quad/graphics, inc. 4th quarter 2015 earnings call dave honan€¦ · 4th quarter 2015 earnings...

4th Quarter 2015 Earnings Call

Quad/Graphics, Inc.

February 23, 2016

Joel QuadracciChairman, President & CEO

Dave HonanExecutive Vice President & CFO

Forward-Looking Statements• To the extent any statements in this investor presentation contain information that is not historical, these statements are forward-looking statements within the

meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to, among other things, our current expectations about the Company’s future results, financial condition, revenue, earnings, free cash flow, margins, objectives, goals, strategies, beliefs, intentions, plans, estimates, prospects, projections and outlook of Quad/Graphics, Inc. (the “Company” or “Quad/Graphics”), and can generally be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “project,” “believe,” “continue” or the negatives of these terms, variations on them and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.

• These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond the control of Quad/Graphics. These risks, uncertainties, and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among risks, uncertainties and other factors that may impact Quad/Graphics are: the impact of decreasing demand for printed materials and significant overcapacity in the highly competitive commercial printing industry creates downward pricing pressure; the inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market conditions; the impact of electronic media and similar technological changes including digital substitution by consumers; the impact of changing future economic conditions; the impact of the various covenants in the Company’s debt facilities that impose restrictions may affect the Company’s ability to operate its business; the failure of clients to perform under contracts or to renew contracts with clients on favorable terms or at all; the impact of fluctuations in costs (including labor and labor-related costs, energy costs, freight rates and raw materials) and the impact of fluctuations in the availability of raw materials; the impact of changes in postal rates, service levels or regulations; the failure to successfully identify, manage, complete and integrate acquisitions and investments; the impact of increased business complexity as a result of the Company’s entry into additional markets; the impact of regulatory matters and legislative developments or changes in laws, including changes in cyber-security, privacy and environmental laws; the impact of an other than temporary decline in operating results and enterprise value that could lead to non-cash impairment charges due to the impairment of property, plant and equipment and other intangible assets; the impact on the holders of Quad/Graphics class A common stock of a limited active market for such shares and the inability to independently elect directors or control decisions due to the voting power of the class B common stock; significant capital expenditures may be needed to maintain the Company’s platform and processes and to remain technologically and economically competitive; the impact of risks associated with the operations outside of the United States; and the other risk factors identified in the Company's most recent Annual Report on Form 10-K, as such may be amended or supplemented by subsequent Quarterly Reports on Form 10-Q or other reports filed with the Securities and Exchange Commission.

• Quad/Graphics cautions that the foregoing list of risks, uncertainties and other factors is not exhaustive and you should carefully consider the other factors detailed from time to time in Quad/Graphics’ filings with the United States Securities and Exchange Commission and other uncertainties and potential events when reviewing Quad/Graphics’ forward-looking statements.

• Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this investor presentation. Except to the extent required by the federal securities laws, Quad/Graphics undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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$4.7 billionNet Sales (YTD 2015)$215 million

Free Cash Flow(1) (YTD 2015)

2.92xDebt Leverage Ratio(1)

$462 millionAdjusted EBITDA(1) (YTD 2015)

______________________________(1) See slides 14 — 21 for definitions and reconciliations of non-GAAP measures.

2015 Financial Results

Continue to Transform Quad

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Repositioning our true benefit to our clients – and our role as a printer – to align with the new world of marketing. This includes:

• Improving clients’ marketing spend efficiencies through reducing their overall production and distribution costs

• Improving clients’ marketing spend effectiveness by marketing their products and content across multiple channels

Financial Overview – Fourth QuarterUS $ Millions

Quarter EndedDecember 31, 2015

Quarter EndedDecember 31, 2014

Net Sales $ 1,335 $ 1,424

Cost of Sales 1,058 1,129

SG&A 122 115

Depreciation and Amortization 80 83

Restructuring, Impairment and Transaction-Related Charges — Cash 30 13

Restructuring, Impairment and Transaction-Related Charges — Non-Cash 55 8

Goodwill Impairment 10 —

Interest Expense 22 23

Adjusted EBITDA(1) 154 183

Adjusted EBITDA Margin(1) 11.5% 12.8%

______________________________(1) See slide 14 for definitions of our non-GAAP measures and slide 15 for reconciliations of Adjusted EBITDA and Adjusted EBITDA Margin as non-GAAP measures.

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Financial Overview – Full YearUS $ Millions

Year EndedDecember 31, 2015

Year EndedDecember 31, 2014

Net Sales $ 4,678 $ 4,862

Cost of Sales 3,761 3,892

SG&A 448 426

Depreciation and Amortization 325 336

Restructuring, Impairment and Transaction-Related Charges — Cash 64 53

Restructuring, Impairment and Transaction-Related Charges — Non-Cash 101 14

Goodwill Impairment(1) 808 —

Interest Expense 88 93

Adjusted EBITDA(2) 462 543

Adjusted EBITDA Margin(2) 9.9% 11.2%

______________________________(1) An $808 million non-cash goodwill impairment charge was recorded during the year ended December 31, 2015 ($542 million after tax).(2) See slide 14 for definitions of our non-GAAP measures and slide 16 for reconciliations of Adjusted EBITDA and Adjusted EBITDA Margin as non-GAAP measures.

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Strong Free Cash Flow(1)

______________________________

(1) See slide 14 for definitions of our non-GAAP measures and slide 17 for a reconciliation of Free Cash Flow as a non-GAAP measure.

(2) Represents the mid-point of our 2016 annual guidance for Free Cash Flow of $190 million to $230 million. See slide 10 for details on 2016 guidance.

(3) Free Cash Flow Yield is calculated as 2015 Free Cash Flow per share divided by Quad/Graphics closing stock price on February 19, 2016 of $10.45.

Year-to-Date Free Cash Flow(1)

Amounts in millions

$154

$215 $210

0

50

100

150

200

250

43%Free Cash Flow Yield(3)

$61 million ↑

2014 2015

We believe we have the ability to sustain Free Cash Flow(1) at 2015 levels into

the foreseeable future due to cash flow tailwinds from sustainable working capital

reductions

2016(2)

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Flexible Balance Sheet

______________________________

(1) See slide 14 for definitions of our non-GAAP measures and slide 18 for a reconciliation of Debt Leverage Ratio as a non-GAAP measure.

(2) Debt balances have been adjusted for debt issuance costs per the adoption of FASB ASU 2015-03.

Continue to believe that operating in the 2.0x to

2.5x leverage range, over the long-term, is the appropriate target

Debt & Pension ObligationsAmounts in millions

$1,405 $1,349

$222 $185

$0

$500

$1,000

$1,500

Dec 2014 Dec 2015

Debt & Capital Leases(2) (in millions)

Single and Multi-Employer Pension Obligations (in millions)

Debt Leverage Ratio(1)

3.09x2.92x

2.5x

3.0x

3.5x

Sep2015

Dec2015

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Capital Structure as of December 31, 2015

Fixed — Weighted Average Interest Rate of 7.1%

Floating — Weighted Average Interest Rate of 3.1%

April 2019Next Significant Maturity

5.1 YearsWeighted Average MaturityBlended Interest Rate of 4.9%

$731 millionLiquidity Under Revolver

57% 43%

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2016 Annual Guidance

US $ Millions 2016Net Sales $4.4 to $4.6 billion

Adjusted EBITDA(1) $420 to $460 million

Free Cash Flow(1) $190 to $230 million

Depreciation and Amortization $280 to $290 million

Interest Expense $85 to $90 million

Restructuring and Transaction-Related Cash Expenses $50 to $60 million

Capital Expenditures $85 to $100 million

Cash Taxes Less than $10 million

Pension Cash Contributions(2) Approximately $20 million

______________________________(1) See slide 14 for definitions of our non-GAAP measures.(2) Includes single employer pension plans and multi-employer pension plans.

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Shareholder Value

Declared dividend of $0.30 per share to be payable on March 18, 2016, to shareholders of record as of March 7, 2016

$0.00

$1.00

$2.00

$3.00

2011 2012 2013 2014 2015

Special Dividend

Regular Cash Dividend

$0.30$0.30

$0.30

$0.30

$0.30

$0.30

$0.30

$0.30

$0.30

$0.25

$0.25

$0.25

$0.25

$0.20$0.20

$0.20

$2.00

______________________________

(1) Dividend Yield is calculated as an annualized dividend of $1.20 per share divided by Quad/Graphics closing stock price on February 19, 2016 of $10.45.

$0.30

$0.30

$0.30

Commitment to Dividend

11%Dividend Yield(1)

< 30%Dividend as % of Free Cash Flow

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For questions contact:Kyle Egan – [email protected]

Supplemental Information

Use of Non-GAAP Financial Measures• In addition to financial measures prepared in accordance with generally accepted accounting principles

(GAAP), this presentation also contains non-GAAP financial measures, specifically EBITDA, EBITDA Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Free Cash Flow, Debt Leverage Ratio and Adjusted Diluted Earnings (Loss) Per Share. They are presented to provide additional information regarding Quad/Graphics’ performance and because they are important measures by which Quad/Graphics assesses the profitability and liquidity of its business. These measures should not be considered alternatives to net earnings (loss) as a measure of operating performance or to cash flows provided by operating activities as a measure of liquidity.

• Adjusted EBITDA is defined as net earnings (loss) plus interest expense, income tax expense (if applicable), depreciation and amortization, restructuring, impairment and transaction-related charges, non-cash goodwill impairment charges and loss on debt extinguishment, and less income tax benefit (if applicable).

• Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net sales.

• Free Cash Flow is defined as net cash provided by operating activities less purchases of property, plant and equipment.

• Debt Leverage Ratio is defined as total debt and capital lease obligations divided by the last twelve months of Adjusted EBITDA, including pro forma Adjusted EBITDA of Brown Printing. Pro forma Adjusted EBITDA for Brown Printing was calculated consistent with the definition of Adjusted EBITDA above.

• Adjusted Diluted Earnings (Loss) Per Share is defined as net earnings (loss) excluding restructuring, impairment and transaction-related charges, non-cash goodwill impairment charges, loss on debt extinguishment and discrete income tax items, divided by diluted weighted average number of common shares outstanding.

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Adjusted EBITDAFourth Quarter (US $ Millions)

Three Months Ended December 31,

2015 2014

Net earnings (loss) attributable to Quad/Graphics common shareholders $ (9.4) $ 25.8

Interest expense 22.0 23.4Income tax expense (benefit) (33.1) 27.9Depreciation and amortization 79.6 83.0

EBITDA [Non-GAAP] $ 59.1 $ 160.1EBITDA Margin [Non-GAAP] 4.4% 11.2%

Restructuring, impairment and transaction-related charges 84.9 21.4Loss on debt extinguishment — 1.2Goodwill impairment 10.0 —

Adjusted EBITDA [Non-GAAP] $ 154.0 $ 182.7

Adjusted EBITDA Margin [Non-GAAP] 11.5% 12.8%

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Adjusted EBITDAFull Year (US $ Millions)

Year Ended December 31,

2015 2014

Net earnings (loss) attributable to Quad/Graphics common shareholders $ (641.9) $ 18.6

Interest expense 88.4 92.9Income tax expense (benefit) (282.8) 20.2Depreciation and amortization 325.3 336.4

EBITDA [Non-GAAP] $ (511.0) $ 468.1EBITDA Margin [Non-GAAP] (10.9)% 9.6%


Adjusted EBITDA [Non-GAAP] $ 462.2 $ 542.6

Adjusted EBITDA Margin [Non-GAAP] 9.9% 11.2%

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Free Cash Flow(US $ Millions)


2015 2014

Net cash provided by operating activities $ 168.9 $ 218.4

Less: purchases of property, plant and equipment (21.8) (26.1)

Free Cash Flow [Non-GAAP] $ 147.1 $ 192.3


2015 2014

Net cash provided by operating activities $ 348.1 $ 293.2

Less: purchases of property, plant and equipment (133.0) (139.2)

Free Cash Flow [Non-GAAP] $ 215.1 $ 154.0

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December 31, 2015 December 31, 2014

Total debt and capital lease obligations on the consolidated balance sheets $ 1,349.3 $ 1,405.6

Divided by:Adjusted EBITDA for the year ended [Non-GAAP] $ 462.2 $ 542.6Pro forma Adjusted EBITDA for Brown Printing [Non-GAAP] — 5.2Pro forma Adjusted EBITDA for the year ended [Non-GAAP] $ 462.2 $ 547.8

Debt Leverage Ratio [Non-GAAP] 2.92x 2.57x

Debt Leverage Ratio(US $ Millions, Except Ratio Data)

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December 31, 2015 December 31, 2014

ASSETSCash and cash equivalents $ 10.8 $ 9.6Receivables 648.7 766.2Inventories 280.1 287.8Other current assets 51.7 70.3Property, plant and equipment—net 1,675.8 1,855.5Goodwill and other intangible assets 110.5 924.6Other long-term assets 69.9 94.8

Total assets $ 2,847.5 $ 4,008.8

LIABILITIES AND SHAREHOLDERS’ EQUITYAccounts payable $ 358.8 $ 406.9Other current liabilities 335.9 343.9Current debt and capital leases 99.7 96.2Long-term debt and capital leases 1,249.6 1,309.4Deferred income taxes 59.0 336.0Single and multi-employer pension obligations 185.4 221.7Other long-term liabilities 135.2 142.2

Total liabilities $ 2,423.6 $ 2,856.3Shareholders’ equity $ 423.9 $ 1,152.5

Total liabilities and shareholders’ equity $ 2,847.5 $ 4,008.8

Balance Sheet(US $ Millions)

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2015 2014

Earnings (loss) before income taxes and equity in earnings (loss) of unconsolidated entities $ (42.3) $ 51.6


52.6 74.2

Income tax expense at 40% normalized tax rate 21.0 29.731.6 44.5

Equity in earnings (loss) of unconsolidated entities (0.2) 2.1

Adjusted net earnings [Non-GAAP] $ 31.4 $ 46.6

Basic weighted average number of common shares outstanding 48.0 47.5Plus: effect of dilutive equity incentive instruments [Non-GAAP] 0.9 1.2Diluted weighted average number of common shares outstanding [Non-GAAP] 48.9 48.7

Adjusted Diluted Earnings Per Share [Non-GAAP] $ 0.64 $ 0.96

Diluted Earnings (Loss) Per Share [GAAP] $ (0.20) $ 0.53

Adjusted Diluted Earnings Per ShareFourth Quarter (US $ Millions, Except Per Share Data)

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2015 2014

Earnings (loss) before income taxes and equity in loss of unconsolidated entities $ (918.4) $ 41.2


54.8 115.7

Income tax expense at 40% normalized tax rate 21.9 46.332.9 69.4

Equity in loss of unconsolidated entities (6.3) (2.7)Net loss attributable to noncontrolling interests — 0.3

Adjusted net earnings [Non-GAAP] $ 26.6 $ 67.0

Basic weighted average number of common shares outstanding 47.9 47.5Plus: effect of dilutive equity incentive instruments [Non-GAAP] 1.0 1.0Diluted weighted average number of common shares outstanding [Non-GAAP] 48.9 48.5

Adjusted Diluted Earnings Per Share [Non-GAAP] $ 0.54 $ 1.38

Diluted Earnings (Loss) Per Share [GAAP] $ (13.40) $ 0.38

Adjusted Diluted Earnings Per ShareFull Year (US $ Millions, Except Per Share Data)

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quad/graphics, inc. 4th quarter 2015 earnings call dave honan€¦ · 4th quarter 2015 earnings...

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