Q2 2020 Veritiv Corp Earnings Call
Good morning, and welcome to the Veritiv Corporation's second quarter 2020 financial results Conference call. As reminder, today's call is being reported we will begin with opening remarks and introduction.
This time I would like to turn the call over to Tom or veto director of Investor Relations Mr. Morabito you may begin.
Thank you in and good morning, everyone. Thank you all for joining us.
So you with your prepared remarks from Mary Laschinger, or chairman and Chief Executive Officer sell about say, our Chief operating officer, and Steve Smith, Our Chief Financial Officer Afterward, we will take your question.
Before we begin please note that some of the statements made in todays presentation regarding intentions beliefs expectations and or predictions of future by the company and word management are forward looking.
Actual results could differ in a material Matt.
Additional information that could cause results to differ from those in the forward looking statements is contained in the company's FCC filings.
This includes but is not limited to risk factors contained in our 2019 and a report on form 10-K.
Subsequent quarterly reports on form 10-Q, and a news release issued this morning, which is posted in the Investor Relations section imperative Corp. dotcom.
Non-GAAP financial measures are included in our comments today and in the presentation slide the reconciliation of these non-GAAP measures to the applicable U.S. GAAP measures are included at the end of the presentation slides and can also be found any investor relations section of our website.
I would like to turn the call over to Mary.
Thanks, Tom Good morning, everyone and thank you for joining us I hope each of you and your families are doing well.
As a company, we remain focused on ensuring the safety and well being of our pool, our employees, while continuing to safely and effectively serve our customers.
During today's call. In addition to reviewing our second quarter 2020 financial results. We will provide an update on the actions we have taken to help mitigate the impact of cobot 19, and provide our perspective on the remainder of the year.
Turning now to our results for the quarter, our consolidated second quarter 2020 results were highlighted by solid adjusted EBITDA and strong free cash flow. Despite a significant decline in revenue.
Cost saving and cash cash preservation actions, we took in the quarter to alleviate the impact of cobot 19, along with our ongoing efficiency programs led to improved margins and a read to reduce our cost structure.
Consolidated net sales in core revenues for the second quarter $1.4 billion down about 28% compared to the prior year period.
Cobot 19 significantly impacted our second quarter volumes and revenues across all of our segment with some segments impacted more than others.
Consolidated adjusted EBITDA for the second quarter was approximately $40 million down only 8% year over year. Despite the revenue decline.
The earnings decline was largely due to the impact of volume declines associated with cobot 19, as well as the continued structural challenges in the paper industry.
The revenue pressures are partially offset by improved margins and lower supply chain and selling expenses.
I would now like to turn it over to sell Abad take our Chief operating officer, who will take you through our second quarter performance by segment.
Thank you Mary and good morning, all.
Starting with packaging in the second quarter core revenues were down approximately 11% year over year, largely due to the impact of cobot 19.
Market conditions in the U.S. continue to be challenging, particularly in the industrial manufacturing sector.
Industry box shipments and prices in the corrugated category were both down in the second quarter contributing to an overall market decline.
Well, our fulfillment and E commerce businesses performed well it was not enough to offset the pressures industrial manufacturing.
Packagings adjusted EBITDA increased nearly 7% year over year.
There's a seat or business efficiency initiatives improved margins and lowered our expenses, resulting in packagings adjusted EBITDA margins improving from 7.4% in the second quarter of 2019.
8.9% in the second quarter of 2020.
Moving onto our facility solutions segment.
Core revenues were down approximately 34% year over year also impacted by Cobot 19.
All personal protective equipment and hygiene related categories had a strong quarter. This revenue increase was more than offset by a steep revenue decline in our traditional away from home product categories.
As we expected second quarter revenue was impacted by the strategic choices. We made in 2019 to better align this segment with our supply chain strengths as well as market product and customer dynamics.
Our adjusted EBITDA increased over 37% year over year due to improved margins from these strategic choices, which lowered supply chain and selling expenses.
These choices have made facility solutions, a smaller more profitable business as demonstrated by our results over the past 18 months.
Switching to our print segment cobot 19, and ongoing secular pressures continue to affect our core revenues, which declined approximately 46% in the second quarter.
As a result, adjusted EBITDA was near breakeven.
The publishing segment's core revenues decreased approximately 43% and the second quarter due to cobot 19, and continued secular declines in market volumes.
Publishing's adjusted EBITDA was also near breakeven due to reduced revenue an increase bad debt expense.
Now I'll turn it over to Steve Smith. So he can take you through the details of our second quarter 2020 financial performance.
Thank you so and good morning, everyone.
We will first review the consolidated results for the second quarter ending June Thirtyth of 2020.
As we review these results. Please note that when we speak to coordinate sales we're referencing the reported net sales performance, excluding the impact of foreign exchange in adjusting for any day count differences.
As it relates to date count we had the same number of shipping days in the second quarter of 2020, as we head into second quarter 2019.
For the remainder of 2020 each quarter, we'll have the same number shipping days as the previous quarter, but as we had an extra shipping day in the first quarter of this year for the full your 2020, you will have one more day than 2019.
Both consolidated net sales in core revenues for the quarter were $1.4 billion down 28% from the prior year period.
Our cost of products sold for the quarter was approximately $1.1 billion.
Net sales less cost of products sold was $298 million.
Net sales less cost to products sold as a percentage of net sales was 21.2%.
210 basis points from the prior year period.
Partially due to improvements in pricing as well as both segment and customer mix.
Consolidated adjusted EBITDA for the second quarter was $39.8 million down $3.5 million or 8.1% versus the prior year period.
The earnings decline was largely due to the effective cobot 19 on volumes in print and publishing partially offset by strong margin management and lower supply chain and selling expenses.
Consolidated adjusted EBITDA as a percentage of net sales for the second quarter was 2.8% up 60 basis points from the prior year period.
Let's now move into the segment results for the second quarter ended June Thirtyth 2020.
Packaging net sales and core revenues were down, 11.3% and 11.1% respectively as the market conditions in the U.S. further eroded.
But with pricing pressure in some product categories.
Packaging contributed $69.9 million, an adjusted EBITDA up 6.7% from the prior year period.
Adjusted EBITDA as a percentage of net sales was 8.9% off 150 basis points from the prior year period.
Facilities solutions net sales were down 35% and core revenues decreased 34.4%.
The revenue decline was due to both the effective cobot 19, as well as our strategic repositioning of this segment.
Facilities solutions contributed $11.4 billion in adjusted EBITDA up 37.3% year over year.
Adjusted EBITDA as a percentage of net sales increased 290 basis points to 5.6% in the quarter.
The print segment experienced the 46.6% decline and net sales and a 46.4% reduction in core revenues.
These declines were driven by the effective cobot 19, and the ongoing secular decline in the market.
Print contributed $1.3 million adjusted EBITDA down from $12.3 million in last year's second quarter.
Publishing net sales in core revenues, both decreased 43.4% from the prior year quarter.
The lower revenues were due to the effective cobot 19, and the ongoing secular decline in the market.
Publishing Hadnt adjusted EBITDA of a negative $200000 down from a positive $5.6 million in last year's second quarter.
Shifting now to our balance sheet and cash flow.
At the end of June we had drawn approximately $580 million against the asset based lending facility and had available borrowing capacity of approximately $246 million.
As a reminder, the ABL facility is backed by the inventory and receivables or the business and earlier this year, we refinanced and extended the facility to 2025.
At the end of June our net debt to adjusted EBITDA leverage ratio was 2.8 times down from 4.0 times in the prior year.
Our long term debt not including the current portion has dropped 20% year over year from $815 million to $652 million.
For the quarter ended June Thirtyth of 2020 cash flow from operations was approximately $142 million subtracting capital expenditures of about $6 million from cash flow from operations, we generated free cash flow of approximately $136 million.
Our strong free cash flow in the quarter was primarily due to the lower inventories and accounts receivable, which was due to lower volume reductions.
Now, we'll turn the call back over dinner, thank Steve and shifting now to our outlook for the rest of the year, we expect to see further impacts on our business related to cobot 19 in the second half of 2020, the environment remains dynamic and there's still significant uncertainty as a result, we are planning for continued softness in.
The business.
While the second half the year is usually stronger for Veritiv. This year, we anticipate earnings will be down from the first half.
Our segment assumptions for the second half the year include the following we expect Packagings revenues and earnings to be comparable to the first half as industrial manufacturing remains challenged.
We anticipate ecommerce and fulfillment to continue to perform well.
We expect facility solutions revenues to be comparable to the first half the year and for earnings to be slightly weaker.
The extended work from home guidelines for many of our customer coupled with the postponement of large venue entertainment events lead us to believe that it could take some time before this business recover.
The structural decline a print and publishing will continue from our current levels and we're not expecting a second half recovery in revenue or earnings for this segment.
Given the difficulties facing our customers in these segments, we foresee an increased risk of higher bad debt charges and bankruptcies.
On a more positive note both of these segments continue to generate positive free cash flow.
On a consolidated basis, we expect adjusted EBITDA in the second half of the year to be lower than both the first half of 2020 and the second half of 2019, driven by print and publishing.
In these segments, we are expecting lower volumes and revenue pricing risk from excess inventory and capacity in the industry and the potential for higher bad debt expenses.
We are however, expecting to see strong performance in free cash flow driven by lower inventories and accounts receivable.
As you mentioned in our first quarter call. We took several temporary actions in April to reduce cost and preserve cash in light of cobot 19.
Organization has done an excellent job managing through the past several months business has stabilized at a new level and with this in mind, we decided on the falling permanent actions, which we are described in our 8-K filed last month first we reduced our U.S. salaried workforce by approximately 15% and eliminated.
Some positions in Canada.
Second we will close certain warehouse facilities. This year, the majority of which are smaller more remote locations as well as all of our print many distribution centers.
We expect these actions to generate between 80 and $90 million an annualized savings.
And that we will incur charges between 70 $590 million in connection with this restructuring which should be substantially completed by the end of Twentytwenty.
Additionally, we continue to assess alternatives to restructure our integrated supply chain in an effort to facilitate better alignment with the supply chain needs of our customers by segment.
And with a view towards reducing complexity.
And lowering overall supply chain costs.
This review is still in process and is separate from the 2020 restructuring plan described earlier.
Which was initiated primarily in response to the cobot 19 pandemic.
We believe our substantial liquidity and flexible business model position us well to continue managing the structural changes in our business as well as the impact of Cobot 19.
Additionally, the permanent actions, we're taking to better align our cost structure with ongoing business needs will help ensure the long term success of our business.
This concludes our prepared remarks, and Ian we're now ready to take question.
At this time, if you'd like to ask a question over the phone lines. Please press Star then one on your telephone keypad.
First question comes from line of John Babcock with Bank of America. Your line is open.
Good morning, and thanks for taking my questions I'm just wanted to start out I mean in pension publishing with the declines that you've seen in clearly they've been very sharp you know how is this causing you to reevaluate your business I know in the past what had been kind of discuss that maybe at some point in time or at least I guess speculated by the investment community.
And maybe you might decide to divest the business, whether or not there's even a buyer out there who knows but how are you thinking about those businesses in light of the challenges that youve seen recently.
Yeah, John you know as you know this has been an ongoing challenge with a continued structural decline you know we continue to look at the business as first of all generates positive cash flow to support many of these initiatives that we have underway, but we're continuing to downsize the supply chain to match.
Ah, what's going on with that industry.
And continuing to take out cost both from a overhead standpoint, as well as direct costs associated with that business.
And we you know certainly have our challenge is with US, but we also think that that business might you know I think we're at a very low point for that business currently with a lot of excess inventory in the system and so the outlook for next year may not be as negative is what we're seeing for the balance of this year just because as they.
Industry, Josh I think there's going to be up some potential upside relative to where we are right now.
So again continued focus on driving costs out both direct to the segment as well as indirect and corporate overhead cost to align with the business. Some work we announced in the 8-K back in March is still underway to determine.
If we're better off operating that business differently from the packaging business and in an effort to reduce the complexity overall for the business.
And reducing costs.
Okay. That's helpful.
And then you know with regards I guess to the same print and publishing business here you didn't we saw earnings get pretty significantly compressed in the quarter.
You know I guess like with you know assuming there will be some recovery. However, modest it may be in volumes over the coming quarters, but how does that potentially incremental incrementally better revenue, even even if it is still negative helped contribute to better margins.
Yeah, I'm a small move in revenue in that segment has it has a significant impact on the on the earnings and fill us Mahmud does benefit overall quite substantially.
Should that happen.
Okay. So somebody should expect somewhat better margins I guess in Threeq and Fourq, assuming there is any sort of sounds from back to school one other maybe election driven trends.
John I would say that that's going to somewhat be dependent on the level of bad debt.
Well, we've been the business has done a tremendous job managing that.
But that that would be a risk factor that we outlined.
Okay, that's great.
And then you talked about or rather I guess, releasing the 8-K, a while ago and so I just want to get a little bit more kind of color on this I mean with plans to reduce U.S. workforce. You know I mean, how are you seeing which areas I guess are you planning to.
Focus on there and ultimately how might that impact your ability to grow in kind of Pakistan facility solutions as you think that longer term if at all.
Yeah. So first of all be the reduction of 15% was broad based however, there were significant differences in terms of the level of reduction based on either the business or the level activity in any given function and so we're gearing the organization to make sure that we have the right research.
This is in our girls segments and packaging NFS.
And so obviously, we saw fewer reductions in those areas versus what we saw in the print and publishing space. So it was broad based but at a across functions and segment, but the degree of difference between them with significant.
Okay, and then enter.
And John most importantly, do not believe it will inhibit our ability to grow packaging RFS.
And then just last question on facility solutions I was wondering if you might go to.
Provide any sort of no breakdown by end market I mean, obviously like we've seen some areas of the economy.
I know in the past you talked about how like cruise ships for example.
Part of the Nextera in schools, and other kind of public venues and so want to get a sense for how much that business is exposed to the public venues versus some of the other businesses that may not have seen as much about.
Hit to volumes, Yeah, I'm going to ask sell to answer that question.
More John.
So in in a facility solutions business were relatively diversified so there isn't any one segment that that is weighted to really impact.
Second over all the issue at the second quarter is that almost all of our our business our business customers. A industries were impacted equally so large venue entertainment, obviously was impacted the cruise lines or not are not going to sale again until now the fourth quarter. They had moved it to the third quarter now they pushed out to October so were impacted.
By that on the higher education elementary education, there's indications across many states that.
It'll be an online format at least for the first month and a half or so so that will impact our second half performance as well as our property management an office in government.
Business industries, which are continuing to work from home and so we do see slight uptick in June and in July, but nothing compared to last year and and so we're we're bracing for a you know a more protracted.
Decline in that industry, not as severe as the second quarter, but.
We will go with how the the customer base and the market industries go for the second half.
It's actually a detail so oh and actually I did just when I was one more question I was just wondering Mary if you could perhaps kind of talked about the trends that you're seeing in print and publishing so far in kind of the third quarter and same in patching as well.
Sell you must be packaging, yeah, so packaging has been.
It has improved again through the second quarter. So so June was better than the first couple of months of of the second quarter and but we do anticipate the second half to be in line with the first half. The so in packaging. There is nothing material that would be significantly different than than the first half.
And on the print and died on the print side, John we are seeing a us a modest improvement at this point in time, but not something that we would say is is a trend yet.
Okay.
Write off.
I appreciate all the details on back of like in the quarter.
Alright, thank you.
[noise] burn off.
Okay. There are no further questions correct T. and there are no further questions at this time I turn the call back over to you marry Alright. Thank you you know as in wrapping up our quarter comments here you know our consolidated second quarter 2020 results were highlighted by what we believe the solid adjusted EBITDA in strong free cash flow.
So as our strategy around her segments actions, we've taken to mitigate the impacts of code at 19, and the ongoing efficiency programs improved our margins and reduced our cost structure. In addition, our strong free cash flow allowed us to significantly reduce our our debt levels.
I am I'm really pleased with the second quarter results and Im proud of a veritiv team members, who have done an excellent job navigating through this and these unprecedented and challenging time, well I businesses, certainly being impacted we believe our substantial liquidity the actions, we're taking to better align our cost structure with the ongoing business needs and.
The flexibility of our business model position us well to continue managing the impact of cobot 19, and ensure our long term success. So thank you again for joining US today, please stay healthy and safe and we look forward to speaking with you in November as we share a third quarter 2020 result.
That ends our comments Ian.
Thank you. This concludes todays conference call you may now disconnect.
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