Quad/Graphics Inc (QUAD) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics First Quarter 2018 Conference Call. (Operator Instructions) A slide presentation accompanies today's webcast, and participants are invited to follow along, advancing the slides themselves. To access the webcast, follow the instructions posted in last night's earnings release.

Alternatively, you can access the slide presentation on the Investors section of Quad/Graphics' website under the Events and Recent Presentations link in the left-hand navigation bar. Following today's presentation, the conference will be open for questions. (Operator Instructions) Please note this event is being recorded.

I will now turn the conference over to Kyle Egan, Quad/Graphic's Senior Manager of Treasury and Investor Relations. Kyle, 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 Executive Vice President and Chief Financial Officer.

Joel will lead off today's call with a detailed discussion of our company's ongoing transformation. Dave will follow with a more detailed review of our first quarter 2018 financial results, followed by Q&A.

I would like to remind everyone that this call is being webcast, and forward-looking statements are subject to safe harbor provisions as outlined in our quarterly news release and in today's slide presentation on Slide 2. 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. A 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.

Thank you, Kyle, and good morning, everyone. I am pleased to report that our first quarter 2018 results were in line with our expectations, and we continue to focus on accelerating our Quad 3.0 transformation. In Quad 3.0, we leverage our strong print foundation as part of a much larger, more robust, integrated marketing platform to create greater value for our clients at a time of significant marketplace disruption.

To fuel our Quad 3.0 transformation, we have a strong and engaged workforce, backed by state-of-the-art technology, to generate the earnings and cash flow necessary to further advance our value-creating strategy. Our goal, as always, is to remain a high-quality, low-cost producer across the continuum, from traditional print to multichannel execution.

Key to our success in Quad 3.0 is our ability to expand our capabilities quickly and have the appropriate resources to scale in a significant way. To accomplish this, we take a disciplined build, partner, acquire approach to accelerate our transformation.

In core strategic functions, we hire marketing professionals with client-side experience and build the capability from within. When seeking scale and complementary offers, we partner with companies whose expertise helps us fill a specific gap or amplify our offering.

Rise Interactive is one such company with whom we've partnered closely with since July of 2016. Rise specializes in digital media, analytics and customer experience. In March of this year, we increased our equity position in the company and now own a controlling interest. This investment capitalizes on Quad's expertise in optimizing a client's marketing spend in offline channels with Rise's expertise in online channels, to create more integrated multichannel campaigns, bridged by the expertise already in place with our BlueSoho and Ivie businesses.

Together, we strategically advance in data-driven marketing through the delivery of highly relevant, consistent messages at scale to consumers across digital and print channels.

Our increased investment in Rise complements our recent acquisition of Ivie & Associates, a leading marketing services provider. Ivie is a leader in customized marketing and business process outsourcing, and Quad, together with our BlueSoho team, is a leader in content production and workflow process optimization.

The combined offering provides our clients with unmatched scale for on-site marketing services, integrated execution and expanded subject matter expertise in digital, media and creative.

Together, Quad, BlueSoho, Ivie and Rise create a stronger, more powerful integrated marketing platform that we believe is unmatched in the marketplace.

As independent companies, we would not generate the same level of client value that we do from stacking our media solutions together as a single, well-integrated entity. Whether we build the capability internally, acquire the expertise externally or increase our investment in an existing partnership, the result is a strategy centered on media integration, from understanding data insights, building strategy and developing creative to buying media and deploying content across various channels.

In Quad 3.0, our expertise in planning and efficiently buying media on behalf of our clients has grown to well over $0.5 billion and has expanded from traditional print to digital channels and now includes TV and radio.

We not only fulfill traditional agency roles of concepting and planning media but provide integrated marketing execution across online and off-line channels.

As we transition from a vendor who makes products to a full-scale provider of marketing solutions, we will continue to deliver increased value by helping our clients reduce the complexities of working with multiple agencies while also improving their process efficiencies and marketing spend effectiveness.

We will continue to scale are offering based on client need. We will be strategic in the way we expand our integrated marketing platform in Quad 3.0 to ensure our functional products and services stack together to generate additional revenue across all our businesses at a time when industry headwinds continue. For example, this morning, we announced a significant direct mail win in the financial services vertical. Under a newly signed, multiyear, multimillion dollar agreement with U.S. Bank, Quad now manages the credit card acquisition programs for hundreds of its small and midsize regional banks.

The volume for the U.S. Bank program is significant, more than 70 million letter pieces per year, all hyper-personalized with data elements highly relevant to each individual recipient to increase engagement and inspire action.

Our best-in-class direct marketing solutions help U.S. Bank increase the effectiveness of its marketing campaigns, while also reducing its production and distribution costs.

Another key area of focus for us in Quad 3.0 has been data security in health care vertical. We were proud to announce earlier this week that we earned HITRUST CSF certified status for our HealthVision Solution and the High Compliance Environment for the health care vertical. This is -- this important status is a differentiator for Quad and demonstrates that we are appropriately managing risk by having met key regulations in industry-defined requirements in health care. This achievement places Quad in an elite group of organizations worldwide that have earned this certification. But more importantly, HITRUST CSF Certification sends a strong message to all our clients that we care deeply about process and data security and have the appropriate information protection requirements in place. My thanks go all out to all the employees who made the certification possible.

Before I hand the call over to Dave, I want to emphasize how confident we are in Quad 3.0, and we will continue to remain focused on our consistent, strategic priorities to generate sustainable, strong free cash flow, drive further EBITDA enhancement, strengthen the balance sheet, demonstrate our ongoing commitment to providing long-term shareholder returns and continue to accelerate Quad 3.0.

With that, I will now hand the call over to Dave.

Thanks, Joel, and good morning, everyone. Our first quarter 2018 results were in line with our expectations, and we remain on track for delivering our 2018 financial guidance.

For comparative purposes, the first quarter of 2018 includes the acquisition of the marketing services firm, Ivie & Associates. We completed this acquisition on February 21. It also includes our increased investment to a 57% majority stake in the digital marketing agency, Rise Interactive. This was completed on March 14.

The financial results from both strategic investments are included in the first quarter results from the date of their acquisition and are included in our 2018 financial guidance that we provided on our previous earnings call.

Slide 4 provides a snapshot of our 2018 first quarter financial results as compared to 2017. Net sales were $968 million, down 3.1% from 2017. Organic sales declined 5.1% due to ongoing print industry volume and pricing pressures after excluding a 2% positive impact from acquisitions. Organic sales also exclude offsetting impacts from pass-through paper sales, which declined 0.2%, and foreign exchange, which increased sales by 0.2%. The organic sales decline is in line with our annual sales guidance assumptions, including continued downward price pressures of 1% to 1.5% and organic volume declines of 1% to 4%.

Adjusted EBITDA decreased $8 million to $111 million as compared to $119 million in 2017, and our adjusted EBITDA margin declined 4% to end the quarter at 11.4% compared to 11.9% in 2017 due to the organic print sales decline, partially offset by cost-reduction activities and contributions from acquisition. As a reminder, beginning in 2018, we began reporting adjusted EBITDA without pension income due to a change in U.S. GAAP that requires pension income to be excluded from operating income and by default non-GAAP adjusted EBITDA. As a result, Q1 adjusted EBITDA excludes $3 million of pension income in both 2018 and 2017.

Our 2018 adjusted EBITDA also includes a $17 million gain from insurance recoveries associated with a press fire, which was partially offset by a $10 million net benefit realized in 2017 from a change in our vacation policy.

We are pleased with our adjusted EBITDA and EBITDA margin performance during the quarter, as it reflects our team's continued focus on proactively matching our cost structure to the realities of the revenue pressures we face in the print industry, we still -- while still allowing the company to invest in Quad 3.0 transformation.

Free cash flow was negative $22 million in the quarter as compared to $40 million in 2017, and it was in line with our expectations. The decrease is primarily from an expected decline in cash provided from working capital due to timing differences between 2018 and 2017, as working capital benefits in 2018 will be more weighted towards the fourth quarter.

We realized our strongest volumes in the back half of the year due to seasonality and, as a result, our free cash flow will be primarily generated in the second half of the year. We expect our full year 2018 free cash flow to range between $200 million and $240 million, which represents a cash conversion of over $0.50 of free cash flow for every dollar of adjusted EBITDA that we earn at the midpoint of our guidance ranges.

Slide 5 includes a summary of our debt capital structure as of March 31. Debt increased $68 million to end the first quarter at $1 billion due to $74 million of net cash paid for the Ivie and Rise Interactive acquisitions during the quarter.

We also repurchased $8 million in shares during the quarter to help partially offset dilution from annual equity grants. We intend to repurchase more shares to continue to offset dilution from equity grants and also to offset our $22 million in shares granted for a special retirement contribution we made in the first quarter as part of investing a portion of the benefit of tax reform back into our employees. As of March 31, 2018, $79 million of authorized share repurchases remain available under our $100 million share-repurchase program.

We finished the quarter with debt leverage of 2.28x, well within our long term and consistent target range of 2x to 2.5x leverage. Our debt capital structure is 63% fixed and 37% floating, with an advantageous blended interest rate of 5.2%.

We have no significant maturities of our debt until January of 2021, and available liquidity under our $725 million revolver was $623 million as of March 31, shows our commitment to our dividend, which is one of the ways in which we return value to our shareholders.

Our next quarterly dividend of $0.30 per share will be payable on June 8, 2018, to shareholders of record as of May 21, 2018.

We consistently paid a quarterly dividend, and our annual dividend of $1.20 per share is yielding approximately 5% but only represents 28% of our free cash flow at the midpoint of our guidance range. While much of the year still remains in front of us, we're pleased that our first quarter results were in line with our expectations and that we remain on track for delivering our 2018 financial guidance.

We've hit the ground running on integrating the Rise and Ivie acquisitions into our multi-channel marketing services offerings and are excited about our opportunity to create more value for our clients and our shareholders through an integrated marketing platform that reduces complexity, increases process efficiency and improves marketing spend effectiveness.

Now I would like to turn the call back to our operator, who will facilitate taking your questions. Anita?

(Operator Instructions) Our first question today comes from Jamie Clement with Buckingham Research.

Joel, I was wondering, with post-Ivie acquisition and with the bigger investment in Rise, can you kind of give us a sense as you look out over the next 2 to 3 years where you think you are in terms of the whole buy versus build versus partner mix on the marketing services side?

Yes, I mean, we're going to continue to scale all of it. And I think we mentioned in the last conference call that we have another $10 million of investment we're doing this year in talent alone. And that's really because we need to build it because the demand is there. What's interesting, as soon as we closed the Ivie deal, we were already, day 2, participating in a couple of major RFPs where Rise was brought into the loop where they wouldn't have before. And so it's really resonating with our customers, as we've done this, because they're telling us this is what they want. They want the integration, they want the simplicity built into a very complicated world that they're dealing with. So all the stuff that we're doing is because the demand is there and the customers' reaction is great. I think I mentioned it in the script, but today, Quad is buying on behalf of our customers well over $0.5 billion worth of media spend, which is really not reflected in our numbers, but it's an important girth as we go forward so that we can efficiently buy different media channels for everybody. And the TV and radio aspect, while not large today, is new to us with the acquisition of Ivie. And so I kind of look at all the things that we're doing together and the fact that we can keep this really integrated. Again, I'm so impressed with the talent at both Rise and Ivie, and the cultures are so similar that it's not about -- there's not a lot of brain cells being killed right now about who does what, it's more along the lines of how can we go faster, because we have active conversations with many customers that we'll be able to do some announcements in the near future. So yes, it really depends on -- the world is changing quite a bit right now. There's going to be a lot of shake out in ad tech and marketing tech. There's a lot of shake out in the home marketing, it happens. And so it's real important as people think about 3.0, it's sort of -- I mentioned the stack, because I need people to understand that, so we've got at the bottom of the stack all the products, the tangible products we produce in print, in store, packaging, all those different things that we're known for, combined with all these enhanced marketing services at the top. And any conversation we have with clients right now is coming through any part of that stack. So we could be selling someone business cards and that could result in suddenly a services conversation that leads to direct mail or leads to retail inserts. It all kind of works together, and it kind of goes up the stack and down the stack depending on how well we can have an effective conversation. And it's happening quickly. So very pleased with it. And I'd say, in 2 to 3 years, you'll continue to see Quad remake itself at a very fast pace.

Joel, would you still be open to a consolidating type of acquisition on the print side?

Dave, start, and I can follow up.

Yes, Jamie, I think it's a fair question. It's a question we get asked a lot. And as Joel talked about with the stack, it's just as important to have the execution assets as it is to have the marketing solutions -- services to add to a total solution sell. And you've known our history as acquirer, we've been very disciplined. And we've always, kind of, looked at consolidating acquisitions from a very disciplined mind-set, whether it was Worldcolor, Brown, Vertis. And so we look through kind of 4 criteria for these acquisitions. One, is it a strategic fit? Two, does it make economic sense and by economic sense, it really comes down to valuations? Three, can we successfully integrate it? And we've walked away from deals where just because of the way our model of doing business was so different than another company's way of doing business, we didn't feel we can integrate it properly. And the final is, we have to take care of that balance sheet. And so we want to make sure that the strength of the balance sheet is just as strong after the acquisition, when we've had a chance to put the synergies into place, than it was before. And so that really comes back to -- valuation is probably the most important thing we look at in terms of those criteria right now and making sure that the economics makes sense. The print segment itself needs further consolidation. It's highly, highly fragmented still, and there is a significant amount of underutilization of capacity from print having to compete against all media channels. So there's opportunities there, but I think we're going to be very patient, we're going to be very disciplined on price. And for instance, the discipline on price goes well beyond just, kind of, looking at the synergies associated with a deal, we'll look hard at the cost to achieve those synergies and whether or not their realistic cost to get to a synergy that allows us to have a sufficient return for the amount of money we're spending. We also dig heavily into the metrics in the -- of a company, such as the quality of earnings and the free cash flow conversion, to understand that the true value that those assets are generating are there. And so we're going to continue to show this discipline, as we've done in the past, and we'll continue to show appropriate patience until a company's valuation reflects the reality of its true performance and its true outlook.

And I'd add to that, that you check those boxes, and we're pretty good at this. And as you look at our strategy, it really is, we do believe print will continue to play a significant role. But if you do it well and you can really kind of manage all that together, it really does continue to create a lot of fuel so that we can continue to transform as well. So everything kind of works together. But again, I think that we've been very good about being disciplined in all the aspects that Dave talked about.

The next question comes from to Dan Jacome with Sidoti & Company.

Just had a couple of questions. First on the free cash flow guidance that appears still intact, can you just -- seasonal components aside, what gives you confidence that you'll be able to achieve that later this year? That was just my first very general question.

Yes, so it's really the high quality of the earnings we have and the conversion of those earnings into cash flow. We currently generate over $0.50 of cash flow for every dollar of EBITDA. So we feel really, really comfortable about where the year is headed in terms of our EBITDA production and what that's going to result in terms of free cash flow. Working capital for us was just -- we knew this was going to be a timing item, but we've talked about on past calls, we've done a substantial amount of continuous improvement in how we manage our working capital. And we've been able to generate well over $250 million in increased cash flow because of working capital improvements we've made to reduce the days it takes to bill, to improve our collection days and to better manage our inventories. We've been through a lot of the heavy lifting in that, and so those benefits are slowing down a bit. But yet, we're getting more towards those seasonal creations of working capital that you'll continue to see for us. And so that will build into the fourth quarter. You'll see a lot of it there. And like you've seen with any kind of major printer, because of the seasonal nature of our for business, all that cash flow starts coming in late third quarter and into the fourth quarter as we hit our peaks.

Okay. Just for modeling purposes, would you say, if you had to pick one, would it be more skewed to inventory discipline or things like DSOs?

It's been DSOs for us. It's been primarily billings and reducing the amount of days it takes to get a bill out and get it collected. So most of our improvement you've seen has all come from the receivable side. And then I would rank it, next would be inventory and the third is -- from just standardization of payable terms.

Okay, great. And then just wanted to pick your brain for a second on what sort of statistics you guys are seeing for TV and radio ad spend and demand, things of that nature. I've seen so many various numbers out there for TV, up 2%. And then for radio flat to down 2% percent. But you sound pretty bullish on these incremental marketing channels that you're helping customers with. And I think longer term, it definitely has promise. But I'm just trying to better understand from a very high level what the demand or industry year-over-year changes everyone else -- everyone has seen.

Yes, it's less about what are the trajectories in one of those verticals -- the reality is, as we take over or get much more involved in the marketing strategy or execution of someone's marketing strategy, the services we need is that media buying whether -- we have most of it, it's just radio and TV we're missing. And you know there's all sorts of ups and downs going on, but the fact of the matter is, is it still required to be able to do it. And so by adding the capability, I think we'll be able to build on it. But certainly, right now, the more significant part of our media spend is going to be in the other channels, but we'll build on this. And I could see us going north of $1 billion in media buying in fairly short order as we sort of continue to ramp this up. So again, I want to repeat that marketing is being disrupted, so this is not about print being disrupted alone, it's all of marketing's being disrupted. You can watch it in the gyrations that are going on with WPP, the holding company. The issues aren't just around the resignation of the CEO for his issues. It actually has a lot to do with the fundamental change in the marketing model. And the fact that there's been so much overspending and over-indexing in many different digital verticals without the prerequisite measurement to go along with it and everyone's figuring that out. So it really kind of shifts how people are thinking about. They really are looking at, what is the effectiveness of my spend? When I spend the money, is it doing something? Is it ringing the cash register? And that's why we're growing so fast into this area. It's out of the demand of simplifying it but also getting visibility to how all these different channels work together. Does that make sense?

Yes. Absolutely, it does.

This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Okay. Well, thank you all for joining us. We look forward to rejoining you next quarter. Have a great week.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.