Quad/Graphics, Inc. (QUAD) Q3 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quad/Graphics Third Quarter 2014 Conference Call. [Operator Instructions] I would 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, Vice President and Chief Financial Officer. Joel will lead off today with key highlights for the quarter and Dave will follow with a more detailed review of our 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. 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 Quad/Graphics' website. There are also instructions on how to access the slide presentation in our third 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'll now turn the call over to Joel.

Thanks, Kelly, and good morning, everyone. Our performance for the third quarter was in line with our expectations and we remain on track to achieve our 2014 financial objectives. We continue to move forward swiftly with integrating operations from the Brown acquisition, putting a strong focus on serving our clients well while improving the efficiency and productivity of our platform to drive future cost savings. We remain confident in our integration process and I'm pleased to report our integration efforts are going well. During the quarter, we completed the 2 previously announced plant closures of former Brown facility in Woodstock, Illinois and a former Worldcolor plant in St. Cloud, Minnesota. Through these closures, we further rationalized capacity and consolidated work into plants where we believe we can achieve the greatest manufacturing and distribution efficiencies. I am proud of the work our employees are doing to advance the integration quickly and achieve our objectives. During the quarter, volumes in our U.S. platform were in line with our expectations and our corporate units performed well. We continue to extend and expand work with existing clients, as well as win work from new clients. Taking a consultative approach, we create value for our clients by showing them how to minimize their overall total cost of print production and distribution, while at the same time, how to maximize their revenue by connecting print to other channels, such as mobile and tablet. Our mailing and distribution solutions are a big part of how we help our clients reduce costs and get the most value for every dollar they invest in print. We have built a leading platform with scale and volumes second to none in the industry and we believe this platform will give us a long-term sustainable advantage versus our competition. Our platform is…

Thanks, Joel, and good morning, everyone. Slide 5 is a snapshot of our third quarter 2014 financial results, as compared to our third quarter in 2013. The acquisition of Brown is included in our 2014 consolidated financial results since the date of acquisition on May 30 of 2014. Accordingly, our 2013 results do not include the acquisition of Brown. Net sales in the third quarter were $1.2 billion, representing a 2.5% increase from 2013, primarily due to the Brown acquisition. If we look at the Brown business on a pro forma basis as if we acquired Brown at the beginning of 2013 instead of on our acquisition date of May 30, 2014, our pro forma consolidated net sales declined 5.6% in the third quarter, of which we estimate Brown represented 1/3 of that decline or approximately 2% of the decline. The remaining 2/3 of the decline or 3.6% reflects the impact of expected volume and pricing pressures and were consistent with our revenue expectations and guidance. Our adjusted EBITDA was $151 million as compared to $154 million in 2013 and our adjusted EBITDA margin was 12.2% as compared to 12.8%, reflecting ongoing pricing and volume pressures and the margin dilution impact of Brown's historically lower margin profile. Year-to-date, free cash flow was in line with our expectations. We define free cash flow as net cash provided by operating activities, including pension contributions, less purchases of property, plants and equipment. Free cash flow was a negative $38 million for the first 9 months of 2014 versus a positive $102 million for the same period in 2013. The variance is primarily due to an estimated $77 million benefit realized in the first 9 months of 2013 related to our acquisition of Vertis, which was acquired without normalized levels of accounts payable and…

[Operator Instructions] And your first question is from John Leonard.

Great quarter. The last call, you sounded optimistic going into the seasonally stronger back half of the year. I was just wondering if you think that there's maybe even scope for an incremental upside surprise given the more constructive macro backdrop that we've seen with the improving employment picture and lower oil price that could lead to higher retail sales or spending. So if you have any color on that, that'd be great.

Okay, John, before I have Dave answer that, I just want to let everyone know that we were informed by our provider for the conference call that we did have some technical glitches with the slides in the web portion so we apologize for that, we will rectify that and have them posted. But with that, Dave, why don't you answer the question.

Yes, John. Just kind of to reiterate, every quarter and so far this year really has come in line with what we had expected. So really, right now, we feel good about the guidance going into the fourth quarter and the inferred midpoint that reflects as you go through the calculation. We gave a fairly tight range to begin the year with and we haven't changed that throughout. And so that leads us into the fourth quarter and the fourth quarter is a very big quarter for us in terms of volumes, EBITDA and especially free cash flow delivery. So right now we feel good going into it but our focus is really going to be on the finish this year well and deliver the results we guided to originally.

And that being said, furthermore, when you look at the fourth quarter, I'd say one of the toughest quarters to see or toughest months to see is actually December because we tend to get a little bit later guidance in terms of what the volumes of our customers will be as they try and assess the season and sort of look forward to 2015. And obviously, there's a lot of dynamics playing out, I think, in the world today. So I think Dave's exactly right. I mean we feel good about the range that we've given and we're going to manage to the best of our abilities depending on where things go.

I'm showing that we have no further questions at this time.

Wow, you guys are easy this quarter. So no further questions. I do want to sort of take a moment to thank all of our employees. I'd like to close this call by recognizing our employees, all of whom have been working really hard attending to the needs of our clients right now. And I want to thank them for the exceptional job they're doing integrating Brown's operations with our own while in the midst of our busiest time of the year. So with that, I will close the call and look forward to speaking to you all next quarter. Thank you.

This does conclude today's conference. You may now disconnect.