Quad/Graphics, Inc. Q3 FY2024 earnings call

• Third quarter results were in line with expectations; net sales declined but adjusted EBITDA and margin improved. - Achieved improvements in adjusted EBITDA and margin, with adjusted EBITDA margin increasing by 54 basis points to 8.7%. - Continued to be a strong cash generator, using funds for debt reduction, balance sheet strengthening, and returning capital to shareholders via quarterly dividend. - Maintaining midpoints of adjusted EBITDA and free cash flow guidance despite full year 2024 net sales trending toward the higher end of decline in guidance range. - Entered into a definitive agreement to sell European Print operations for an enterprise value of approximately $45 million, representing 5% of total net sales, to optimize business portfolio as an MX company. - Enhanced media intelligence solutions through proprietary household-based data stack, leveraging partnership with Google Cloud to create AI-driven solutions. - Showcased client examples like Nicklaus Children's Hospital, where MX Solutions Suite led to significant improvements in click-through rate, engagement, and website traffic.

Third quarter net sales were $675 million, a 4% decline compared to the same period in 2023, primarily due to lower paper and agency solution sales. Year-to-date net sales in 2024 were $2 billion, a 9% decline compared to 2023, mainly due to lower paper sales and print volumes. European Print operations represent just 5% of total net sales. Adjusted EBITDA in the third quarter of 2024 was $59 million compared to $57 million in the third quarter of 2023, and the adjusted EBITDA margin increased 54 basis points from 8.2% to 8.7%. Year-to-date adjusted EBITDA in 2024 was $161 million compared to $168 million in 2023, and the adjusted EBITDA margin increased 48 basis points from 7.7% in the first nine months of 2023 to 8.2% in the first nine months of 2024, primarily due to benefits from improved manufacturing productivity and savings from cost reduction initiatives.

• Annual net sales are trending toward the higher end of decline in guidance range, expected to decline approximately 9% compared to original guidance of 5%-9% decline. - Maintaining midpoints of adjusted EBITDA guidance at $225 million and free cash flow guidance at $60 million. - Anticipating year end net debt leverage to improve to approximately 1.5 times, reduced from original guidance of 1.8 times and below targeted long-term debt leverage range of 1.75 to 2.25 times, pending sale of majority of European operations by year end.

• Business seasonality leads to negative free cash flow in the first nine months of the year followed by large positive free cash flow in the fourth quarter. - Macro-economic factors such as postal rates and interest rates can impact client spending and business volumes. - Regulatory clearances and other closing conditions for asset sales may affect the timing and expected cash proceeds from divestitures.

Q: Kevin Steinke asked about the partnership with Google, initial feedback from clients and if it can be a differentiator.

A: Joel Quadracci said clients are eager to test the content and data, and it will be a large differentiator as it helps solve marketers' problems with transparency and specific audience targeting.

Q: Kevin Steinke asked about the reduction in year-end leverage ratio target being driven by European operation sale.

A: Joel Quadracci said it's a combination of multiple divestitures including Saratoga Springs facility sale.

Q: Barton Crockett asked about full year guide and fourth quarter pressure.

A: Joel Quadracci said fourth quarter expected to be 8%-9% decline, with factors like grocery client loss and mix.

Q: Barton Crockett asked about cash flow from asset sales.

A: Tony Staniak said includes Saratoga sale, Manipal investment sale, and Europe sale not yet in cash flow but expected.

Q: Barton Crockett asked about interest expense trajectory.

A: Joel Quadracci said variable rates expected to come down, with debt leverage improvement leading to lower interest costs.

Q: Barton Crockett asked about Google AI arrangement timeline.

A: Joel Quadracci said expected to roll out towards end of year and into next year.