Good morning. And welcome to Quad’s Second Quarter 2024 Conference Call. During today’s call, all participants will be in listen-only mode. [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 the earnings release. Alternatively, you can access the slide presentation on the Investors section of Quad’s website under the Events and Presentations link. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I will now turn the conference over to Katie Krebsbach, Quad’s Investor Relations Manager. Katie, please go ahead.

Thank you, Operator, and good morning, everyone. With me today are Joel Quadracci, Quad’s Chairman, President and Chief Executive Officer; and Tony Staniak, Quad’s Chief Financial Officer. Joel will lead today’s call with a business update and Tony will follow with a summary of Quad’s second quarter and year-to-date 2024 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. Quad’s 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, adjusted diluted earnings per share, free cash flow, net debt and debt leverage ratio. We have included in the slide presentation reconciliations of these non-GAAP financial measures to GAAP financial measures. Finally, a replay of the call will be available on the Investor section of quad.com shortly after our call concludes today. I will now hand over the call to Joel.

Thank you, Katie, and good morning, everyone. Our second quarter results were in line with our expectations. Net sales declined versus prior year due to lower paper, print, and agency solution sales. Print volumes continued to be negatively impacted by ongoing external headwinds, such as significant postal rate increases and elevated interest rates. However, during the second quarter, we achieved improvements in both adjusted EBITDA and adjusted EBITDA margin, with adjusted EBITDA margin increasing by 100 basis points to 8.2%. We continue to manage all aspects of our business by treating all costs as variable, aligning our cost structure to revenue opportunities and optimizing our print manufacturing platform by consolidating work into plans where we can achieve the greatest manufacturing efficiencies, and subsequently, selling assets no longer required for business operations. Turning to Slide 3, our MX solutions suite spans every facet of the marketing journey, from offline to online, across creative, production and media, supported by data-driven intelligence and state-of-the-art technology. Our focus as a marketing experience company includes delivering integrated service excellence, which we achieved by removing pain points and sources of friction from the marketing process, and providing transparency on clients’ marketing expenditures. Accelerating market penetration and key verticals and product lines with the greatest expansion opportunities and continuing to leverage our unique company culture, which is based on honesty and transparency, to grow as an MX company. On Slide 4, we continue to expand our presence in retail media networks, one of the fastest-growing media channels today. As I shared on last quarter’s call, eMarketer predicts ad spend in omnichannel retail media networks will grow to more than $100 billion by 2027. Our solution, called In-Store Connect by Quad, elevates the shopping experience by taking the best elements of digital commerce and bringing them into physical…

Thanks, Joel, and good morning, everyone. On Slide 12, we show our diverse revenue mix. Net sales were $634 million in the second quarter of 2024, a 10% decline compared to the second quarter of 2023, and net sales in the first half of 2024 were $1.3 billion, a 12% decline compared to the first half of 2023. Net sales declined in both periods due to lower paper, print and agency solution sales. Our print volumes were negatively impacted by ongoing external headwinds, including significant postal rate increases and the impact of ongoing higher interest rates on our financial services clients, as well as the loss of a large grocery client. On a year-to-date basis, magazines and catalogs increased as a portion of our net sales mix by 3% compared to the previous year due to recent segment share wins, such as AARP. These segment share wins also increased our mix of lower unit price per year printing versus offset printing volumes. In addition, Latin American net sales decreased by 2% as part of our total sales mix, primarily from lower educational book volume exported to the United States. Slide 13 provides a snapshot of our second quarter of 2024 financial results. Adjusted EBITDA was $52 million in the second quarter of 2024, as compared to $50 million in the second quarter of 2023, and adjusted EBITDA margin increased 100 basis points from 7.2% to 8.2%. On a year-to-date basis, adjusted EBITDA was $102 million in 2024, compared to $111 million in 2023, and adjusted EBITDA margin increased 41 basis points from 7.5% in the first half of 2023 to 7.9% in the first half of 2024. The margin increase in both periods was primarily due to benefits from improved manufacturing productivity, savings from cost reduction initiatives and a $4…

[Operator Instructions] Our first question comes from Kevin Steinke with Barrington Research Associates. Please go ahead.

Good morning, Kevin.

Good morning, Kevin.

Good morning. Good morning. I wanted to start out by asking about the pipeline for your retail media networks or RMN offering. It looks like that continues to build nicely. Maybe just speak to how quickly those opportunities can move through the pipeline and then just the larger opportunity even beyond what you currently have in the pipeline.

Yeah. I think that this has been a story that’s been developing very quickly this year, not just at Quad but also in the industry. So, CAN [ph] is always a good place to get a feel for what people are talking about. And last year this time, they were talking about retail media networks because it’s a big growing area, but it really accelerated when we were there this year. So, the whole industry is trying to capitalize on this, because when you look at a digital retail media network like an Amazon where they’re selling significant ad dollars to CPGs, a lot of the retailers can’t compete with that and they’re trying. And so, especially if you’re a midsize to even larger ones, people are trying to figure it out. And when you go into the store, that’s where your intent to purchase is the most, and brick-and-mortar is here to stay. I think it’s stronger than people thought it would be. And so, there’s really an opportunity here where you’re putting the digital screens right in front of people and being able to serve up content very specifically that you’ve sold to CPGs to populate the space. And so, what we’ve seen is with Save Mart, we started those conversations early on. They see where this is going and they were very intent on getting going with testing. So, that’s where we’re actually right now going live and rolling out stores and then you saw our new announcement just in this conference call about the next one. And we are talking to quite a few, because I think it’s one of these things where people want to see the proof in the pudding. Like, what happens when you actually do it? What is the result? What are…

Okay. That sounds great. And it sounds like you feel like you have a pretty unique offering there. What -- you said, when you talked about the ability to create content, as well as deploying the digital screens. And I’m just wondering, given the emerging nature of this opportunity, if you’re seeing a fair amount of competition in the marketplace and where do you feel like you’re positioned competitively in this RMN landscape?

I think there’s definitely competition and there are screens out there doing things. But ours is a little bit more unique in that it’s the full service, the full line of stuff. Think about it. If you can create that coast-to-coast sort of set of a lot of stores that matter enough to a CPG, we can actually -- they can decide in what order, where do they want to serve it up. So, it’s a very dynamic offering. The big guys like Amazon obviously will do it themselves. You’ve got other people like Walmart who made big acquisitions for this. They’ll try and do it themselves. But most retailers aren’t really set up to do it. So, I think the fact that we’re already rolling this out live gives us more of an aggressive, full-service, first-mover opportunity here relative to the competitors. But certainly, they’ll be competitors and this is a huge space growing rapidly, and the retail media network for brick-and-mortar is just in its fledgling stage.

Hey, Kevin. I’d add to that. I think we’re better capitalized than our competition for this. With the work that we’ve done on debt reduction, we’ve got the dry powder to take advantage of this opportunity.

Okay. That’s great. And you mentioned there the DART Innovation acquisition to help build out the offering. Can you also talk about the partnership with Swiftly? I’m just trying to understand a little bit better what that partnership brings to you in terms of the In-Store Connect offering?

Yeah. So, Swiftly really brings to us another sales channel to sell the inventory. They’re already out there doing that for different format stores and retail media networks in general. So, the opportunity is that we want to fill that inventory. Once you have those screens up, you’ve got to sell the ads. And I think in the early days, you’ve got to go fast because a lot of big CPGs, they’re not going to necessarily want to buy inventory until it’s meaningful. And so we’re out there selling wherever we can get people to do it, because there are a lot of people who also want to learn as the learning curve happens in placing that inventory. So, they’re another sales channel, but they also help manage the back end of the transactions on the inventory. So, it’s another sales channel for us, but also a great partnership. They’re a great company.

Great. That’s helpful. And just switching gears here, you’re talking about some of the sales headwinds you’re encountering in terms of postal rates. Have you seen any easing there in terms of your clients becoming a little more used to operating in that environment? I know you recently launched Household Fusion or any further discussions with the relevant government parties about the future direction of rates? Maybe just an overall update on the postal rate landscape and how you’re addressing that?

Yeah. To remind everybody, last year we saw a pretty significant reset of volume in the second half because the Post Office had surprised our clients with a significant increase last July. That wasn’t built into their annual budget cycle and that’s where we saw a big pullback. If you think about the first half of this year, that’s carried through, because you didn’t see a spring forward after the first of the year. I also had talked about in previous calls my concern about the postal rate increase that was happening this July. It just happened about a week ago at 10%. Remember, this is the largest cost for people using print to get to the household. My hope was that people weren’t surprised this time and that they were able to sort of manage it into their budget. And I’d say so far so good. We haven’t seen the same significant pullback which we would typically have seen by now for the second half. It doesn’t mean there won’t be some ebbing and flowing on that because people are still also very concerned about the consumer. And that’s another reason why we are at the low end of our sales guidance is because of the continued economic uncertainty. I mean, I’ll come back to that, but to further answer your question, we certainly have all sorts of efforts. We’ve submitted comments. The Postal Rate Commission is doing a total review of the structure and what’s going on. Congress is very upset with the Post Office, because they’ve launched a major restructuring that’s supposed to fix things, but performance has been horrible. So they’re hearing from their constituents and they’re counting on a whole bunch of parcel volume to be their future. But unfortunately, the horses have already left…

Okay. That’s helpful commentary. And as you have on past calls, maybe just run through some of the sales trends and some of your key product categories, what you’ve seen maybe in the quarter and year-to-date. And then, related to that, just even with your expectation that maybe the sales will be towards the lower end of the guidance range, it still implies a pretty healthy seasonal ramp in the second half in terms of sales. Are you seeing your typical seasonal ramp up or benefit from recent business wins or maybe if you could speak to that as well?

Yeah. That is actually -- that is correct. That -- again, with the postal rate when it hit, we saw across the Board negative high-single to low double-digit decline in the different categories that use postal and then some of the stuff in packaging and store were down because of the economic thing, but it does imply a ramp up in the second half, because then the you get the annualization of the impact of the postal rate increase, but also some of the segment share comes in. I mean, if you look at publication catalogs, volume-wise, those were up, not down volume-wise, but still down sales-wise because of that mixed change. And so, I guess, I’d characterize in general a lot of the stuff in the first half was down because of the things I just talked about, but you should see a nice ramp up in the second half, which is the busier time of the year.

Yeah. We’ll have closer results to our comparables of the prior year in the second half of the year than the first. Our revenue decline will not be as much.

Okay. Yeah. Understood. I will turn it back over for now. Thanks for taking the questions.

Okay. Thank you, Kevin. Operator, next question.

And the next question comes from Barton Crockett with Rosenblatt. Please go ahead.

Okay. Thanks…

Good morning, Barton. Good morning, Barton.

Good morning.

We wanted to thank you for picking up coverage in May. Welcome officially to the team here.

Okay. Happy to be covering you guys and thanks for taking the questions. So, I guess, one of the things I was curious about is just circling back to your guidance. So, you’re saying the high end of the revenue decline, but you’re not saying anything about the EBITDA and free cash flow. One might presume that it could follow that you’d be at the worse end of the range for those of the revenues at the worse end, but maybe not with your cost cutting. So, what can you say about the EBITDA and free cash flow guidance ranges?

Yeah. I appreciate the question, Barton. So, I think, you’ve caught on a major theme for us, which is while smaller, as Joel discussed with the revenue pressures, a more profitable business when you look at our margins with a lot of focus on cost reduction and labor and manufacturing productivity improvements that will keep our EBITDA and free cash flow higher such that we did not feel the need to guide to the lower end of those respective ranges.

I think one of the things that we’re proud of with the 100-basis-point improvement in adjusting EBITDA margin is we’ve got a knack for doing cost reduction and productivity improvement in a sustainable way as opposed to intense one-time shots and so that’s why we feel good about where we’re at.

Okay. Now I was also curious about the progress on asset sales. I think you mentioned four. I know that you guys have some larger facilities, Saratoga, I think, and around Effingham, Illinois. Those two facilities, can you update us on where you are in the sales process there and what you think the timeline might be for wrapping those up and what the four properties are specifically that you’re talking about?

Yeah. So, we have four properties for sale, two buildings located in Effingham, Illinois, one in Sacramento, California, and one, the largest one, in Saratoga Springs, New York. Those sales are all in process. It’s always hard to guess on the timing of when this will come through. A lot of things have to come together. I feel pretty certain that some of these are going to go into 2025, Barton, but I’ll also add that to achieve our debt leverage range of 1.8, we wouldn’t need any of these properties to sell for us to believe we can achieve that approximately 1.8 debt leverage ratio. So if something does, it serves as benefit.

Okay. I understand that that could be a benefit. But the -- but what -- there is obviously some questions, I think, about just the broader real estate market given interest rates. How would you describe kind of the activity and the level of interest around these properties at this point?

It can differ based on the respective geographies is what we’re seeing at this point. So, we have interest in some and in others, not, less interest.

Okay. But do you still have confidence that there is resolution for all four of these sometime in the next several months by 2025 or is it possible that maybe one of them doesn’t get sold, you pull it back?

No. We would expect to eventually sell these properties.

Okay. All right. and in terms of the competitive environment, I know that you guys are facing pressures, your competitors in printing are facing pressures. How would you describe the competitive environment right now in terms of high competitiveness or even just staying in the game or potentially some pullback? What are you seeing at this point? What do you expect to play out?

Well, we referenced some segment share gains that were pretty significant. I think that kind of speaks for itself on part of it. But I’d also say as these postal rates continue to do what they do, it’s harder and harder to have -- if you don’t have the scale, it’s very hard to help your clients offset it. And in our side, close to 10% of the post office’s marketing volume comes out of our clients, which is significant, which has helped us be able to go to the next level with Fusion Mail, where it’s another cost-saving way for our clients to get in the mail and not insignificant. I mean, the offsetting to the recent increases is somewhere between 10% and 25%, depending on the client and that’s of the biggest cost. So I’d say that we feel very comfortable with where we are competitively against much of the industry and I’d say that also shows up in how we’re able to get paid for what we do.

Yeah. And on the agency side of the house, we feel good about our momentum and how we’re building a solution that targets the needs of the marketer. Wrapped with data analytics and client tech, we’re able to bring print as one media channel, but also multiple other media channels to serve the client’s need.

And that’s a good point, Tony, because that then speaks to the new competitive set that we have, which is really kind of the big holding company agencies and other agencies. And again, we have a unique value proposition where we can pull execution together with the advisory services and content creation and media placement that we do.

Okay. All right. Thank you, guys. I’ll leave it there. I appreciate it.

Thank you, Barton.

Thanks, Barton.

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

Well, thank you, everyone, for joining today’s call. I want to close by reiterating that our integrated marketing offering continues to be a competitive differentiator and a key driver behind our ongoing evolution as a marketing experience company. By providing a better marketing experience, our clients can focus on delivering the best customer experience. At the same time, we remain focused on enhancing our financial strength and creating shareholder value. With that, thank you again and have a good day. We look forward to speaking with you again next quarter.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.