Q4 2020 Veritiv Corp Earnings Call
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Good morning, and welcome to <unk> corporations fourth quarter and full year 2012 financial results Conference call.
As a reminder, today's call is being recorded and we will begin with opening remarks and introductions at this time I'd like to turn the call over to Scott Hoffman.
Finance and Investor Relations Mr. Paul Freedman you may begin.
Thank you Jack and good morning, everyone.
On today's call you will hear prepared remarks from our CEO and celebrate day 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 our predictions of the future by the company <unk> management are forward looking actual results could differ in a material manner additional information.
Information that could cause results to differ from those and our forward looking statements is contained and the Companys SEC filings.
This includes but is not limited to risks and other factors described in our 2020 annual report on form 10-K, and and the news release issued this morning, which is posted in and in the Investor Relations section at <unk> Corp Dot com.
Non-GAAP financial measures are included in our comments today and in the presentation slides.
A 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 and the Investor Relations section of our website.
At this time I'd like to turn the call over to Sal.
Thank you Scott.
Hello, and thank you for joining us this morning.
Before I review our financial results.
Like to share a brief update on how our organization has responded to the challenges resulting from the ongoing pandemic.
The health and safety of our employees remains a vital importance.
Very early on.
Team facilitated work from home capabilities for all of our office based personnel to ensure minimal disruption to the services our customers have grown to expect.
The organization responded quickly to ensure the necessary personal protective equipment sanitizers and related materials were available for Barrett as essential workers and customers.
All of our facilities have remained remained operational throughout the pandemic with no service disruptions.
We are pleased to report that the internal safety metrics have improved for the third straight year, which reflects our long term commitment to safety and.
In fact, our employees have reduced recordable injuries to their lowest levels and the history of our company.
Having accomplished all of this we remain flexible and responsive to the needs and employees and customers as market dynamics continue to evolve.
Switching now to review of our performance.
We finished 2020 with record adjusted EBITDA and the fourth quarter and record net income for both the quarter and full year.
We also finished with record free cash flow for the full year of $266 million.
Despite significant market volatility and headwinds the fundamentals of our business continued to improve and a stepwise manner.
Deliberate changes to customer product and segment mix have been and an essential part of our strategy.
These strategic choices have enabled margin expansion and.
Healthy balance sheet, and the lowest debt leverage and our company's history.
On the tactical side in recent years, we have improved the quality of our accounts receivable portfolio and reduced our bad debt expense.
These efforts have favorably impacted earnings by lowering quarterly bad debt expense again, and the fourth quarter, despite pandemic related customer liquidity challenges.
Our full year 2020, bad debt expense was down 17% compared to the prior year and the best performance and for years.
And short despite the myriad of challenges brought on by COVID-19, and I'm pleased with the team's significant progress in 2020 towards our vision of becoming a leading provider of value added packaging products services and solutions for the remainder of our segments executing against their strategic.
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As we move into the fourth quarter and full year results and I'll cover our consolidated earnings performance and key business highlights and then.
And turn the call over to Steve for more details on our segment results balance sheet and cash flow.
As we discussed the results will provide comparisons of sequential quarterly trends that we're seeing within the business and addition to the usual year over year comparisons.
And after Steve's comments I'll provide an update on our 2020 restructuring plan and an outlook on our 2021 projected performance and anticipated market dynamics.
Turning now to our results for the full year and fourth quarter.
Full year 2020, adjusted EBITDA was 188 million, reflecting a 20% increase over prior year.
Our adjusted EBITDA margin rate reached 3%, which was approximately one full percentage point better than last year and the highest in company history.
Our fourth quarter results were highlighted by sequential and year over year growth and packaging revenues.
Substantially improved consolidated adjusted EBITDA and positive free cash flow.
Our fourth quarter revenues continued to improve from the Covid driven loans in the second quarter and that trend along with meaningful cost reductions.
Contributing to both favorable adjusted EBITDA comparisons versus the fourth quarter of 2019 as well as the third quarter of 2020.
Supply chain, corporate and selling expense reductions contributed to better operating leverage and the fourth quarter and sequential improvement and adjusted EBITDA dollars and margin rate.
As a result consolidated adjusted EBITDA was 62 million and the fourth quarter and <unk>.
31% improvement over prior year.
Our adjusted EBITDA margin was three 8%, which was an improvement of approximately 120 basis points over the same period.
Our packaging segment saw demand continued to improve during the second half of 2020, resulting in fourth quarter sales per day growth of 8% compared to the third quarter and growth of 4% compared to the prior year period.
Our comprehensive customized solutions and cold chain capabilities drove strong sales performance and the food processing delivery specialty retail and health care sectors.
We also participated in the accelerated e-commerce growth.
The industrial manufacturing and use sector continues to show sequential improvements and revenue trends, we have not yet seen that sector's order pattern and return to pre COVID-19 levels.
Rigid packaging demand continues to drive strong sales growth for the packaging segment, which experienced double digit growth and the fourth quarter compared to prior year.
We continue to be pleased with our investments and rigid packaging, which has further expanded our packaging product offering.
Now Steve will review, our financial performance in more detail.
Thank you Sal and good morning, everyone as.
As we review these results. Please note that when we speak to the core net sales we are referring to 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 the same number of shipping days and the fourth quarter of 2020, as we had and the fourth quarter of 2019.
As a reminder, we had an extra day and the first quarter of 2020, so for the full year 2020, we had one more shipping day than in 2019.
First quarter of 2021 will have one less shipping day than the first quarter of 2020.
With Sal having covered consolidated earnings performance I will provide an overview of consolidated sales results and review our segment performance as well as our balance sheet and cash flow statements.
Verity of consolidated net sales and the fourth quarter were down 10, 5% and core sales were down 10, 7% from the prior year period.
Full year 2020, net sales were down 17, 2% and core sales were down 17, 4% from 2019 due to bolt market headwinds from the COVID-19, pandemic and secular declines and the print and publishing industries.
Consolidated core sales decreased sorry increased two 9% sequentially from the third quarter to the fourth quarter, primarily due to improving trends and the packaging and publishing segments.
Moving now to our packaging segment.
Net sales and the fourth quarter were up four 3% and core sales were up four 1% compared to the prior year.
Packaging revenues were bolstered this quarter by growth in food processing and delivery and specialty retail sectors.
We continue to invest and our rigid packaging business, and which we experienced double digit sales growth and the quarter compared to the prior year.
Our packaging presence outside of North America, particularly in Asia has also been a source of the salary growth and diversification.
Sales trends continue to improve with our industrial manufacturing customers, but volumes and this sector have not yet returned to pre COVID-19 levels.
Packaging adjusted EBITDA and the fourth quarter was $84 $6 million, a 35, 6% increase compared to the prior year.
Our return to year over year packaging sales growth, coupled with efficient and responsive operations have driven a step change and adjusted EBITDA margin.
Given these improvements packaging adjusted EBITDA margins increased from seven 4% and the fourth quarter of 2019 to nine 6% and the fourth quarter of 2020.
Packaging net sales for the full year were down three 8% and core sales were down 4% compared to the prior year largely due to the market headwinds related to COVID-19 pandemic.
Full year packaging adjusted EBITDA was a record $300 million, a 23% increase compared to 2019.
Adjusted EBITDA margin for the year was 9% and all time high and nearly 200 basis points improvement compared to the prior year.
Now shifting to our facilities solutions segment.
And the fourth quarter net sales were down 13, 3% and core sales were down 13, 6% from the prior year period.
Traditional away from home sectors continued to be depressed by current market dynamics related to COVID-19.
However, personal protective equipment and hygiene related product sales remained strong.
Supply of PPE improved which generated a sales lift and the fourth quarter as we cleared back orders for these products.
Fourth quarter adjusted EBITDA for the segment was $8 $1 million, which is 15, 6% lower than prior year due to inventory charges taken related to market saturation and select COVID-19 related categories.
Our facility solutions segment made significant changes and its operating model over the last two years.
The strategic choices made over this timeframe have improved our gross margins and lower selling cost and supply chain and expenses.
Two areas of meaningful improvement and operating efficiency had been handling and delivery.
These improvements continue to make facility solutions and more profitable business.
These strategic choices were substantially complete by the end of 2019, so the year over year lapping effect on sales concluded at the end of 2020.
Facility solutions net and core sales for the year were down 22%.
Despite the sales decline adjusted EBITDA for 'twenty, and 'twenty was $41 $6 million, which is an improvement of 25, 7% compared to the prior year.
The performance reflects our efforts to improve the profitability of this segment's business model through strategic choices and operational efficiencies.
Moving now to the print segment.
Fourth quarter, and net fourth quarter net and core sales were both down roughly 28% from the prior year period.
Adjusted EBITDA was $12 $4 million and adjusted EBITDA margin improved from two 6% and the fourth quarter of 2019 to three 5% and the fourth quarter of 2020.
The print business has continued to quickly adjust its costs to align with volume trends.
For the year, both net and core sales declined 31% due to both the ongoing secular decline and the effects of COVID-19.
<unk> adjusted EBITDA for the full year 2020 was $33 $7 million.
Adjusted EBITDA margin was two 3%, which was slightly better than prior year.
Publishing net and core sales and the fourth quarter declined 27% from the prior year, but improved 19% sequentially for the third quarter to the fourth quarter due to stronger than expected book and grocery demand.
Net and core sales in 2020, both decreased 32% from the prior year adjusted.
Adjusted EBITDA was $12 $8 million for the year.
As with our print segment, the lower revenue was due to both the ongoing secular decline and the market as well as the effect of COVID-19.
Adjusted EBITDA for publishing was $5 $9 million for the quarter, while adjusted EBITDA margin improved from three 3% and the fourth quarter of 2019 to four 1% and the fourth quarter of 2020.
The printed publishing segments continue to play an important role for <unk> and our customers.
Our actions over the last several years to improve the quality of the customer portfolio minimize the impact of bad debt.
We are pleased with our bottom line performance of these segments and a year of significant market volatility and will continue to rapidly adapt to market changes and this space.
Shifting now to the balance sheet and cash flow statements.
At the end of December we had drawn approximately $520 million against the asset based lending facility and had available borrowing capacity of approximately $342 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 two one times down from four one times in December of 2019 and improved from the prior sequential quarter.
Our long term debt not including the current portion has declined 21% year over year from $742 million to $589 million.
For the year ended December 31, 2020 cash flow from operations was approximately $289 million.
Subtracting capital expenditures of about $23 million from cash flow from operations, we generated free cash flow of approximately $266 million.
Our strong free cash flow performance was primarily due to strong earnings and the ongoing efforts to improve working capital.
I will now turn the call back over to Sal.
Thanks, Steve.
Before we move to your questions I'd like to provide and update on the restructuring plan that we announced last year and our outlook for 2021.
The plan was originally announced in July and updated later in the year in response to the impacts of the COVID-19 pandemic on our business, including the acceleration of the secular decline and the print and publishing industries.
Plan was designed to better align our cost structure with ongoing business needs.
And I'm pleased to say the restructuring plan is on schedule and on target.
We expect this restructuring plan to be substantially complete by the end of this year.
As we move to a more comprehensive outlook for 2021, we expect consolidated revenues to be relatively flat to prior year with varying performance by segment.
During the first half of the year revenue is expected to be unfavorably impacted by the effects of the COVID-19 pandemic across all segments with the exception and packaging.
However, we like most companies anticipate a broader economic rebound and the second half of the year.
Based on these factors, we expect income before taxes for full year 2021 to be and a range of $60 million to $80 million and adjusted EBITDA to be and a range of $195 million to $205 million.
Our strategic initiatives will continue to drive the results in the coming year.
We will remain focused on investments and high growth sectors margin and cost management and a disciplined approach to bad debt.
We expect our 2021 free cash flow to be at least $75 million driven by earnings and continuing working capital discipline.
We will continue to invest and business growth and expect capital expenditures for the year to be approximately $35 million.
We also announced today that the board of directors has approved a $50 million stock repurchase program.
Combination of improved earnings record free cash flow and low leverage ratios allows us now to reinvest in our business and return capital through a share repurchase program.
Our management team and board of directors are committed to initiatives with the highest return on investment as well as prudent capital management.
We believe this stock repurchase program accomplishes both of these objectives.
This concludes our prepared remarks, operator, we are now ready to take questions.
Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad to withdraw. Your question you can press the pound key John Babcock with Bank of America. Your line is open.
Hey, good morning, and thanks for taking my questions starting out I was wondering if you could begin with the restructuring plan and just talk about generally what's left to be done there.
Good morning, John This is Sal.
And the restructuring trend that we announced last year had many facets and we.
Had made some comprehensive.
Hey, yet pay program changes and those are substantially done and in play for 2021 and beyond we also announced.
Location warehouse closures and consolidations to really map to our future packaging and facility solutions footprint and those are.
We accomplished about 20% of that last year with the balance of that expected for this year and then the third component. The third largest component was the reduction in force last summer from Corona virus and that is complete and so we anticipate that by the end of this year, we will complete that 2020.
Restructuring program for the most part.
Les Steve about I don't know five or $10 million and 2022, that's right. So yes.
Alright, Thank you and.
And then another piece I wanted to ask about was really just what you're at and you know what you're seeing so far and <unk> on the packaging side, particularly as it pertains to growth there.
And what we're hearing and the market is debt and a containerboard sector is continuing to see strong growth and so I was wondering if that's what you're seeing as well and if he might be able to provide more color around that and then also if you could talk about some of your other packaging substrates and and how those are parent too.
Yes.
John is that it started in the second half of last year and so we saw the momentum build and the third quarter, and obviously and the first fourth quarter with the results that we shared this morning, and we do see at a high level. The first quarter continuing that trend and so we are really reflecting the market dynamics that you're seeing and the broader market.
And that is across <unk>.
Just about all substrates I mean, we do have some some areas where they are dependent on.
Certain large either customers or end use segments like aerospace that haven't yet rebounded but for the most part.
We are tracking at or maybe slightly ahead of the market depending on the category.
That's helpful and then.
Yeah, and you probably have been following the market very closely and you know there.
And number of price increases announced across various different grades given us quite a bit and fundamentals as well as on the inflation, we're seeing out there.
With these price increases have been announced and the paper grades and also and containerboard can you just remind us how these flow through and our results.
Yes, yes, I will.
Start and and then Steve if you want to add some color commentary, there, but we have seen and increasing price and pricing pressures for many of our product lines, most notably corrugated and resin and most recently as you mentioned John some of the paper grades.
And it's really driven by manufacturing input costs, including freight.
We will pass these on accordingly, and we've been able to do that over the last 18 or 24 months with our increased discipline and our cost and price management, both with our suppliers and our customers and then and and Furthermore, because we have our own freight fleet, we don't quite see the freight increases debt some of the.
<unk> have seen so we do have inflation built into the plan, but we do have plans to whether that through.
And through a combination of cost reductions as well as passing on most of that onto our customers.
And John and Brett Yeah go ahead and state.
I was just gonna add debt to the extent that the rate of inflation and any of the commodity like products is greater than we anticipated and our plan you see that impacting and a form of LIFO generally the pre tax income that we guided to but its an add back to adjusted EBITDA. So you would not see necessarily impacting adjusted EBITDA.
Gotcha.
Paul just on the rest and side quickly and we have heard of some shortages there or is that something that is impacting per too.
We have not seen at least through through today, and we have not seen any impact basically driven by our ability to to have stocked up before the before the winter storms hit and so we.
We haven't seen the impact of that yet John we did see some impact to the winter storms in February, but we were able to react to that through some of our other locations and to the extent our customers were down and we were down but for the most part we don't expect it to materially impact our Q1 performance.
Okay could you talk a little bit more about that impact on the phone.
It was about a half a dozen locations that were that were shut down because of the road conditions and the and the impact of the ice storms and typically.
And we'll deliver through that if our customers are open but.
And those southwest markets in particular that are not equipped to handle the snow and ice so the the southern and Tennessee markets, The Texas market and we saw some closures there, Arkansas, but again, a small impact and in relation to our overall business.
Okay.
And then next just on the inflation side of things.
And we are here.
Here and some conversations from investors and.
Perhaps even more broadly from the market about what direction inflation may take in 2020 one.
How are you thinking about that and how is that baked into your guidance.
So as Steve mentioned and we'd get some inflation built into the budget for a variety of.
Categories, including freight and so two ways to mitigate that one is through pass throughs to our customers and for the most part again as I mentioned earlier, our disciplined out there allows us to do that and then secondarily just our ongoing continuous improvement around cost reduction and so we have and income.
Junction with the restructuring plan last year, we have launched a more comprehensive continuous improvement program that will continue to keep ourselves out in front of the inflation and maybe not fully this year, depending how quickly it ramps up but that program should continue to have cost reductions throughout not only.
The segments and supply chain, and selling and administrative costs, but also and our corporate corporate areas.
And John we would add to that also that to the extent that we're seeing any kind of inflation and the fuel area and we're not seeing it quite yet, but if we were.
That would be an impact debt measured in millions of dollars for us not even $10 million. So there is that possible risk.
Ed and extreme movement, we would have in place some protection against rising fuel costs and we go into that detail later, if you'd like.
Yeah, that'd be great and then just last question before I turn it over and you do have capex a bit above guidance would be a bit about 2020 levels can you just talk about some of the investments that are driving that.
Sure John most of those investments would be in our and our warehouses for various technology and.
And food grade enhancements as well as overall, it and technology and technology enhancements across the board on the customer facing side, that's where the predominant capital expenditures will be in 2021.
Okay, great. Thanks for all the detail.
You bet.
There are no further questions at this time I will now turn the call back over to CEO salary for.
For final remarks.
Well, thank you for your questions.
Well 2020 was a historic year for Barrett of about one year ago. We asked all of our office employees to move to a virtual work environment.
At the same time, we put in place the necessary precautions and protocols to ensure the health and safety of our essential employees throughout our supply chain network and continuity of our service to our customers.
And a year of widespread uncertainty as well as significant changes at work and at home our employees showed resilience and adaptability.
Due to the diligent efforts of our employees all our operations have remained open throughout the pandemic.
I'd like to thank our employees for their efforts and accomplishments in 2020.
As we've stated before we will continue to adapt to the needs of our employees and customers and look forward to another great year.
Thank you again for joining us on the call today, please stay healthy and safe and we look forward to talking with you and May when we review our first quarter 2021 results.
Thank you.
This concludes the verity of corporations fourth quarter and full year 2020 financial results Conference call. We thank you for your participation you may now disconnect.