Earnings Call Transcript - QUAD Q4 2023

Operator, Operator

Good morning, and welcome to the Quad's Fourth Quarter and Full Year 2023 Conference Call. During today’s call, all participants will be in a listen-only mode. A slide presentation accompanies today's webcast and participants are invited to follow along, advancing the slides themselves. To access the webcast, follow 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. Please note, that this event is being recorded. I'd now like to turn the conference over to Katie Krebsbach, Quad's Investor Relations Manager. Katie, please go ahead.

Katie Krebsbach, Investor Relations Manager

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 fourth quarter and full year 2023 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 and the slide presentation will be available on the Investors section of quad.com shortly after our call concludes today. I will now hand over the call to Joel.

Joel Quadracci, CEO

Thank you, Katie. And good morning, everyone. Beginning on Slide 3, I am pleased to report we delivered solid 2023 results, meeting our guidance across all metrics. Our results included adjusted EBITDA above the midpoint of our guidance range, and adjusted EBITDA margin was consistent with 2022, despite an 8% decline in annual net sales. This was due to a significant postal rate increase that was well above the rate of inflation, ongoing economic uncertainty, especially in early 2023, and the impact of elevated interest rates on the financial services sector, leading to reduced direct mail budgets. I will share more details on our net sales breakdown shortly. We ended 2023 with strong free cash flow that was near the high end of our guidance range and used our cash generation to further strengthen our balance sheet, reducing our net debt leverage to two times, which is our lowest leverage level since 2017. Since January 1, 2020, we have paid off $564 million in debt, a 55% reduction over four years. Through 2023, we also continued to return capital to shareholders through share repurchases. We will continue to be opportunistic in terms of our future share repurchases. And, as we announced last week, we have reinstated a quarterly dividend of $0.05 per share. We remain confident in our ability to address business impacts, including long term expected organic declines in large scale print due to our well-established and disciplined approach to managing all aspects of our business. This includes treating all costs as variable, aligning our cost structure to revenue opportunities, and optimizing our print manufacturing platform by consolidating work into plants where we can achieve the greatest manufacturing efficiencies and subsequently selling assets no longer required for business operations. At the same time, we continue to aggressively push forward on our growth strategy as a marketing experience company. The three pillars of our growth strategy are outlined on Slide 4, and include delivering integrated service excellence, which we achieve by focusing on solving problems, removing pain points and sources of friction from the marketing process, and providing transparency on clients' marketing expenditures. Accelerating market penetration in 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 a marketing experience company. On Slide 5, we show how we continue to make progress in our revenue diversification strategy into higher value, higher margin offerings. Between 2018 and 2023, integrated solutions and targeted print increased as a portion of total net sales and now represent 63% of net sales, an increase from five years ago when they accounted for 54% of net sales. Our integrated solutions include agency solutions, while targeted print comprises catalogs, direct mail, packaging, and in-store signage and displays. Large scale print, which includes retail inserts, magazines, and directories, continues to decrease as a percentage of total net sales due to organic declines. The increase in our international locations is primarily driven by stronger sales in Latin America, especially in Mexico, a strategic extension of our U.S. platform. Moving on to Slide 6, we achieved client service excellence and distinct competitive advantage through our suite of flexible, scalable, and connected marketing experience solutions. These solutions span every facet of the marketing journey, from offline to online, across creative production and media, and are supported by data-driven intelligence and state-of-the-art technology. We tailor each of these solutions to client objectives, driving cost efficiencies, improving speed to market, strengthening market effectiveness, and delivering clear value on investments. Quad's data-driven intelligence solutions empower smarter decisions to maximize marketing effectiveness and generate quantifiable impact, while our client-facing AI-driven technology solutions remove friction in the marketing process, by helping clients connect marketing strategy, global content creation, analytics, and personalized communications across online and offline channels. We have long employed artificial intelligence and robotic process automation and cognitive insights, and continue to explore new ways to apply generative AI across internal workflows and client-facing solutions. Our creative solutions help clients increase engagement with their brands to accelerate business growth, supporting all channels through every step of the creative process, including strategy, brand design, campaign ideation, media, adaptive design, and content creation. As far as production, Quad offers a wide range of production solutions for deploying content to all channels, offline and online. This is a major point of differentiation among our competitive set. Traditional agencies or agency holding companies develop creative and then outsource production, while traditional consulting firms provide strategy and then outsource implementation. Quad however, is able to strategize, create, and execute all campaign elements across all channels, using our own internal resources, providing a more efficient marketing experience for our clients and a better experience for the consumer. And lastly, through our media solutions, we provide strategic omnichannel media planning and placement, managing hundreds of millions of dollars of media billings annually. All our media solutions prioritize transparency and neutrality, so our clients can feel confident that their media spend is supported by the best data, platform, and partners for their unique needs to generate measurable impact. As I shared with you on last quarter's call, Joshua Lowcock, a well-respected and experienced leader in global media and data, joined Quad as President of Media. Since joining us a few short months ago, he quickly set about implementing the next evolution of our audience targeting and media engagement offering, which will improve our competitiveness and drive revenue growth. This next evolution aligns our data and analytics offering with our media and planning offering, as shown on Slide 7. By doing this, we're integrating audience identification abilities anchored on Quad's proprietary household data with planning and measurement across all forms of client media, online, offline, in-home, or in-store. The value to our clients will be superior audience identification and fully integrated planning, placement, and measurement to optimize spend in almost real time. This integrated offering is the foundation of a new Quad media offering grounded in our unique household insights and data capability that we will be bringing to market soon. Another area in which we are strategically investing is retail media networks. Earlier this month, we announced our acquisition of DART Innovation, an in-store digital media solutions provider to further build on our retail expertise and offerings, as shown on Slide 8. With DART's capabilities and technology, we aim to revolutionize the shopping experience for retailers, consumer packaged goods companies, and consumers by delivering targeted promotions on digital screens right at the store shelf, the most critical moment in the purchasing decision. This strategic investment expands and seamlessly integrates into our suite of marketing experience solutions, and enables an integrated consumer purchasing journey across home, online, and in-store. Retailers are highly interested in our offerings in this space and we are already leveraging DART's capabilities to launch the first phase of our rollout with the Save Mart companies, the largest private grocery retailer on the West Coast. Turning to Slide 9, we also continue to innovate solutions in our core print business, especially postage optimization programs to help offset ongoing significant postal rate increases. Postage makes up the largest portion of cost for our print clients as compared to paper and manufacturing. The U.S. Postal Service continues to pursue what we believe is a flawed strategy of implementing enormous postal hikes in an attempt to make up for billions of dollars in annual losses. This strategy is driving away the very volume that supports its existence. In the last year alone, mail volumes plummeted by 11 billion pieces, according to USPS data. This is primarily due to the cumulative effect of postal rate hikes. We expect to see additional volume reductions if this unsound strategy is not rectified, as our clients cannot continue to absorb massive rate increases, some of which have totaled as much as 57% over the last three years, more than triple the rate of inflation. We are urging swift action to preserve the affordability of the printed mail channel before it potentially has to undergo a massive taxpayer bailout. We have been working with members of Congress, White House staff, and our client base to moderate these increases. This effort is important as the postal service is at the core of a $1.9 trillion mailing industry that provides family-supporting jobs for 7.9 million Americans and is the backbone for a large portion of the private sector. We will share updates on our efforts to address this crisis, including the launch of a new dynamic postal optimization program at our 23rd Postal Conference next month. Turning to Slide 10, we are pleased to show how we're growing our presence with well-known brands, with a particular focus on commerce which includes retail, consumer packaged goods, direct-to-consumer, financial services, health, and publishing. These reputable, well-known brands include Amazon, Walmart, Red Bull, American Express, Abbott Labs, and more. They are all admired for their excellence and the loyalty they have built with consumers. We take great pride in knowing they trust us to help deliver on their marketing vision. On Slide 11, we show an example of how we are using our connected solutions to improve consumer response rates and revenue for leading brands and marketers. Wolverine Worldwide, one of the world's leading marketers and licensors of branded footwear and apparel, including Merrell, Saucony, and Wolverine, had used direct mail successfully for many years. But over time, they started seeing a decline in its effectiveness. The company had considered reducing or altogether eliminating direct mail to focus exclusively on digital campaigns for growing and strengthening consumer connections. We partnered with Wolverine Worldwide to optimize its direct marketing performance, conducting pre-market testing and integrated campaign support. We utilized accelerated marketing insights, our proprietary pre-market testing platform to research different messages and creative treatments for consumer preference and to build an audience influence messaging hierarchy. Our testing included multiple variables in more than 1,400 different combinations to assemble the optimum content and design for a challenger direct mail piece to outperform existing content already in the market. Additionally, we leveraged Informed Delivery, a U.S. Postal Service solution that lets consumers preview upcoming mail deliveries in emails to send digital challenger ads to the same target audience online and via social media. The results were exceptional. Year-over-year, we were able to help Wolverine achieve nearly double its response rate. The client also doubled conversion rates, thanks to more effective digital creative and messaging, accomplishing twice the click-through rate and increasing sales an incredible 261% per buyer. We look forward to continuing to work with Wolverine to increase engagement between its brands and consumers to accelerate business growth. On Slide 12, we show an example of how our flexible, scalable and connected solutions are helping Rural King, a farm and home retailer with 135 stores across 13 states, increase marketing efficiency and effectiveness. We have been steadily expanding our relationship with Rural King since 2016 when we started printing its retail ad inserts. Soon thereafter, we added media planning and placement for inserts, eventually becoming the retailer's full media agency of record in 2020. Since then, we have expanded our relationship to include creative development and execution for all channels, including linear and connected TV, radio, display, YouTube, and social. Robust data and analytics solutions, including the use of our proprietary tool for optimizing cross-channel marketing spend, a custom dashboard for tracking real-time channel performance, and media mix modeling services that transparently detail marketing return on investment, as well as our proprietary content management system that enables content at scale across marketing channels, are also utilized by Rural King. Rural King uses our data and analytics capabilities to conduct brand health measurement, tracking perception and reputation among consumers along with performance in the marketplace. Our data and analytics expertise is important to Rural King, as is our integrated service approach which includes a single point of contact for all Quad services. This offering removes the complexity of working with multiple vendors and partners, enabling Rural King to focus on delivering the best consumer experience. We value our relationship and look forward to continuing to partner on new initiatives, including brand positioning work this spring. Turning to Slide 13, for more than 52 years, Quad has worked to create a positive sustainable impact at our company and in the communities where we live and work. Recently, our work on two notable recognitions is noteworthy. Quad was a finalist in the Greater Good Awards presented by Digiday, Glossy, Modern Retail, and Worklife, for ongoing support of social causes, including staff empowerment, extracurricular programs, and community partnerships. Additionally, members of our corporate responsibility team were recently recognized by Milwaukee-based Uplifting Impact for their efforts to advance inclusive leadership at Quad. Before I turn the call over to Tony, I would like to thank our employees for their commitment to performing well for our clients while we proactively manage all aspects of our business for long-term strength and stability. I have great confidence in our team and continue to be enthusiastic about our growth opportunities as a marketing experience company. I'll now turn the call over to Tony for a financial review.

Anthony Staniak, CFO

Thanks, Joel, and good morning, everyone. Slide 14 provides a snapshot of our fourth quarter and full year 2023 financial results. Net sales were $788 million in the fourth quarter of 2023, down 11% from 2022. For the full year, net sales were $3 billion, down 8% from 2022. The net sales decline was primarily due to lower print, paper, and logistics sales as well as the 2022 divestiture of our Argentina print operations. Print volumes were negatively impacted by ongoing external headwinds, including significant postal rate increases, economic uncertainty, and the effect of elevated interest rates on specific clients. Adjusted EBITDA was $66 million in the fourth quarter of 2023 compared to $79 million in the fourth quarter of 2022, and adjusted EBITDA margin declined 8.3% in the fourth quarter of 2023 compared to 8.9% in the fourth quarter of 2022. For the full year, adjusted EBITDA was $234 million in 2023 compared to $252 million in 2022. However, adjusted EBITDA margin improved from 7.8% to 7.9%. The decrease in full year adjusted EBITDA was primarily due to $11 million of lower pension income as well as the impact of lower sales, partially offset by benefits from improved manufacturing productivity and savings from cost reduction initiatives. Adjusted diluted earnings per share was $0.23 in the fourth quarter of 2023 compared to $0.41 in the fourth quarter of 2022. For the full year, adjusted diluted earnings per share was $0.52 in 2023 compared to $0.89 in 2022. The decline was primarily due to lower adjusted net earnings and was partially offset by the positive impact from share repurchases. In the fourth quarter, we continued to return capital to shareholders through share repurchases. Since the second quarter of 2022, we have repurchased 5.9 million shares or approximately 11% of our outstanding shares for a total purchase price of $23 million. Free cash flow was $77 million in 2023 compared to $94 million in 2022. The decline in free cash flow was primarily due to an $11 million increase in capital expenditures as we continue to invest in innovation and automation initiatives. During 2023, we invested $71 million in capital expenditures to drive efficiencies. In addition to free cash flow, we also continue to generate significant cash from asset sales, as shown on Slide 15. During the 5-year period from 2020 to 2024, we expect to generate over $700 million of free cash flow and proceeds from asset sales. These sales include divestitures of certain non-core portions of our business as well as sales of property, plant, and equipment from closed facilities, such as our Merced, California print building that we sold in 2023 for net proceeds of $19 million. Beginning in the fourth quarter of 2023 and into the first quarter of 2024, we have announced the closure of an additional four owned facilities from which we will generate further proceeds from asset sales. This strong cash generation fuels our capital allocation strategy, as shown on Slide 16. Our capital allocation priorities include using free cash flow and cash proceeds from asset sales to invest in scaling our offerings as a marketing experience company, such as the acquisition of DART, continued debt reduction, and return capital to shareholders. As announced last week, on February 16, our Board of Directors reinstated a quarterly dividend of $0.05 per share, or $0.20 per share on an annualized basis. We are pleased to return capital to shareholders through the quarterly dividend, and we also expect to continue to be opportunistic in terms of our future share repurchases. We saw our commitment to debt reduction on Slide 17. As part of a multiyear debt reduction strategy, at the end of 2023, we reduced net debt by $564 million, a 55% reduction from over $1 billion of debt we had on January 1, 2020, and we reached 2.0 times debt leverage, which was the low end of our previous long-term targeted leverage range. We intend to further reduce debt leverage to approximately 1.8 times by the end of 2024. We are also lowering our targeted debt leverage range by 0.25 turns to now be 1.75 to 2.25 times. Slide 18 includes a summary of our debt capital structure. At the end of 2023, our net debt was $470 million, our blended interest rate was 6.9%, and our debt was 44% floating and 56% fixed. In early 2024, we generated $53 million of cash by successfully increasing the commitment with one of our banks to add $25 million to our term loan and by entering into $28 million of leases for two large printing presses instead of purchasing those presses outright. We then used our revolving credit facility and cash on hand to repay an $88 million term loan maturity, and at that same time, the total capacity under our revolving credit facility decreased by $90 million to $343 million. With the step-down in debt complete, our next nearest significant debt maturity is now November of 2026. On Slide 19, we have included our 2024 financial guidance. Annual net sales are expected to decline 5% to 9% compared to the prior year. The decline in net sales is primarily due to expected organic declines in certain product lines heightened by significant postal rate increases. In addition, our net sales guidance will be impacted by the ending of a long-standing relationship with a large grocery client. Our relationship with this client concludes at the end of this month and represented approximately 3% of our 2023 net sales. While the loss of any client is disappointing, our revenue is highly diversified with no single client representing more than 5% of our annual revenue. We have a large base of over 2,700 clients that provide sales growth opportunities as we continue to expand our offerings as a marketing experience company. Full year 2024 adjusted EBITDA is expected to be between $205 million and $245 million, with $225 million at the midpoint of that range, representing a $9 million decline from 2023 adjusted EBITDA, but a 28 basis point improvement in adjusted EBITDA margin to 8.2%, due to benefits from improved manufacturing productivity and savings from cost reduction initiatives. These cost reduction initiatives include the closures of our Sacramento, California; Ethingham in Bolingbrook, Illinois; and Saratoga Springs, New York facilities, as well as other labor reductions in production and SG&A. These decisions, while difficult, are expected to result in $16 million of annual cost savings. From a quarterly perspective, we anticipate our lowest adjusted EBITDA to be in the first quarter of 2024, as the benefits from the cost reduction actions will reach their full annualized amount late in the second quarter of 2024. We then expect improved adjusted EBITDA in the second half of 2024 due to the full benefit of the restructuring actions combined with higher sales during our seasonal production peak. We expect 2024 free cash flow to be in the range of $50 million to $70 million, with $60 million at the midpoint of that range, representing a $17 million decline compared to 2023. In 2024, free cash flow will be most impacted by higher restructuring payments, particularly in the first half of the year due to the recent plant closures and other labor actions. The higher restructuring payments and the reduction in cash flow from lower net sales will be partially offset by improvements in working capital, lower interest payments due to our debt reduction, and lower capital expenditures. Capital expenditures are expected to be in the range of $60 million to $70 million, approximately $6 million lower than 2023 at the midpoint of our 2024 guidance range. We expect our free cash flow to be augmented by cash proceeds from asset sales, the extent of which will be based on the timing of selling the buildings that were recently announced for closure. With our strong cash generation, we will continue to prioritize debt reduction and expect to further reduce our net debt leverage ratio to be approximately 1.8 times by the end of 2024, near the low end of our new long-term targeted net debt leverage range of 1.75 to 2.25 times. Slide 20 includes our key investment highlights as we continue to build on our momentum as a marketing experience company. We believe that Quad is a compelling long-term investment—including the recently announced quarterly dividend—and we remain focused on growing net sales and driving higher profitability through continued diversification of our revenue and clients. With our expanded offerings as a marketing experience company, including investments in new offerings such as in-store digital promotions with the DART acquisition, there is a significant addressable revenue opportunity with both our large base of existing clients as well as new clients. Additionally, our successful multiyear debt reduction strategy, including achieving 2.0 times debt leverage at the end of 2023, provides us increased flexibility in capital allocation. Our focus on debt reduction will not change as that is in the best interest of Quad and its shareholders as we reduce interest costs in this high-interest rate environment and further strengthen what we believe is an industry-leading financial foundation. While continuing to reduce debt, we also now have the capital flexibility to add to the ways we provide returns to shareholders with the reinstatement of the quarterly dividend. With that, I'd like to turn the call back to our operator for questions.

Operator, Operator

The first question comes from Kevin Steinke of Barrington Research Associates. Please go ahead.

Kevin Steinke, Analyst

Good morning, Joel. Thanks for taking the questions. Nice job on the fourth quarter results and getting to the low end of your prior leverage ratio range, and also it was good to see you reduce the targeted range going forward. But I want to start out by asking about just the sales outlook as you think about 2024. You mentioned expected organic declines in certain product categories. Maybe just touch on which categories you're expecting to decline and the factors behind that. I talked about interest rates, economic uncertainty as well as the postage rate increases, and then as well, can you just kind of touch on what you saw in the various categories in the fourth quarter as well as the full year 2023?

Joel Quadracci, CEO

Yes. I think the best way for me to explain this is to start with 2023 and then move forward. We continue to expect organic decline in large-scale print, particularly in retail inserts, which has been declining at a double-digit rate for many years. This is something we manage and we still generate good free cash flow from it, so it's manageable. At the beginning of 2023, two main themes emerged. One was economic uncertainty, which our clients were expressing, and it was felt globally. This contributed to a more cautious sharing of their 2023 plans. The second theme was significant interest rate increases, which impacted us heavily in direct mail. We had considerable exposure to the financial sector, including one major player leaving the consumer banking market. High-interest rates led to a notable pullback in direct mail, particularly in consumer lending services. Additionally, the post office implemented an early increase in postage rates at the beginning of the year and then followed up with a substantial mid-year increase of 10% to 14%. Clients were not expecting this second increase and had already set their budgets for the year. As this represented their largest cost, we observed a significant decline in catalog and direct mail in the second half of the year due to the postage hikes. This wasn't about digital disruption, but rather a significant increase in costs imposed by the post office. In response, clients reduced their prospecting mailings to offset these costs. We noted that catalog sales were down approximately 6% year-to-date, heavily weighted towards the back end of the year. Looking ahead to 2024, the post office is set to implement another increase, having recently introduced about a 4% to 4.5% increase, with a 10% hike planned for July. We believe this strategy is flawed, as marketing mail is crucial for the post office's operations. While we don't expect to lose the ability to use the post office, there are concerns about a potential taxpayer bailout or takeover since postage currently funds the post office. The increases we are seeing are significantly above the inflation rate, resulting in over a 57% hike in costs in the last three years, which makes no economic sense. We've accounted for this in our guidance and have factored in expected organic decline due to postage. We hope for changes, but we are planning as if these increases will proceed. Additionally, we are launching a major new product designed to assist in reducing postage costs by 10% to 20%, which, while not completely offsetting the postal rate hikes, should help manage the situation. From a direct mail perspective, we are noticing some recovery in the core financial segment, although not necessarily in personal lending. Some clients who had stepped back from direct mail are beginning to return, and we have promising discussions underway. As the effectiveness of digital advertising diminishes, especially with changes like the deprecation of cookies, clients are reevaluating their media strategies, and they are not planning to overlook print.

Kevin Steinke, Analyst

Yes, absolutely. That was great insight. As I consider 2024, it seems that the expected decline is primarily related to postal rate increases rather than economic uncertainty. Is that a fair assessment?

Joel Quadracci, CEO

That's the way we're looking at it. And I'll remind you though that in large-scale print, we continue to expect double-digit decline, and that's what we've been saying for years. But in the areas of catalogs and direct mail, that would be accurate.

Kevin Steinke, Analyst

Okay. And you mentioned working with the government on perhaps trying to reverse or slow this trend of increasing rates. I don't know, obviously, as one of the largest mailers in the U.S., you probably have their ear a bit. I mean, I don't know if they're getting a lot of pushback. I would suppose from other large mailers. And just wondering what you think your level of influence is or the industry's level of influence? And do you have any sense as to whether they were surprised by these volume declines? Or what their thinking is after seeing these volume declines, I guess?

Joel Quadracci, CEO

Yes, what we've been told is they don't believe in something called elasticity, that volume declines are because of digital disruption. And if you talk to a lot of mailers out there, they say we went through a lot of the digital disruption, but we still use catalog and direct mail in our mix. And that this particular era is about this huge increase in cost. I mean, it would be like telling me that my biggest cost, labor, is going to go up 57%, and I have no ability to pass it on to my customers because most of the world is stuck at raising prices somewhere in the CPI range. It's just the math doesn't work. Now no one single person can influence this, but we speak on behalf of a lot of different mailers. We work in conjunction with the C21, which is made up of a lot of different groups. I've testified in Congress multiple times as we got the post office huge relief just a couple of years ago after working on a bill for 10 years. They saved billions of dollars by not having to pre-fund retirement health care and things like that. But the downside was they got released from having to cap their postal rates at the same rate that everybody else in the world is capped at about CPI. And no one thought they would go to extreme levels like this. And it just logically doesn't make sense. You don't run a business this way. So we're hitting it, but I will also tell you, there are a lot of big players out there in the non-profit world. Non-profits are getting killed by this. There are a lot of other players who do a lot of their own lobbying, and right now, there's a lot of people screaming. Ultimately, it's getting Congress' attention and, hopefully, the board of governors who will oversee it to bring some rational behavior to bear. Again, it's not going to go away, but I think that they should be worried about a massive taxpayer takeover, which no one wants because there's too much of that going on.

Kevin Steinke, Analyst

All right. That's helpful. Thank you. I just also wanted to touch on, you mentioned there the loss of a longtime grocery client. Maybe just what happened there? And how you would expect to maybe kind of backfill that over time?

Joel Quadracci, CEO

Yes. We will work to backfill it. I hate losing clients. This client, we did a lot of complex things for across multiple services. And the two things I'll just say on it is that, we need to get paid for what we do. We're not asking to help the world, but we have to get paid for what we do with all these complex services we provide. I'll also say that this customer is also managing through some very significant complexities of their own. So I'll leave it at that.

Kevin Steinke, Analyst

Understood. I mean, yes, that's kind of what I was thinking maybe you touch on is perhaps the profitability wasn't there, so maybe it's not as significant or large of an impact to your profitability as perhaps your revenue.

Joel Quadracci, CEO

Yes. I just think it's so important for my employees and my shareholders that as we invest in all these things, we get paid a fair price. That's all we ask. We get paid for a huge benefit we're giving people by providing all this integration, postal savings, all the different things that we do. Sometimes, that results in answers you don't like, but those are the best answers for the long-term health of my company.

Kevin Steinke, Analyst

Understood. Great. So I also wanted to talk about agency solutions, your end-to-end marketing solutions, and the demand you're seeing there. I think you mentioned a strong business pipeline. So maybe what you're seeing on that front? And if that continues to be resilient in these uncertain economic times?

Joel Quadracci, CEO

Yes, I'd say that the pipeline is actually heating up nicely because remember, we just relaunched our brand a year ago, and a lot of this has been about opening up the aperture to clients we never had access to before. We really weren't direct to CPG and things like that. We weren't always seen as a player in the agency space or viewed as providing media solutions. So we really ramped that up this past year. I mean, a couple of years ago, I never thought I'd be telling you that we were redesigning the brand look for Titleist Pro V1. When you look at what we shared about Wolverine today, think of this as a flywheel. It's not just an agency solution I want to win; I want to win the relationship. Any entry point is great. So for Wolverine, we entered and were able to suddenly offer them quite a few different products and services to solve their problem. I'd like to see if we enter into a creative space with someone that suddenly then we're talking about for packaging, for instance, how does that package appear in-store? Let's talk to our in-store people. Along with that, with our retail media network we're launching, we’d love to take the data that comes out of the retail media network to sell CPGs on advertising within the store with eyeballs, but then using the data we get out of that experience to further go after new audiences. Think of this all as a big flywheel that's speeding up, creating a lot of revenue and will create revenue across a lot of the print channels as well, especially in targeted print. I think Wolverine is a great example of that.

Kevin Steinke, Analyst

Okay, great. So when I think about the sales guidance and adjusted EBITDA guidance ranges for 2024, what are some of the factors that maybe give you the high end or the low end of those ranges as you think about how the year might play out?

Anthony Staniak, CFO

I believe that from a revenue perspective, we expect the current economic conditions to persist throughout 2024. If the economic situation improves significantly, it could lead to increased marketing spend and sales benefits. We're also focused on further enhancing productivity after our initiatives in 2023, with ongoing efforts into 2024. We anticipate that the automation benefits from new large web presses recently implemented in the United States, along with another one being installed in Mexico this month, will contribute to our profitability. Ultimately, the connection that Joel mentioned regarding the flywheel effect will continue to drive sales between print and agency.

Joel Quadracci, CEO

And then the one last point on the revenue side is what I've been talking about—the wild card is a bit of how does this postal thing play out. Do they hold steady on their strategy, or do other thoughts come into play that correct that?

Anthony Staniak, CFO

And Kevin, I would just say on the guidance, we're happy with the fact that we're maintaining profitability despite these revenue pressures that you're hearing from us with the postal rates, resulting in a slightly improved adjusted EBITDA margin as we are improving profitability on the margin. So we're happy about that.

Kevin Steinke, Analyst

Absolutely. Yes, as I looked at the guidance, that clearly stood out to me, essentially flat profitability within that range at the midpoint despite the projected sales decline. So, maybe just a couple more here. Just on any more commentary on DART Innovation, just in terms of size or purchase price, quantitatively or qualitatively, and any other color commentary on what that brings to you?

Joel Quadracci, CEO

Yes, it wasn't a large deal, but it was an important one. That team has been around for several years, working with a very large retailer currently that they've deployed it in for several years now. The exciting thing is that we brought to the table this opportunity with Save Mart whose leadership are veterans in the grocery business. They know the business, they know it well, and they trust us. The fact is, is we're already launching on a rollout with them to test in their stores for hopefully a bigger rollout as well as with other retailers. This is a very important step because if you follow the world of media, retail media networks is a huge conversation right now to the point where you just saw Walmart buy Vizio to try and leapfrog into this space in their own stores. For us, it's a real opportunity to help those who aren't of the size and scale of Walmart to actually be able to play in the same space and get control of that all-important data of what happens within their stores.

Anthony Staniak, CFO

Yes. I think, Kevin, exciting that takes Quad’s relationships, which got up to the very highest level of retailers, combines that with DART's offering of what they have assembled, and we think there's significant possibility to scale. It ties in, quite frankly, with the discussions we're already having with physical in-store signage, and now digital in-store signage, rounding out our offerings to that group of retailers.

Kevin Steinke, Analyst

Great. And then lastly, I'd just like to ask about reinstating the dividend. Certainly, that was welcome, I think, and just maybe the thought process that went into your decision to reinstate the dividend?

Joel Quadracci, CEO

Well, I think first and foremost, the sustainability of it. As we've wanted to come back to that point, we're very careful about the balance sheet. I think we've proven ourselves that we've really done a great job of focusing on paying down debt to very low levels, and we'll continue to do that. But we feel that launching a dividend at this size is very sustainable for us. Would we love to revisit it in the future? Of course, and we will to see if we can do more, but at this point, we like this as a great sustainable starting point.

Anthony Staniak, CFO

Yes, I would add that Quad has historically been a dividend payer, which was important for rewarding our shareholders. At the onset of COVID, we made the prudent decision to stop the dividend. We focused on reducing our debt and have now lowered it to the lower end of our target range. As Joel mentioned, we can now consider reinstating the dividend and providing returns to our shareholders, and I’m pleased we have the opportunity to do so.

Kevin Steinke, Analyst

Okay, great. Thanks for all the commentary. I’ll turn it back over.

Operator, Operator

The next question comes from Barton Crockett of Rosenblatt. Please go ahead.

Barton Crockett, Analyst

Good morning. Thanks for taking my questions here. And you guys have covered a lot from the presentation in the Q&A. But just stepping back, I mean, one thing I would appreciate, kind of your perspective on Joel, is I think the real opportunity for your shares is to get back to a place of revenue growth. And what would it take to get there? I mean, do you need, as kind of a prerequisite for that, the postal service to go to normalized kind of price, CPI price growth versus the outsized growth? Does that have to happen? Or is there a world where you can grow revenues again even if the postal service continues down the road that it's laid out?

Joel Quadracci, CEO

Yes. I mean we're going to continue to grow revenue through all the other services. I mean, in-store year-to-date was up 12% at the end. So that's an example of how we're doing that, and that comes from some of that multi-feature relationship that we do with people. Certainly, more rational thinking of the post office would significantly help. In fact, if you didn't have that type of increase last year, we were feeling really good about sort of that flip point of having to deal with organic decline versus new revenue coming in. So were we there yet? No, but we are heading that direction. With this surprise where people got caught, like I said in the second half, we saw that significant reaction to it. I think the question is the post office keeps their trajectory. The customers will have to be very smart about how they manage through it with other cost initiatives and trying to pass on to customers. How that plays out will be seen, but I feel good about our ability to manage through it. I mean when I saw the postal increase happened last year, we closed a significant 40-year plant of ours that I had a very close relationship with for many years. I pulled forward closing that because of the postal increase just to ensure we could manage ahead of it and consolidate. That’s what we mean when we say we treat all costs as variable. If we see something happen on volume in core traditional lines, we know how to react to it. But at the same time, we'll continue to grow all the other offerings, which will impact things like catalog, direct mail, packaging, in-store, and agency. But when you get that one-time surprise, there's a big reaction that typically happens. I hope even as they go forward, to see that moderate, but it certainly puts some of the onus—a lot of onus—on the customer base to be able to figure that out. The bottom line is the catalog works, direct mail works. It's an important part of the go-forward media mix for people because that media mix landscape is a challenging one. You still have to sell your product.

Barton Crockett, Analyst

Okay. All right. I appreciate that. Now I guess if you look at some of the question marks around the longer-term revenue trajectory. I understand your guidance for this year, but even after this year, there are some unknowns. To what degree should we expect you guys to continue to reduce debt? I know your next maturity is 2026, but there could be an argument if revenue pressures continue for some time to keep reducing debt. How do you guys kind of feel about that?

Joel Quadracci, CEO

Yes. I think you have to look at debt levels and leverage in conjunction with the business you're in and your ability to manage challenges. In a growth business, people would say we're under-leveraged. In a business like this, I think we're being very prudent because of those unknowns. I would tell you, we will continue to pay down debt until I see something different. That's why I like the balance of a sustainable dividend we're doing; being able to still opportunistically look at share repurchases. I want to see that same question answered. Therefore, we want to continue to keep paying debt down, which is why we changed our guidance on the leverage range.

Anthony Staniak, CFO

We have mentioned that about 50% of our debt is fixed while the other 50% has a floating interest rate. Given the current interest rates, managing our debt prudently not only saves us money through paying down debt but also allows us to redirect that savings into the company's growth. We allocate 2% of our revenue for capital expenditures. While some of this is for maintenance, we are also investing significantly in automation to enhance efficiency and increasing our technology spending as we innovate. You'll notice us shifting funds in this direction; reducing debt supports this effort, and we are pleased to maintain the dividend.

Joel Quadracci, CEO

Another thing, Barton, if you look back at where we come from in our strategy, when we started playing a consolidator in the core business where the product lines are shrinking, it was about managing good, strong free cash flow by ensuring you put the work in the most efficient plants and then squeezing the platform down as volume went down. The cash isn't just from yearly free cash flow. It's from expected sales of those assets that you close and sell as the organic decline happens. The two of them have resulted in that huge ability to pay down debt. I mean, we went through a pandemic, and we're still paying down debt because we treat all costs as variable with closed plants as the volume dictated it. That ability is there to manage what comes to us. Meanwhile, this flywheel of all the other services and driving other large invoices in print will continue to go.

Barton Crockett, Analyst

Okay. That’s very helpful. Thank you, guys.

Operator, Operator

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

Joel Quadracci, CEO

Thank you, everyone, for joining today's call. I just want to close by reiterating my confidence in our team and our strategy and in our future as a marketing experience company. Our pipeline for new business remains strong thanks to our unique offering, and we will continue to prioritize growth in verticals and product lines with the greatest expansion opportunities while managing all aspects of our business for long-term strength and stability and shareholder value creation. So with that, we look forward to speaking to you next quarter.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.