Q1 2021 Veritiv Corp Earnings Call
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Good morning, and welcome to their tip of corporations first quarter 2021 financial results conference call as the.
A reminder of today's 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 Freedman you may begin.
Thank you Misty and good morning, everyone.
On today's call you will you will hear prepared remarks from our CEO silo Bot 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 <unk> predictions of the future by the company <unk> 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 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 in the news release issued this morning.
Which is posted in the Investor Relations section at various Corp Dot com.
Non-GAAP financial measures are included in our comments today and in our presentation slides. 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 in the Investor Relations section of our website.
At this time I'd like to turn the call over to Sal.
Thank you Scott.
Good morning, everyone and thank you for joining us.
Before I review of record first quarter earnings I will provide a few updates on our business as they relate to our capital and portfolio objectives, including our share repurchase efforts in the sale of the small component of our print segment.
I will also provide an update on our sustainability efforts.
After my remarks, Steve will walk through our segment results as well as our balance sheet and cash flow performance.
We will also provide an update to our outlook for the full year.
The results in the first quarter continue to reflect progress toward our multi year strategy to drive profitable growth and become the leading full service provider of packaging products and supply chain solutions.
Each of our segments is executing on their strategic objectives and contributing to the profitability improvements reflected in the results.
Strong earnings and disciplined working capital management.
<unk> us to reduce net leverage and expand capacity to deploy capital in support of our strategic priorities.
Earlier this year, we announced the $50 million share repurchase plan to return value to shareholders.
Through the end of the first quarter, we repurchased approximately $25 million of our shares including approximately 550000 shares from the U W. W. H, the holding company owned by Bain capital and Georgia Pacific.
To provide some additional context, Bain capital and Georgia Pacific, where previously the owners of Unisource worldwide.
When unisource worldwide and Expedites merged to create Verity of Corp. In July of 2014.
You Ww H held 49% of the shares of the new public company.
Overtime, you Ww H liquidated portions of its stake in the company and sold all of its remaining shares in the first quarter of this year.
As a result of this exit partially facilitated by our share repurchase program.
The downward pressure of the UW W. H ownership position on our stock of the last few years has been lifted.
We believe our share repurchase plan reflects the potentially high yielding deployment of capital and we'll continue to execute against our plan.
As part of our efforts to focus on our core businesses. We recently completed the sale of our specialized paper converting business roll source, which was an operating unit within our print segment.
The transaction was completed at the end of March.
Pixel of specialty solutions, a current supplier of severity of acquired this business as part of larger strategic moves in the print industry.
The sale of the role of sort of specialty business will allow verity of to become even more focused on our core product and service offerings and will not have a material impact on Barrett of future earnings.
Moving now to our first quarter financial results.
We are pleased to report that the record financial performance from the fourth quarter of 2020 continued into the first quarter of this year.
Robust packaging sales growth stronger than expected print and publishing results.
And the operational efficiencies across the business led to adjusted EBITDA improvements across all segments compared to the prior year.
As a result, both pretax income and adjusted EBITDA reached record highs for the first quarter of $30 million and $60 million respectively.
This reflects a 30 million dollar improvement in pretax income and a $23 million increase in adjusted EBITDA or plus 64% compared to prior year.
Adjusted EBITDA margin remained at a record high of three 8% in the first quarter, which was an improvement of 170 basis points compared to prior year.
Our packaging segment also achieved record adjusted EBITDA in the first quarter of $78 million, reflecting a 31% increase over prior year.
Continued improvement in demand and additional lift from price drove sales growth of 8% in the first quarter of 2021 compared to prior year when adjusting for one less shipping day.
Similar to last quarter, our customized solutions and capabilities in the food processing specialty retail consumer electronics and health care sectors continue to drive strong sales performance and favorable customer mix.
The ongoing shift by consumers to E. Commerce remains a source of volume across several of our end use sectors.
Our automotive and aerospace manufacturing customers continued to recover but at a slower pace than the general manufacturing sector and have yet to return to pre COVID-19 levels.
We continue to closely monitor inflationary changes across our product portfolio and operations.
Thus far we have successfully mirrored recent supplier product cost increases to our customers in a timely manner, which has led to stable margins across all business segments through the first quarter.
More specifically corrugated sales were strong in the first quarter due to both demand and multi quarter industry wide price increases.
Weather related impacts in February led to manufacturing production constraints, particularly with our suppliers of resin based products.
Fortunately, our national supply chain network ensure that the weather related impact to our customers was minimal.
Because we are of national distribution company with no customer accounting for even five per cent of our revenues weather did not have a material impact of our financial results on the first quarter.
I would now like to shift to a brief update on our efforts around sustainability.
We view sustainability as more than of value add or of premium solution.
It is a core responsibility one that contributes to the wellbeing of our business our people and our planet.
Our team has been committed to helping our company and customers reduce environmental impacts for over a decade.
We recently published an updated corporate social responsibility report, which can be found in the corporate responsibility in investor relations sections of our website.
We are proud of our progress and eager to do even more.
Now Steve will provide additional details on our financial performance for the first quarter, Steve. Thank you Sal and good morning, everyone.
With Sal having covered consolidated earnings performance I will provide enough overview of consolidated sales results and review our segment performance as well as changes in both of our balance sheet and cash flow statements.
As we review of these results. Please note that when we speak to core sales. We are referencing the reported net sales performance, excluding the impact of foreign exchange and adjusting for any day count differences.
As it relates to the day count we had one less shipping day in the first quarter of 2021, but we had in the first quarter of 2020.
All remaining quarters. This year have the same number of shipping days as prior year and as a result full year of 2021 will have one less shipping day than 2020.
Verity of consolidated net sales in the first quarter were down eight 7% and core sales were down seven 9% from the prior year.
Due to both continued market headwinds from the COVID-19 pandemic across our non packaging segments and continuing secular decline in the print and publishing industries.
Going to our segment results.
Packaging net sales in the first quarter were up six 5% and core sales were up seven five per cent compared to the prior year due to strong demand and upward movement in price.
We continue to see robust demand from our food processing specialty retail and health care customers, which were enabled by our specialized capabilities in those sectors.
Our manufacturing sector continued to recover but some areas within the manufacturing like automotive and aerospace remained below pre COVID-19 levels.
Packaging packaging as adjusted EBITDA was a record $78 million for the first quarter and increased 31% compared to prior year.
Packaging sales growth, coupled with efficient and responsive operations continues to drive a meaningful change in adjusted EBITDA margin.
As a result of these improvements packaging adjusted EBITDA margins increased from seven 4% in the first quarter of 2020 to nine 1% in the first quarter of 2021.
Moving to our facilities of solutions segment.
In the first quarter, both net sales and core sales were down roughly 21% from the prior year period as traditional away from home sectors continued to be depressed by market dynamics related to COVID-19.
Despite these ongoing market headwinds first quarter adjusted EBITDA per facility solutions was a record $11 $5 million or 28% higher than prior year.
Adjusted EBITDA margin for facilities solutions of five 6% remained near record high levels due to our multiyear efforts to improve the profitability of this business through price discipline operating efficiencies and a focus on certain end use sectors.
Operating margins continue to benefit from a likely temporary mix shift toward customers and end use sectors like healthcare and foodservice that were less impacted by COVID-19 related closures.
Shifting now to the print segment.
First quarter net sales were down 28, 5% and core sales were down 27, 9% from the prior year period, which was better than expected.
Adjusted EBITDA was $12 $3 million, while adjusted EBITDA margin improved from two 5% in the first quarter of 2020 to three 8% in the first quarter of 2021.
Ongoing efforts to quickly align this business to market demand as well as historically low bad debt expense drove the segment's margin improvement.
Publishing's net sales declined 11, 2% and core sales declined nine 7% in the first quarter compared to the prior year.
The first quarter sales performance for the publishing segment was better than expected due to an accelerated recovery of demand in the education and grocery sectors.
Adjusted EBITDA for publishing of $5 $1 million for the quarter was nearly 42% better than prior year, while adjusted EBITDA margin improved from two 2% in the first quarter of 2020 to three 4% in the first quarter of 2021.
We are encouraged by the recent financial performance of the print and publishing segments, Despite COVID-19 related and ongoing secular volume declines.
The segments continue to play an important role in our portfolio and are delivering on the strategic and financial objectives early in 2021.
Because of the improved performance across all our segments, let me take a moment to comment on the downstream effect on our effective tax rate.
Given our strength and earnings are pre tax and after tax earnings are higher.
Therefore, our tax rate is becoming less volatile.
Similar to the first quarter, we expect our effective tax rate for 2021 to be in the high 20 to low 30% range.
Shifting now to our balance sheet and cash flow.
At the end of the first quarter of 2021, we had drawn approximately $534 million against the asset based lending facility and had available borrowing capacity of approximately $344 million.
As a reminder, the ABL facility is backed by the inventory and receivables of our business.
At the end of the quarter, our net debt to adjusted EBITDA leverage ratio was 2.0 times down significantly from three five times at the end of the first quarter of 2020.
At the end of the first quarter, our long term debt not including the current portion declined about 19% year over year from $740 million to $601 million.
Our credit profile has improved meaningfully over the last 12 months as our long term debt has declined and our earnings have improved.
Our lenders are pleased with this outcome, we are working with our lenders to adjust our ABL to reflect the improved credit profile, we will share more information when this process is completed.
For the quarter ended March 31, 2021 cash flow from operations was approximately $13 million.
Subtracting capital expenditures of about $6 million from cash flow from operations, we generated free cash flow of approximately $7 million.
I will now turn the call back over to Sal.
Thank you Steve.
Before we move to your questions I'd like to provide an update on our 2020 of restructuring plan and our 2021 guidance.
As a reminder, the 2020 restructuring plan was originally announced in July of 2020 in response to the impacts of the COVID-19 pandemic on our business, including the acceleration of the secular decline in the print and publishing industries.
The plan was designed to better align our cost structure and distribution network with the ongoing needs of the business.
The restructuring plan remains on schedule and we still expect it to be substantially complete by the end of 2021.
We are pleased to report that due to the diligent efforts by the organization the level of cost incurred under the restructuring plan is lower than originally expected and now estimated to be in the range of 70 million to $87 million and approximately 12% reduction from our previous estimate.
Let's shift now to our outlook for 2021.
Given the strong performance in the first quarter and earnings prospects for the remainder of the year.
We are increasing our earnings guidance for 2021.
Growth in our packaging segment is expected to continue for the remainder of the year.
Note that because of our packaging segment began its recovery in the second half of 2020, we anticipate that the rate of year over year growth is likely to be stronger than the first half of 2021, then the second half of 2021.
As it relates to revenue expectations for our other segments, the timing and level of recovery from the effects of COVID-19 will be mixed in remain uncertain.
Components of our facility solutions business like entertainment hospitality and office buildings are not expected to begin to recover in a meaningful way until the second half of 2021.
As a result, we now expect income before taxes per full year of 2021 to be in the range of 95 million two of $105 million to $115 million and adjusted EBITDA to be in the range of $220 million to $240 million.
We remain focused on investments in high growth sectors, and will continue to respond quickly to inflationary impacts across our businesses.
Our 2021 free cash flow is still expected to be at least $75 million and capital expenditures for the year of approximately $35 million remain on track.
This concludes our prepared remarks.
Mr. <unk>, we are now ready to take questions.
At this time, if you would like to ask a question press star one on your telephone keypad I get that of star and the number one.
Two of a question from John Babcock with the Bank of America.
Thanks, Good morning, great job during the quarter I.
I guess I just wanted to start out on it and packaging you know obviously, you're starting to see some improved growth here and it seems like a corrugated markets are plugging right along.
How are you kind of thinking about I mean, you mentioned expecting some sort of in the back half in part due to tougher comps.
But also one of kind of get your sense on whether we should now expect growth to be pretty steadily positive here.
Or if there might be of reasons to expect.
There could be.
Some of them kind of fluctuation overtime.
Greg Good morning, John and thanks for the question.
We expect packaging growth to continue through the year. If you look at the market indicators. They point to continued growth, but not quite as strong as Q4, and then the first half of the year.
So we expect to grow alongside and slightly better than the market as reflected in our Q1 performance.
And we're encouraged by the fact that the the overall indicators actually of ticked up for the balance of the year and so that is reflected.
In our forecast the obviously the second quarter because of the anomaly of the COVID-19.
Comps being so volatile versus last year.
Those numbers are going to be what I would say much higher than other periods, but then will will stabilize in Q3 and Q4, but still expect to see growth.
We do expect to continue to see stronger growth in our international business and our rigid business and that that has been really continuing since the latter part of last summer.
And so what's the reasonable long term growth rate to assume here.
Recognizing obviously that could change over time, but what are you kind of thinking that right now.
Yes.
Expect our packaging business to grow at GDP, plus switches, which is what we've historically targeted.
Yes, that's right.
And then just facility solutions.
Different parts of the country are are reopening of the U S. Obviously.
Our of reopening right now and so I just wanted to get a sense, what you're hearing from customers as you know what your thoughts are on the trajectory of how that.
On his could improve.
And overall that will occur.
Yeah. Thanks, John we're really pleased with where facility solutions is in this first quarter of 2021, despite the impacts of COVID-19 on on the profitability side of the equation for sure and we have seen a higher growth rate in our COVID-19 related hygiene products, our skin care.
The wipes sanitizers and those will become a more meaningful and PPE, obviously have become a more meaningful portion of our portfolio and so we see those continuing to grow and in fact <unk>.
As businesses reopen in a more fulsome way, we expect accelerated growth in those in those categories.
The caveat here is that entertainment hospitality, particularly large venue, where we are you know where we tend.
<unk> tend to play more readily is of slower return than we originally anticipated and now most likely more into the middle of the of the third quarter than the beginning of the third quarter and particularly in the office space in areas, where you know where we rely on folks returning to two offices.
Like government and so we expect those two to rebound from where they are but not not reach.
Pre COVID-19 levels for quite some time, but in the second half of the year, we are expecting a rebound in the in our cruise line business. Obviously transportation has already started to pick up and now we're we're hearing signs of the entertainment industry starting to to return and Youre seeing some.
Additions in things like concerts, and sporting events projected to be at full capacity in the fall and so that's what our projections are based on for the balance of the year for facility solutions.
Okay.
And then the next question you know you raised your guidance here I was wondering if you might be able to talk about some of the.
Some of the factors that are driving that and also you know what could go right what could go wrong. So on.
Obviously, we've heard about rising price levels across a number of the different product lines that you have particularly on the paper side in corrugated side.
And then we have.
I heard about rising fuel prices. So if you could just kind of go through the different factors that impact.
Impact on EBITDA guidance that'd be helpful.
Sure sure I'll I'll start John and the Alaska, Steve to provide some some commentary as well, but the primary driver of our earnings guidance increases our packaging growth and it really drove the significant portion of our performance over plan and in the first quarter over estimates and again as we mentioned we.
Those two continue.
Also just continued operational expense efficiencies and cost management.
Now continuing into the second quarter, and then projected to continue for the full year. So we're seeing the effects and we will see the effects of of full year of cost savings cost savings from last years.
Moves and then lastly, the our disciplined cost and price management, which which frankly, we put in place about a year and a half ago and continues to be well managed by the team.
Well orchestrated and communicated both with our suppliers and with our customers and the ability to pass those cost increases onto our customers has been of a key element of being able to take our our guidance up now. We also are talking to our suppliers and making sure that these cost increases are justified.
On behalf.
Of our customers and when we look at inflation and the potential for price increases in the future and I'll talk about more of our materials versus fuel for a minute.
We do believe that.
We're getting close to the apex of the price increases that were driven by things like shortages due to storms and just overall.
Heat it up and frankly pent up demand from the pandemic and so we believe we're at the apex and when we look at the insights from the market the marketing insights from the market itself. It says that prices should stabilize.
On the middle part of the year and continuing on for the balance of the year and so that that's reflected.
In our in our upward guidance with respect to earnings.
Certainly fuel we expect to take some increases.
The in the fuel arena, and but recall on the on the freight side of the business because we have our own fleet.
We're relatively sheltered from the.
The impact of what's happening in the in the heated up freight markets. So those are the the I think look and so those of the things that could go right.
If there were a sum.
The obvious.
Third or fourth way of the of the <unk>.
<unk> could could create a constraint on the balance of the year.
And we were not anticipating this but of wholesale shift to remote working that could put a strain on our facility solutions business potentially but I think those are those are less likely than than the of the goodness that we have built on our guidance and that's why we're comfortable.
Moving the range is as high as we we did Steve anything to add there, yes, I'll just two supplemental thoughts the first one being on the reason for the increase in that.
We had a very low bad debt expense John in the first quarter and we anticipate at this time that continuing through the balance of the year. So upside in the fact that we have lower bad debt expense and then secondly on the downsides on.
On the downside rather there is the inflation in corrugated resin that Sal mentioned really impacting our pretax guidance not so much adjusted EBITDA because it does get adjusted through the LIFO calculation, which we can talk about but so upside on bad debt expense and a little bit of downside on the inflationary LIFO risk.
Okay. That's helpful. And then if you could just talk about the free cash flow guidance.
The higher earnings outlook, I assume theyre, probably some offsets perhaps from working capital, but if there's anything else there worth highlighting that'd be useful.
Sure. So yeah. It is driven John by the.
The cash flow upside associated with performance. So let me just walk you through the the.
The guidance that we provided of of at least $75 million and that's just a couple of three steps to it first we start with a mid point of our revised adjusted EBITDA guidance of $230 million and then we have five different cash usages, which total about $145 million those on.
Our capex, which we guided to the $35 million.
Interest expense, which is coming down because of lower borrowings and lower interest rates of about $20 million cash taxes, which are up this year over prior to around $45 million.
Restructuring cash payments as Sal mentioned in our script that we are anticipating completing the bulk of our 2020 efforts in 2021 and that will cost about $35 million of cash and then last but not least of little bit of working capital use of about $10 million.
As our packaging business grows and we have to support that growth with working capital associated with inventory and receivables. So those items sum total is $145 million you subtract that from the starting point of $2 30, and you get about $85 million. So we guided to at least 75 million of free cash flow for the year.
Yeah, that's right and then.
Just last question I, just wanted to make it a little bit more of a strategic before I turn it over I was just wondering if you.
So you could talk about you know really like how youre thinking about the main priorities for this year.
What what you want to accomplish.
And this is incremental to what you already have in place. So you know all of US obviously your complaint of restructuring program, but I wanted to get a sense for what's what kind of of the focus is from here.
Yeah sure John I think just as you as you stated the successful completion of our restructuring plan, which includes.
Our footprint consolidation to to right size, our on our north American footprint to align with our packaging business and that's going on.
Very well on it.
We didn't talk much about the the print and publishing side, but we.
We are we are working as part of that restructuring plan, a kind of a more robust print supply chain model that will continue to drive efficiencies.
And our working capital down in that business, while serving our customers well, but you know the bigger strategic initiatives beyond those more tactical operational.
Initiatives are really driving packaging growth in those sectors that we've talked about and in particular the front end. So if you recall, we launched our Irvine agency model earlier in the year and late last year that is really focused on the front of the packaging business, which is on design and testing and kind of concept to delivery in <unk>.
<unk> continued continued growth with new customers and synergies from our rigid acquisition AAC, which is doing incredibly well and then continued growth across the globe with our specialty retail on our consumer electronics business in our packaging business. So those are our core of what I would call.
Organic growth initiatives.
The initiatives and then obviously with where we are with our leverage ratio on our cash position and we always look at opportunities for inorganic growth as well on and we have the ability to do that more so now than we have frankly in the on the history of the young history of a verity of so those of those of the and then I guess lastly.
I would say threading through all of that.
Is our focus on.
Our digital technology solutions, and making sure we're keeping pace with where the future of the business is going and providing omnichannel solutions to our customers in a more digital way and so we've got significant investment earmarked for this year and beyond with respect to our technology and I think that again the.
Putting the integration behind us and now focusing more on our transformation and in particular technology.
<unk> technology, I think is going to be a big area for us and will really help accelerate our growth as well as do that in a very cost effective way and and Steve anything to add to that yeah, just on the capital side Sal.
John as we're thinking about strategic needs, we through our Treasury group and gain the Bell we're working on an ABL extension of year ago. When we amended our facility was a five year facility, we're going to extend that facility.
To give us increased flexibility and then also as we mentioned in our prepared remarks that we're continuing our share repurchase program because of our leverage ratio is still low and the performance is so strong.
Okay, great. Thanks, Stephen so ill and best of luck in the second quarter.
Great. Thank you John.
Okay.
Great. Thanks.
Thank you Misty.
Well to wrap up in the first quarter, we achieved record earnings and profitability improvements across each of our segments.
We exited a non core asset in our print segment and successfully executed against our shareholder repurchase program.
We are pleased with our strong performance to start the year as well as the significant progress we've made toward our long term financial and strategic goals.
We also continued to drive improvements in our sustainability and corporate responsibility initiatives.
In 2020 Verity of established of working group to more effectively guide the company's efforts regarding sustainability.
This group is working with internal and external stakeholders and our senior management team to further develop our sustainability goals.
I look forward to collaborating with our team customers suppliers and local communities throughout this journey. So we can be careful stewards of the world together.
Thank you again for joining us on the call today, please stay healthy and safe and we look forward to talking with you again in August when we will review our second quarter 2021 results.
<unk>.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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