Q1 2020 Earnings Call
So its calling for its tool.
Mitre today's call is being recorded the will begin with opening remarks and introduction at this time I would like to turn the call over to Tom RFP to director of Investor relationship.
Mr. Barbie, Tony you may begin.
[music]. Thank you in 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 sell about they our Chief operating officer, and Steve Smith, Our Chief Financial Officer Afterward, we'll take your questions.
Before we begin please note that some of the statements made in cities presentation regarding 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 is contained in the company's FCC pilot.
[laughter].
This includes but is 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 any investor relations section at Baird import Dot com.
Non-GAAP financial measures are included in our comments today and in the presentation slides. The reconciliation of these non-GAAP measures a couple U.S. GAAP measures are included at the end of the presentation slides and can also be found in the 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.
Oh, good 19 pandemic is taking a toll on everyone well professionally and personally and we hope you are all able to successfully navigate through the issues you're facing during these challenging time as a company we remain focused on ensuring the safety and well being up our employees, while continuing to safely and effectively serve our key.
Customers.
During today's call. In addition to reviewing their first quarter 2020 financial results. We will provide an update on the impact of the pandemic is having on her business.
Actions, we're taking to address the rapidly changing environment.
Turning now to our results for the first quarter.
Our consolidated first quarter 2020 result were highlighted by a significant improvement in both adjusted EBITDA and free cash flow as our optimization initiative improve margins reduced our overall cost structure and lowered working capital.
Consolidated reported net sales for the first quarter were $1.7 billion down 12% compared to the prior year period with revenues declined 13%.
Consolidated adjusted EBITDA for the first quarter was $36 million up 78% year over year. The improvement in earnings was largely due to improve margins lower supply chain and selling expenses and one additional selling day.
These benefits were somewhat offset by the earnings impact a volume decline.
The Corona virus did not have a significant impact on our first quarter operations or resolve.
We'll speak to the nature of the Corona virus impact on the balance of the year in a few minutes.
Well, Steve will provide more detailed information I want to briefly comment now on our balance sheet and liquidity position.
At the ended the quarter, we had $75 million in cash on hand, as well as $286 million in borrowing capacity under our asset based lending facility.
We recently refinanced the A.B.L. under substantially similar terms and extended the facility to 2025.
Our first quarter free cash flow generation enabled a reduction in our net debt to adjusted EBITDA ratio from 4.1 time at the yearend 2019 to 3.5 times at the end of March 2020.
I would now like turn it over to South who will take you through our first quarter performance by segment.
Thank you Mary and good morning, everyone.
In the first quarter packaging is core revenues were down 6% year over year, which is an improvement from the fourth quarter of 2019, although market conditions in the U.S. have become more challenging.
Industry box shipments were up in the first quarter, partly due to panic buying in March however, pricing pressures in the corrugated category contributed to an overall market decline.
Packaging was also affected by the slow down in the industrial manufacturing sector.
Packagings adjusted EBITDA increased 24% year over year.
Despite the revenue decline our business optimization initiatives improved margins and lowered our expenses, resulting in packagings adjusted EBITDA margins improving from 5.7% in the first quarter of 2019% to 7.4% in the first quarter of 2020.
Moving onto our facility solutions segment core revenues were down 14% year over year, which was in line with our expectations.
First quarter revenue decline was due to the repositioning of this segment for success in 2019 by making strategic customer choices to better align with our supply chain strengths as well as market product and customer dynamics.
These choices have resulted in facility solutions, becoming a smaller but more profitable business as demonstrated by our first quarter results.
Our adjusted EBITDA more than doubled year over year due to improve margins from our strategic repositioning, which lowered supply chain and selling expenses.
Switching to our print segment secular pressures driven by lower demand continue to affect our revenues.
Print core revenues declined 19.6% in the first quarter.
This decline was driven by market dynamics as well as our continued decisions regarding customers suppliers products and service requirements.
The print segment's adjusted EBITDA was up nearly 56% year over year due to lower expenses and better margins, partially offset by the earnings impact of the revenue decline.
The publishing segment's core revenues decreased nearly 22% in the first quarter.
Similar to print publishing was impacted by continued secular declines in market volumes, but also by changes in order patterns due to customer consolidation digital advertising and other factors as well as credit reasons.
Adjusted EBITDA in this segment decreased 25% year over year due to the reduction in revenue an increase in charges for high risk credit accounts slightly offset by improved pricing and lower costs.
Adjusted EBITDA margins were relatively flat.
I will now turn it back over to Mary.
Thanks, Sal and shifting now to our strategy in 2017, I shared with you that our strategy.
Our portfolio mix higher girl higher margin businesses, and we would do that by investing in packaging and services protecting our leading market positions, where we choose to compete and facility solutions print and publishing and optimizing our business processes post integration across commercial.
Supply chain and back office operations.
All these initiatives were designed to grow adjusted EBITDA and cash flow and lead to a higher return on invested capital.
Last year.
Also shared with you how we expected to create value across these three levers of our business model for more efficient commercial operations with better processes and controls will improve margins to better pricing and supplier cost management greater emphasis on higher margin products and categories, including privately.
Label, and narrowing our focus to end use markets with greater growth and profitability opportunities.
Do these initiatives, we also expect to lower our selling expenses.
Second improvements in handling delivery and inventory management will drive supply chain operational efficiencies.
Third more standardization and greater efficiencies will drive significant improvement in our back office operations.
Our first quarter 2020 resolve demonstrated the continuing execution of our strategy around or segments.
And optimization initiatives.
This was evident as we grew margins across our segments reduced our cost structure and improved our processes around working capital.
As part of this strategy. We recently filed an 8-K regarding devaluation of alternative to restructure our integrated supply chain to optimize.
Packaging business, while managing the structural decline of the print industry.
We continue to evaluate alternatives to reduce complexity and lower overall supply chain costs as well as drive greater alignment with our packaging customers, while adapting to the market dynamics of France.
Now turning to an update on the Corona virus.
Howard is impacting our business and the actions, we're taking to adjust to this unprecedented and rapidly evolving environment.
Veritiv is operating as an essential business.
Our business is fully functional and operating consistent with guidelines provided by federal state and local officials. So we can continue to safely meet the customer the needs of our customers.
As a distributor our business model allows us to temporarily remove costs associated with our selling efforts supply chain and back office based on order activity.
Additionally, due to our integration and optimization initiative, we have both the experience and processes to quickly adapt to the changing environment as well as effectively manage our costs and minimize working capital.
These factors positively contributed to free cash flow as shown in our full year 2019 resolved.
Our business also serves a broad range of industry and we have very little revenue concentration with specific customers in particular sector or in certain geographies within North America, no single customer represents 3% of our aggregate annual revenue.
The Corona virus, we'll have a negative impact on our results for the remainder of year.
We expect revenue declines in each of our segments with packaging experiencing lease significant revenue declines followed by facility solutions, France, and then publishing.
The extent and duration of decline very difficult to predict we also anticipate that some customers will delay or fail to make payments.
For planning purposes, we had been modeling a range of scenarios far business that assume potential revenue decline for the remainder of 2020 greater than those of the first quarter.
Given our current financial profile and our business model flexibility combined with our experience in removing costs as well specific actions. We're taking at this time, we are confident that we will have adequate liquidity.
We have taken several significant proactive steps to help mitigate the effect of the revenue decline on our earnings as well as to strengthen our access to capital.
These actions include the following.
Temporarily reducing salaries for senior leaders from 10% to 50% depending on a position.
Temporarily reducing annual cash retainers, where independent directors by 50%.
Placing approximately 50% of companies salaried workforce on temporary furlough based on business activity.
[noise] flexing, our supply chain operation staff, depending on volume at specific locations.
We also suspended our share repurchase program.
Were delaying the merit increase for SAP increases for salaried employees.
We also temporarily suspended the company's matching contributions for salaried employees defined contribution plan.
And finally, we are further reducing spending including capital expenditures.
Given the uncertain environment, we are withdrawing our prior 2020 guidance for adjusted EBITDA free cash flow and capital expenditure and will not be providing updated guidance at this time.
Now I'll turn it over to Steve. So he can take you through the detail of our first quarter 2020 financial performance.
Thank you Mary and good morning, everyone.
We will first review the overall results for the first quarter ending March 31st 20 Twond.
As we review these results. Please note that when we speak to core net 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 first quarter 2020, and we had in the first quarter of 29 team.
For the remainder of 2020 each quarter. So we'll have to sing number shipping days as the previous years comparable quarter.
Consolidated net sales for the quarter for $1.7 billion down 12.1% from the prior year period with core revenues declining at 13.4%.
Our cost of products sold for the quarter was approximately $1.4 billion.
Sales less the cost of products sold was $348 million.
Net sales less cost or products sold as a percentage of net sales was 20.4%.
240 basis points from the prior year period, largely due to improvements in pricing as well spoke segment and customer mix.
Consolidated adjusted EBITDA for the first quarter was $36.2 million up $15.8 million were 78% versus the prior year period.
The improvement earnings was largely due to strong margin management.
Lower supply chain and selling expenses and one additional selling day.
Somewhat offset by lower earnings from volume declines in print and publishing.
Adjusted EBITDA as a percentage of net sales for the first quarter was 2.1% nearly doubled the prior year period.
Let's now move into the second results for the first quarter ended March 30, Onest of 2020.
Packaging net sales in core revenues were down, 5.1% and 6.4% respectively as market conditions in the U.S. further eroded coupled with pricing pressure in some product categories.
As Sam mentioned, we've also been affected by the slowdown in the industrial manufacturing sector.
[noise] packaging contributed $59.6 million, an adjusted EBITDA up 23.7% from the prior year period.
Adjusted EBITDA as a percentage of net sales were 7.4% up 170 basis points from the prior year period.
The increase in earnings was due to our business optimization initiatives, which improved margins and lowered expenses and was partially offset by the decline in revenues.
Facility solutions net sales were down 13% and core revenues decreased 14.1%.
The revenue decline was due to the repositioning of the segment for success are making strategic customer choices to better align with our supply chain strengths as well as market product and customer dynamics.
Facility solutions contributed $9 million, an adjusted EBITDA up 114% year over year.
Adjusted EBITDA as a percentage of net sales increased 210 basis points to 3.5% in the quarter.
The earnings increase was primarily driven by improved margins from our strategic repositioning, which lowered supply chain and selling expenses.
The print segment experienced an 18.4% decline in net sales and core revenues were down 19.6%.
This decline was driven by market dynamics as well as our continued decisions regarding customers suppliers.
Products and service requirements.
Pretty contributed $11.2 million, an adjusted EBITDA up nearly 56% year over year due to lower expenses and better margins, partially offset by the earnings impact of the revenue decline.
Publishing net sales decreased 20.7% and core revenues declined 21.9% from the prior years quarter.
The lower revenue was due to continued secular declines in market volumes changes in order patterns due to customer consolidation.
Digital advertising and credit reasons.
Publishing contributed $3.6 million, an adjusted EBITDA down 25% year over year.
The decrease in adjusted EBITDA can be attributed to the reduction in volume increases in charges for high risk credit accounts slightly offset by improved pricing and lower costs.
Shifting now to the balance sheet and cash flow.
For the end of March we had drawn approximately $667 million against the asset based lending facility and had available borrowing capacity for approximately $286 million.
As a reminder, the ABL facility is backed by the inventory and receivables of the business.
At the end of March our net debt to adjusted EBITDA leverage ratio was 3.5 times down from 4.7 times in the prior year period.
Regarding the IPO, we recently refinanced and extended the facility to 2025 under substantially the same terms.
Our long term debt net of current portion on the balance sheet has dropped 22% from $944 million at the end of March 2000, 1980 $740 million at the end of March 20 Twond.
For the quarter ended March 31st 2020.
Cash flow from operations was approximately $85 million.
Subtracting capital expenditures of about $9 million from cash flow from operations, we generated free cash flow of approximately $76 million.
Our strong free cash flow in a quarter was primarily due to lower inventories and higher accounts payable enabled by volume reductions and process improvements.
That concludes our prepared remarks, Ian we're now ready to take questions.
At this time, if you would like to ask a question over the phone lines. Please press Star then one on your telephone keypad be we'll pause for a moment compile the today roster.
Your first question comes from line of Shawn Collins with Bank of America. Your line is open.
Good morning.
So just wanted to start as one if you could talk about the trends that you're seen so far into Q.
Different businesses.
Good morning, John.
Thanks for being on the call I'll I'll speak to print and publishing and then I'll ask sell to speak to a packaging NFS.
So your question is one of the trends we're seeing in the segments as we come out of the quarter is that correct.
Yeah actually actually more in Twoq, just given kind of the current of adversely impact here. So just trying to get a better read on that.
Yeah, Okay. So in the print space in April we did see significant decline relative to the first quarter.
As we came into April and ending April you've seen a lot of the recent publications.
Coming from other people in the space it down roughly 50%.
We're experiencing something similar to that we would expect that to stay down.
For it could be the next couple of quarters.
With an unknown of what that absolute recovery looks like.
We also see something similar to that in the publishing space.
For the same reasons as what we saw in print.
And so that's what we're seeing in print and publishing and Sal I'll ask you to respond to packaging NFS.
Sure Mary Good morning, John.
In the pack and the packaging segment for April we were off approximately two and a half times the quarter one rate, but we did see an improvement in the second half of April.
Later in the month and for the balance of Q2, we're anticipating being off about two times the rate.
The first quarter after the after the second quarter. The the rest of the year is really difficult to predict depending on what happens with the.
Economic re entry.
For facility solutions, we were up approximately two and a half times the rate of Q1 declined four for facility solutions.
We had greater demand, but as you.
Sure you know the inventory shortages and in some categories prevented us from from gaining against our first quarter. So we we started to see those declines late March and they carried into April about two and a half times the rate in packaging and about two times the rate and facility solutions.
Okay. That's helpful. And then also if you could just kind of go back to touching a little bit and I think you mentioned some weakness, particularly on the industrial side are there.
Yes, just generally how are trends and somebody other areas of your business right now.
Sal.
Sure sure Mary So Thats right John It are the industrial segments manufacture heavy manufacturing aerospace automotive, they're all of us significantly strained and then also our customers in the print segment.
Slightly offset though by strength in an E commerce and in food packaging and fulfillment, but but.
Not enough to overcome declines in those in those large industrial manufacturing base companies.
We do anticipate a little bit more strength in may than April as we start to see folks returned to work, but most of the customers that that we're tracking are coming in at 25, 30% of capacity as they reenter the workforce.
Okay. That's helpful. And then I guess kind of like the next question I had was kind of touching on little bit. What you were talking about previously just on inventory as a whole I was wondering can kind of talking about where inventories 10 for your customers.
Patch in print facility solutions and publishing.
So I'll do you want to give some perspective on our customer inventories and packaging and facility solution.
Sure sure Mary so on the on the packaging front and in conversations with our suppliers and we are we're in a relatively good shape with with inventories on the packaging front. We did have indications that there was some forward buying in March and Thats why we saw propped up March box shipment, but.
But folks anticipate those shipments coming down in the second quarter and facility solutions. We did see a very strong run up in the middle early part to the middle part of March and then the shortages began to occur and they really have stayed down through most of the month of April but we are starting to see some some.
Some improved shipments and we're starting to see our inventory positions improve throughout our facility solutions segment, but still constrained in one or two items that would be in most demand.
[noise] and then John on the on the print side.
Believed that inventory have the likelihood of being relatively high.
The reason for that is because we began to see.
Across the board not just our customers, but across the board with the mills a lot of canceling of orders.
And a lot of those were not canceled soon enough in April.
And ended up falling into May and so we would anticipate that inventories could be reasonably high at our customers.
Okay.
And then kind of next to the more kind of to your strategic vision going forward I was wondering if he can talk more about how you plan to Orient spending to drive higher growth and improve next infection.
So you know as I shared with you we announced what our strategy was going to be a back and 17 already in terms of.
Excel or focusing on higher growth and a higher margin businesses, which is what a packaging was at the time and now frankly facility solutions is getting stronger and stronger as we've made those choices.
So we put a lot of effort into.
Where we're going to focus both in product category and as well as and youth segment.
And felt very good about that in first quarter as you can see with our resolve hello hard today to estimate what the impact of all this is going to be I'm here for the balance of the year in our girls segments of packaging and ultimately at fast, but again, it's I'm focused on the right and you segments. It's the focus on the.
Product categories that would have the higher girl.
And better management across the board post integration evolve our processes to improve profitability and lower costs.
Okay and as you move forward with this strategy towards kind of more efficient commercial operations.
You know what impact do you see just having on your footprint of facilities if any.
So I think you actually means supply chain operations.
And the impact on our supply chain operations, we do believe there there will be an impact on supply chain operation.
Out of the reason for issuing the 8-K that we issue.
I think it was in.
February already.
Was to give some perspective that we could be looking at potentially some restructuring of the supply chain to adapt to the changes that we're seeing in print and also to get the footprint Rightsized for what we think is the go forward packaging a part of the company, which has different service requires.
Bunts and what we see in print. So we would anticipate some changes in the supply chain over the course of the next 12 to 24 months.
That's great and then just last question before I turn it over I was wondering can.
Obviously, you kind of talked about some different credit reasons.
Touched on that a little bit and I guess, you know how are you kind of seen bad debts.
Trendy and I mean, I have to imagine you know there they are going up at this point, but wanted to get a sense for how you are imagining that progress unit as Peter goes forward. Thanks, Yeah. Yeah. Okay. So we are anticipating that there could be some challenges as I mentioned with customers.
Going into bankruptcy.
We have done frankly, an excellent job in our print and space.
Managing high risk customers, which is the process. We went through over the course of 18, and 19 and our bad debt situation and risk in France is.
In a very good place actually.
Lawless, it's probably going in the history of the company.
Hard to predict whether it'll stay that way, but we've been very successful and making sure. We've got the right customer portfolio in that space, which we consider some of the higher risk based on when you look at publishing we're beginning to see some risk. Although again, we've managed it very well in particular in the retail space.
Any I'm sure you've seen some of those announcement again, that's an area where we have also continued to pull back.
And have managed that and feel like we're managing it very well and so are not expecting a huge surprises the packaging NFS.
We are beginning to see in particular NFS. Some extension request for an extension of payments we've been holding firm.
On that and it but it's more from large customers that we know we'll be able to pay but their businesses such right now that they're probably cash challenged and our packaging business has been very stable.
No that's great appreciate all the on the health.
Okay.
[noise] there are no further questions over the phone lines at this time I turn the call over to Mary Laschinger for closing remarks.
Thank you for your questions and thank you everyone for being on the call. This morning.
To wrap up quickly here, our consolidated first quarter 2020 results were highlighted by a significant improvement in both adjusted EBITDA and free cash flow as our strategy around or segments and optimization initiatives improved margins reduced our overall cost structure and lowered working capital in a.
Yes, and the strong free cash flow helped significantly reduced our debt leverage ratio I am very pleased with our first quarter results and I'm proud of the entire Veritiv team, which has done an excellent job navigating through these unprecedented in challenging times.
While our business is certainly being impacted we do have the we believe we have the flexibility with our business model, which serves a broad range of industries and very little revenue concentration in terms of specific customers sector or geographies within North America, all positions us well to manage the impact of the Corona.
Virus Center business I.
I would like to thank our employees customers and suppliers for all your hard work and support while we cannot predict how long. This current situation will last we remain committed to supporting our employees and serving our customers while ensuring the long term success of the company. Thank you again for joining US today, please stay healthy insane and we look forward.
Speaking with you in August as we share second quarter 2020 result.
Yes, that's a wrap up.
This concludes todays conference call you may now disconnect.
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