Good morning, and welcome to Quad's Second Quarter 2025 Conference Call. [Operator Instructions] Please note this event is being recorded. I will now turn the conference call over to Katie Krebsbach, Quad's Senior Manager of Investor Relations. 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 Tony Staniak, Quad's Chief Financial Officer. Joel will lead today's call with a business update, and Tony will follow with a summary of Quad's second quarter and year-to-date financial results, followed by Q&A. I would like to remind everyone that this call is being webcast, and forward-looking statements are subject to safe harbor provisions as outlined in our quarterly news release and in today's slide presentation on Slide 2. Quad's financial results are prepared in accordance with generally accepted accounting principles. However, this presentation also contains non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share, free cash flow, net debt, and debt leverage ratio. We have included in the slide presentation reconciliations of these non-GAAP financial measures to GAAP financial measures. Finally, a replay of the call 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.

Thank you, Katie, and good morning, everyone. Second quarter results met our expectations as we continue to differentiate ourselves as a marketing experience company that simplifies the complexities of marketing for brands and marketers. Our distinctive offering shown on Slide 3 includes a suite of integrated solutions for creative production and media backed by intelligence and tech across all digital and physical channels. We continue to invest in our strategic growth areas, including innovative solutions and superior talent to stay ahead of industry trends and execute faster, better, and with more agility. Quad's overall supply chain continues to have limited direct exposure to tariffs. Our largest import is the paper we bring in from Canada as we look at -- as well as we manufacture -- books we manufacture in our facilities in Mexico. These products are compliant under the USMCA, and our expectation is that they will continue to be exempt from tariffs. During the second quarter, we did not see a significant pullback from clients due to tariffs or inflationary pressures. However, we continue to closely monitor for potential impacts on our clients given the widespread uncertainty of when and how tariffs will ultimately be implemented. We are paying particular attention to our client supply chains for potential disruptions as well as fluctuations in consumer demand that may affect their mission-critical marketing plans. Rising postal rates also continue to challenge our clients, but a special 9-month USPS catalog discount launching in October offers some relief. This 10% discount aims to test volume elasticity within the catalog vertical. We appreciate the USPS agreeing to this test, which follows a recent study from the Postal Regulatory Commission confirming that rising rates negatively impact mail volume, a long-held view within Quad and other industries that rely on the USPS services to…

Thanks, Joel, and good morning, everyone. On Slide 11, we show our diverse revenue mix. Net sales were $572 million in the second quarter of 2025, a decrease of 4% compared to the second quarter of 2024, when excluding the 6% impact of the February 28, 2025, divestiture of our European operations. The decline in net sales during the second quarter was primarily due to lower paper and logistics sales. Net sales were $1.2 billion in the first half of 2025, a 3% decline compared to the first half of 2024, when excluding the 4% impact of the Europe divestiture. On a year-to-date basis, the decline in net sales was primarily due to lower paper, logistics, and agency solutions sales, including the loss of a large grocery client, which annualized at the beginning of March 2025. Comparing our net sales breakdown between the first half of 2024 and 2025, our revenue as a percentage of total sales increased 2% in our targeted print offerings, driven by direct marketing, packaging, and in-store, while our large-scale print offerings decreased 2% in our revenue mix due to expected organic declines in magazines and retail inserts. Slide 12 provides a snapshot of our second quarter 2025 financial results. Adjusted EBITDA was $43 million in the second quarter of 2025 as compared to $52 million in the second quarter of 2024, and adjusted EBITDA margin declined from 8.2% to 7.6%. On a year-to-date basis, adjusted EBITDA was $89 million in 2025 compared to $102 million in 2024, and adjusted EBITDA margin declined from 7.9% to 7.4%. The decrease in adjusted EBITDA in both periods was primarily due to the impact of lower sales, increased investments in innovative offerings to drive future revenue growth, and the divestiture of our European operations, partially offset by lower selling,…

[Operator Instructions] The first question comes from the line of Kevin Steinke with Barrington Research Associates.

So I wanted to start off by asking about the landscape in terms of the postal rates in the post office. It sounded like, again, a little more optimism on that front that you voiced on this call with maybe a little more focus on the pricing versus volume trade-off. And I know you keep in touch closely with the folks at the postal service. So kind of maybe give us a little bit more on how you see that progressing, and if we potentially can get a little more relief on that front while also recognizing you do a lot for your clients to help offset rising rates.

Yes. A lot going on here. Last week was the formal transition of the old Postmaster General to the new one. I was actually at the reception for him at the National Postal Museum, which is part of the Smithsonian Institute. I knew David when he was CEO of Waste Management, and I know him as a strong practical people-oriented leader. And so I'm optimistic about his talent being able to be applied to what is a rather complicated story. But the other thing is happening is they did just implement that expected 11% postal rate increase, which puts more weight on top of the 50% to 70% that they've increased over the past 4 years alone. But that was expected. And I think that the hope here is that they're starting to recognize that adding -- those increases have hurt them. as well as volume in the industry. And it's an age-old argument that when you increase your biggest cost to your clients, volume will go down. They seem to finally be believing that. And so one of the things that they're doing, which is encouraging is this test that starts in October, which goes for 9 months, where if you reach certain criteria as a cataloger that you can get up to a 10% discount. That's really important because it's the prospecting side using catalogs where the volume dries up the quickest when rates increase. So hopefully, that relief will help show maybe less decline and in some cases, some growth. And so we're looking forward to that. The other big thing that happened is the Postal Rate Commission, which really oversees the rate structure of the post office, started a review of everything a couple of years ahead of when they usually do it. And some initial things just came out last week with we just submitted new comments this week that they're accepting is that they recognize formally that the pricing increases have hurt volume. There's even a recommendation to go to once a year price increases because it's hard for businesses to manage. But they also went as far as to suggest that the rate increases should be capped again under CPI increases. And so that's something we're watching, and we will be participating in. And so I'm encouraged. I'm encouraged by it. It is a complicated, difficult thing to manage. So it's not easy for any Postmaster General to come in and fix something like this. But I like what we're hearing, I like the direction, and we're going to stay very closely in touch with the post office as they think about their next moves because they are engaging with the industry again, which is nice to see.

And I just wanted to shift to your ongoing investments and growth and innovation and a lot of the discussion about AI in your remarks, and specifically the launch of Audience Builder 2.0. You noted in your press release that that's a significant milestone in being able to activate this wealth of data that you have. So maybe can you -- you touched on it, but what does it do for you that you weren't able to do before, and how that benefits the client and ultimately, how that contributes to maybe growth in your business?

Yes. I'd say the data stack that we've done and partnered with Google Cloud to really -- to launch it and be able to make sure that we'll be able to use it in the ways that we expect to in the future. What it really kind of does Audience Builder, which was built on the Snowflake platform, really helps kind of democratize the access to the data. So it's one thing to have a large data stack. It's another to kind of translate and dive into it and say, here's the audience I need to build from that data stack that's good for this specific customer and the attributes they're looking for. Traditionally, you're working with some data scientists to try and navigate that, and they're doing all sorts of work and modeling to pull out the right data in the data stack. What Audience Builder 2.0 does is actually allows us to automate that. And so even someone like me, although hopefully, they'll keep me from doing that, could actually start entering some of the attributes into the model, and we use some AI features to help navigate through the data stack to automatically pull those out. And as I referenced before, the next phase of this is where we're going to apply generative AI or large language models to actually help do prompt into the data stack. So you go from having to input into multiple fields to actually just prompting the AI to go find, I want the person who likes to run outside and uses these types of shoes for what they like to do, please create an audience of 300,000 people who look like that, and it will then automatically navigate it. And so you can sort of see the progression of the use of AI on the data stack. But again, AI is a tool. And so the way I look at it is the way to make things much more accessible in a faster pace, so that customers will be able to iterate the audience data faster than ever.

Yes, that sounds really interesting. I mean, do you think this is a tool or something you can go out to your client base and kind of show them that this is a differentiator, and ultimately, these sort of tools that you continue to build and launch kind of continue to drive new business wins for you? Yes.

Yes. I think there's a lot of differentiators that happen. Certainly, this will be the data stack is. But where we spend our time, and I'm trying to show you in the script and roll out in the examples, is it's not the data stack on to itself. It's not an AI model on to itself. It's what is it applied to, to help the customer sell more business. And that's what we're totally focused on. And so when we talk about the data stack and that we Audience 2.0 to help navigate it, what we're really saying to the customer is, we got this great data stack. Now we're going to be able to grab data faster than ever, more accurately than ever. And we're, at the same time, showing them where to apply that -- and so great, we got the audience data quickly. It may help us more quickly say this much should be in social, this much of your budget should be in direct mail. These are the different places you should spend the money. It's that complexity that the customers are asking us to help them with. And that's why I think it's important to understand in a complex marketing world that's evolving here, it's not like one thing that the customer is looking for. They're looking for help in how to use that one thing, and how does it tie to the 3 or 4 other things that are happening. I mean in the half or even in the quarter, I'm really excited by the 7% increases in sales we're seeing in direct mail and packaging, and a 13% increase in sales for in-store because we're not selling those individual products by mimicking what they're already doing. We're getting the sales by tying in…

And I appreciate you touching on some of the -- it sounds like really healthy growth rates in the targeted print categories. I believe you said 7% and 13% for a couple of categories.

Yes, year-to-date, a little higher in that quarter.

Well, yes, that's very helpful color. because that kind of dovetails in just like bigger picture, my question is any evidence you can point to that gives you greater confidence about this journey you're on to achieving net sales growth. I know you continue to say by 2028, but it sounds like there's some kind of real tangible evidence you're seeing so far this year that the strategy in that journey continues to progress and take hold.

Yes. I mean I think you look at the pie charts that we show you of targeted print versus large-scale print, in large-scale print, that is viable marketing material. Retail inserts still work. People still want May, but they have the biggest decline rate. And so part of the migration to increasing the share of pie in targeted print and -- on the integrated solutions side is that you have that steady decline, but it's still good revenue, it's good cash flow revenue. And so that kind of dictates it a little bit. I mean, in fact, I think we're seeing a little bit less decline in retail inserts than we typically expect. Some of that's maybe some market share and maybe a little bit more resilience in some categories, but it will continue to decline. So that's the healthy balance that people have to think about, about why 2028 for the flip. But we still have this big dirthy print volume stuff that creates good cash flow, and we'll manage it as we management while we grow the other stuff. But it's how we're winning the other stuff that encourages me because we're not winning it by just doing the me-too pitch, we're doing it by using intelligence to create those channels to be more customer-centric from a growth rate standpoint, higher ROI.

Next question comes from the line of Barton Crockett with Rosenblatt.

I guess a couple of things I was curious about on the numbers. One is your sales trend kind of excluding the Europe divestiture, down 4% in the quarter, a little bit of a deceleration from the down 2% in the first quarter, even though I think you had the benefit of lapping the loss of a grocery client. And I was just wondering if you could just remind us how material was that grocery impact? And also unwrap a little bit, unpack a little bit about what prompted the deceleration here in trend in the second quarter versus the first.

Yes. So I'll start with your question on the grocery client. That was -- we had disclosed earlier, 3% of revenue, right? So I think $90 million to $100 million on the top line for a year. And then when you look at quarter-over-quarter, you're right on the trend Q1 versus Q2. Q2 is typically our lowest volume quarter. We saw higher organic decline in some of those larger print product lines in that quarter. We also saw some volume get into the first quarter that might typically have fallen into the second quarter, which explains the kind of the quarter-over-quarter trend. But we're still -- for the year, we're down 3% on the top line, so closer to the better end of our range of 2% to 6%. And now we expect increasing volumes going into our third and then the fourth quarter. So it's just a matter of lower volumes in Q2.

So to that end, I mean, I know you guys have the full year guidance. Anything you can say about how the third quarter is trending based on what you can see so far?

Yes. I guess I didn't see any of the volumes in the quarter to be alarming. But I will say we were worried about the effect of tariffs and the last quarter, and we talked about that, but we also said that we hadn't seen large-scale pullback because of tariffs. I'd say the tone that I'm hearing in the marketplace now is cautious optimism. -- that, boy, the world is still functioning after all this stuff that's happened that -- again, I think people are sort of charging ahead. We'll continue to look at what kind of impact maybe as the tariffs roll out, it will have on the consumer. But as I talk to catalogers, there seems to be an optimism there, cautious optimism. I think in retail, a little bit of the same, but you have to -- it depends on who you talk to and what category. So I think that I'm feeling comfortable with what we're seeing and what we're hearing in terms of our guidance relative to our guidance.

But it sounds like you said that trends have been -- volumes are up -- and that was a comment I want to make sure I understand. Are you saying--

Yes, I think as the rest of the year plays out, you should expect, compared to the second quarter, higher revenue and EBITDA in the third and then the fourth to be the highest revenue and EBITDA quarter of the year.

Seasonally, but on a year-over-year basis, is the trend -- are you saying the trend improves or just it goes up seasonally quarter-to-quarter?

It will stay within the guidance range that we gave of the 2% to 6% on the quarters.

And then you guys -- in terms of the asset sales, you guys had a couple of things going on here that I just want to make sure I understand what's in the results you just reported. So you guys had closed Sacramento. And so that cash is in the door here in the quarter you just reported. Is that correct?

That is correct, $5 million.

And then you guys had bought Enru, I think, for $34 million. And that outflow is also in the quarter you just reported?

We paid $16 million upfront, and that's in the quarter that we just reported. There's a $2 million cash payment later this year. And then there's an earnout that depends on how the business performs, that makes up the rest of the potential purchase price over 5 years.

Now in terms of the other kind of assets. I mean, is there -- can you just remind us what do you have that is on the block right now that could be sold that's remaining at this point?

Yes. We've got 2 buildings located in Eppingham, Illinois. These are all from earlier plant closures. We have one building in Waukee, Iowa, and we have one building in Greenville, Michigan, which was our most recent plant closure done in the early part of the second quarter. The Greenville and Waukee plants are relatively small, I think around 100,000 square feet. Eppingham has got a little more -- between the 2 buildings, a little more square footage to it.

Now in terms of your guide for net debt at $300 million, I think, from what was $350, so about a $50 million net reduction, which kind of squares with the middle point of your free cash flow guidance for the year. Are you guys -- how are you guys kind of treating cash from potential asset sales when you're guiding for net debt? Is that kind of not included, or anything you can say about that?

I would say we do make estimates on when we think facilities are going to sell and what we think they're going to sell for, and we do include that in the year-end guidance. So it's possible, depending on the timing of asset sales, that the only impact it would have would be on the net debt and the debt leverage. And again, we'll eventually sell those buildings. So depending on timing, it's possible something could slip into 2026. Okay. All right.

And then I guess the final point is on this Postal Service report, which sounds interesting. The recommendation for CPI-capped rate increases would sound like revolutionary compared to the last 4 years of much bigger than inflation at a time when inflation has been elevated. What would it take for that to be implemented? And what would be the timing for that to be implemented? And what is the probability of that, in your opinion?

Yes, that's a good question. That will have to play out because they're the governing body that overlooks it. And there's lots of process that goes on here. There's lots of input being gathered this week, quite frankly. And so what the process will be, how long that will take, is a little bit yet to be seen. It's not revolutionary. It's actually where we came from until the pandemic happened and after the pandemic happened, where they were allowed to use these -- the authority to go above the CPI increase. But for the many years, decade plus before that, it was capped at CPI. And if you look at that range, what happened was is, yes, we had decline in print, but it was pretty consistent and manageable. And then as soon as the pandemic happened, you saw a big increase in the decline in print, but then it bounced way back, back to a little bit better than the decrease that it was seeing. But that's when they really started cranking the prices. So in the next subsequent from '22 on is when you suddenly saw the print decline accelerate because you just saw the pricing increase so dramatically. And I guess the challenge is they got to run it like a declining business. I think the previous Postmaster General declared you wanted to run it like a growing business. Well, the only way you can grow revenue if volume is declining as you crank pricing. Well, that's a very short-term thing to do. And so I think there's a lot of people in the industry really pushing to come up with something that works. And will it be a cap at CPI? I don't know. But I think lessons are being learned here, and I think there's a real impetus and desire to want to come up with something that allows the industry to be healthy, which means the post office can be healthy. But it's going to take some complexity and some heavy lifting to get that happening. I wish I could give you a more succinct answer, but we will share it as we see it happening.

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

Thank you, everyone, for joining today's call. And I want to close by reiterating that Quad remains steadfast in our strategic vision, leveraging our integrated marketing platform to unlock diversified growth, improve print and marketing efficiencies, and create meaningful value for all stakeholders. With that, thank you again, and have a great day.

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