Earnings Call Transcript - QUAD Q1 2026

Operator, Operator

Good morning, and welcome to Quad's First Quarter 2026 Conference Call. Please note this event is being recorded. I will now turn the conference over to Julie Fraundorf, Quad's Executive Director of Corporate Development and Investor Relations. Julie, please go ahead.

Julie Fraundorf, Executive Director of Corporate Development and Investor Relations

Thank you, operator, and good morning, everyone. With me today are Joel Quadracci, Quad's Chairman and Chief Executive Officer; and Tony Staniak, Quad's Chief Financial Officer and Treasurer. Joel will lead today's call with a business update, and Tony will follow with a summary of Quad's first quarter 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 net 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 Investors section of quad.com shortly after our call concludes today. I will now hand over the call to Joel.

J. Joel Quadracci, Chairman and Chief Executive Officer

Thank you, Julie, and good morning, everyone. I'll begin with key highlights shown on Slide 3. Our first quarter results were in line with our expectations, and we are on track to achieve our full year 2026 guidance. During the quarter, we maintained steady profitability and expanded margins compared to Q1 2025. Our strong balance sheet enabled us to return $7 million to shareholders, including $6 million in regular cash dividends and $1 million in share repurchases. We continue to make strategic investments in our expanded marketing solutions and are seeing strong momentum in our audience strategy services, which are powered by Quad's proprietary household-based data stack. Quad's MX offering shown on Slide 4 includes a suite of integrated solutions across creative, production and media supported by intelligence and technology and spanning both digital and physical channels. As we invest in our growing solutions portfolio, we are maintaining cost discipline while navigating dynamic macroeconomic challenges, including continued postage rate increases and cost pressures in our supply chain stemming from the ongoing conflict in the Middle East. In late Q1, oil and gas prices increased sharply, driving up distribution costs and raising input costs tied to petrochemicals used in certain manufacturing processes, most notably ink. In response, Quad implemented a temporary surcharge on ink. We are continuing to proactively manage the situation should volatility persist, including diversifying suppliers, optimizing inventory planning and taking targeted pricing actions where appropriate. Postage remains a significant macroeconomic challenge for many of our clients, representing the single largest marketing expense for our mailers and a key factor shaping marketing spend decisions. The USPS continues to rely on price increases as one of its primary levers to address its financial challenges. Earlier this month, the Postal Service announced the details of its next rate increase expected to take effect on July 12. We estimate this will result in an average postage increase of up to 10% for many of our Co-mail clients. In March, Postmaster General David Steiner testified before Congress stating that absent federal intervention, the USPS is expected to run out of cash in 2027. The Postmaster General attributes this in large part to the USPS' universal service obligation, which requires it to deliver mail six days a week to every address, a number that grows by more than 1 million delivery points each year. The Postmaster General emphasized that to continue executing its universal service obligation, the USPS must either be federally compensated for the public service or provided the pricing and operational flexibility necessary to sustain it. It should be noted that since the Postmaster General's testimony before Congress, the USPS has been granted additional financial flexibility that will now provide it with liquidity beyond 2027. As this situation evolves, Quad's Postal Affairs team remains actively engaged with policymakers in Washington as well as the Postal Service, advocating on behalf of our clients and the broader mailing ecosystem. To help mitigate ongoing rate increases, we continue to deploy the same two-pronged approaches we have had for decades, focused on maximizing postal cost savings while improving response rates. Small reductions in the cost of postage can translate into substantial savings when applied across millions of pieces, and this is where Quad continues to deliver measurable value for our clients. As shown on Slide 5, our postal optimization solutions work together to reduce clients' mailing costs. This example demonstrates how a layered optimization approach led to significant savings for our client across one week of mailings. To start, the client reduced its overall postage cost by 20% by participating in Quad's main optimization program of Co-mail. The client realized an additional 3% savings per piece in high-density delivery areas by utilizing advanced Co-mail sortation capabilities. We help the client capture further savings through our Household Fusion program, which combines multiple publications or catalogs into a single mail piece where eligible. In parallel, our postal experts help the client qualify for USPS promotions, lowering its cost even further. Taken together, these solutions cut the client's postage costs by 27%. This is a notable savings considering postage accounts for up to 70% of the cost to manufacture and deliver print mail pieces. It is also important to note that savings generally increase as the size of our weekly Co-mail pool grows. Today, there is still a fair amount of clients who do not optimize their mailings in our programs. As more clients adopt our postal optimization programs, we expect to generate higher savings for all participants. We also continue to invest in innovative solutions that improve the efficiency and effectiveness of direct mail, including At-Home Direct, our self-service direct mail automation platform. Launched last year, the platform enables personalized mail with timely, scalable delivery, greater speed and operational simplicity. It also enables trigger-based mail informed by online consumer interactions or special life events to drive consumers further along the purchasing journeys. On Slide 6, we show an example of how Fidium, a rapidly growing fiber Internet provider, is using the platform to streamline workflows and get into market faster, consolidating multiple segmented direct mailings into a single weekly execution. With At-Home Connect, Fidium reduced its mail cycle from two weeks to just five days, eliminating approximately 45 labor hours per month and reduced direct mail production costs by 33%. As one Fidium executive said, switching to At-Home Connect has been a game changer for our direct mail program. It saves us time and reduces print and postage costs without sacrificing volume. Overall, it's been a seamless and highly effective solution. Beyond driving operational efficiencies, we are always working to identify and invest in solutions that improve marketing effectiveness and generate stronger response rates for our clients. Slide 7 highlights our work with Monogram, a Boston-based financial services firm as it scaled its new private student loan product, Abe. Monogram needed a partner to help increase booked loans while establishing credibility in a competitive, mature market. Quad partnered with the client from strategy through execution, leveraging our team's industry insights and experience to develop the brand's first-ever direct mail effort. The program launched during the peak lending season, running six campaigns from late April through September 2025. The strategy used Quad's proprietary household-based data stack to identify high potential borrowers and cosigners. Campaigns incorporated premarket testing, audience modeling, creative optimization and response analysis with insights continuously applied to improve performance over time. The program delivered strong results. Abe achieved its 2025 growth objectives with booked loans increasing sixfold year-over-year while maintaining its target cost per application. This example reflects the value of our integrated approach, which combines data, strategy, creative and execution. The program also earned industry recognition with Quad receiving a Financial Services Strategy award in the personal finance category from the Gramercy Institute, the world's largest network for senior marketers from leading financial institutions. As an industry thought leader, Quad partners with some of the nation's most respected researchers to better understand emerging market trends. As shown on Slide 8, we have continued our partnership with the Harris Poll, one of the longest-running survey firms in the U.S., releasing findings from a new national study that examined how AI is shaping the consumer shopping experience. The studies show shoppers are primarily turning to AI for practical reasons. When we ask why AI appeals to them, two in three shoppers said they like how the technology can spot pricing inconsistencies and three in five said it helps them stay on budget and narrow choices more quickly. Findings also underscore that AI complements physical shopping experiences versus replacing them with a majority of Gen Z and millennials saying they use AI in store for real-time help. As AI continues to influence how consumers discover, evaluate, engage with brands, Quad is helping clients adapt. For example, AI-based search has significantly disrupted traditional paid search and search engine optimization marketing strategies. In response, Rise has developed a proprietary AI referral agent reporting system that enables clients to track, measure and optimize performance across large language models. By monitoring metrics like AI citation rate, depth and engagement quality, the system helps clients understand if AI LLMs are surfacing their brand content, whether those appearances are driving site traffic and which platforms are delivering the strongest results, allowing them to continuously refine their strategy and improve market effectiveness. Before I turn the call over to Tony, I would like to recognize our employees and thank them. Their hard work and commitment to urgently innovate is helping solve our clients' most complex marketing problems, drive Quad's diversified business and advance our long-term strategic goals. With that, I'll turn the call over to Tony.

Anthony Staniak, Chief Financial Officer and Treasurer

Thanks, Joel, and good morning, everyone. On Slide 9, we show our diverse revenue mix. During the first quarter of 2026, net sales were $581 million, a decrease of 4.3% compared to the first quarter of 2025 when excluding the February 28, 2025 divestiture of our European operations. The decline in net sales was primarily due to lower print volumes and lower agency solutions sales. Our agency solutions sales were impacted by a pullback in spend from certain existing clients and our ongoing evolution from project-based work toward agency of record engagements. Comparing our net sales breakdown between first quarter 2025 and 2026, our revenue mix as a percentage of total net sales increased in our targeted print offerings of direct mail, packaging and in-store and also in our logistics business due to increased volume and additional list services provided through our enhanced Co-mail operations. These increases were offset by declines in the print product lines of magazines and catalogs and also agency solutions. Slide 10 provides a snapshot of our first quarter 2026 financial results. Adjusted EBITDA was $45 million in the first quarter of 2026 as compared to $46 million in the first quarter of 2025, and adjusted EBITDA margin increased from 7.2% to 7.7%. The increase in adjusted EBITDA margin was primarily due to cost realignment actions taken due to print volume declines and benefits from improved manufacturing productivity. Adjusted diluted earnings per share was $0.25 in the first quarter of 2026 as compared to $0.20 in the first quarter of 2025, an increase of 25%. The increase was primarily due to higher net earnings, including lower interest expense due to reduced debt and lower depreciation and amortization as well as the beneficial impact of a lower share count. Beginning in 2022, we have repurchased 7.6 million Quad shares at an average price of $4.16 per share, representing approximately 13.6% of our total outstanding common stock as of that time. This includes 167,000 shares repurchased year-to-date for approximately $1 million. Quad's Board of Directors authorized a share repurchase program of up to $100 million of our outstanding Class A common stock in 2018. As of March 31, 2026, there were $68.4 million of authorized repurchases remaining under the program. Free cash flow was negative $107 million in the first quarter of 2026 as compared to negative $100 million in the first quarter of 2025. The $7 million decline in free cash flow was primarily due to a $5 million increase in net cash used in operating activities, mainly from higher inventories and a $2 million increase in capital expenditures. We show the seasonality of our free cash flow and debt leverage on Slide 11. We typically generate negative free cash flow in the first nine months of the year, followed by large positive free cash flow in the fourth quarter with higher collections after our production peak. In 2026, we anticipate a similar pattern for our free cash flow and debt leverage. When removing the impact of seasonality, our net debt has reduced by $36 million from March 31, 2025 to March 31, 2026. As previously reported, we completed the divestiture of our European operations to Capmont in February 2025. The total sales price included a three-year note receivable. As of March 31, 2026, we did not receive payment of principal and interest for the first annual installment of the note receivable totaling $6 million, which was due to be paid to us on February 28, 2026. As a result, our net debt balance as of March 31, 2026 was $6 million higher than we expected. We are working with Capmont on this past-due payment. Slide 12 presents our balanced capital allocation strategy, which is fueled by our free cash flow in addition to our ability to generate proceeds from asset sales. We expect to generate future cash proceeds from buildings we currently have for sale in Waukee, Iowa and Thomaston, Georgia. With this strong cash generation, we intend to continue to increase our growth investments as a marketing experience company, maintain low debt balances and return capital to shareholders through our quarterly dividend and share repurchases. In the first quarter of this year, we increased our quarterly dividend by 33% to $0.10 per share or $0.40 per share on an annual basis. We are pleased to return capital to shareholders through the quarterly dividend and opportunistic share repurchases. Slide 13 includes a summary of our debt capital structure. At the end of the first quarter, our debt had a blended interest rate of 6.6% and our total available liquidity, including cash on hand under our most restrictive debt covenant, was $177 million. Our next significant debt maturity of $205 million is not due until October of 2029. Given uncertainty regarding interest rates, we hold four interest rate swaps with notional value of $130 million and one interest rate collar agreement with notional value of $75 million. Including all interest rate derivatives, we have 49% of our interest rate exposure capped if interest rates rise. And with the interest rate collar, we would pay lower interest expense on approximately 68% of our debt if interest rates decline. We reaffirm our 2026 guidance as shown on Slide 14 and are pleased that our guidance represents another step on our way to our 2028 outlook for revenue growth. We continue to expect 2026 net sales to decline 1% to 5% compared to 2025, excluding $23 million of 2025 net sales from the divestiture of our European operations. The 3% sales decline at the midpoint of the guidance range reflects the continued ongoing improvement trend from a 5% net sales decrease from 2024 to 2025 and a 10% decrease from 2023 to 2024, excluding the European divestiture. Consistent with the seasonal pattern from last year, net sales in the second quarter are expected to be the lowest of the year, followed by sequentially increasing net sales in the third and fourth quarters during our seasonal production peak. Full year 2026 adjusted EBITDA is expected to be between $175 million and $215 million, with $195 million at the midpoint of that range being essentially equal with the 2025 adjusted EBITDA of $196 million. We anticipate lower adjusted EBITDA in the second quarter of 2026 compared to the first quarter, and then we expect sequentially higher adjusted EBITDA in the third and fourth quarters, consistent with the projected net sales seasonality. Our adjusted EBITDA margin is expected to increase by 30 basis points from 8.1% in 2025 to 8.4% in 2026 due to continued disciplined cost management and margin-enhancing changes in our revenue mix. We expect 2026 free cash flow to be in the range of $40 million to $60 million, with $50 million at the midpoint of that range, also essentially equal with the 2025 free cash flow of $51 million. We expect increased net cash from operating activities due to higher cash earnings and the timing of working capital despite an additional week of payroll payments for 53 Thursday paydays falling in the 2026 calendar year. We will have a year-over-year cash flow benefit as we return to 52 weekly payrolls in 2027 and the next time we will pay 53 payrolls in a calendar year will not occur until 2032. The projected higher net cash from operating activities is expected to be offset by higher capital expenditures, which are expected to be in the range of $55 million to $65 million. Over many years, we have invested in robotics and automation on the plant floor and across our postal optimization solutions to have what we believe is the most technology-advanced platform in the industry. We intend to continue investing in growth and automation, both in our print platform, such as digital presses and direct mail as well as in our service lines, including In-Store Connect by Quad. And finally, our net debt leverage ratio is expected to decrease to approximately 1.5x by the end of 2026, achieving the low end of our long-term targeted net debt leverage range of 1.5x to 2.0x. As a reminder, we may operate above this range at certain times of the year due to the seasonality of our business, investments or acquisitions. We are closely monitoring the current business climate, which continues to present uncertainty, driven by factors including persistent inflationary pressures, evolving global trade dynamics, geopolitical tensions and cautious business spending. These factors, in addition to postal rate increases, could affect print and marketing spend. We will remain agile and adapt to the shifting environment. Slide 15 includes a summary of our 2028 financial outlook and long-term financial goals as we continue to build on our momentum as a marketing experience company. We continue to expect the rate of net sales decline to improve as it has since 2024 and then reach an inflection point of net sales growth in 2028. In addition, by 2028, we expect to improve adjusted EBITDA margin to 9.4% and are planning to achieve progress towards that goal in 2026 by improving the adjusted EBITDA margin by 30 basis points. Regarding free cash flow, we expect to improve our free cash flow conversion as a percentage of adjusted EBITDA from approximately 26% based on our 2026 guidance to 35% by 2028, primarily due to lower interest payments on decreasing debt balances and lower restructuring payments. Finally, we expect to maintain our current long-term targeted net debt leverage ratio in the range of 1.5x to 2.0x as part of our balanced capital allocation strategy. We believe that Quad is a compelling long-term investment, and we remain focused on achieving our financial goals and providing strong shareholder returns. With that, I'd like to turn the call back to our operator for questions.

Operator, Operator

The first question comes from Barton Crockett with Rosenblatt Securities.

Barton Crockett, Analyst - Rosenblatt Securities

Let me see. One of the things, I guess, just to look a little bit kind of big picture for the moment. Could you talk a little bit about the degree to which you're seeing all of the macro pressures, including the war pressures and the inflation pressures that prompted you to put in the surcharge, and the return of kind of postage rate hikes. To what degree is that dampening demand from your marketing clients? Or to what degree are people kind of looking past that and continuing the pace?

J. Joel Quadracci, Chairman and Chief Executive Officer

Yes, on the disruption of the supply chain, there's a lot of petroleum-based products that go into some of the things that we do, but primarily impacting ink, whether it's pigments or some of the underlying other components. That's why we put a surcharge on. It's a meaningful number in our pricing, but nothing close to what postage does to our customers. We will monitor the situation and adjust as it goes forward. One of the other challenges is those components we compete with other industries on as well. They have choices on where to put those components, and so ink is just one of the areas those components go in from a global perspective. Postage has been a cumulative effect of multiple years of double inflationary increases. With this postal increase, and it depends who you are, it's anywhere from a 3% to 10% increase for clients in July. Generally, clients expected in their budgeting process an increase somewhere in that range. I don't expect a big pullback through the end of the year. The question will be how that cumulative impact adjusts their planning for 2027, and that's what we focus on now. In general, we don't see people adjusting plans significantly at this point because of postage. We added a waterfall slide for you all to understand the impact of the different layers of Co-mail and optimization that we've built. One example: we just had our postal conference a couple of weeks ago where all our clients come together. One very large customer didn't do a lot of optimization out of their own volume because they had significant volume. They were going to get hit by about a 10% increase, which was a bit of a surprise to them. They ended up within days saying that they're going to join our optimization program to a bigger degree than they were, which is allowing them to come back down to more of the expected rate increase impact. All in all, as we said, we are as expected for the year and don't see volumes at this point changing significantly from what we're expecting, but it's also a crazy world.

Barton Crockett, Analyst - Rosenblatt Securities

Okay. All right. Now one of the things also is in your long-term outlook, aspiring to growth in 2028, when you guys at your Investor Day had talked about the road there, you talked about some growth areas bracketed largely within services becoming big enough to tip the top line into positive and outweighing the pressure in the products that are more secularly challenged. To what degree do the results that you're seeing in the first quarter and year-to-date, are they consistent with that kind of long-term aspiration you have to return to growth?

Anthony Staniak, Chief Financial Officer and Treasurer

Yes, Barton. In our services offerings, we still think those are growth areas for us. We saw a decline in agency in the first quarter compared to last year. We view that more due to our change from project-based to agency of record engagements. So we expect growth in 2027 and beyond in agency. I also would remind that targeted print—direct mail, packaging, in-store—those are also expected to grow in our model. We've seen that as a percentage of our revenue mix in Q1 and even dating back to last year; those areas continue to grow. So we believe we remain on track for the 2028 inflection point.

J. Joel Quadracci, Chairman and Chief Executive Officer

Yes, to add to that, I talk about the print tangible products as being really big invoices—really big engagements—whereas on the services side, the invoices are smaller but generally more profitable. They impact each other by flowing revenue back and forth. In-store, packaging and direct mail are all places we're going to grow that have those larger engagements. Catalogs and publications are where we see the bigger declines that we have to offset. Catalogs are probably the most sensitive to postal increases. If the Postmaster General can get control of the situation, I feel better about it. We still have strong product lines we expect to grow, and In-store was significantly up in the first quarter as an example.

Barton Crockett, Analyst - Rosenblatt Securities

Okay. And one of the things that you had mentioned was the delayed payment from Capmont. Can you give us more detail of what's going on? Was there some inability on their part to pay? Or was there some performance benchmark that was not hit by the business you sold? I mean, can you give us some sense of what's going on there?

Anthony Staniak, Chief Financial Officer and Treasurer

I'll start by saying that we expect to be paid in full on the note receivable. We're actively working with Capmont to achieve that. There is no performance benchmark as it relates to the note receivable. It's very clear on being due at certain periods. We are fully anticipating receiving those payments. I wouldn't want to speculate beyond that.

Barton Crockett, Analyst - Rosenblatt Securities

Okay. And then just the final thing here, just to step back again on the Postal Service. With Steiner beginning to—his regime, we're beginning to see what they do, how they flex the business versus DeJoy. Do you still have hopes that under Steiner, we're going to see a less aggressive rate hike regime over multiple years than we saw with DeJoy? Or is the jury still out on that?

J. Joel Quadracci, Chairman and Chief Executive Officer

If you watch his testimony, it's a good hint. He's doing a very good job of simplifying the problem for Congress and trying to get people more on the same page. When you talk about the Post Office, it's a big organization. But if you talk about the postal system—the economy around the Post Office—it's a $2 trillion economy that uses the Post Office. There is significant impact to the economy from what happens with the Post Office, and people forget that. He's clarifying that we have this mandate that started in 1971 requiring delivery six days a week to every household. Every time it's been pushed to pull back from some of those mandates, politically, it hasn't been able to happen. In 1971, Congress anticipated there had to be some public sharing of cost to create ongoing delivery and subsidized the Post Office by about $460 million a year, which decreased into the '80s as the Post Office could sustain itself. They didn't anticipate the Internet, but they did anticipate that there may be funding from time to time. Today, the equivalent would be somewhere around $10 billion to help support it. I have always believed that the taxpayer will at some point step in because there's no business that can have its hands tied and expect to sustain the infrastructure cost without public support. I think Steiner is bringing attention and momentum to look at what's good for America and the consumer. The consumer wants to have a Post Office. Consider things in that $2 trillion economy, like getting prescription drugs in a rural area—those go through the Post Office. I have renewed optimism that a Postmaster General like David Steiner, who works well with Congress, can crystallize the problem and help bring a realistic solution. That optimism is enhanced by our additional investments in Co-mail, getting to high density, and the waterfall of different opportunities we've created for clients to offset these costs. I don't think it's politically viable to let the Post Office fail.

Operator, Operator

The next question comes from Mark Zgutowicz with Benchmark.

Mark Zgutowicz, Analyst - Benchmark

Just looking at your agency business, down 18% year-over-year and the underlying growth that we're seeing coming from Rise generally in that business. Just curious how you anticipate or when you anticipate a visible acceleration there. You've obviously got macro pressures, but curious, as you look at Rise and the initiatives that you talked a bit about there, how that may offset some of those pressures. And if we're looking at next year, first half versus second half in terms of realizing some of those growth benefits from Rise?

J. Joel Quadracci, Chairman and Chief Executive Officer

In the quarter, we did see some pullback from existing customers tied to macroeconomic factors. We are spending a lot of time continuing to enhance what Rise does. As a reminder, we came from performance media to now full stack media. Performance media is a bit more transactional; full stack media has a longer sales cycle. Part of this is the transition to a broader offering, and I feel good about ramping up toward the end of the year, but much of the acceleration is into 2027. Our expectations are to continue to ramp the agency solutions side, including Betty creative and other parts of agency solutions. The transition from transactional to holistic approaches has longer cycles, and combined with macroeconomic factors and the normal win-loss dynamics, this explains where we are.

Mark Zgutowicz, Analyst - Benchmark

And then Tony, just one last one for me. Tony, in terms of the free cash flow range, obviously, you're reiterating that guidance. But just as we look at that range, $40 million to $60 million, it's a wide one. Just if you could maybe talk about some of the puts and takes on that range, including perhaps CapEx trajectory there, which is up a couple of million dollars this quarter. But just some of the puts and takes there as you look at potentially coming in at that low end versus high end of that range.

Anthony Staniak, Chief Financial Officer and Treasurer

Great. Mark, first I want to say welcome to the call and excited to have you covering the stock. On the CapEx side, we've guided for the year to $55 million to $65 million, midpoint of $60 million. We will spend that amount if we think there are opportunities that further enhance our growth and automation possibilities. Last year, for example, we didn't spend the full CapEx range as we looked at timing of investments and where we wanted to put our money. So it's possible CapEx could be an area that moves us toward either the higher or lower end of the free cash flow range. The other two components that walk us from adjusted EBITDA down to free cash flow are interest expense and restructuring. We can predict interest expense reasonably well and we think we have a good hold on restructuring for the year, consistent with cash payments from last year. So CapEx and ultimately where adjusted EBITDA lands are the two biggest drivers that will flex us within the range.

Operator, Operator

The next question comes from Kevin Steinke with Barrington Research Associates.

Kevin Steinke, Analyst - Barrington Research Associates

Just to maybe wrap up on the discussion about the Postal Service. You mentioned that the Postal Service had been granted additional flexibility that will keep it solvent. I know there had been some discussion about raising the debt limit for the Postal Service and also giving it the ability to actually raise prices more. Just any more insight into the flexibility that they now have...

J. Joel Quadracci, Chairman and Chief Executive Officer

Part of this is he's purposely trying to create a sense of urgency because none of this is really new; everyone knows the Post Office has been sliding and struggling. They're getting relief on some of the pension to create liquidity. Their debt limit hasn't been raised in years, so asking to raise it to something more realistic is logical. The structural challenges with how the Post Office is set up remain. They have a regulatory oversight group, the PRC, that regulates pricing. He wants more flexibility on pricing. For example, a first-class stamp price change might not materially change consumer behavior, and relative to other countries our stamp price is comparatively lower in many contexts. The big issue is the mandate. If everyone wants universal delivery, the government must provide funding or allow pricing flexibility. The short-term approach of raising rates above inflation has been happening but is unsustainable because it can reduce the volume that funds the system. Steiner's approach is to clarify the trade-offs and seek a sustainable solution. I support that approach.

Kevin Steinke, Analyst - Barrington Research Associates

Great. That's helpful color. Just also following up on the temporary surcharge. It doesn't sound like it's that meaningful, but just can you give us a sense of just how much of your cost base that applies to? And is there any meaningful benefit to just your reported revenue from that temporary surcharge flowing through?

Anthony Staniak, Chief Financial Officer and Treasurer

I don't think you should view this as a material or significant benefit to revenue. From a bottom-line standpoint, it is just an offset of the increase in costs. So it doesn't make us better or worse off. Relative to print and paper, ink is a relatively smaller component of the cost structure. This is not a highly significant item.

J. Joel Quadracci, Chairman and Chief Executive Officer

On the freight side, diesel fuel being up significantly impacts distribution costs. For years now, we've had a weekly surcharge that fluctuates with diesel, so we're not impacted from that on the freight side, which is important. We already have that surcharge structure in place on a weekly basis for diesel, which would have been more impactful absent that structure.

Kevin Steinke, Analyst - Barrington Research Associates

Okay. Understood. So just again, to circle back on the agency solutions, you mentioned a pullback from some existing clients. Do you expect that to pick back up again? Or have you had discussions with those clients about why they pulled back and again, when it might come back? Just any more color on that side.

J. Joel Quadracci, Chairman and Chief Executive Officer

Reasons for pullback vary by client. Some in the industry expect consumer tax refunds to drive a positive effect this year. We're in a time where geopolitical events, supply chain disruptions and surcharges are affecting many clients' product costs, so clients are figuring out how to respond. You're early in the season and there's natural ebb and flow. I don't feel this has significantly disrupted our product lines to the point of a huge long-term issue. There may have been some pullback on the agency side, but that didn't necessarily reflect a pullback in higher revenue print lines; we didn't see widespread pulling back because of those issues.

Kevin Steinke, Analyst - Barrington Research Associates

Okay. Understood. That's helpful. You highlighted some momentum in audience strategy services and tying that to the data stack. Just, I guess, any more comment on that? One of your best assets is that household-based data stack and maybe more commentary on how that continues to benefit you?

J. Joel Quadracci, Chairman and Chief Executive Officer

It benefits us across product lines, particularly direct mail and the DM agency. The DM agency focuses on audience identification—finding confirmed, recent transactors who fit the client's target profile. The data stack helps us sift through and find the right audience in combination with other data sets. We believe our household-level data brings another level because of the nature of the household attributes we can see. That capability informs whether a direct mail piece will perform better and helps us demonstrate effectiveness. We're enhancing the effectiveness of print pieces, which helps us win larger engagements and gain trust to act as the agency for clients using our other product lines.

Operator, Operator

No. This concludes the question-and-answer session. I would like to turn the conference back over to Joel Quadracci for any closing remarks.

J. Joel Quadracci, Chairman and Chief Executive Officer

Okay. Thanks, operator. Thank you, everyone, for joining today's call. I just want to close by reiterating that Quad remains committed to our strategic vision, leveraging our integrated marketing platform to drive diversified growth, improve print and marketing efficiencies and create meaningful value for all of our stakeholders. With that, thank you, and we'll see you next quarter.

Operator, Operator

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