Q3 2020 Veritiv Corp Earnings Call

[noise] Mike good.

Good morning, and welcome to Veritiv Corporation's third quarter 2020 financial results Conference call. As a reminder, today's column Prince call is being recorded.

We will begin with opening remarks and introductions.

At this time I would like to turn the call over to Scott Powell Freeman director of Finance and Investor Relations.

Mr., Paul Friedman you may begin.

Thank you Lindsey and good morning, everyone.

Thank you all for joining us.

On today's call you will hear prepared remarks from our new CEO, Stella buffet and our CFO, Steve Smith after that we will take your questions.

Before we begin please note that some of the statements made in today's presentation regarding the intentions beliefs expectations and or predictions of the future by the company under 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 SEC filings. This.

This includes but is not limited to the risks and other factors described in our 2019 annual report our form 10-K.

Subsequent quarterly reports on form 10-Q, and in the news release issued this morning, which is posted in the Investor Relations section at Veritiv Corp. Dotcom.

Non-GAAP financial measures are included in our comments today and in the presentation slides. The reconciliation of these non-GAAP measures to the applicable us GAAP measures included at the end of the presentation slides isn't is 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 Sal.

Thanks, Scott good.

Good morning, everyone and thank you for joining us.

Before we get into our third quarter results.

I would like to take a moment to personally. Thank our recently retired CEO Mary Laschinger for her leadership efforts and advice.

We wish her the very best in his retirement.

I am honored by the trust that marries the board and the broader organization have placed in me in my new role as CEO.

When I joined Veritiv in 2018, I strongly believed in the vision and future of the company.

The structural changes made and the strategic direction, we embarked on over the last 18 months have moved us even closer toward this vision of a leading provider of value added packaging goods and services from concept to delivery.

I am now more confident than ever in our ability to execute against this vision.

As you will hear on the call today, the fundamentals of our business are improving and the flexibility of our business model is helping us weather the challenges of the co bid 19 pandemic.

As we move into this quarter's results I will briefly discuss how COVID-19 is impacting our operations and then cover the consolidated performance of the quarter.

Ill, then turn it over to Steve for more details on our segment results balance sheet and cash flow.

Due to the uncertainty and ongoing impacts of COVID-19, we withdrew our full year guidance earlier this year.

However, we did provide some perspective on our outlook for the second half of the year during our call last quarter.

During today's call, we will provide an updated outlook on our anticipated performance for 2020.

And a view of the 2021 expected market dynamics.

During these unprecedented times of the COVID-19 pandemic, we continue to remain focused on ensuring the safety of our employees while meeting the needs of our customers.

Okay.

Packaging revenue increased 8% when compared to the prior sequential quarter as a result of improving market demand sales discipline around share of wallet initiatives and a focus on higher growth sectors.

During the third quarter, we saw some improvement in the broader industrial manufacturing sector, while fulfillment and E. Commerce volumes continued to be relatively strong.

Ah rigid packaging sales in the third quarter were better than prior year, and we continue to be pleased with our 2017 acquisition and that space. However.

However, demand as remained soft in the aerospace and automotive manufacturing sectors.

The cost any actions taken at the beginning of the second quarter to mitigate the potential impacts of COVID-19.

Long with our ongoing efficiency programs continue to drive improved margins and kept costs and check in the third quarter.

The strong earnings results were partially offset by an adjustment to performance based compensation.

For more than two years, we've been taking proactive steps to improve the quality of our customer portfolio and reduce our bad debt expense.

We believe these efforts that had a favorable impact on earnings by lowering sequential quarterly bad that expense during 2020, despite pandemic related customer liquidity challenges.

Or a bad debt expenses down over $2 million compared to the prior year's third quarter.

As a result of all these factors consolidated adjusted EBITDA margin for the third quarter was three 1%.

With stabilizing demand in our operating expenses adjusted to current volume levels. The segment's earnings on a positive trajectory.

Given our efficiency initiatives packaging. This adjusted EBITDA margins improved from 7.7% in the third quarter of 2019 to a record high of 10.1% in this years third quarter.

Now shifting to the facility solutions segment.

Net and core sales were down 25% year over year with continued headwinds related to cold at 19.

During the third quarter personal protective equipment and hygiene related products sales remained strong, but we began to see signs of market saturation in some of those categories.

Our traditional away from home sectors, which make up a large share of segment portfolio continue to be depressed by current market dynamics and did not improve as much as expected.

Third quarter revenues continued to be negatively impacted by the strategic choices. We made in 2019 to better align with this segment with our supply chain strengths as well as the market product and customer dynamics.

Adjusted EBITDA for the segment was up approximately 19% compared to the prior year. Despite the significantly lower sales due to improved margins from the strategic choices just mentioned.

These strategic choices helped to both improve the segments gross margins as well as lower selling cost and supply chain expenses, such as delivery and handling.

These results continue to support the strategic directive to make facility solutions, a smaller but more profitable business.

The print segment experienced a 30% decline in both net and core revenues compared to the prior year.

This revenue reduction was driven by both the ongoing secular decline and the effect of COVID-19.

However, sales over the prior sequential quarter due to improved faster than expected as second quarter net sales had fallen 47%.

Print contributed $8.8 million and adjusted EBITDA down only $1.8 million from last years third quarter. The print business continues to quickly align costs to the volume trends.

Publishing net and core revenues, both decreased 37% from the prior year.

As with our print segment the lower revenue is due to both the ongoing secular decline in the market and the effects of COVID-19.

Publishing had an adjusted EBITDA of $3.5 million down from $4.6 million in last years third quarter.

Shifting now to our balance sheet and cash flow.

At the end of September we had drawn approximately $520 million against the asset based lending facility and had available borrowing capacity of approximately $359 million.

As a reminder, the ABL facility is backed by the inventory and receivables of the business.

At the end of the quarter, our net debt to adjusted EBITDA leverage ratio was 2.4 times down from 3.6 times since September of 2019 and down from 4.1 times in December of 2019.

Our long term debt not including the current portion has declined 19% year over year from $726 million to $591 million.

For the quarter ended September Thirtyth of 2020 cash flow from operations was approximately $54 million.

Subtracting capital expenditures of about $5 million from cash flow from operations, we generated free cash flow of approximately $49 million.

Our strong free cash flow in the quarter was primarily due to positive earnings the lower days sales outstanding and days inventory on hand over sequential quarters, driven by our continuing efforts to improve working capital.

One last comment before I turn it back to Sal, who will comment on the balance of 2020.

As we continue to improve pre tax earnings our effective tax rate continues to be volatile due to the level and variation of pre tax earnings by our jurisdictions. We continue to evaluate the need for increases in our deferred tax valuation allowances in all our jurisdictions.

We do not believe at this time that any changes in our tax rate will impact cash taxes paid in 2020.

I will now turn it back over to Sal.

Thanks, Steve.

Shifting to our outlook for the balance of the year, we expect to see further impacts on our business related to COVID-19, primarily related to our non packaging businesses.

Environment remains dynamic in this there is still significant uncertainty.

As a result, we expect fourth quarters consolidated net sales to remain similar to third quarter levels. Once adjusted for the two fewer shipping days.

As we announced earlier this year, we have taken permanent actions to reduce costs in light of COVID-19.

We are pleased to report that the restructuring plan as announced in July remains on schedule and on target.

Our business is showing the benefits of improved operating leverage as volumes have increased since their lowest levels in the second quarter.

At this time, we expect the fourth quarter earnings will drive our 2020 full year adjusted EBITDA above our 2019 full year adjusted EBITDA.

Regarding 2021 market dynamics, we expect significant market volatility through the first half of the year as the COVID-19 situation remains uncertain.

With that in mind, we expect their packaging performance to improve despite potential pricing pressure headwinds, particularly in the corrugated and resin based markets.

We expect our facility solutions business to remain suppressed during the first half of the year driven by continued softness in the entertainment and hospitality and office sectors as large entertainment venues continue to be shutdowns and the work from home trend continues.

We expect to see continued increased demand for our hygiene products.

For the full recovery will not ensue until these sectors opened back up more fully.

Lastly, while we believe we have already experienced the worst downturn for print and publishing in quarter two of this year.

Ongoing secular declines will shape, our print and publishing results for 2021.

We will continue to be proactive and responsive and addressing future market volatility.

This concludes our prepared remarks, operator, we're now ready to take questions.

As a reminder, ladies and gentlemen, if you would like to ask a question. Please press the style buys on your telephone keypad.

Our first question comes from the line of John Babcock with Bank of America Your.

Your line is now open.

Hey, good morning, and thanks for taking my questions.

So we had I was wondering if you could.

Maybe help me a little bit up in understanding the guidance for Fourq two I mean, obviously it sounds like you're expecting full year earnings to be higher than the 2019, which Odyssey allows some room for interpretation there, but overall it seems like perhaps you might be expecting 14, it'd be a little bit lower than three tier one I think.

You mentioned you have two fewer shipping days is there anything else that's coming into play in the quarter.

That I should be or that we should be mindful of here.

Good morning, John Thanks for the question. This is Sal I think I think you summed it up which is we expect our full year to be improved over last year. We expect our Q4 run rate to be similar to Q3, and then impacted by two fewer shipping days will foot out to be.

Lower than Q3, but.

But for the full year, we do expect to be last year.

Okay. That's helpful.

And then on the packaging business and you obviously had very good improvement in margins here and I was wondering if you might be able to provide some color on where those margins should ultimately be longer term.

And also.

Core revenue improvements pretty significant then.

You talked about some improvements in the business, but also were there any other factors noise mix for example that might have.

Coming up for that.

Yes, so certainly I'll just comment on the overall mix. So our overall consolidated margins are up due to a shift in segment mix mix toward packaging.

And so and then inside of packaging the factors that are driving our margin improvement one are the ongoing customer.

Choices that we've made over the past couple of years and the second is our.

Pricing discipline, which we put in last year, both from a customer perspective, and a supplier perspective, and so that is really what's helping us hold margins pretty consistently throughout the last 18 months or so in terms of where we're headed we.

We do expect some pressure as I mentioned on the pricing front in corrugated and in resin based products again, though our discipline around our processes will allow us to be able to.

Sustain that as best as we can.

Where where they're going in the future beyond today, we believe that we are going to be in the fourth quarter and heading into next year quite similar to where we are now.

We've seen probably in the market John that there had been announced increases for both corrugated and resin based products and we're planning accordingly for those for those increases.

Okay, Yes that was actually part of my next question. There. So I mean, you mentioned that you expect some pressure in corrugated as part of that because of the near term increase in containerboard and then ultimately as we look out over the next couple of quarters as those guys fully as the producers start to fully implement those increases of one point does.

Verity, perhaps get some spread on that debt.

Help margins if at all.

Yes, Thats right Thats right down it's really a wholesale increase from from the entire market and we've seen that actually already implemented in many cases and therefore, we've already taken action around that.

It really will and it is due to the ongoing strength in the fulfillment sectors and E commerce, which are anticipated to be strong in the quarter in the fourth quarter and into next year now as additional capacity comes online.

As folks are shifting their print print assets to packaging that will have a determination of what future prices might look like as we head into say Q2 of next year.

Yes. Thank you.

And then next question.

Just quickly on the holiday season, we signed on Prime day was in early October.

Now the next focus really on the holiday season, and how that might Pan out and I was wondering based on your packaging business what sort of initial read you might have if you can share anything on that.

Yes, I mean, we were seeing.

Our business is really following the trend you see in the market, which is strong holiday.

Shipping and in the E commerce fulfillment actually hone hone groceries is doing well our international business consumer electronics luxury retail those are all driving.

Positive Q3 into Q4 as well as the food processing segment, which did dip a little bit in the market in Q3, we actually fared.

Fared fairly well in the food processing in Q3, but Thats also.

Segment that will.

We think be strong, especially if there is a more protracted lockdown coming from the effects of Cove in 19.

Okay. Thanks, and just last question before I turn it over just on cash flow has learned a few Michael to provide some color on how we should think about working capital for the full year.

Steve Please yes, so good morning, John so.

We expect that the coal did impact the income statement will flow over into the balance sheet. This year, we know that some customers at we'll be looking at addressing their balance sheet at year end and we expect that in our own patterns. It.

It will be a little bit atypical because of that as far as our fourth quarter and so we do not expect.

An inflow in the fourth quarter, we expect an outflow over the fourth quarter in cash flow John this year, but given our excellent year to date cash flow free cash flow and low net leverage we expected that we will continue to march toward an improved working capital set of metrics in the fourth quarter and into 21.

But the actual flow will be negative probably in the fourth quarter.

Okay. Thank you to appreciate all the although pest.

[music].

And there are no further questions in queue at this time I'll turn the call back to follow up on looking for closing comments.

Great well, thank you and thank thank you for your questions.

Our results over the last two quarters have illustrated our ability to be nimble and responsive in an unprecedented iden amick market.

The fundamentals of the business continue to improve.

As we conclude a strong quarter during this unusual operating environment.

We thank both our former CEO Mary Laschinger for her vision log narrative and our many employees who are executing so well against this shared vision.

Thanks for joining us today, please stay healthy and safe and we look forward to speaking with you in March as we share our fourth quarter and full year 2020 results.

This concludes today's conference call you may now disconnect.

Okay.

[music].

Hello.

Total revenue.

Hi.

I.