Q3 2019 Earnings Call
Good morning, and welcome to Veritiv Corporation's third quarter 2019 financial results Conference call.
Under today's call is being recorded.
I'll begin with opening remarks in introductions.
Time, I'd like to turn the call over to Tom Morabito Director of Investor Relations Mr. Morabito, you may begin.
Thank you Denise and good morning, everyone. Thank you all for joining US today, you will hear prepared remarks from Mary Laschinger, or chairman and Chief Executive Officer, and Steve Smith, Our Chief Financial Officer Afterward, we'll take your question.
Before we begin please note that some of the statements made in todays presentation regarding the intentions beliefs expectations and or predictions of the future.
The company and or management are forward looking actual results could differ in a material manner.
Additional information that could cause results to differ from those in the forward looking statements is contained in the company's FCC filings include what is not limited to risk factors contained in our 2018 annual report on Form 10-K and in the news release issued this morning, which is posted any investor relations section at Veritiv Corp. dotcom.
non-GAAP financial measures are included in our comments today and in the presentation slides reconciliation of these non-GAAP measures city applicable U.S. GAAP measures are included at the end of the presentation slides and can also be found an investor relations section of our website.
At this time I'd like to turn the call over to Mary.
Thanks, Tom a good morning, everyone and thank you for joining US today as we review our third quarter 2019 financial results and provide an update on our full year outlook.
Our third quarter results were highlighted by strong free cash flow as well as improved margins and adjusted EBITDA in our packaging and facility solutions segment.
However, consolidated revenues were well below expectations and declined year over year, largely due to the ongoing structural decline in our print and publishing segment and general market softness in packaging I.
Additionally, similar to previous quarter's some of the revenue decline was planned as we made strategic customer choices in facility solutions print and publishing and the corridor.
Consolidated reported net sales for the third quarter were $1.9 billion down about 12% compared to the prior year period with our coordinate sales declining 13.5%.
All four of our segments experienced revenue declined this quarter.
Consolidated adjusted EBITDA for the third quarter was $45 million down about 15% year over year. The reduction in earnings was largely due to the volume declines in print and publishing somewhat offset by lower costs and margin improvement in packaging and facility solutions.
Shifting now to the review of our performance by segment.
Packagings adjusted EBITDA in the third quarter increased just over 5% year over year.
The earnings increase was due to improve margins from customer mix and process improvements in margin management.
Packaging core revenues were down 4.5% year over year due to changes in customer mix market conditions in the U.S., a slow down in certain non U.S. markets and price pressures in some categories.
The U.S. market has weakened over the past year with box shipments and sales of resin based products flat to slightly down year to date.
For the remainder of 2019, we expect packaging revenues continued to be soft in the fourth quarter and for adjusted EBITDA margins to improve from last year.
Moving onto our facility solutions that segment.
As stated in prior quarter, we are repositioning this segment for success by continuing to make strategic customer choices to better align with our supply chain strength as well as market product and customer dynamics. These choices have put significant pressure on our topline results with a third quarter decline of eight.
Percent in core revenues year over year.
We believe these choices will result in facility solutions being a smaller but more profitable business as demonstrated by our third quarter results. Our adjusted EBITDA increased about 36% year over year due to lower supply chain and selling expenses as well as improved margins, but most of.
TJ repositioning.
In prior quarter, we indicated we were exiting certain retail customers due to supply chain dynamics and credit risks during the third quarter. We made the decision to exit our U.S. based redistribution business known as soft felt this business Serb smaller distribution companies in the U.
<unk> with a broad array of products and services oftentimes characterized by smaller order of noncore product as well as having greater delivery distances.
So I felt generate approximately 2% of Baird of annual revenue and accounted for about 12% of the facility solutions revenue, but was less profitable than the rest of the segment.
Well the exit did not have a material impact on our third quarter results year over year revenue comparisons will be it affected in the fourth quarter and more so in 2020, where we expect to see a double digit revenue declines for the segment.
For the remainder of 2019, we expect facility solutions revenue to see further declines due to the choices. Just mentioned however, we expect to see an improvement in year over year adjusted EBITDA led by continuation of the key drivers experienced during the first nine months of year, but subject to risk of recent.
Revenue trends.
Switching to our print segment.
Secular pressures driven by lower demand disintermediation and industry consolidation.
Continue to affect our revenue print core revenues declined nearly 23% in the third quarter.
Approximately three quarters of this decline was driven by a combination of market dynamics and certain supplier and customer actions, which disproportionately impacted our results.
In addition, we had been making choices to manage credit risk in our print segment, which may continue to have a negative impact on or volume.
These choices have improved the quality of our accounts receivable portfolio and have significantly reduced bad debt charges.
The print segment's adjusted EBITDA was down approximately 27% year over year due to revenue decline in margin pressure, partially offset by lower expenses.
We expect secular industry trends will continue to negatively impact prints revenue for the balance of 2019.
The print business model changes executed in 2018, along with our ongoing optimization efforts to reduce costs will only partially offset the earnings impact of the volume declines in 2019.
Taking all these factors into account, we expect print adjusted EBITDA in the fourth quarter of 2019 to be lower than the fourth quarter of 2018.
The publishing segment's core revenue declines decreased nearly 28% in the third quarter similar to print publishing was impacted by continued secular declines in market volumes, but also it was negatively affected by the loss of certain retail account some for credit reasons.
Adjusted EBITDA in the segment decreased about 18% year over year due to the reduction in revenue slightly offset by improved pricing and better cost management.
For the fourth quarter of 2019, we expect the segment's revenues to decline at a slightly greater rate than the previous two corridor. We also expect earnings to decline at roughly the same rate as the prior years fourth quarter.
Turning now to our consolidated 2019 guidance.
The deterioration of the print and publishing businesses has been significant to give you an idea of the effect of this decline has had on our income statement, we are forecasting that print and publishing.
I will negatively impact our 2019 gross profit defined as net sales less cost of goods sold by approximately $85 million.
The positive effects of optimization efforts will offset the majority of the declines in both print and publishing.
Due to these factors for full year 2019, we're now expect adjusted EBITDA to be in the range of $150 million to $160 million down from our previous guidance of 165 to 180 million.
A key assumption for reaching this range includes the rate of decline in print and publishing segment similar to our third quarter.
In the third quarter of 2019, we generated approximately $81 million a free cash flow compared to negative 13 million in the third quarter of 2918.
The increase was due to both volume declines as well as successful post integration working capital process improvements, which resulted in a meaningful lowering of accounts receivable and inventory.
Due to the strong cash flow results year to date and a continued focus on post integration process improvement, we are raising our 2019 expectation for free cash flow to at least $170 million up from our previous guidance of at least 85 million.
Given the challenges we have had with our print and publishing businesses. This year. We thought we would briefly update you on our strategy, including our optimization initiatives.
Previously outlined our strategy, we outlined our strategy to transition the company into higher growth higher margin business by investing in packaging and providing value added services protecting our leadership positions in facility solutions print and publishing and optimizing our business processes post.
Integration.
We are successfully implementing our optimization plans and our ahead of our optimization target.
Our business mix is also continues to shift into higher growth and margin business with packaging and to a lesser extent facilities dilution.
However, the structural declines in print and publishing is putting significant near term pressure on achieving our previously communicated cumulative adjusted EBITDA improvement goal.
While we expect to achieve this goal it will likely take longer than originally expected. We will provide a more detailed update on our multiyear optimization guidance. When we report 2019 full year earnings next February now I'll turn it over to Steve. So he can take you through the details of the third quarter financial performance.
Thank you Mary and good morning, everyone.
We will first review the overall results for the third quarter ending September 2019.
As we review these results. Please note that when we speak to coordinate sales were referencing the reported net sales performance, excluding the impact of foreign exchange and adjusting for any day count differences.
As it relates to day count.
We had one more shipping day in the third quarter of 2019 than we had in the third quarter of 2018.
As a reminder, we had one less shipping day in the first quarter with the second and fourth quarters, having the same number of days as in 2018.
Consequently, we will have the same number of shipping days during 2019 as we head in 2018.
Consolidated net sales for the quarter $1.9 billion down 12% from the prior year period with coordinates sales down 13.5%.
Our cost of products sold for the quarter was approximately $1.6 billion.
Sales less cost or products sold was $374 million.
Net sales less cost or product sold as a percentage of net sales was 19.4%.
About 180 basis points from the prior year period, largely due to improvements in pricing as well as both segment and customer mix.
Consolidated adjusted EBITDA for the third quarter was $45 million down $7.7 million for 14.6% versus the prior year period.
Our adjusted EBITDA as a percentage of net sales for the third quarter was 2.3% down 10 basis points versus the prior year period.
Consolidated adjusted EBITDA declined approximately $7.7 million year over year with a decrease in the print segment earnings driving approximately one half of that that that decline versus the prior year quarter.
In addition, there was an increase in our corporate other expenses as a prior years third quarter hadn't unwind of an incentive compensation plan expense and this years third quarter to not have that earnings benefit.
Margin management the mix of products sold.
Lower supply chain or back office costs as well as one extra day helped to partially offset these headwinds.
Let's now move into the segment results for the third quarter.
Packagings net sales and core revenues were down, 3.1% and 4.5% respectively due to changes in customer mix marketing conditions in the U.S., a slowdown in certain non U.S. markets and price pressures in some categories.
Packaging contributed 60 $467.4 million, an adjusted EBITDA up $3.4 million were 5.3% year over year.
Adjusted EBITDA as a percentage of net sales were 7.7% up 60 basis points from the prior year period.
The earnings increase was due to improved margins from our customer mix and process improvements in margin management.
[laughter] abilities solutions net sales decreased 6.8%, while core revenues decreased 8%.
The revenue decline in this increasingly competitive segment was due to channel dynamics as well as the fact that we're making customer choices to aligned to our product and service capabilities.
Facility solutions contributed $11 million, an adjusted EBITDA up 35.8% year over year.
Adjusted EBITDA as a percentage of net sales increased 110 basis points from the prior year period.
The earnings increase was primarily driven by lower supply chain and selling expenses as well as improved margins from our strategic repositioning.
The print segment experienced a 21.7% decline in net sales and core revenues were down 22.9%.
Approximately three quarters of this decline was driven by a combination of market dynamics and certain supplier in customer actions, which disproportionately impacted our results.
The ongoing effect of these choices that we've made to manage credit risk also impacted the topline.
For the third quarter contributed $10.6 million, an adjusted EBITDA down 27% year over year.
The earnings impact of the sales decline and margin pressure was only partially offset by lower expenses.
Publishing's net sales in core revenues decreased 26.5% and 27.6% respectively from the prior year quarter.
The lower revenue was due to a reduction in volumes, primarily driven by continued secular decline in the industry and the loss of certain retail accounts some for credit reasons.
Publishing contributed $4.6 million and adjusted EBITDA down 17.9% year over year.
A decrease in adjusted EBITDA can be attributed to the reduction in volume slightly offset by improved pricing and cost management.
For the entire company, we had $4.8 million of bad debt expense in the third quarter down from $8.1 million in the third quarter of 2018.
For the second consecutive quarter, the print segment experienced a year over year reduction and bad debt expense and on an absolute basis. It was prince lowest quarterly level three years.
Shifting now to our balance sheet and cash flow.
At the end of September we had drawn approximately $665 million against the asset based lending facility and had available borrowing capacity of approximately $354 million.
As a reminder, the ABL facility is backed by the inventory receivables of the business.
At the end of September our net debt to adjusted EBITDA leverage ratio was 3.6 times down from 4.8 times in the prior year period.
Our long term strategic goal continues to be a net leverage ratio of around three times.
I'd also note that our long term debt net of current portion on the balance sheet has dropped 27% year over year from $998 million to $726 million.
Cash flow from operations for the third quarter was approximately $88 million.
Attracting capital expenditures of about $7 million from cash flow from operations, we generated free cash flow of approximately $81 million.
If we add back the roughly $11 million of cash items do acquisition integration and restructuring activities adjusted free cash flow for the quarter would've been approximately $92 million.
As anticipated and shared with our annual guidance, both our capital expenditures as well as our cash cost for integration and restructuring have declined quarter over quarter as well as in the nine month comparison.
Our strong third quarter free cash flow was primarily due to the lowering of both both accounts receivable and inventory, which combined are down approximately $380 million versus the prior year quarter.
Approximately two thirds the improvement was enabled by volume reductions.
The other one third was the result of process improvements many of which had been enabled by the integration the last several years and deployed for optimization initiatives.
As a result, our cash conversion cycle has improved four days versus the prior year quarter.
While we are experiencing strong free cash flow year to date, we do not expected to treat this level performance in 2020.
We believe that the annual level of sustainable free cash flow is approximately $50 million to $75 million.
This range uses the midpoint of this years adjusted EBITDA guidance and his sons assumes no ongoing working capital benefit.
While we do not assume any working capital benefits in our sustainable free cash flow guidance, we currently anticipate incremental reductions and working capital in 2020.
And lastly for 2019, our total capital expenditures are expected to be approximately $45 million.
That concludes our prepared remarks, Denise we're now ready to take questions.
Ladies and gentlemen, Tosca question. Please press Star then the number one on your telephone keypad will pass this momentum coupled acuity roster.
Your first question comes from John Babcock with Bank of America. Your line is open.
Good morning, just want to sort out just on kind of the optimization plans I was wondering if you could no generally sounds like everything's going pretty well there, but I also want to get a sense for how that has impacted earnings. This year and also how we should think about that in 2020.
Good morning, John I'm, Thank you for being on the call.
So going back over a year ago, we laid out.
Some optimization initiatives that were broad based around improving margins as well as reducing costs and it has had a we haven't reported the actual benefit of that this year. It has been significant as you can imagine and and but we do anticipate updating that in the first quarter.
We would expect something similar in terms of benefit for 2020.
Go ahead, Steve May add to that and also John as you think about how it's impacting US we would tell you that.
Margin improvements have been about a third of the total benefit this year and cost reductions, which we could get into at some point have been about two thirds of the benefit.
Okay. That's helpful.
And then realize it maybe a little bit early also to think about 20 to 20 earnings guidance and I assume you guys already have a plan for that but at least from our vantage point, how should we think about the key factors to bridge from 2018 to 2020.
Well I think one of the biggest key factors is how we're looking at our print business.
Revenues across the board and what we shared with you today is we anticipate continued structural decline in print maybe not to the same degree as what we saw in 2019 print and publishing we already alluded that we'd have declines in facility solutions due to the exit of our fall self fell business.
And you know as we look at our packaging business, we haven't given estimates on growth, we do see in the fourth quarter that the outlook could be similar to what we saw a year to date, but we haven't given specific guidance, but that is an area, where we're going to continue to focus and grow the business as well as we expect continued.
To improve margins in our packaging business. So it's a combination of making estimates around revenue in the three segments in terms of decline growth and packaging, whether its revenue or eat or margin growth. We will also have margin improvement in our facility solutions business and then those.
Reported also with additional cost decreases driven by our optimization efforts.
We haven't given specific guidance, yet, obviously, but we will do that in February John .
Yes. Thank you and then net debt it sounds like you were able to bring that down a fair bit. This quarter. All 20. What are you thinking is kind of like longer term target. What do you think is achievable by the end of this year and then.
You know kind of over the next couple of years.
So.
First of all John the.
3.6 is a.
Seasonal trough and our leverage because of the fact that typically in the fourth quarter. We have an accounts payable outflow as we have the last few years and so we would expect leveraged to tick back up.
In the fourth quarter because of that seasonal outflow BP.
With the guidance broad being brought down we also will see LTM trailing EBITDA.
Two coming down in the forward forecast level also cause leverage to go up so a combination of seasonality and slightly lower earning stream will will cause leverage to go up as it relates to the longer term, we have targeted three times leverage ratio as a long term target there'll be times, where we go above that for.
For purposes of investment as we did with the acquisition at times, where we might surpass that going below it due to strong cash flow.
Okay, and then in the packaging business ultimately sustainability to become a hotter topic, there and I just want to get a sense how is that impacting the types of packaging solutions that you provided customers on and also generally how you serve them.
So we agree with you that sustainability is is incredible and very important topic in the packaging space today, we do offer already a broad array of products that.
That meet various customer need. It is also a platform that we're continuing to build out and is actually one of the pillars of our of our strategy that we just shared with our board of directors a couple of weeks ago.
So where we are today as we have product offerings that will meet.
Customer needs and demands and the fact that were substrate agnostic as well helps benefit from that because we're not tied to a specific product type like a resin based product or a fiber based product. It's all about what the customer needs and constantly working with our our supplier partners and.
Developing those products that meet that are more sustainable or environmentally friendly.
But we feel we're in a great position to support the customer needs in that area going forward.
Yes. Thank you and then just last question.
So it looks like paper inventories have started to improve in the channel at least in North America.
Are you seeing any signs of improvement in the print and publishing businesses. So far this quarter and also how are you thinking about that over the next couple of quarters.
So we would agree with you that the inventories are improving slightly but there's a lot of changes going on in the industry and some of them disproportionately impacting the distribution channel as well.
You know because there's been customer consolidation.
For example that have impacted the distribution channel as well as mills, making decisions to no longer sell certain products, which are some of the implications that we've had in the fourth quarter. We alluded that we would have a revenue similar to what we saw a year and as we look into the next year, we're not anticipating them to be that quite that naked.
Because of some the choices that we made around high credit risk customers. Some product choices that we no longer just sports well, we'll have gone through all of that and so we would expect our revenue declines to be not as severe as they were in 20 to 2019.
Okay. Thank you.
There are no further questions queued up at this time, it kinda call back over to Mary Laschinger.
I'm. Thank you John for your questions you know our third quarter results were highlighted by improved margins and increase adjusted EBITDA and packaging and facility solutions as well as strong free cash flow, which has enabled us to significantly reduce our debt the performance of our print and publishing businesses have been very challenging however.
For our optimization efforts, which began in 2018 have resulted in significant cost reductions and margin improvement as well as improved working capital and cash flow. The team has done an outstanding excellent job and executing on our multiyear optimization plan, which has offset much of the unanticipated gross profit decline.
In our print and publishing segment.
Thank you again for joining us today, and we look forward to speaking with you early next year as we share our fourth quarter and full year 2019 results have a great day.
This concludes today's conference call you may now disconnect.