Dear Fellow Shareholders,
2018 was a pivotal year in our ongoing transformation in Quad 3.0 as a marketing solutions partner. Today we not only help our clients plan and produce marketing campaigns and programs, but also physically deploy and measure them across all channels – print, digital and broadcast.
Through our integrated marketing solutions platform, which now encompasses audience targeting and campaign development through content and print production, we create greater value for our clients. We help our clients reduce the complexity of working with multiple partners; increase efficiencies through workflow re-engineering, content production and process optimization; and improve marketing spend effectiveness through data-driven consumer insights, media planning, creative strategy and enhanced personalization all of which lead to more broad-scale campaigns to provide real-time and actionable measurement.
Today we not only help our clients plan and produce marketing campaigns and programs, but also physically deploy and measure them across all channels—print, digital and broadcast.
We have been aggressively implementing our Quad 3.0 strategy for some time now through investments in marketing talent, technology and services. Our most recent investments that strengthen our offering include the 2018 acquisition of marketing services provider Ivie & Associates; the 2018 majority investment in digital agency Rise Interactive; and the 2019 acquisition of Periscope, one of the nation’s top five independent creative agencies by annual revenue. The revenue associated with our integrated services is now approximately 20% of our total net sales and represents more then 40% growth since 2017.
To reflect the sale of our offering and the expanded role we now play with our clients, we have evolved our brand from Quad/Graphics to Quad. This change represents the strategic next step in our company’s transformation. As Quad, we will retain our company’s iconic logo element – the stacked Q’s and G’s that symbolize printing press rollers and printing process colors – as it speaks to our heritage in print, which will remain a critical part of our offering going forward. In fact, our print foundation is a key differentiator in our integrated marketing solutions platform.
In 2018, we continued to invest in our business and execute on our strategic priorities for long-term growth and shareholder value.
Net sales increased 1.5% to $4.2 billion. After excluding the impacts of acquisitions, pass-through paper sales and foreign exchange, organic sales decreased 3.8% due to ongoing print industry volume and pricing pressures primarily in our large-scale execution product lines of magazines, retail inserts and directories.
As expected, GAAP net earnings decreased to $8 million; non-GAAP Adjusted EBITDA decreased 7% to $415 million; and Adjusted EBITDA margin was 9.9% compared to 10.8% in 2017, reflecting the impact from organic sales decline, as well as strategic investments in our employees to support the company’s ongoing transformation, partially offset by growth in our integrated services revenues and cost-savings initiatives.
Net cash provided by operating activities decreased $83 million to $261 million and Free Cash Flow decreased by $94 million to $164 million due to our decision to increase long-term strategic investments in manufacturing automation, wages for hourly production employees in our company’s most competitive labor markets, and paper inventories to ensure uninterrupted client service, along with transaction-related costs for the pending LSC acquisition. We continue to focus on strengthening an already healthy balance sheet through debt and pension reductions, while continuing to make strategic investments – a balanced approach that allowed us to invest $71 million of net cash for Ivie and Rise and repurchase $37 million of stock while also reducing debt by $24 million. We concluded 2018 with a Debt Leverage Ratio, net of excess cash, of 2.11x which is at the low end of our long-term targeted range of 2.0x to 2.5x.
To ensure we maintain our momentum as a marketing solutions partner, we will continue to:
- Make long-term strategic investments that further accelerate our Quad 3.0 transformation and proactively address the changing needs of our clientele.
- Generate sustainable strong Free Cash Flow to support our disciplined capital deployment strategy, which includes value-creating opportunities that fuel our ongoing transformation.
- Drive EBITDA enhancement through sustainable cost reductions and productivity improvements to offset organic print declines while remaining focused on incremental revenue from expanding client relationships as part of our Quad 3.0 offering.
- Strengthen the balance sheet through ongoing debt and pension liability reduction with an ongoing focus on being within our long-term targeted debt leverage range of 2.0x to 2.5x.
- Demonstrate our ongoing commitment to providing long-term shareholder returns by paying an annual dividend of $1.20 per share and making opportunistic share repurchases.
Since 1971, Quad has been a company grounded in strong values and lasting culture that is built on creating a better way, every day, for our clients. This focus has led us to evolve our offering over the years to deliver more value for our clients as a leading marketing solutions partner. I am proud of our journey and profoundly grateful for all our employees and the important role they continue to play in our transformation. We are Quad.
J. Joel Quadracci
Chairman, President &
Chief Executive Officer