Good morning, ladies and gentlemen, and welcome to Quad's Second Quarter 2020 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 and Recent Presentations link. Following today's presentation, the conference call will be open for questions. [Operator Instructions] Please also note this event is being recorded. And at this time, I like to turn the conference over to Katie Krebsbach, Investor Relations Lead. Katie, please go ahead.

Thank you, operator, 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 business update and Dave will follow with a summary of Quad's second quarter 2020 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 margins, 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 Investor Section of quad.com shortly after our call concludes today. I will now hand over the call to Joel.

Thank you, Katie, and good morning everyone. Our second quarter performance was strong and reflects the resiliency of our business and our team's ability to aggressively and effectively respond to crisis such as the COVID-19 pandemic. We continue to proactively address a significant reduction in client demand by realigning our cost structure to match lower volumes, while also driving continued productivity improvements and protecting the health of our balance sheet. Notably, we achieved higher profit margins for the quarter and on a year-to-date basis generated positive cash flow and continued to pay down debt. Turning to Slide 3. Throughout the quarter, we carried out our business continuity plans in response to the pandemic. With a focus on maintaining the health and wellbeing of our employees, providing high-quality on-time delivery for our clients and ensuring the long-term financial health of the company. As you will recall, in the first quarter, within a very short timeframe, we shifted 3,700 administrative employees to work from home to support social distancing. We will continue our work from home policy until we feel it is safe for all employees. For our production employees, who work in our manufacturing facilities, we continue to focus on our Safe at Work program, which includes daily temperature checks, protocols for social distancing and mask-wearing and procedures for cleaning and sanitizing workstations, equipment and common areas. Our program also includes frequent employee communications and ongoing education around how to stay healthy, both inside and outside of work. Our dedicated COVID-19 rapid response team continues to monitor and manage all suspected and confirmed cases of the coronavirus throughout the company, and is responsible for our transitioning impacted employees to self-quarantine, performing rigorous contact tracing and reporting out daily metrics, so we can understand real time impact of COVID-19 on our workforce.…

Thanks, Joel. Good morning, everyone. Slide 9 provides a snapshot of our second quarter financial results. Our second quarter operating and cash performance was strong as we generated positive free cash flow and reduced net debt in the quarter, despite the significant net sales impact from the pandemic. We continue to prioritize, the health and well being of our employees, while protecting Quad financial health, providing great service to our clients, and winning new work due to our Quad 3.0 strategy. We remain focused on aligning our cost structure to lower net sales as we reduce costs at a higher percentage of their net sales declined. In this way, we were able to protect the health of our balance sheet through continued debt reduction and liquidity preservation to ensure that we have the financial flexibility to navigate COVID-19 and continue to advance our transformation as a marketing solutions partner. We also continue to optimize our product portfolio as Joel mentioned, by completing the sale of one of our three book manufacturing facilities on July 1st, as part of our overall plan to exit the book business. Net sales in the quarter were $585 million down 38% from 2019. The sales decline was primarily due to the economic impacts of the COVID-19 pandemic, ongoing print industry volume and pricing pressures, and a negative 2% impact from the divestiture of our Omaha packaging plants in January of 2020. On a year-to-date basis, net sales were $1.4 billion, down 26% as compared to 2019. The sales decline is primarily due to the economic impact from the COVID-19 pandemic, ongoing print industry volume and pricing pressures and a negative 1% impact from divestitures. We shared on our last earnings call that, we began to see customer demand substantially weakened in mid-March due to the…

[Operator Instructions]. And our first question today comes from Jamie Clement from Clement and Company. Please go ahead with your question.

Hey, Joel. Can you take us through kind of the cadence between March to April, April to May, May to June et cetera, et cetera, in terms of what you were hearing from customers as it relates to the virus and demand and that sort of thing, and kind of on the flip side, how you all reacted to that?

Yes, I mean, you can imagine that, in the second half of March, it was a hard shot for many people. The economy in the second quarter basically dropped by a third, which is obviously a big number. And when you think about some of the big retailers out there that literally closed stores for quite a period of time. We saw the biggest reduction in volume coming from retail inserts. And that was, while the economy was down 33%, it was off about 55%. And not surprising because if the stores aren't there, you're not going to try and drive traffic. Furthermore, even though print still drives online revenue. They were also doing what we were doing, which is considered the balance sheet and really cut costs as fast as possible to weather the storm. And so, we saw the bulk of it there. When you think about catalogs and direct mail, they were also about same as the economy, even about 33% plus or minus. And remember if some retailers are also catalogers, so I'd say that some of the impact came from retailers, ceasing or suspending catalogs. It's kind of interesting. I mean, packaging continued to do well. Our in-store group continued to do well. And as we look forward, we think that catalog packaging in store, all those things will and direct mail will start to heal themselves as people get back to normalcy. Again, visibility is horrible right now. But, I'm a little bit comfort at that big retailers are safe and small retailers take it upon themselves to demand that people wear masks as they go into the store, because I don't think there's much of a, appetite to close the economy again. But that being said, we did see a lot of system…

Yes, absolutely. And I appreciate that. So, when they ask a question, I have managed through the challenges over the last couple months that some of your customers are obviously looking to cut costs and outsource of functions, that obviously Quad can handle better than they can and probably at a if you look at most certainly to reduce costs. First is, is analyze extend and second of all, is there a specific kind of customer, where that discussion has been more common, or has it been across the board?

Yes, we've been pretty consistent about, 3.0 and what it means. And as I said in the scripts, we've increased the number of on sites that we do by 20% to 90%. And it wasn't that long ago when I would think I was talking about 65% or 70%. And so what we felt that people were already kind of going down this route, and rethinking how they create content and execute upon it, that they all have a lot of legacy costs, not only eat up costs, but also take time to execute on the media, landscape. And so now, I think that, given that a lot of companies sort of shut down or partially shut down, sending people home, what we're seeing is a greater willingness to think more aggressively about what don't you bring back as marketers. I mean, ultimately, most of our customers are, merchandisers and they strategize on how to sell that merchandise. But when you get to the execution of it, there's a lot of costs that they incur that they have to manage in the ups and downs of labor as a fixed cost versus variable. And so a lot of what we're seeing is people really engaging on, okay, how can some of my Quad, who can handle execution across channels, sort of take the cross sell. And ultimately, what they really are looking for, too, is how do they execute quicker and make sure that all the different channels are very integrated together. Because if you're really going to surround the consumer in a 360 degree view, you have to make sure that you're doing things very quickly from project execution to deployments. Again, I went through the $100 million of segments when that we had recently and that many of those most of all those were basically 3.0 wins that resulted in a lot of revenue from print as well. And so, yes, we're looking at this as a big opportunity and right now, we don't really need to acquire more processes in terms of acquisitions. What we're really acquiring right now is, a really good talent and there's a lot of talent available right now.

And Joel, I appreciate the comment about the fixed versus variable and Dave I assure you, I will get to you in a moment. But Joel, from a competitive standpoint, obviously, a big competitor Chapter 11 filed and that kind of thing, smaller competitors from my understanding, they're more to come particularly, really it sound like on the West Coast. Can you kind of give a little bit of color about what you're hearing from customers, and obviously would you have a situation where competitors that are challenged, maybe they go through a period of cost cutting, and then ultimately that turns it to be some market share gain for Quad that sort of thing. Can you kind of give us a sense of where you see the industry right now?

Look I mean, it's no secret that the industry is a tough and that's driven a bunch of consolidation overtime. But ultimately, what we look at is, we're really competing with the big agencies now and all the different things that our customers are trying to do is, really provide an integration of all the marketing aspects that they need. And by the way, that always drives a lot of print. So print isn't disappearing. It's gone through decline, but it's very hard to execute for the clients when they're looking for much more when you're just a printer. And we recognize that, quite awhile ago, which is a big reason why we've we followed what our customers want and that's the 3.0 execution.

I appreciate it. And Dave, if I can turn to you, obviously the revenue and demand decline is what it is. But, obviously margin performance in the quarter one of your stronger ones in recent years. Can you kind of talk a little bit more about kind of how you view the cost structure of Quad from a fixed versus variable perspective?

Yes, absolutely. Joel touched on it, but when we saw what was coming with the pandemic. There was just a lot of uncertainty in most of our customer base, our vendor base, and we just moved very quickly at that point in time. And it's really stemmed in the lean enterprise environment that our operating team has established at Quad that strong lean enterprise is just really teaches you foundationally nasally that treat every cost as a variable cost so that you can adjust really rapidly to changing conditions. And in the print industry, where bulk of our revenue basis, you have to operate that way. And so, if you're in Europe, this is the way this company has been built. It's foundational belief. And so, really going after our cost structure right away in order to preserve cash, because we're intent of continuing to de-lever even through these difficult times and keep a lot of liquidity in the structure that Joel reference, to be able to take advantage of opportunities that come out of a economic disruption, so we believe that will keep us on strategy as we continue to innovate and provide great new products and services and talent for our customers. Go ahead Joel.

Yes. I'd say Jamie, the other thing is that, we always say hope is not an operating strategy. And when you get into a crisis like a pandemic. We've learned that finding the breaks hard, quickly is the right way to go. If you go too far, you can always feel this act, but that has the benefit of getting you out of the crisis mode quicker. So, you think about the pandemic when everyone entered it, everyone's in crisis mode and for a long period of time. But if you slam the brakes hard up front, you can even though you're still in a crisis, your team can kind of switch gears and not feel like you're in crisis mode. And that's where we're able to continue to focus on moving the transformation forward and winning signature.

As it relates to cash generation. And that's really important for us now and that goal for deleveraging. I touched on a few points in my prepared comments about things we're doing around cash generation, and it starts with foundationally what we just talked about, in addressing costs from a very making training all parts of it if they're variable to drive good past flow, despite an overall decline in the dollars EBITDA. We're a seasonal business. And I think if there's a mixed blessing and all this is the most impact that hit us during our seasonal locally. We're optimistic as some of my commentary about some improvement in the rate of decline in sales moving forward as we reach our seasonal peak, which is our customer seasonal peak for promotional activities. So, I think some of the volume declines hitting us during our seasonal point is actually gives us some optimism as we look to the future and again, very cloudy, but we see as the economy continues to gradually reopen and re-establish itself, we can see volume and cash flow pressures lessen, as the year goes on. The other thing we mentioned on our last call, but I think it's really important when you look in our ability to see leverage is the CARES Act has some important provisions in it, one which is pretty well known, which is just a deferral social security payroll tax into 2020 or 2022. That's had a nice impact for us, but also the ability under the tax law to carry back net operating losses in the years where the statutory rate was 35% versus our current 21% we filed our 2019 returning we expect to see based on the CARES Act provisions, well over a $40 million impact, positive impact to our cash flow once those refunds come in for the rest of the year. So, the CARES Act has actually had a very significant impact for us this year, some of that's deferred and from next year into 2022. But the ability to carry back at a weld is a big deal for companies like us?

Dave, appreciate that until last one. E-commerce, Brad Jacobs, the CEO of Expedia Logistics which is big guy, transportation logistics provider for a lot of e-commerce folks. Can you -- and I know this has been a trend over the last couple years you guys. Can you kind of give us a refresher in terms of how your conversations with e-commerce customers and that kind of stuff. Have gone around the catalog as being a, an integral piece of kind of the e-commerce marketing puzzle?

Yes, I'll just remind you that the original catalogers, they all been to this world where the original multichannel marketers, they were primarily in catalogs, but when dot.com came along, they discovered that print really drove a lot of their traffic as they tried to experiment with pulling back on print, and so we've had significant e-commerce companies that were engaged with rediscover print and it's interesting because when they do they they're amazed at the responsiveness especially at a time where the digital space is very crowded and going through lots of change where their responsiveness has actually gone down. And so, you're seeing it with a lot of the direct-to-consumer guides with some significant e-commerce companies are rediscovering it -- and rediscovering it quickly. And from a 3.0 standpoint, they don't necessarily come with a legacy knowledge base of how to execute on it. And so, that's where they really rely on the services we have that we built on 3.0, whether it's onsite dealing with content creation as well as the execution that, and then also learning how to take the data they have from online and using print to personalized, which for many of them is a whole new experience in the legacy channel. So, it's an interesting thing that's going on and I think we'll continue to see that segment grow.

[Operator Instructions]. Ladies and gentlemen, at this time I'm showing additional questions. I'd like to turn the call over to management for any closing remarks.

Thank you, and thank you everyone for joining today's call. I just want to close by thanking again and recognizing our employees for their hard work and sacrifices during this incredibly disruptive time. You really have my sincere appreciation for the work you do each and every day to create a better way for our clients and ourselves. In short, you are amazing and thank you for all you do. Have a good day, everybody.

Ladies and gentlemen, with that, we will conclude today's conference call. We thank you for joining today's presentation. You may now disconnect your lines.