Q2 2021 Veritiv Corp Earnings Call
Okay.
Good morning, and welcome to <unk> Corp, second quarter 2021 financial results Conference call. As a reminder, 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 Felicia and good morning, everyone.
On today's call you will hear prepared remarks from our CEO Sallow bought day, followed by our CFO, Steve Smith and.
After that we will open the call for questions before we begin. Please note that some of the statements made in today's presentation regarding the intentions beliefs expectations and predictions of the future by the company and our management are forward looking.
Actual results could differ in a material manner additional information that could cause results to differ from those and the forward looking statements is contained and the Companys SEC filings. This.
And 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 Meredith Corp Dot com.
Non-GAAP financial measures are included in our comments today and the presentation slides. The reconciliation of these non-GAAP measures.
A couple of 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.
I'd now like to turn the call over to Sal.
Thank you Scott and good morning, everyone. Thank you for joining us.
We are proud to report very strong financial results and the second quarter.
We achieved our best adjusted EBITDA in both dollars and margin of any quarter and the company's history as well as record net income for a second quarter.
Our sales and the second quarter increased by double digits across all of our business segments, and 18% overall increase compared to prior year.
Year over year sales per day performance has improved every quarter for the last 4 quarters due to the continued recovery from last year's pandemic driven lows.
We reported record net income of $26.4 million and diluted earnings per share of $1.62 for the second quarter.
Adjusted EBITDA and the second quarter was also an all time record of $73.5 million, which was an 85% increase compared to prior year and a 70% increase compared to the second quarter of 2019.
Our quarterly adjusted EBITDA has improved year over year and 5 of the last 6 quarters.
We continued to see strong sales and earnings growth and our packaging segment.
Our packaging sales and the second quarter increased 17% compared to prior year.
Our record packaging adjusted EBITDA of $95 million and the second quarter increased more than double the rate of our sales growth and was 37% compared to prior year and up 46% compared to the second quarter of 2019.
Adjusted EBITDA margin increased from 8.9% and the second quarter of 2022, a record 10, 4% and the second quarter of 2021.
Within the packaging segment are health care transportation, and consumer electronics sectors drove elevated growth and the second quarter compared to both prior year and the second quarter of 2019.
Sales trends to commit to manufacturing customers continued to improve.
And increased significantly and the second quarter compared to prior year.
In addition to strong packaging sales.
We also saw demand continue to recover across our other business segments and the second quarter.
In particular, the pace of recovery for our print and publishing segments has been stronger than expected, which contributed to our favorable results in the quarter.
The combination of strong demand and rising supplier costs have led to several price increases across our product portfolio.
While we mitigated our internal cost increases with productivity offsets.
We worked closely with both our suppliers and customers to ensure price increases were communicated effectively and with proper notice.
As a result of our cost and price management discipline margins were stable throughout the first half of the year.
We are also well positioned to navigate additional market price increases that had been announced for the second half of 2021 and the price volatility that is expected to continue and the near term.
Yeah.
It's important to recognize that our record earnings performance is not simply the result of temporary benefits or short term market dynamics.
While we acknowledge the benefit of the favorable comparisons to the prior year.
Our stepwise improvement and earnings performance has resulted primarily from the cumulative effect of the successful execution of our multi year strategic initiatives.
As a reflection of these efforts our first half adjusted EBITDA margin improved from 1.6% in 2019 to.
And to 2.4% and 2020 and then to 4.1% this year.
Our employees have worked hard to drive process improvements across the organization.
These enhancements meaningfully contributed to our results and our ability to deliver on our commitments to customers and suppliers.
I'll now turn it over to Steve to provide more details on our financial performance for the quarter.
After Steve's remarks, I'll provide some additional perspective on our historic performance.
I'll also give an updated outlook for the remainder of the year and our priorities as we move forward.
Steve Thank you Sal and good morning, everyone.
With Sal having covered consolidated earnings performance I will provide more details on our segment performance as well as changes in both our balance sheet and cash flow statements.
As we review 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 day count we had the same number of shipping days and the second quarter of 2021, as we had and the second quarter of 2020.
As a reminder, we had 1 less shipping day in the first quarter of 2021 than 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 2021 will have 1 less shipping day than 2020.
Our packaging segment continues to perform very well and is the leading driver of the record consolidated earnings performance and the second quarter.
Packaging net sales and the second quarter were up 17, 1% and core sales were up 15, 9% compared to the prior year.
Improved demand and upward movement in price continued into the second quarter.
We saw growth across all of our end use sectors compared to prior year.
Market price increases across the majority of our packaging products continued to favorably impact our financial results and the second quarter.
Packaging is adjusted EBITDA was a record high $95 million for the second quarter, which is an increase of $26 million or 37% compared to prior year.
A combination of packaging sales growth.
Efficient price and cost management and operational improvements continued to drive a meaningful change and adjusted EBITDA margin.
Packaging adjusted EBITDA margin increased from 8.9% and the second quarter of 2020 to a record 10, 4% and the second quarter of 2021.
Now moving to our facilities solutions segment.
Net sales and the second quarter increased 11% and core sales were up 7.3% from the prior year due to the ongoing recovery of our traditional away from home sectors.
As a result, we're starting to see a mix of customers and products shipped back toward our historical blend.
Our customers within the education Entertainment and hospitality sectors have continued have begun to recover from the pandemic driven lows of the prior year, while office and property management customers remain near last year's levels.
Throughout the last 18 months, we delivered critical personnel protective equipment, sanitizers and cleaning supplies to support our customers we took.
Related risks with inventory on these types of products to ensure product availability for our customers despite unprecedented volatility and market demand.
As a result of saturated supply chain and product channel and we took approximately $2 million and charges and the second quarter for pandemic related safety products and our facilities solutions segment.
Second quarter adjusted EBITDA for facility solutions was $10.4 million, which was $1 million or 8.8% lower than prior year.
Despite the pandemic related product charges adjusted EBITDA margin for facility solutions was 4.6% and remain elevated from pre 2020 levels due to our multiyear efforts to improve the profitability of this segment.
Shifting now to the print segment.
Quarter net sales were up 24, 5% and core sales were up 22, 7% from the prior year period, which was better than expected and what we believe is a temporary pause and the secular decline and the paper industry.
Adjusted EBITDA and second quarter was $18.3 million and increase of $17 million from prior year.
Adjusted EBITDA margin improved from 0.5% and the second quarter of 2020 to 5.2% and the second quarter of 2021.
Our multiyear efforts to align this business to market demand and improve the risk profile of its customer portfolio have resulted in strong adjusted EBITDA and the second quarter and our best adjusted EBITDA margin of any quarter on record.
Finishing our segment review.
Publishing's net sales and core sales increased 19, 6% and the second quarter compared to the prior year.
Second quarter sales performance for the publishing segment was also better than expected due to an accelerated recovery of demand and the book and specialty sectors.
Publishing adjusted EBITDA was $3.9 million, and the second quarter and increase of $4.1 million compared to prior year.
Adjusted EBITDA margin for the quarter was 2.8% and improvement of 300 basis points compared to prior year.
Our print and publishing segments continue to execute well against their financial objectives, and we are proud of the team's strong performance and the first half of the year.
Shifting now to cash flow.
Before we examine our second quarter's free cash flow results, let us take a moment to look back at our 2019 and 2020 free cash flow.
This look back provides context not only for our second quarter free cash flow comparison, but it also helps to explain our significant net debt reduction.
Looking back to 2019.2020, the combination of our segment mix transformation.
Our improved earnings level, and our enhanced working capital discipline generated roughly $500 million and free cash flow over those 2 years.
For the quarter ended June 30th from 2021 cash flow from operations was approximately $37 million.
Subtracting capital expenditures of about $3 million from free cash flow from operations, we generated free cash flow of approximately $34 million and the second quarter.
Due to our ongoing working capital discipline and strong earnings performance and the first half of this year, we are raising our full year 2021 guidance for free cash flow to be at least $110 million.
After removing the onetime impact of our 2020 restructuring plan on our 2021 free cash flow guidance, we expect our 2021 normalized free cash flow to be at least $140 million.
At the end of the second quarter, our net debt to adjusted EBITDA leverage ratio based on our trailing 12 months results reached a record low of 1.7 times well below our long term target of 3 times.
As we look back to prior years, our leverage ratio peaked at 5.4 times at the end of the third quarter of 2017 soon after our rigid packaging packaging acquisition of all American containers.
As we mentioned earlier strong cash flow generated in 2019, and 2020 and subsequent earnings improvement in 2021 have led to a dramatic reduction and our leverage ratio to 1.7 times.
This leverage improvement enabled the simultaneous execution of both our 2020 restructuring plan and a $100 million share repurchase program.
Our 2020 restructuring plan remains on schedule with the original timeline and we expect to be substantially complete with the plan by the end of this year our.
Our restructuring plan costs are lower than our original estimates and our benefits are in line with our expectations are.
Our share repurchase program is still underway and we expect to complete the program by the end of this year.
We continue to make capital investments and the business to drive process efficiencies organic growth and improved customer experience. We're very encouraged by the progress. We've made on these strategic initiatives. While we are also achieving historically low leverage.
This low leverage gives us optionality for incremental investments and both organic and inorganic growth I will now turn it back over to sell.
Thank you Steve.
Our performance and the second quarter and over the last 12 months has signified and meaningful inflection point and the business.
We are incredibly pleased with the efforts of our employees to overcome a myriad of challenges during an unprecedented environment as a result of the Covid pandemic.
I'd like now to review the comprehensive and multi year initiatives that have transformed the company from where we were just a few years ago.
Perhaps more importantly, I'd like to share why we believe these improvements differentiate <unk> as the leader and packaging distribution and position us for continued acceleration of earnings over the coming years.
Over the last 3 years, we have made fundamental changes to our business, resulting in meaningful adjusted EBITDA performance for Barrett of overall and adjusted EBITDA margin improvements for all of our segments over the last 12 months.
As such we believe we have reached an inflection point and our overall financial results.
Our adjusted EBITDA margin for the company has more than doubled since 2017 from 2% to over 4%.
Packaging is our largest and fastest growing segment and provides customized solutions to a diversified portfolio of customers, including more than half of the fortune 500.
Our multi year optimization efforts have resulted in and nearly 3 percentage point improvement and adjusted EBITDA margin since 2018.
Our packaging adjusted EBITDA margin reached 9.8% over the last 12 months and a record 10, 4% in the second quarter.
Our facility solutions segment margin more than doubled from 2.2% and 2018 to 4.8% over the last 12 months.
A key driver of improved earnings performance unique to facility solutions was the decision to exit our low margin and high cost to serve redistribution business and other unprofitable customers throughout 2019.
Also in 2019, we centralized cost and price management activities across all of our segments to ensure a more streamlined sales process from both our employees and customers.
These process improvements and helped us quickly adjust to inflationary pressures this year.
And July of 2020, we announced a restructuring plan and response to the pandemic and to align our operations with the long term needs of our growth segments.
As Steve mentioned, the restructuring plan expenses are lower than expected and I would point out the savings are above our initial estimates and we are running on schedule.
And the last 2 years, we also implemented and industry, leading commercial optimization initiatives, such as cost price discipline and product lifecycle management to further incentivize profitable sales growth.
Our print and publishing segments continue to play an important role on our portfolio and provide earnings and cash flow for the organization.
We have de risked and rationalized our portfolio of print and publishing customers and products, resulting and multi year of working capital improvements and favorable bad debt performance.
As a result, adjusted EBITDA margins in these segments have improved over the last 12 months compared to the last 3 fiscal years.
Our packaging segment is now the fundamental driver of our overall results.
Over time through a combination of selective divestitures.
Packaging acquisition, and an intentional shift and resources toward our growth segments are packaging adjusted EBITDA has increased from 55% of the company's pro forma adjusted EBITDA in 2014% to 75% over the last 12 months.
This segment mix transformation was a tremendous undertaking for the organization.
Our print and publishing segments had made strategic changes to the mix of products customers and supply chains to drive positive cash flow.
Due to these changes and the growth of our packaging business.
The secular market decline and the print industry is significantly less impactful to our results.
Our print and publishing segments now have more efficient operating models that are adaptable to future market dynamics to support continued earnings generation.
Over that same time period, our adjusted EBITDA has increased from $154 million to $245 million, primarily due to sales growth and margin expansion and our packaging business.
The combination of these factors led to a 7 year cumulative average growth rate and adjusted EBITDA up 9% and our packaging segment from 2014 through the 12 months ended June 30 of this year.
As we look forward, our packaging business is well positioned for above market growth, given our current strength and the industry and our commitment to investment and both organic and inorganic growth.
We are an essential partner to our customers, providing customized solutions and services that meet their full spectrum and packaging and supply chain needs.
We are intimately involved and product packaging ideation and design and testing all the way from concept to delivery.
We remain focused on key high growth industry sectors, including healthcare and consumer electronics.
We are also investing and sustainable cold chain products and capabilities to serve sectors, such as food delivery.
We offer a broad portfolio of both custom and standard packaging products with in house expertise that insurers and material agnostic approach to best meet specific customer needs.
This comprehensive product offering is supported by a global network of industry, leading suppliers.
We continue to invest and selling and supply chain capabilities that will enhance the customer experience and improve our ability to leverage our scale and a highly fragmented and desirable industry.
We are encouraged by the stepwise improvement and our recent results.
And we remain focused on executing against our vision to be the premier provider of packaging solutions and North America.
Now switching to our guidance for 2021.
Given our strong performance through the first half of the year as well as strong earnings prospects for the remainder of the year.
We are increasing our full year 2021, adjusted EBITDA guidance to a range of 270 million to $290 million.
Because of the expected stability and our tax rate. We are also now adding guidance for both net income and earnings per share.
We expect full year 2021, net income to be and a range of $100 million to $120 million and full year earnings per share to be and a range of $6.25.
To $7.50.
Diluted shares outstanding are expected to be approximately 16 million shares.
Despite the pandemic related headwinds, we expect to report back to back record full year net income performance for 2020 and 2021.
As it relates to the second half of 2021, the market is anticipating a very strong holiday season that is expected to drive continued sales growth and our packaging segment.
We also expect second quarter adjusted EBITDA margin levels for the packaging segment.
To continue for the second half of the year.
In addition, the latest market information and indicates that recently implemented and announced price increases across a wide array of our product categories are expected to hold for the remainder of the year, given strong underlying demand and constrained supply.
We will continue to work closely with suppliers and customers to ensure market price volatility has managed effectively and with proper notice.
As a result of our increased earnings outlook and continued working capital discipline. We are also raising our estimated free cash flow for full year 2021 to be at least $110 million.
Capital expenditures for the full year are still expected to be close to $35 million.
This concludes our prepared remarks.
Felicia, we are now ready to take questions.
And at this time, if you would like to ask a question Press Star then the number 1 on your telephone keypad. Once again that is star 1 to ask a question and we'll pause for a moment to compile the Q&A roster.
And your first question comes from the line and John Babcock of Bank of America.
Hey, good morning, and thanks for taking my questions and also congratulations on the quarter.
And I guess, just starting out and packaging what are your customers, saying on how packaging demand could play out over the balance of the year.
Good morning, John This is Sal. Thank you for joining thanks for question and.
We have seen it.
As you've seen and and most of our suppliers earnings reports to packaging demand continue to be strong box shipments have continued to be historically strong although tapering a little bit on the second quarter and we do expect that the second quarter box shipments will continue into the third and then have a very strong fourth quarter.
Driven primarily by another anticipated strong holiday season, particularly in E Commerce E Commerce and fulfillment and so that is baked into our earnings guidance for the balance of the year.
Got it thanks for that and then with regards to guidance what factors should we think about that gets you to the high end of that range and also that while we're on.
That's a good question I think on the on the on the lower end of the range and Steve can speak more to it but the price increases do have an impact on our LIFO inventory calculations and that could impact us getting to the lower range and then also including.
Facility solutions, perhaps not recovering as fast as we'd like it to so with this new Delta variant strain and we are seeing additional delays to the return to office and that that could suppress our facility solutions to the lower end of our guidance on our guidance on the higher end of the range.
John It would be continued strength in the and the print segment, where the demand has been very healthy and the second quarter and price impacts on the second half are expected to be positive for print and as I mentioned continued strong demand and the packaging sector segment will will get us.
The higher end of the range.
And 1 other thing.
I'm sorry, Jon just 1 thing to add to the higher end of the range debt.
The first half of this year, we've experienced very limited bad debt expense and to the extent that that continues for the second half although not in our guidance, it's possible and that would also help move us from the midpoint towards the higher and lower bad debt expense.
Got you that that was actually.
And 1 of my next question was just on bad debt expense, where does that stand during the quarter.
Relative to last year.
Yes, so it was basically zero in the quarter John.
Company has worked incredibly hard through multiple disciplines to try to drive that down really starting back about 4 years ago and so over the last 4 years, we've been averaging just over $17.5 million of bad debt. This year and the first half was as I said basically zero and and the second half of this year we have.
They have roughly a 9 million dollar has the average run rate and <unk>.
We're not experiencing the types of bankruptcies and reserves necessary and so theres some upside to it but.
But 1 doesn't know because COVID-19 is causing such unusual patterns to our customers.
Okay, and then in terms of.
Other costs and and where does the company is seeing inflation right now and what are your expectations for the rest of 2021.
So our primary driver of inflation is obviously cost of goods sold so we're seeing.
Cost increases across all of our packaging products as well as our print products and some and some rising costs and facility solutions and those we've been able to pass on as we've mentioned to our customers and of <unk>.
Very disciplined fashion, we've also seen some some wage increase inflation and and fuel inflation again, both of those are baked in to our guidance for the second half of the year, but and we've been we've been actively.
Improving our processes internally to not have to pass those on to our customers, but those are the key factors really John that we see for.
And for inflation now there is there is indications.
Packaging capacity coming on board and the in the late third quarter and the fourth quarter that could help Tampa.
Tamper down the inflation a bit although that could have.
On a corresponding increase and print because it's coming from the print industry capacity so as as.
Our suppliers switch their capacity from print to packaging and packaging should ease and print may see additional inflation factors.
Okay, Yeah that makes sense and then.
Next question just can you talk about the dynamics driving margins and print and publishing.
Typically it seems and margins for these segments moved together well and this last quarter margins expanded and print the contracted and publishing and so any color you can provide there would be useful.
Yes, the primary difference between packaging and I'm sorry between print and publishing is is customer mix and industry mix. So we are seeing.
Our mix to lower grades and publishing which is having an effect on their margins versus print.
We also see John D.
Bad debt expense that we spoke to a few moments ago significantly impact those 2 segments sofa and a particular quarter or have 1 of those 2 segments has.
Our reserve for a troubled accounts, we'll see that influence the results temporarily and then and a year over year comparison, which is what's happening and publishing and look favorable.
Okay and then.
And just last question before I turn it over can you just walk us through kind of the free cash flow guidance overall and kind of the key things to pay attention to that.
Yes, Steve you want to do that sure so.
We guided is the midpoint to $280 million of adjusted EBITDA and were guiding to at least a $110 million of free cash flow. John So let me walk us through the 5 items that are driving the cash uses that are taking us down from $2.82 rough.
<unk> little over 110, so that's about $160 million to $170 million of cash usage. So those items are and the order of size, our cash taxes, which in the neighborhood of about $45 million for this year, which just as a note is higher than typical given the year's earnings projection.
But because we carried forward from 2020, some cares act.
Tax cash benefits of about $10 million to $15 million with look we're going to have a little higher cash taxes in 'twenty, 1 'twenty low as a benefit to our shareholders. So $45 million of cash taxes about $35 million of capital expenditures.
$30 million of cash payments for our restructuring that we announced in 2020.
About $30 million of cash used for working capital as our revenue is growing and we're investing and working capital and then finally about $20 million of interest expense. If you add those together a little over 160, and we guided to EBITDA to 80, so that would bring us down to a little bit under 120. So that's.
Why we said at least 110.
Okay. That's very helpful. All right well, thanks again for answering my questions and best of luck for the rest of year.
Thank you John Thank you John.
And thanks for your questions.
In conclusion.
The past 18 months have been unprecedented for our employees customers and individuals around the world.
Over this time, we evaluated how we can improve as an organization to positively impact people and be responsible environmental stewards and the communities where we operate.
And may of this year, we appointed a chief compliance and sustainability officer to lead our company wide environmental sustainability and governance initiatives.
We continue to enhance our corporate social responsibility program by strengthening core foundational elements, such as our health and safety initiatives.
The health and safety of our employees is a critical priority of the organization and we're pleased that during the last 3 years our rate of injuries meeting Osha recordable and criteria was less than 1 and a low record low so far this year.
We are working to create a more diverse equitable and inclusive culture as well.
And supported this commitment we recently signed the CEO action for diversity and inclusion pledge and look forward to sharing with and learning from others and the business community and connection with this important initiative.
We also seek innovative opportunities to operate and a more sustainable manner. For example, we recently launched and electric truck pilot program on the West Coast as we consider ways to use more sustainable energy and reduced emissions.
We are proud of the actions we are taken and committed to further progress.
Thank you again for joining us on the call today. Please.
Please stay healthy and safe and we look forward to talking with you again in November when we review our third quarter 2020 results.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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