Q4 2019 Earnings Call
But we will begin with opening remarks introduction.
This time I would like to turn the call over to Tom more but I would like to trend.
Director of Investor Relations.
Let's see Tom you may begin your call.
Thank you Heather 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 the Bell, our vice President financial planning and analysis and Treasurer.
Steve Smith, our Chief Financial Officer is recuperating from a medical procedure and we look forward to welcoming and back soon.
During the prepared remarks, we will 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 by 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 contained in the company's FCC filing.
This concludes but did not limited to risk factors contained in our 2019 annual report on form 10-K and in the news release issued this morning, which is posted in the Investor Relations section at Veritiv pork dotcom.
Non-GAAP financial measures are are included in our comments today and in the presentation slides a reconciliation of these non-GAAP measures to be applicable U.S. GAAP measures.
Got it at the end of the presentations lies in can also be found any investor relations section of our website.
At this time I'd like to turn the call over to Mary.
Thanks, Tom Good morning, everyone and thank you for joining us today as we review our fourth quarter and full year 2019 financial results.
We will also provide some thoughts on the important drivers of our expected full year 2020 performance and share guidance for the year.
Our consolidated fourth quarter and full year 2019 results were highlighted by strong free cash flow as well as improved adjusted EBITDA margins in packaging and facilities solution.
However challenges in our print and publishing segment negatively impacted our overall revenues and earnings for both the corridor and here.
Consolidated reported net sales for the fourth quarter were $1.8 billion down nearly 18% compared to the prior year period, whereas our core revenues also declining at the same rate.
All four of our segments experienced revenue declines this quarter. Some of the revenue decline was planned as he made strategic customer choices in facility solutions print and publishing that impacted the quarter.
Consolidated adjusted EBITDA for the fourth quarter was $47 million down about 18% year over year.
The reduction in earnings is largely due to volume declines in print and publishing somewhat offset by improved margins and lower supply chain and selling expenses.
However, adjusted EBITDA margins improved in all four of our segment.
Reported net sales for the year were $7.7 billion down about 12% compared to the prior year period and core revenues decreased at about the same rate.
The revenue decline was largely driven by the print and publishing segment, However, packaging and facility solutions were also down year over year.
Adjusted EBITDA for 2019 was $156 million down nearly 16% year over year.
The earnings decrease was driven by the revenue declined mainly in print and publishing partially offset by improved margins lower supply chain and selling expenses and lower bad debt expenses.
Now I'd like to shift to review the performance by segment.
In the fourth quarter packaging core revenues were down 7% year over year as market conditions in the U.S. further eroded coupled with price pressures in some product categories.
U.S. market has weakened over the past year with industry box shipments slowing in corrugated pricing down in the second half.
Pricing for resin based products were also down in the second half.
For the year packaging core revenues were down 2.6%, which we believe was in line with the market.
Packaging adjusted EBITDA decreased 3.6% year over year in the fourth quarter and decreased 1% for the full year 2019.
John margin management kept our adjusted EBITDA relatively flat to prior year. Despite the revenue decline and the negative impact of increased storage cost experienced in the first half the year due to certain financing leases being replaced by operating leases.
In addition, packagings adjusted EBITDA margins increased from 7.1% in the fourth quarter of 2018% to 7.4% in the fourth quarter of 2019.
For full year 2020, we expect packaging revenues to decline in the first half the year, but and slightly positive compared to 2019 and for adjusted EBITDA margins to improve from last year as we continue to focus on operational and selling related efficiencies.
Moving onto our facility solutions segment as stated in prior quarters. We're repositioning this segment for success by making strategic customer choices to better align with their supply chains strength as well as market product and customer dynamics.
These choices negatively impacted our topline results for the fourth quarter decline of 19% in core revenues year over year.
For full year 2019 core revenues were down 9%.
These choices have resulted in facility solutions, becoming a smaller but more profitable business as demonstrated by our fourth quarter and full year 2019 result.
In the quarter, our adjusted EBITDA increased more than 4% year over year due to lower supply chain and selling expenses as well as improved margins from our street strategic repositioning.
For full year 2019, adjusted EBITDA increased about 14%.
For 2020, we expect facility solution revenues to see declines similar to the full year of 2019. However, we expect to see a similar adjusted EBITDA levels as 2019, due to improved customer mix and supply chain efficiencies despite the lower volumes.
Switching to our print segment secular declines driven by lower demand disintermediation and industry consolidation continue to affect their revenues.
Print core revenues declined 25% in the fourth quarter and 21% for the year.
This decline was driven by a combination of market dynamics and certain supplier in customer actions that disproportionately impacted our results.
As well as our choices to manage credit risk.
These actions have improved the quality of our accounts receivable portfolio and have significantly reduce bad debt charges to their lowest levels in nearly 40 years.
The print segment's adjusted EBITDA was down nearly 21% in the fourth quarter and 33% for the year due to the revenue decline and margin pressure, partially offset by lower expenses.
We expect secular industry trends will continue to negatively impact Prince revenue in 20 in 2020. However, we expect the industry decline to be less and that we will perform closer to the overall market as we lap several onetime items that affected 2019 resolved.
The ongoing optimization efforts to reduce cost only partially offset the earnings impact as the volume declines in 2020.
Taking all these factors into account, we expect Prince adjusted EBITDA rate of decline in 2020 to be similar to that of 2019.
In light of the structural decline and ongoing uncertainty in the industry. We will continue to adapt our infrastructure to changes in the business.
The publishing segment's core revenues decreased nearly 32% in the fourth quarter and about 22% in 2019 similar to print publishing was impacted by continued secular declines in market volumes, but also by changes in order patterns due to customer consolidation and other fact.
<unk> as well as for credit reasons.
Adjusted EBITDA in the segment decreased 13.5% in the fourth quarter.
And 13% for the year due to the reduction in volume and revenue slightly offset by improved pricing and cost management.
However, our adjusted EBITDA margins did improve for both the corridor and the year.
For 2020, we expect publishing's revenues to decline at a slower rate than 2019 based on industry estimates. We also believe that earnings could have a modest decline in 2020 based on the variable nature of expenses in this business and our overall cost management.
Now turning to a brief update on our strategy, including our optimization initiative and our 2020 guidance.
We previously outlined our strategy to transition the company into higher growth higher margin businesses by investing in packaging and provided value added services protecting our leadership positions in facility solutions print and publishing and optimizing our business processes post integration.
We successfully implemented our optimization plans in 2019, and we'll continue doing so in 2020, which is reducing cost and working capital and improving margins.
While our optimization initiatives, our minimizing the earnings impact of the structural decline in print and publishing in the near term they are not enough to drive.
Substantial improvement in consolidated adjusted EBITDA dollars.
We expect to change this dynamic over time, but doing so this year would be challenging given the expectations for packaging industry growth dynamics.
Considering all these factors we are expecting our 2020 adjusted EBITDA to be in the range of $140 million to $155 million.
Key drivers of our guidance include an expectation that print and publishing industry normalizes to historical levels of decline and that we perform closer to those levels.
We also anticipate an improvement in the packaging industry in the second half of the year and further reductions in costs and improve margins from our ongoing optimization initiative.
The guidance does not include any potential impact to our business related to the Corona virus.
Our optimization efforts had a significant positive impact on free cash flow.
2019 was a record year for free cash flow as we generated $247 million compared to negative 30 million in 2018.
The improvement was due to both volume declines and post integration working capital process improvements, which resulted in a meaningful lowering of accounts receivable and inventory.
As we indicated on the third quarter call, we do not expect to repeat this free cash flow performance in 2020, and we believe the annual level of sustainable free cash flow is approximately $50 million to $75 million.
For 2020, we expect free cash flow to be at least $60 million.
Now I'll turn it over to geese. So he can take you through the details of our fourth quarter and full year 2019 financial performance.
Thank you Mary and good morning, everyone will first review the over our results for the fourth quarter and full year ending December 31, 2019 as were reviewed this results. Please note there when we speak to coordinate sales were referencing to reported net sales performance, excluding the impact of foreign exchange and adjusting for any day count.
For instance, as it relates to day count we had the same number of shipping days into fourth quarter. Two calls in the 19 as we head into fourth quarter of 2018.
Additionally, we had the same number of shipping days during 2019 as we head in 2018.
Consolidated net sales for the fourth quarter were $1.8 billion down 17.7% from the prior year period.
Core revenues declining at the same rate.
Our cost of products told for the quarter was approximately $1.5 billion.
Net sales lift across the product sold was $356 million natsios less the cost of product sold as a percentage of next <unk> was 19.4% up 160 basis points from the prior year period, largely due to improvements in pricing both segments and customer mix.
Consolidated adjusted EBITDA for the fourth quarter was $47.2 million down Kemper $4 million or 18% versus the prior year period.
Adjusted EBITDA as a percentage of and that's figures for the fourth quarter was 2.6% same as the prior year period.
Consolidated adjusted EBITDA in the fourth quarter declined approximately $10.4 million year over year higher corporate and other expenses, resulting from a larger unwind over incentive compensation for an accrual in the fourth quarter of 2018 drew over 40% of the decline.
The balance of the decline was mostly driven by the decrease in to print and publishing segments earnings.
For the year ended December 31, 2019, we had net sales of $7.7 billion down 11.9 per stemmed from the prior year period.
Our core sales declined 11.7% year over year.
For the year, our cost of product sold was approximately $6.2 billion.
Net sales less cost of products sold was approximately $1.5 billion.
Net sales less cost for products. So as a percentage of net sales was 19% up about 140 basis points from the prior year period.
Adjusted EBITDA for the year was 150 $549 million a decrease of 15.9% from the prior year period.
Over 80% <unk> earnings decrease was driven by the lower earnings from the print and publishing segment.
Adjusted EBITDA as a percentage of mats sales was 2% down 10 basis points versus the prior year.
Let's now move into the segment results for both the fourth quarter in year ended December 31 2019.
In the fourth quarter packaging that sales in core revenues were down, 7.4% and 7.3% respectively as market conditions in the U.S. border wrote a couple of price pressures from product categories.
For the year packaging segments net sales were down 2.8%.
Core revenues were down 2.6%.
For the fourth quarter packaging contributed $62.4 million in adjusted EBITDA down 3.6% from the prior year period I.
Adjusted EBITDA as a percentage of net sales were 7.4% up 30 basis points from the prior year period.
Increase was due to improved margins from a customer mix and process improvements in margin management.
For the full year packaging contributed $243.5 million in adjusted EBITDA down 1.3% from the prior year period.
Adjusted EBITDA as a percentage on its sales was 7.1%.
10 basis points from the prior year period, similar to the fourth quarter. The increase was due to higher margins from our customer mix and process improvements in margin management.
Were partially offset by the higher storage costs I think there, especially during the first half a year from sort of financing visas being replaced by operating leases.
In the fourth quarter facility solutions net sales in core revenues both decreased 19.2%.
Revenue decline was due to our repositioning of the segment for success by making strategic customer choices to better align with our supply chain strength as well as market product and customer dynamics.
For the year facility solutions net sales decreased 9.9% and core revenues decreased 9.4%.
For the fourth quarter and full year facility solutions contributed $9.6 million and part of $3.1 million, an adjusted EBITDA of approximately 4% and 14% respectively.
Adjusted EBITDA as a percentage of net sales increased 80 basis points to 3.6% during the quarter in 60 basis points to 2.8% for the year. The earnings increase was primarily driven by lower supply chain in selling expenses as well as improved margins from our strategic repositioning.
In the fourth quarter, the print segment experienced a 25% decline in both net sales in core revenues. This decline was driven by a combination of market dynamics and sort of supplier customer actions that disproportionately affected our results as most choices made to manage credit risk for the year the Princess.
Had a 21 for 4% declining that sales and core revenues were down 21.2%.
For the fourth quarter and full year, Prince tribute to $13 billion afforded three per $1 million, not just that EBITDA down nearly 21% and 33% respectively.
The earnings impact of the state with declining margin pressure for its owner, partially offset by lower expenses.
In the fourth quarter publishing that saves in core revenues, both decreased 31.7% from the prior year quarter. The lower revenue was due to continued secular declines in market volumes changes in order patterns to two customer consolidation and other factors as well as credit results.
For the year, the publishing segment had a 21.7% declining both net sales in core revenues.
For the fourth quarter in full year, focusing contributed $6.4 million in 21 for $4 million, an adjusted EBITDA down, 13.5% and 13% respect.
The decrease in adjusted EBITDA can be attributed to the reduction in volume slightly offset by improved pricing and cost management.
Shifting now to our balance sheet and cash flow.
At the end of December we had drawn approximately $673 million against the asset based lending facility and had available borrowing capacity of approximately $282 million.
As a reminder, that you'd be all facilities backed by the inventory and receivables on the business.
At the end of December our net debt to adjusted EBITDA leverage ratio was 4.1 points down from 4.7 times in the prior year period.
I would also note that our long term never of current portion on the balance sheet has dropped 23% year over year from $964 million to $742 million.
For year ended December 31, 2019 cash flow from operations was approximately $281 billion subtracting capital expenditures of about $34 million from cash flow from operations, we generated free cash flow of approximately $247 billion.
If we add back the roughly $52 million of cash items due to acquisition integration and restructuring activities adjusted free cash flow for 2019 would have been approximately $299 million.
How strong free cash flow in 2019 was primarily due to the lowering of both accounts receivable inventory, which combine are down approximately $406 million versus the prior year enabled by volume reduction and process improvement.
As Mary mentioned, why we experienced strong free cash flow in 2019, we do not expect to repeat this level of performance in 2020, we believe the annual level sustainable free cash flow is approximately $50 million to $75 million. This range uses current levels of adjusted EBITDA and assumes no working capital benefits.
Once again, we anticipate at least $60 million of free cash flow in 2020.
Also for 2000 and Swinton, our total kept our expense expenditures are expected to be approximately $40 million.
And that concludes our prepared remarks, operator, we're now ready to take questions.
At this time, if he would like to ask a question press star and the number one on your telephone keypad death Star followed by the number one on your telephone keypad.
Your first question.
From John Babcock with Bank of America.
Hey, good morning, Thanks for all the details first of all you did quickly reference the current virus I was wondering if you could talk about the impact of that.
No and what you've seen so far particular, I guess as it pertains to packaging facility solutions.
Yeah.
Good morning, John So we have not seen any impact to date, obviously in our because it's early on in our performance and we would expect minimal impact even going forward, but let me explain where we might see some impact but of course, it's very difficult to judge.
It could come in three ways first of all we do have an international business that we operate out of China.
That supports some technology companies that our manufacturing over there our late and so to the extent that people are not working over there it could impact the supply chain.
The latest word we had on that is that they are going back to work in the course of the next couple of weeks.
But it could have some could have some impact in the near term, although we don't believe it to be material to us.
The second area, where it could impact us as we do source materials from China in particular for a rigid packaging business. Its its about its not a huge amount, but it could impact that but again, we expect that to have a nominal impact.
The third area that it could which is a very unpredictable is in our <unk> and both of those first where in our packaging business on the third area also in our packaging business, which has come very difficult to assess is if global supply chains were interrupted supporting the manufacturing companies that we support again, we haven't seen any indication of.
That yet John but if it if that if it got that bad I guess it it could have some impact on us. Although again, we don't believe it would be significant and the last area. That's more domestic related is FX our facility solutions business, where we provide service to cruise lines theme parks those kinds of venues.
If people choose to stop visiting or reduced activity. It could have a modest impact on RFS business.
But again at this point in time, we're not we're not expecting a material impact to the company at this time.
Gotcha and I assume.
The aforementioned impact on.
Obviously since is already in guidance.
No it's not.
Because we haven't seen an impact too as of yet.
Gotcha.
And then next I was wanting to just kind of provide a quick update on how the optimization efforts are going in particularly relative to your expectations.
So I are up and yeah. So our optimization efforts are going very very well. So if you go back to 2018, I think we announced that we felt there was at least $100 million of optimization benefits coming from both cost reduction in margin improvement.
And and then and then I think at a later points and maybe it was early 19, we we said we thought we could improve our adjusted EBITDA of 30 to 50 million due to those benefits.
Where we are John is is that we have already met that hundred million of optimization benefits that we committed to we do see more upside to that and 'em. We haven't seen signaled what that is but we feel that there is more which we mentioned in our comments today. So it is gone.
I'm very very well, both in terms of improving margins and reducing costs.
As well as reducing working capital driving the cash flow that you saw this year that was generated so we're we're executing I think exceptionally well on the three levers of commercial operational excellence.
Our supply chain and back office.
And there is more upside as we mentioned in the no comments as it relates to the EBITDA commitment. We made we we caveated that with the on with the uncertainty around print and given the tremendous step back we had with the print and publishing business and.
2019, we would not expect to meet that $30 million to $50 million EBITDA improvement in the timeframe that we that we had put out there and so it will be delayed for sure. We haven't come back out and said to what at what point, but that has been the only negative in terms of those commitment.
Made is the print and publishing revenue and margin declines.
Okay. Thanks for that and then.
Just on patching.
Currently there were some revenue declines.
The second half of 2019, and it sounds like you're expecting.
No more declines in the first half you know personal I guess could you quantify.
So you know what sort of decline just thinking about in the first half and then.
Yes, It does sound like you are expecting growth.
For the year as a whole and on that point I was wondering kind of talk about what you can do and what levers you have to pull that to catalyze growth and actually going forward.
Yeah. So yeah, we did see I'm, an increasing level of decline in the second half as I mentioned, driven by both volume and price I'm in the packaging space and I know you're familiar with the industry dynamics and I think you've seen report you know there are some of the benchmarks we use.
Whose is what's going on in the core good market as well as resin based products.
So as we look at the first half of the year, we would expect a in general let me talk about 2020, we were expecting a negative growth in the first half of the year I'm, probably not too different than what we experienced in the second half of 19.
And then we're expecting that to improve over the course of the year I'm anticipating being slightly positive at the end of the year.
We do have several levers to pull on to drive a growth in the business first of all just all the work done around optimization in the past years gotten us more focused.
And better understanding the business and managing.
The business and an offshoot of that is is we actually anticipate our margins continuing to improve as well and so even if the topline is challenged our total gross margin dollars will continue to improve.
Based on just Oh, my managing the business better <unk> post integration.
We also have specific programs that we've launched because we are a sizable player in the marketplace to that ranges from a growing within existing accounts as well as capturing new accounts as well as I'm, putting more focus on some of our national accounts, because we're one of the few national players in the marketplace today.
And so we feel between process improvements and structures are driving I'm more focused agenda. We believe that we can generate more positive growth toward the end of the year.
And with positive growth in margins as well one of the things that we've addressed in the optimization efforts is better management of both cost and price to get at once we got through integration, which is delivering benefits and you can see it in our margins.
And the next I was just wanted to get talking about the factors impacting the castle working capital and somebody other items.
So I will talk about working capital in General and then he can talk about free cash flow. So on the working capital again, we saw improved significant improvements in our accounts receivable as well as inventory levels and it was a result, not only a volume declines that process improvements throughout.
At the entire supply chain from ordered a cash in particular on <unk> on accounts receivable as well as having better line of sight of our inventories again as we continue to get better information post integration because we're on common systems were integrated and so we're able to bring as we work through.
In order to cash process improvement that's generated a improvements in D.S., so and as we've worked through the supply chain improvements with the you know the completion of mostly of the network consolidations installing most of the warehouse management systems under one and having better.
Her line of sight of our inventory I'm, we're able to take working capital out at a level that we haven't been able to prior to the integration.
So those are the big levers on working capital and I'll, let Keith speak to just the overall cash flow of the business.
So John you saw that for the year at the cash the free cash flow strongly driven by the performance working capital one of the comments made is there we are not expected to see a similar benefits into 2020. So let me walk you little bit through how we're thinking about 2020, we gave you the guidance range between 100 afforded to 155.
We need in all adjusted EBITDA, you could take the mute points over there.
Cash interest days during a hard the NPL bylaws you'd get to somewhere between $25 million to $30 million of use of cash we talked about a capex of about $40 million. So you do them out to get you get for about $80 million before.
A few items. So we said, we're not expecting material source or use of working capital for 20 to 20.
And you will also read ones are 10-K's out that integration and restructuring plans related to merger our complete so we're not expecting any cash outflows related to those items. So the difference between to about 80 that I just walked you through at least 60 is driven by cash taxes and maybe some minor.
Our cash associated with small add backs or winding down of accrued liabilities.
Yes, and then just the last question before I turn over I was just farhan. It's good to talk about clearly there is still decent GOP and EBITDA and adjusted EBITDA.
Overtime, how investors should kind of think about.
Whether that gap will close.
Yeah, Let me start out so first of all based on what are the Kinski just made and we look at this is the quality of earnings.
There's actually a is a material change between 18 and 19, and then 19 to 2020.
And so.
There is an if you go and look in the filings we've had a or that we had you'll see that the the quality of earnings is almost.
Doubled year over year.
Yes, just one more item, we've talked about above $52 million of cash items related to integration and restructuring that in fact at our cash flow for 2019.
The Doe that number is going to be a lot closer to.
Zero as we're looking to 2020.
Okay, great. Thanks for all.
Right.
At this time I'll now turn the call back over to our CEO Mary Laschinger for closing remarks.
Well. Thank you John for your questions and for all those who are on the call. Today you know our 2019 results were highlighted again by our strong free cash flow and a subsequent reduction in debt as well as improved adjusted EBITDA margins in three of our four segments. In addition, the Veritiv team has done an excellent job executing are.
You can plan, which has resulted in significant cost reductions and margin improvements as well <unk> improved working capital and cash flow offsetting a portion of the gross profit dollar declines we had in our print and publishing businesses.
During 2020, we will continue to adapt to the ongoing structural decline in the print and publishing industries and we believe these efforts combined with our continued execution of our optimization initiatives.
And the transformation of our portfolio mix to higher growth higher margin benefits, but higher margin businesses will drive benefits for us in the year. So again, thank you for joining us today on the call and look forward to speaking with you in may as we share a first quarter 2020 results have a good day.
This concludes todays conference call you may now disconnect.
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