of more cautious spending by the retailers.

Retailers and advertisers

And advertisers.

In general, what many expect is that the collapse in the energy prices will, in a way, spur consumer demand. Do you think we could see a more aggressive spending in the second half of the year than we saw even last year, for example?

If I could predict that, I could go to Vegas tomorrow. If I look at my typical employee, and you look at employees across the country, specifically in manufacturing, it has been hard. Everybody has been in a period of low growth for so many years that everyone cut cut cut. So, that is why you see some of the slow growth in wages. A lot of our employees live outside of cities have trucks and things like that. It is sort of a hidden raise. You start to see gasoline prices drop, it has an impact. You also have to take into account that people are going to be more conservative these days, because the world is not in a great place. They use a lot of appropriate caution to make sure they don't get themselves into a place that they had gotten in the past.

If I could predict that, that would be wonderful. But that is my two cents: that you would hope -- and I think there's some good things coming in the economy. But you also have to remember that when you look at the unemployment rate, that's of the people who are willing to work. There is a whole lot of people out there that are not in the workforce. Probably more than ever before. And so you have a smaller group trying to fuel an economy to pay for everything else. That is very worrisome to me. If you go back and look at those statistics, that may be helpful for you to understand the impact of that problem we have in this country.

Regarding your logistics business, do you benefit from low oil prices right now?

It's really, when we talk about logistics, that stuff is typically passed through on a week by week fuel surcharge. The challenge, though, in logistics, is that the whole trucking world is under a lot of pressure. We have a shortage of drivers, a shortage of trucks, and part of it -- a lot of it -- is regulation-driven: the number of work hours that drivers are allowed to drive. It is very much an aging group, with people retiring and not enough people coming behind. Because we had a good idea, so the world thought -- that why should we let a 18-year-old get a CDL to drive a truck? They are too young; it's not safe. They can't do it until they are 21 now. That 18-year-old is going to go off into a different career path in that time frame, and never come back.

Right now there's a lot of pressure on cost, on the logistics side. But when you talk about energy, that's typically, in our industry, that's something that a pass-through week by week.

That is all for me.

Thank you. Operator?

(Operator Instructions)

Jamie Clement, Macquarie Research.

As promised, Joel.

You do report international results; you did talk three months ago about the challenges in Argentina. Clearly, you know there is still some work to be done in Latin America, it seems like, based on your press release. Can you talk a little bit more in detail about that?

Over the long-term, I do get intrigued by fast-growing middle classes. With that, comes with lots of gyrations. Specifically Latin America, you are seeing that play out. Argentina -- we had a partnership there years ago. When Argentina went through their last bout of crisis, we ended up being owners of that. As you know, when we did the World Color Deal, we picked up another plant. And have since restructured that, because of the crisis that is going on down there. We've got a great platform down there. It's the strongest business in the industry, but within a country that is a work in process. So I tell you Argentina will continue to be a work in process for us. No fault of their own; it is a great platform, great people, they are doing a great job in a very difficult environment.

One of the things we just did recently is, our partnership in Chile was with a family that is a wonderful caretaker of the asset; that partnership started under World Color. We've sold that back to them; it is not a big business. But the family was interested in buying it back. Quite frankly, when we look at all of our businesses, we look at the portfolio and say, what's going to add value to us? While we loved that business, and we loved that platform, and we loved that management team and the family, there's not much we can add to it, and there's not much that will move the needle for us. So we're very pleased to be selling it back to a family company, because I am a strong believer in the power of family companies. And we will continue to maintain a very strong relationship with them.

We have another partnership in Brazil that is a fairly large one. And Brazil has obviously gone through its challenges, so we managed through that. And then we have got Colombia and Peru, which we think are promising marketplaces, again, within the context of a tough Latin America. As well as Mexico -- we have gone through some challenges there, as we have integrated the transcontinental assets and the challenges of Mexico in general. Again, it's a marketplace that is not going away; has a lot of demand.

That's what's going on there. And Dave -- maybe you can speak to some of what we did with some of the restructuring costs, et cetera.

I think, Jamie, one of the questions we may get is, we had a little bit higher restructuring costs in the quarter. Roughly 50% of those were not cash; 17% of which was related to our exit of the investment -- the equity investment we had in Chile with the partnership there. That transaction just closed the end of July.

I will tell you that the family members running it -- Carlos, the Patriarch and Alejandro, the next generation -- I would put up against anybody; they are fantastic leaders.

All right. Final question and I will cut to the chase here with the stock under some pressure this morning. There's Marin's, there's Copac, and about a year ago Brown. Quite frankly -- and I would count myself as part of this crowd -- it looks to me like your SG&A is quite frankly running too high. That needs to come down. I think you all would agree that needs to come down; I know there are plans in place for that to come down. When should we start to expect to see some progress there?

Jamie, we were up $10 million in year-over-year in the quarter, and $16 million year-to-date; and that is all from acquisition -- incremental SG&A from acquisition. We don't disagree with you that, given the challenges in this industry, you have to be very efficient with your overhead and indirect costs associated within SG&A. That is an area we continually are focused on; you'll see us focus on there going forward. You can also refer to, too, is look at the cost of sales line for us is relatively flat year-over-year.

Absolutely; no question.

That is the result of a sustainable cost reduction, lean and continuous improvement environment we have there. That same principle applies into our SG&A side.

Keep in mind, Jamie, while we are doing some smaller acquisitions [which require] integration, this is really the first year we have not been doing a major integration. When you are in those major integrations, you're are focused on bringing in that girth and making plants work and closing plants and selling them out. But now we have a chance to take a breath here, and kind of look at -- okay, look at the platform, not just from the standpoint post these big integrations. Are we where we want to be, with the most efficient plants being at the highest capacity utilization? But also, what is the girth of a company? And so, we are aggressively looking at the whole SG&A side to catch it up to where we should be, post bringing these companies in.

People needed perhaps this morning, some reassurance that work was being done and people could expect some progress over the next couple of quarters, and it sounds like that is, in fact, coming. Thank you for your time.

Thank you. Operator?

Ladies and gentlemen, at this time I am showing no additional questions. I would like to turn the call back over to Management for any closing remarks.

Thank you, Operator.

Obviously it is an interesting time in the industry, with lots of different developments. But we are going to continue to focus on running our business and looking at opportunities that make sense. Really making sure that we continue to evolve who we are to our customers, and really helping drive the whole change in attitude about how marketing needs to change. And how we can apply all of our different assets in a very integrated way to help drive customer sales.

With that we will talk to you all next quarter. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending you may now disconnect your telephone lines.