Quad/Graphics, Inc. (QUAD) Q2 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to Quad’s Second Quarter 2019 Conference Call. During today’s call, all participants will be in a listen-only mode. [Operator Instructions] A slide presentation accompanies today’s webcast and participants are invited to follow along advancing the slides themselves. To access the webcast follow the instructions posted in this morning’s earnings release. Alternatively, you can access the slide presentation on the Investors section of Quad’s website under the Events & Recent Presentations link. Following today’s presentation, the conference call will be opened for questions. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I would like to turn the conference call over to Kyle Egan, Quad’s Director of Investor Relations and Assistant Treasurer. Kyle, please go ahead.

Thank you, Jamie, and good morning, everyone. With me today are Joel Quadracci, Quad’s Chairman, President and Chief Executive Officer; and Dave Honan, Quad’s Executive Vice President and Chief Financial Officer. Joel will lead off today’s call with a discussion of our Quad analysis deal termination and Quad’s ongoing focus on its 3.0 growth strategy. Dave will follow with a summary of Quad’s second quarter 2019 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, free cash flow 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’ll now hand the call to Joel.

Thank you, Kyle, and welcome, everyone. Our second quarter 2019 results were in line with our expectations as we continue to aggressively execute our Quad 3.0 growth strategy. Before I discuss the success we’re having with 3.0, I want to address the decision to terminate the agreement under which Quad would have acquired LSC. As you may be aware, in late June, the Department of Justice sued to block our transaction with LSC. This month, a Federal judge set a litigation schedule that included a trial beginning in mid-November at the earliest. Under this timeline, we likely would not have had a decision on the transaction until well into 2020. The added delay, uncertainty and costs stemming from legal challenges likely would have eroded a considerable amount of the benefits we had originally hoped to achieve from the transaction. Quad was ready to vigorously defend our position if we would have been allowed to be heard in court within a reasonable timeframe. Since that was not possible, rather than devote time and resources to prolonged litigation, Quad and LSC mutually agreed to terminate the agreement. We’re disappointed that the Department of Justice chose to sue to block our transaction. We believe that its position does not reflect the dynamics of print dynamics today and the competitive effect of digital media. Independent of this outcome, our focus has been and remains on delivering increased value for our clients through our integrated marketing solutions offering, as shown on Slide 3, and aggressively executing on our Quad 3.0 growth strategy. Our strategy is producing results as evidenced in new or expanded relationships with clients, and an increase in our strategic partnership portfolio, all of which has helped to offset print industry volume and pricing pressures by 3 basis points. One area in which we are seeing intensified focus among clients is media spend allocation and the balance between online and offline channels. Currently, many brand marketers’ media spend is disproportionately weighted towards online channels, such as social. While useful for brand awareness, online channels are just one tool in a brand marketer’s toolbox and should not be their entire brand presence. Online channels are what we refer to as vanishing media. Our brand marketer’s messaging appears for a moment in a pop-up ad or a social media feed and then vanishes. While important for generating awareness and initial interest, vanishing media needs to be balanced with longer life resident media, such as print. As its name infers, resident media resides for long periods of time in the hands of the recipient, helps convert customers and is critical goal for long-term retention. As part of our Quad 3.0 offering, we’re helping clients balance the use of all media to achieve their marketing goals. Brand marketers who find the right balance between vanishing and resident media and integrate those efforts have a significant strategic advantage over competition that markets in silos. Take, for example, our relationship with a large e-commerce retailer with whom we began partnering last year to significantly improve their holiday campaign. As outlined on Slide 4, the company was looking to increase its household presence in a market vertical and determined that longer life or resident media, such as a catalog, would create a strategic advantage. The company turned to Quad to leverage our expertise in print production and distribution, and we produced a product-rich catalog delivering – delivered to a highly targeted test market. The print catalog performed exceptionally well establishing Quad as a strategic solution provider for this client’s customer acquisition objectives. As a result, this client significantly increased its program with Quad for this year’s catalog to tens of millions of copies. What’s more, we will now be producing catalogs and direct mail for a number of the clients other market verticals and integrating production steps like page production and photo retouching. This example is representative of a trend we’re seeing among e-commerce pure plays. Turning to Slide 5, another company with whom we are now partnering to deliver Quad 3.0 solutions is, LendingClub, a leader in peer-to-peer personal loans. LendingClub has long used direct mail as part of its customer acquisition strategy. Earlier this year, it began looking to identify a new partner to help and create a direct mail program that could be scalable, predictable and always growing in terms of response. After Quad performed well on multiple test runs, the personal loan leader is now looking to us to drive innovation in its multimillion piece direct marketing program. We will produce and distribute LendingClub’s direct mail using our state-of-the-art four-color personalization, mail optimization and data analytics capabilities. In addition, LendingClub will use our virtual testing platform called Accelerated Insights to rapidly test direct mail creative and formats without a physical mailing and leverage our strategic marketing consulting services. We look forward to growing our relationship in value with LendingClub. These latest examples show how Quad’s 3.0 strategy is helping clients solve marketing problems and process challenges. This has made us a sought after partner in developing markets as evidenced in our newly announced partnership with the dtx company, as shown on Slide 6. dtx, which stands for direct-to-everything, is led by Tim Armstrong, who has held key leadership positions at several digital media companies, including CEO of Oath and AOL and a senior leader at Google. dtx is building the infrastructure for the direct-to-consumer economy through direct experiences, technology and data. Earlier this month, dtx announced Unbox, an offline and online ecosystem that is revolutionizing the way consumers discover new brands. Unbox multichannel experiences powered by mobile-first codes and tags will allow consumers to instantly access and connect to direct-to-consumer brands and services, and allow those brands and services to get direct control over their customer relationships, customer acquisition costs and their customer data. Currently, we have staff embedded at dtx’s headquarters in New York City to work across a variety of initiatives, including audience targeting and multi touchpoint campaigns, featuring brands that are part of the Unbox Ecosystem. Quad will print and distribute these camps – campaigns starting this fall. Quad is the right partner for dtx and dtx is the right partner for Quad because of our deep experience with the original direct-to-consumer brand marketers, catalogers. Catalogers successfully built their businesses on the strength of the print channel. As online evolved, they expanded their marketing strategy to include digital channels to remain top of mind and drive continued growth. But print remains an important part of their media mix due to its strength of driving traffic to all retail channels and increasing frequency of engagement. Today, many new direct-to-consumer brands are watching and building their businesses online and marketing heavily in social channels. However, these brands are now realizing that online channels alone are not enough to support their growth, as these channels become increasingly more costly and less effective for customer acquisition purposes. dtx together with Quad, is addressing this reality through the new Unbox Ecosystem, ensuring the next-generation of great brands, find the right balance in their media spend allocation of vanishing media and resident media I described earlier. So where we now play as a marketing solutions partner in today’s consumer-led economy is reflected in our brand evolution. Earlier this year, we updated our brand identity from Quad/Graphics to Quad to reflect our expanded offering. Now we are evolving the way we articulate the true value we bring to our clients through brand positioning that we refer to as colorful engineering. As shown on Slide 7, colorful engineering captures the uniqueness of our integrated marketing solutions platform, which includes both thinking and making. Through our platform, we offer customer analytics, strategy, creativity and execution, all woven together to effectively address the obstacles marketers face today. It’s the left brain and the right brain coming together in an outcomes-focused platform. This is an important points of differentiation. Historically, marketing programs would move in a very linear fashion from customer analytics to execution with multiple partners and each requiring a handoff that compromises both the strategy of the programs, as well as the speed which it gets done. But at Quad, there are no handoffs, because we offer a fully integrated offering from customer analytics all the way through execution. Colorful engineering accurately describes the creative through execution integration that only Quad can provide. Looking ahead, we will continue to make investments and establish partnerships that support the continued evolution of our integrated marketing solutions offering. We have strengthened our platform through the strategic acquisitions of Periscope and Ivie and a controlling interest in Rise Interactive, as well as the addition of senior client-side talent. In fact, we just welcome aboard a senior media analytics executive who comes to us from a big agency. He understands the intricacies of media planning and buying and will focus on optimizing our clients media spend across all channels, including digital, TV, radio, in-store and print. This is an important role, as more and more clients rethink their media allocation, we will be able to show them how well their current spend is performing and where they should and should not make – be making future allocations based on measurement. Before I hand the call over to Dave, I want to emphasize that we have designed our growth strategy around our ability to be nimble and ready to adapt in the face of changing circumstances in the industries which we compete and in the economy in general. As a closely held publicly traded company, we have the added advantage of being able to make long-term decisions that are in the best interest of our clients, shareholders and employees. As we continue to evolve our offering and deliver more value to clients, we remain focused on our consistent priorities to make long-term strategic investments that further accelerate our transformation and proactively address the changing needs of our clientele, generate sustainable strong free cash, drive EBITDA enhancement, strengthen the balance sheet and demonstrate our ongoing commitment to providing long-term shareholder returns. I want to acknowledge our employees as we continue our remarkable company transformation and thank them for their focus on performing well for our clients, especially as we enter the busiest half of the year. You are the foundation that fuels our future and your hard work and commitment to creating a better way every day creates a competitive advantage. With that, I will now turn over the call to Dave.

Thank you, Joel, and good morning, everyone. Our second quarter results were in line with our quarterly guidance and we remain on track for delivering our full-year financial guidance. For comparative purposes, the financial results of Periscope are included in the 2019 financial results from the date of their acquisition on January 3, 2019. Slide 8 provides a snapshot of our second quarter 2000 financial – 2019 financial results. Net sales decreased 1.2% to $1 billion, and when excluding the Periscope acquisition, organic sales declined 2.4%, primarily unexpected lower print volume, which was in line with our print volume expectations and was consistent with print volume trends over the last several quarters. On a year-to-date basis, net sales increased 1.3% to $2 billion. Excluding acquisitions, organic sales declined 1.5%. The organic sales decline is due to ongoing print volume and pricing pressures, primarily in our large scale execution category related to magazines, retail inserts and directories, partially offset by incremental revenue from our Quad 3.0 growth strategy. We continue to realize significant incremental revenue from expanding client relationships as part of our Quad 3.0 offering. And since we began our transformational journey in 2017, Quad 3.0 has generated over $300 million in incremental revenue. This has helped offset approximately 3 percentage points of organic print revenue decline annually and on a trailing 12-month basis, which is increase from a 2 percentage point benefit in prior years. Adjusted EBITDA for the second quarter was $75 million and was at the midpoint of our second quarter guidance range of $70 million to $80 million. Adjusted EBITDA margin was 7.5%. This compares to $90 million of adjusted EBITDA and adjusted EBITDA margin of 8.8% in the second quarter of 2018. The $15 million decrease to prior year is primarily due to an $8 million impact from the strategic investments we made to increase hourly production wages in our most competitive labor markets, a $7 million reduction in paper byproduct recoveries due to lower market prices, and the EBITDA impact of our organic sales decline of 2.4%, primarily in magazine, retail insert and directory product lines. Adjusted EBITDA for the six months ended June 30, 2019 was $145 million, with a margin of 7.2%, as compared to adjusted EBITDA of $200 million and a margin of 10.1% in 2018. The $55 million decrease in adjusted EBITDA is primarily due to $24 million in non-recurring benefits realized in 2018 that did not repeat in 2019, and that included a gain on a property insurance claim and a change in employee vacation policy. The remainder of the decrease included a $16 million impact from strategic investments we made to increase hourly production wages in our most competitive labor markets, a $6 million reduction in paper byproduct recoveries due to lower market prices and the EBITDA impact of the organic year-to-date sales decline of 1.5%, again, primarily in magazines, retail inserts and directory product lines. As we’ve discussed on past earnings calls, we anticipated the adjusted EBITDA decline in the front-half of 2019 and expect growth in the back-half of the year due to incremental revenues from our Quad 3.0 integrated services offering, continued year-over-year impact from the Periscope acquisitions, as well as productivity improvements from the additional long-term investments in employees and automation. Given the prolonged nature of the recently terminated LSC acquisition, most cost reduction activities had been delayed in anticipation of the acquisition and related integration synergies. Given those delays, we expect to see a year-over-year decline in adjusted EBITDA in the third quarter with growth in the fourth quarter, as we fully implement our planned cost reductions on a standalone basis. The nature and extent of these cost reductions totaled $40 million in incremental savings on an annualized basis, and we expect approximately $10 million of these savings to be realized in 2019, primarily in the fourth quarter. As a result, we anticipate third quarter adjusted EBITDA to be in the range of $90 million to $100 million. Free cash flow, excluding LSC-related payments was $51 million in the second quarter, which is an increase of $42 million over 2018. Year-to-date, free cash flow was negative $50 million, as compared to negative $13 million in 2018 and was in line with our expectations. The year-to-date decrease in free cash flow is primarily due to $43 million in lower net earnings and $21 million in increased capital expenditures, primarily for long-term investments in automation and productivity in our manufacturing platform. These were partially offset by the expected improvement in cash provided by working capital. In addition, we incurred $8.5 million of LSC-related payments in the first six months of 2019, which we exclude from free cash flow. As a reminder, we realize our strongest volumes in the back-half of the year due to seasonality, and as a result, a majority of our free cash flow will be generated in the fourth quarter of the year. Slide 9 includes the summary of our debt capital structure as of June 30. Debt increased by $171 million since year-end to end the second quarter at $1.1 billion, primarily due to $121 million of net cash paid for the Periscope acquisition and $50 million of negative free cash flow as previously discussed. We finished the second quarter of 2019 with a debt leverage ratio of 3.06 times. Last week, upon the termination of the proposed LSC acquisition, we paid LSC the agreed upon $45 million termination fee. The payment increases our debt leverage ratio by approximately 12 basis points in the third quarter. However, even considering the increase in leverage in the short-term, we expect leverage to be less than 2.8 times by the end of the year. The LSC termination fee will not impact reported third quarter adjusted EBITDA and free cash flow, as the LSC-related payments have been consistently treated as a non-recurring restructuring and transaction-related charge on our income statement. Correspondingly, we’ve increased our guidance for restructuring and transaction-related cash expense by $45 million. As we’ve noted before, our long-term targeted leverage range is 2 to 2.5 times, and we may operate outside of this range like we currently are due to the timing of compelling strategic investment opportunities, such as the Periscope acquisition. Our current priority for use of cash will continue to be debt reduction until we’re back in our long-term leverage target range of 2 to 2.5 times. Our debt capital structure is 67% fixed and 33% floating, with a blended interest rate of 6.5% at June 30, 2019. Available liquidity under our $800 million revolver was $531 million as of June 30, and we have no significant maturities until May of 2022. We believe we have sufficient liquidity for current business needs, pursuing future growth opportunities and returning value to our shareholders. Last week, we funded our $825 million delayed draw Term Loan A, which matures in 2024. This was done to payoff the existing $500 million Term Loan B and reduced borrowings under our revolving credit facility. This has changed – this change allows us to reduce our interest rate by 2.5 points that would have been paid under the Term Loan B, and this saves approximately $12 million in annualized interest cost. As a result pro forma for the repayment of our Term Loan B, our overall blended interest rate will decrease from 6.5% to approximately 5.3%. And our available liquidity under our revolver will increase to $769 million from $531 million at June 30. Slide 10 shows our continued commitment to our dividend, which is one of the ways in which we returned value to our shareholders. Our next quarterly dividend of $0.30 per share will be payable on September 6, 2019 to shareholders of record as of August 19, 2019. The significant and consistent free cash flow generating power of our business allows Quad to maintain an affordable and sustainable dividend of $1 20 per share, representing 39% of our free cash flow at the midpoint of our 2019 guidance, yielding a substantial 12% return at today’s stock price. As we move into our seasonally busiest time of the year, we will remain focused on driving EBITDA enhancement and strong free cash flow generation by adding new business and continuing to focus on sustainable cost reductions and productivity improvements, and continue to strengthen our balance sheet through ongoing debt reduction and look for opportunities to continue to invest in our business to accelerate our transformation. Our investments in the dtx company, Periscope, Ivie and Rise Interactive has helped to expand our offering beyond print production to include an integrated stack of marketing services. This expanded offering at a time of continued media disruption provides us with a unique opportunity with our clients, and we believe makes Quad a compelling long-term investment for shareholders. And now, I’d like to turn the call back to our operator, who facilitate taking your questions. Jamie?

Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jamie Clement from Buckingham. Please go ahead with your question.

Gentlemen, good morning and congratulations for keeping your eye on the ball.

Thanks, Jamie. How are you?

Yes. Good, good. Joel, I’ll start with you and then if I could ask Dave, if I could just ask you a couple of questions about guidance. But, Joel, when you guys – when these partnerships come up and you don’t have to talk specifically about dtx if you don’t want to. But how do these things transpire? And I guess, what I’m getting at is, as the 3.0 progression continues, are there folks more actively coming to you?

Yes, absolutely. And, in fact, I think, when we relaunched the brand earlier this year, remember, we had planned on this since 2015. But I wanted to wait till we’re actually executing on what we’re saying we’re doing. And so from that point forward, you start to get more inbound calls from different places and, Tim Armstrong, was one of those inbound calls. I think he saw what we’re doing in conjunction with what he was trying to do. And I think the reality is, people understand – marketers understand the challenges they have. They get – they sort of get the joke that’s going on that there’s been so much over indexing as a result of not having integrated measurements across all the channels and are looking for help. That’s why we always say that one of the advantages we have as a printer is, we have really big invoices, which means we have access to the C-suite. And as we talk to the C-suite, it becomes apparent that they’re looking for health. And as we explain what we’re trying to do, it really resonates with them. And then as we share sort of the examples of what we’re doing to win, such as the one we shared on Sirius XM, which now LendingClub is very similar to that, it really does get traction. I think that case studies to get more opportunity. But I think, we’re really starting to see the inbound coming from way outside our box of what we’re usually used to getting in terms of just pure marketers that you may not have been involved in print before. And it’s kind of fun, because as we convince maybe an e-tailer to try a catalog, we’re typically dealing with people on the other side, who grew up in the digital world. And when we asked them how things went, they usually just say, like in a quiet response, like wow, this print stuff really works. And so to me, that’s kind of exciting, because it drives home the point that all these layers work together. And I purposely mentioned that, remember, the original direct-to-consumer brands were catalogers.

Yes,.

And I live that world, because I was in sales as this was all happening. And I remember some of our catalog customers who did only catalogues, no brick-and-mortar, no digital, they started to create separate secondary brands where they put.com at the end and they thought it was a replacement strategy for print. But each one of them whenever they cut back to print, the online traffic disappeared. And so they learned very early on the importance of layering all the channels. And so now we’re sort of back to the future, again, where marketers are really kind of experiencing the same thing. A lot of marketers has started up in digital and realize now that the cost is increasing, the effectiveness is decreasing. It’s still a wonderful channel, and there’s lots of different ways to use it. But they’re realizing that it’s not a replacement strategy that you have to kind of get back to sort of what we call the resident mix as well, where you have something tangible that people can slip through that they can refer to later, if you didn’t get them on that sort of fleeting moment on the digital side. And so, yes, we’re seeing a ramp-up in the inbound traffic, which is great and a ramp-up of people we already know tapping into our expertise.

Now, Joel, on the e-commerce retailers, like the case study that’s in the investor slides, was that – that was last holiday season?

Well, it started last holiday season. We’ll continue on to this holiday season.

I noticed there’s a picture of a child – there’s a child in the picture. Were these consumer products marketed to children by any chance?

Well, look, it’s an example of what’s happening in general with e-tailers and I’m not going to take the bait. But the fact is that, when you get some pretty serious players kind of now starting to play in this place and seeing it work, I think that’s also by the way, is Tim and I had talked. He sees sort of a releveling of media coming. And it’s not like we’re going to return to where we were, but it’s going to return to a mix where people – the water starts seeking the proper level, as opposed to sloshing to one side. And so, I like to show those examples, because there is no such thing as a catalog, or there is no such thing as a retailer, there’s no such thing anymore as an e-tailer. Every one’s using every channel now. You see the e-tailers creating bricks-and-mortar, right? You see, catalogers have been using digital for a long time. And so it’s really about marketers and using all channels, because if you just use logic, the reason that makes sense is all the consumers use all the different channels.

Okay. Joel, thank you for that. I’m going to move to Dave, and then I’ll just get back in the queue. Dave, can you just walk me through the $40 million, again? I was just – I was scribbling notes and I was – I just sort of lost track a little bit. You think you’re going to realize $10 million in the fourth quarter? Is that right?

Yes. That’s right, Jamie. I think, the thing to note about the fourth quarter, because we’re calling out growth in the fourth quarter, is that we feel really good about where we’re positioned heading into our seasonally busiest time of the year. So the back-half of the year is always where we produce the significant amount of our volumes on an annualized basis and generates a significant amount of our free cash flow that typically comes through in the fourth quarter. Our business has done a good job, and I’m glad to use the word kept your eye on the ball, because that’s exactly what our operating guys have done. We talked a year ago about investing in hourly and production employee wages in our most competitive labor markets due to kind of low unemployment levels and the difficulty of fully loading our facilities with great employees to be able to produce the work for our customers. The – going in and strategically investing nearly $20 million into this has paid off for us. We’re starting to see that productivity improvement in our plants. But as we enter it, we did this almost a year ago at the end of the third quarter. So the fourth quarter won’t have that year-over-year pressure in terms of higher labor wages and we’re starting to produce – we’re starting to get that productivity for that investment. So you – because you fall off it, which has been about an $8 million impact from cost of those wages on a quarterly basis and you start to see the lift of productivity. I think that combined with realizing that once we could not execute on the LSC acquisition and we had to quickly go into what are we going to do from a standalone purposes, because we had really – our operating guys were really ready to go to start the integrating activities – integration activities, then I’ll just turn that focus inwardly and have identified $40 million of incremental cost reductions we can do on a standalone basis, and – of which 10 of that’s going to hit in the fourth quarter. So that’ll provide us incremental lift. And then all that on the backdrop of the momentum you’re seeing at growth story of Quad 3.0 and how well the business is operating. Give us kind of that strength of what we’re talking about in the fourth quarter.

Hey, Jamie, let me just add something on the investment and the employees, because that was significant and we knew that would eat into EBITDA when we did it, because most – you don’t see this in most companies in any industry, where we – you make that big of a bet relative to the size. Because the problem is as you make the investment and the benefit comes later. And so it’s a little bit of a white-knuckle thing to do. But we believe so heartily and what our operating people can do, because last year because of the low unemployment rate, we saw different productivity. And that’s the part that really hurts when you have a low unemployment environment, because you’re – you have higher turnover at the entry level. It slows machines down. You have machines you can’t crew. And so we not only invested in from a starting wage standpoint where we had the biggest challenges, but we really redoubled in our innovation and how we train people and bring them along. And so I can tell you today that, that is absolutely paying off. We are seeing the productivity improvements and it’s pretty amazing what our team has done. So my hats off to them. But that’s a very important point to make and understand.

Okay. Thank you for that. And just one quick question. Is there a significant EBITDA seasonality to Periscope?

No, I think you can think about them fairly evenly throughout the full-year.

Okay.

But I don’t anticipate [Multiple speakers]

…not mimicking your own?

Sorry, sorry. Say that again, Jamie?

I would say, I said not mimicking your own where the second-half is significantly stronger than the first?

Right, right. And I’d say that on the creative side, remember, they’re doing things for TV campaigns, for experiences, for print, for packaging different things. And in the creative agency world, also things are just more lumpy, right, but not necessarily linked to season.

Got it.

The final comment on it, Jamie, this is the relative size to the overall business. It just doesn’t impact our seasonality all that much.

Yes. I was just more thinking about kind of bridging first-half to second-half and guidance and that whole that kind of thing, I mean, that’s why I was asking? All right. I appreciate. I’ll get back in the queue.

All right. Thanks, Jamie. Operator?

Our next question comes from Dan Jacome from Sidoti & Company. Please go ahead with your question.

Hi, good morning.

Hey, Dan.

Hey, how’s it going? So congrats on the – I think there’s a LendingClub contract. Just wondering, well, a couple of questions. I personally get a lot of direct mail from some of the fintech companies, then there’s a company market, they got some of their stuff the other day. So I think it’s definitely interesting. Just maybe high-level, what do you think some of these companies are reverting to direct mail? Is it just kind of like the ROI they’re getting more targeted marketing, brand awareness? Is there anything different that you’re seeing? And then is this the first time that you guys, if you can even talk about this like your first foray into fintech, because everything I’ve read about this end market appears compelling and I’m – I’ve been surprised by the the moves they are making in direct mail, where they seem to be working?

Yes. Well, many of them have been in direct mail for a long time. I mean, LendingClub, Sirius XM, those – direct mail has been one of their primary drivers for new acquisition for a while. But I think what you – the way you have to think about it is that things are becoming – you able to use the data much more than you ever were before. And so what you’re seeing with the LendingClub or Sirius XM, the migration is to using the data to heavily personalize. And I’d say, relative to our mix of work in the quarter, I mean, our direct mail volume was up double-digit percent, which is outstanding. And so much of that is due to driving higher response rate. It’s very simple. When you drop a mail piece, you pretty quickly see did it work or did it not work. And if you’re going to spend more money on a per piece basis, because you’re doing heavy personalization, you’ll see right away did it – did that investment makes sense. And we typically see significant ROI increases when you’re much more data-driven and personalized than if you were doing something alone. And so I’d say that in general, not just fintech, but across the board, people are rediscovering direct mail and it’s really taking off.

Okay. And then I just had a really nitpicky question about working capital. I think it was kind of related to Jamie’s question. But is there any difference in kind of like receivables and things of that nature with some of the companies you’ve been buying? I don’t think it’s really a concerning matter. I just didn’t see the receivables drop off this quarter versus the first quarter of 2019, the way they did last year. But I got to keep in mind, you’ve done some acquisitions, and then last year, there was, I think, some gain from a property insurance claims. I’m just trying to, like, parse together the – what could be the steady state operating cash flow from you guys, as you continue through the transformation?

Yes. So there’s nothing that’s materially impacting our working capital from acquisition.

Yes.

I would tell you, the second quarter for us from a receivable standpoint, it was a very strong collection quarter. I thought we performed well on working capital, we called it out in the script, because it was a strong generation of working capital and that was mainly because of strong inventory control. And if you go back a year ago, we were facing high cost, increasing market rates in inventory and we were carrying proactively more inventory for our customers. So they didn’t get stuck in the marketplace with a shortage of inventory…

Of inventory of paper primarily.

Inventory of paper, and then we’ve worked that down this year accordingly. So the team has done a nice job managing working capital. But from an acquisition standpoint, those are going to materially impact the working capital moving forward. From an overall free cash flow perspective, we always shoot to be somewhere between generating $0.40 to $0.50 of free cash flow for $1 of EBITDA that we generate out of the business on an annualized basis.

Okay, thanks. And then – sorry, if I missed it, on the debt interest rate reduction, the refinancing, is this – this is all tied to the LSC coming off the table, or is it something that was going to happen anyways? I think I missed the details.

Yes. No, that’s correct.

Okay.

When we negotiated the new Term Loan B, the new amended debt structure in – early this year, we negotiated the ability if the deal did not occur that we could then draw down the Term Loan B and fund up the Term Loan A to take advantage of a lower interest rate. And that’s exactly what we did post termination of the transaction.

Okay. Okay, fantastic. Good luck with the rest of the current quarter. Thank you.

All right. Thanks, Dan. Operator?

And our next question is from Jamie Clement from Buckingham. Please go ahead with your question.

Welcome back, Jamie.

Hey, guys, can you hear me? Thank you very much. I appreciate that. Joel, so during this earnings season, we’ve heard from some companies that they were referring to kind of increasing kind of levels of uncertainty that kind of popped up in the June quarter. I didn’t – certainly, in your numbers and in your guide, there’s just no evidence of kind of increasing concern or anything like that. Is uncertainties kind of the new certainty in your world over the last couple of years? I mean, what are you hearing from customers? It sounds like it’s business as usual. Just kind of curious for your thoughts.

Yes. Well, Jamie, we’re printers, remember that originally. And so we’re kind of used to the world of uncertainty, because it’s really about the marketing world and what they see happening and how they adjust their budgets when they do have concern. But I’ll tell you that we’re not seeing anything from a volume standpoint that’s not consistent with the past several quarters of things other than I did call out the double-digit increase in direct mail. But it’s pretty much business as usual. But I think that we’ve also learned that you got to be ready for the negative. The positive, anyone can take advantage of the positive, that’s easy. It’s companies that are always ready for the negative and can be nimble and react that kind of separates you out. And so I think we’ve just given where we come from and all that we’ve done. We know how to do that. And that’s also, as people continue to try and guess and second-guess what the economy is going to do, we always say, what, let’s be prepared for a downturn and if it doesn’t happen even better.

Yes. Okay. That’s very fair. I appreciate it.

You’re welcome. Operator?

Ladies and gentlemen, with that, we’ll conclude today’s question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

Thank you, operator, and thank you, everyone, for joining us. As we shared on today’s calls, we are confident in the Quad 3.0 strategy, which is, in fact, transforming our company. The strategy is working. We continue to expand work with existing clients, as well as when new work from regular print clients, as well as people who are new to the space. Looking ahead, we will continue to pursue strategic investment and partnerships that support our transformation and value to our clients and shareholders. As always, we will remain focused on making decisions in the long-term best interest of our clients, shareholders and employees and remain agile in the face of industry and economic pressures. So with that, I thank you all for joining us. We’ll see you next quarter.

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for joining today’s presentation. You may now disconnect your telephone lines.