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Quad Reports Fourth Quarter and Full-Year 2019 Results

Press release from the issuing company

Strong Customer Service Performance Drives Fourth Quarter Profitability, Free Cash Flow and Reduced Leverage; Positions Company for Accelerated Transformation

Sussex, Wis. – Quad/Graphics, Inc. (“Quad” or the “Company”) today reported results for its fourth quarter and full-year ending December 31, 2019.

Recent Highlights

  • Exceeded revised 2019 guidance for net sales, Adjusted EBITDA and Free Cash Flow.
  • Reduced Debt Leverage Ratio to 3.1x in the fourth quarter.
    Expands cost reduction program to $100 million, to be fully realized in 2020.
  • Divested Omaha, Neb., packaging plant for $41 million as part of ongoing efforts to optimize its product portfolio.
  • Declares quarterly dividend of $0.15 per share.

“I am pleased to report that our fourth quarter results exceeded expectations, driven by continued execution against our strategic priorities, including aggressive cost management and increased manufacturing productivity. We had one of the best quarters in the past decade in terms of customer service performance, achieving strong quality and on-time delivery for our clients in their busiest season. This strong performance is due, in large part, to our decision to invest $40 million to increase hourly production employees’ wages, as we saw significant productivity gains throughout the quarter,” said Joel Quadracci, Chairman, President & CEO.

“In 2020, we will continue to make prudent, long-term decisions as we accelerate the transformation of our company as a marketing solutions partner with a strong foundation in print,” Quadracci continued. “This transformation, which we call Quad 3.0, is focused on counteracting ongoing print industry volume declines in order to reposition the business toward growth. During 2019, this strategy led to $225 million of organic incremental sales growth, helping to significantly offset print sales decline. Our ultimate goal is to completely offset the organic sales decline through growth of our higher-margin marketing solutions, which drive revenue across all our products and services.”

Added Quadracci: “We continue to win segment share, which reflects the strength of our offering as well as the long-term financial and operational stability of our company. We recently secured 100 percent of print volumes from two large national magazine publishers, and are onboarding that multi-year work now. We also continue to optimize our product portfolio for the long term through the lens of Quad 3.0. Most recently we divested our Omaha packaging plant to focus on our higher value packaging solutions that help clients create a cohesive brand experience across channels. This follows our decision to divest our book business and sell our industrial wood crating business in 2019.”

Summary Results

Results for the three months ended December 31, 2019, included:

Net Sales (excluding discontinued operations) — Net sales were $1.1 billion in 2019, down 4.9% from 2018. Organic sales declined 5.9% during the quarter, after excluding sales related to the January 2019 acquisition of Periscope. The organic results benefitted from new sales generated from the Company’s Quad 3.0 growth strategy, which were offset by ongoing print industry volume and pricing pressures, and a negative 0.3% impact from foreign exchange.

Net Earnings Attributable to Quad Common Shareholders — Net earnings attributable to Quad common shareholders were $8 million in 2019, or $0.15 diluted earnings per share, as compared to net loss of $21 million in 2018, or $0.42 diluted loss per share. Excluding the results from discontinued operations, net earnings from continuing operations were $7 million in 2019, or $0.14 diluted earnings per share, as compared to net loss from continuing operations of $11 million in 2018, or $0.23 diluted loss per share.

Adjusted EBITDA (excluding discontinued operations) — Adjusted EBITDA was $96 million in 2019, as compared to $118 million in 2018, and Adjusted EBITDA margin was 9.0% in 2019, as compared to 10.5% in 2018. The variance to prior year primarily reflects the impact from the organic sales decline of 5.9%, a $13 million decrease in print profits from the reduction in market price for paper byproduct recoveries, the impact of a $6 million gain in 2018 from a sales tax litigation settlement in Peru, and $5 million of strategic investments made to increase hourly production employees’ wages, partially offset by cost reduction activities.

Results for the full-year ended December 31, 2019, included:

Net Sales (excluding discontinued operations) — Net sales were $3.9 billion in 2019 as compared to $4.0 billion in 2018, down 1.6%. Organic sales declined 3.5% after excluding sales related to the acquisitions of Ivie and Periscope, and an investment in Rise Interactive. The organic results reflect new sales generated from the Company’s Quad 3.0 growth strategy, offset by ongoing print industry volume and pricing pressures, and a negative 0.6% impact from foreign exchange.

Net Loss Attributable to Quad Common Shareholders — Net loss attributable to Quad common shareholders was $156 million in 2019, or $3.12 diluted loss per share, as compared to net earnings of $9 million in 2018, or $0.16 diluted earnings per share. Excluding the results from discontinued operations, net loss from continuing operations was $56 million in 2019, or $1.11 diluted loss per share, as compared to net earnings from continuing operations of $30 million in 2018, or $0.59 diluted earnings per share.

Adjusted EBITDA (excluding discontinued operations) — Adjusted EBITDA was $335 million in 2019, as compared to $428 million in 2018, and Adjusted EBITDA margin was 8.5% in 2019, as compared to 10.7% in 2018. The variance to prior year primarily reflects the impact from the organic sales decline of 3.5%, $33 million in non-recurring benefits in 2018 that did not repeat at the same level in 2019, a $29 million impact from strategic investments made to increase hourly production employees’ wages, and a $27 million decrease in print profits from the reduction in market price for paper byproduct recoveries, partially offset by cost reduction activities.

Net Cash Provided by Operating Activities — Net cash provided by operating activities was $156 million in 2019, as compared to $261 million in 2018, primarily due to lower net earnings and $61 million in transaction costs associated with a terminated acquisition during the year.

Free Cash Flow — Free Cash Flow, excluding $61 million in payments from a terminated acquisition, was $106 million in 2019, as compared to $164 million in 2018, primarily due to lower net earnings and increased capital expenditures on long-term investments in automation and productivity improvements in the manufacturing platform.
Dividend

Quad’s next quarterly dividend of $0.15 per share will be payable on March 9, 2020, to shareholders of record as of February 28, 2020.

2020 Guidance

The Company provided the following 2020 financial guidance:

The Company provided the following 2020 financial guidance:

U.S. $ 2019 Actuals 2020 Guidance Range
Net Sales $3.9 billion $3.5 to $3.7 billion
Adjusted EBITDA $335 million $285 to $315 million
Free Cash Flow(1) $106 million $100 to $130 million

(1) Free Cash Flow includes cash flows from the discontinued operations of the book business.

Dave Honan, Executive Vice President and CFO, concluded: “In fiscal 2020, we remain disciplined in our efforts to manage our costs, and drive earnings and Free Cash Flow growth to reduce our leverage and further strengthen our balance sheet. In line with these goals, we have doubled our previously announced $50 million cost reduction program to $100 million, which we expect to fully realize in 2020. Looking ahead, these efforts, and the ongoing success of our Quad 3.0 strategy, are expected to continue to significantly offset ongoing print industry volume and pricing pressures.”

Quarterly Conference Call

Quad will hold a conference call at 10 a.m. ET on Wednesday, February 19, to discuss fourth quarter and full-year 2019 results.

Participants can pre-register for the webcast by navigating to http://dpregister.com/10137590. Participants will be given a unique PIN to gain immediate access to the call on February 19, bypassing the live operator. Participants may pre-register at any time, including up to and after the call start time.

Alternatively, participants without internet access may dial in on the day of the call as follows:

U.S. Toll-Free: 1-877-328-5508
International Toll: 1-412-317-5424
An audio replay of the call will be posted on the Investors section of Quad’s website shortly after the conference call ends. In addition, telephone playback will also be available until March 19, 2020, accessible as follows:

U.S. Toll-Free: 1-877-344-7529
International Toll: 1-412-317-0088
Replay Access Code: 10137590

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