Quad/Graphics, Inc. (NYSE: QUAD) is a global marketing experience (MX) company that helps brands make direct consumer connections, from household to in-store to online. The company's mission is to provide a better marketing experience for its clients, so they can focus on delivering the best customer experience to theirs. Quad employs approximately 13,000 people in 14 countries and serves approximately 2,700 clients, including industry-leading blue-chip companies that serve both businesses and consumers across multiple industry verticals, with a particular focus on commerce, including retail, consumer packaged goods and direct-to-consumer; financial services; and health.

Financials

Quad's first quarter 2024 results were in line with the company's expectations, with net sales of $654.8 million, a 15% decline compared to the first quarter of 2023. The decrease was primarily due to lower paper, print and agency solution sales, as print volumes were negatively impacted by ongoing external headwinds, including significant postal rate increases and economic uncertainty, as well as the loss of a large grocery client. Despite these challenges, Quad remains focused on executing its growth strategy and delivering innovative solutions to its clients.

Business Overview

In-Store Connect Retail Media Network

One of Quad's key initiatives is the expansion of its In-Store Connect retail media network. This solution aims to elevate the shopping experience by installing networked digital screens and kiosks at retailer locations to deliver engaging messages and targeted promotions right at the store shelf – the most critical moment in the purchasing decision. Quad recently announced a partnership with The Save Mart Companies, the largest private regional grocer on the West Coast, to launch its In-Store Retail Media Network. The company is also in active talks with several other retailers and looks forward to demonstrating how In-Store Connect can generate value for its clients as it strives to become the industry standard for in-store media networks.

Household Fusion

Another innovative offering from Quad is Household Fusion, which combines various marketing mail from different brands or separately various magazines from different publishers into a single package delivered to one address, creating significant postal savings for participating clients. The company's clients, including PWX Solutions, a direct marketing and production partnership formed between Hearst and Conde Nast, have praised Household Fusion, stating that "Quad is always looking out for everyone's best interests. And the Household Fusion program is really paying off."

Media Agency and Creative Services

Quad's media agency, Rise, has also undergone an evolution, bringing together the company's full range of media and owned data services under one brand. This integrated offering is differentiated by its modern data stack, which has privacy at its core and is resilient to industry challenges like the deprecation of third-party cookies. Additionally, Quad's "radical transparency" approach, which provides clients with full visibility into the company's media activities, helps minimize the "tech tax" typically paid to data onboarding platforms.

In the creative services space, Quad is launching an integrated and flexible new solution that combines its brand strategy, design, campaign ideation, premedia, adaptive design, content creation and 24/7 global production capabilities. This offering aims to redefine creative excellence, putting quality first, regardless of project size, scope, timeline or budget.

Financials

Quad's financial performance in the first quarter of 2024 was impacted by the external headwinds, with adjusted EBITDA of $51 million, compared to $60 million in the first quarter of 2023. The decrease was primarily due to lower sales, partially offset by benefits from improved manufacturing productivity and savings from cost reduction initiatives. Adjusted diluted earnings per share was $0.10 in the first quarter of 2024, compared to $0.15 in the first quarter of 2023, primarily due to lower adjusted net earnings, partially offset by the impact of a lower share count due to stock buybacks.

Free cash flow was negative $70 million in the first quarter of 2024, a $9 million improvement compared to 2023, primarily due to reduced capital expenditures. Quad continues to target annual capital expenditures of approximately 2% of its net sales. The company expects to generate over $740 million of free cash flow and proceeds from asset sales during the 5-year period from 2020 to 2024, which will be used to strengthen the balance sheet, invest in the business, and return capital to shareholders.

Liquidity

At the end of the first quarter, Quad's net debt was $544 million. The company has made progress on reducing its debt, with the goal of reaching a net debt leverage ratio of approximately 1.8x by the end of 2024, near the low end of its targeted range of 1.75x to 2.25x. Quad's strong balance sheet and commitment to debt reduction were recently recognized by Fitch Ratings, who revised the company's corporate credit rating outlook to positive from stable, indicating a potential future upgrade.

Outlook

For the full year 2024, Quad expects annual net sales to decline 5% to 9% compared to the prior year, with full year adjusted EBITDA expected to be between $205 million and $245 million, representing a 28 basis point improvement in adjusted EBITDA margin to 8.2%. The company expects 2024 free cash flow to be in the range of $50 million to $70 million.

Conclusion

Quad's key investment highlights include its continued diversification of revenue and clients, the significant addressable revenue opportunity with its expanded offerings, such as In-Store Connect and Household Fusion, and its strong cash generation that will fuel its capital allocation priorities, including investing in scaling its offerings, further reducing debt, and returning capital to shareholders through dividends and share repurchases.

Despite the ongoing industry challenges, Quad remains focused on delivering innovative solutions, optimizing its cost structure, and strengthening its financial position. The company's commitment to providing a better marketing experience for its clients, coupled with its resilience and adaptability, position it well to navigate the current environment and drive long-term value for its shareholders.