Q3 2021 Veritiv Corp Earnings Call
Okay.
Good morning, and welcome to vary too.
St Barbara 2021 financial results conference call.
Port on Form 10-K, and in the news release issued this morning, which is posted in the Investor Relations section at <unk> Dot com.
Non-GAAP financial measures are included in our comments today and in the presentation slides. The reconciliation of these non-GAAP measures the applicable us GAAP measures are included at the end of the presentation slides and can also be found in the Investor Relations section of our website.
I would now like to turn the call over to Sal.
Thanks Scott.
Good morning, everyone and thank you for joining us.
Today, we reported another record quarter for our consolidated results.
Continued successful execution of our multiyear strategy along with improved demand also drove record results and most of our business segments in our third quarter.
Strong packaging demand and sales growth across all segments contributed to an 11% increase in consolidated sales in the third quarter compared to prior year.
Supplier driven inflationary price increases continued throughout the third quarter and led to year over year sales growth for all of our business segments.
Sales and earnings growth in our print in publishing segments were better than expected due to both a more efficient operating model and our strategic inventory positions.
The combination of strong sales growth disc.
Disciplined pass through of market price increases and the benefits from our 2020 restructuring plan led to record net income of $40 million and diluted earnings per share of $2.54 in the third quarter near.
Nearly double what we reported for the third quarter of last year for both figures.
Third quarter year to date net income was $88 million and diluted earnings per share where $5 40.
Our adjusted EBITDA in the third quarter was $94 million, reflecting a $44 million increase a nearly 90% improvement compared to prior year and more than double compared to the third quarter of 2019.
Our adjusted EBITDA margin in the third quarter was five 3%, which.
Which reflects a more than 200 basis point improvement over prior year, and our highest margin level of any quarter in our history.
Adjusted EBITDA margins across our three largest segments also reach record high levels in the third quarter.
We are pleased with the earnings improvement and we have seen across our organization and we continued to pursue additional opportunities for above market earnings growth.
Our packaging segment again achieve record results in the third quarter.
Packaging adjusted EBITDA was $107 million, which is our first time above $100 million and adjusted EBITDA for any of our segments and a single quarter.
We reported packaging adjusted EBITDA margin of 11% in the third quarter.
This marks are 10th consecutive quarter of year over year improvement and packaging adjusted EBITDA margin.
Packaging sales grew nearly 15% in the third quarter compared to prior year and were 11% higher than the third quarter of 2019.
Third quarter sales growth across our packaging segment included double digit growth with all of our key customer sectors in product categories compared to prior year.
Sales growth was particularly strong within our consumer electronics healthcare and manufacturing customer sectors.
Year to date, we estimate that roughly half of our sales growth and packaging is related to an increased in volume while the other half is driven by price.
Price was more pronounced in our third quarter sales due to the cumulative impact of supplier driven price increases implemented throughout the year.
Moving now to other key factors impacting our third quarter results as.
As I just mentioned, we experienced several supplier initiated price increases during the first three quarters of this year.
We work closely with our suppliers and customers to ensure cost and price changes were managed effectively and with proper notice.
As a result, our margins have not been negatively impacted by these market related inflationary factors.
Continued demand and constrained supply are expected to support prices at their current levels and we will continue to monitor market conditions and adjust quickly to any future price volatility.
We saw wage inflation at a rate consistent with the broader market throughout our supply chain.
Staying competitive with wage increases is allowed us to hire and retain employees. Despite a tight labor market.
These and other increases like higher storage and fuel costs were fully offset by efficiency programs and the ongoing benefits of our 2020 restructuring plan.
We will continue to look for ways to offset the effects of inflation to minimize the impact on our customers and protect recent improvements in our adjusted EBITDA margin.
Are established portfolio, a best in class suppliers, coupled with our own trucking fleet and warehouse network allow.
Allowed us to maintain historical service levels for most of our customers despite significant constraints and the broader supply chain marketplace.
A record results in the third quarter are a reflection of the commercial discipline and has now become an integral part of how we do business.
We also recognize that the current market environment is created challenges for our customers.
We remain committed to the needs of our customers and will continue to make the investments necessary to improve the way they interact and do business with <unk>.
Our employees played a significant role in the company's third quarter performance.
Despite a demanding and constrained operating environment, our employees continue to execute on our commitments to our customers in new and innovative ways.
This year as part of our pay for performance culture, we are expecting to reward employees with additional incentive compensation and recognition of the record performance.
I will now turn it over to Steve to provide more details on our financial performance for the quarter and an update on our use of capital.
I will then share additional details about our upward revision of guidance for the remainder of the year, Steve. Thank you Sal and good morning, everyone.
With Sal having covered consolidated earnings performance I will provide more details on our segment performance.
I will also provide some color on both our balance sheet and cash flow results.
As we review these results. Please note that when we speak to core sales were 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 in the third quarter of 2021, as we had in the third quarter of 2020 as.
As a reminder, we had one less shipping day in the first quarter of 2021 than the first quarter of 2020.
The fourth quarter of this year will have the same number of shipping days prior year as a result.
Full year 2021 will have one less shipping day than 2020.
Packaging net sales in the third quarter increased 14, 45% and core sales were up 13.9% compared to the prior year.
Strong demand continued in the third quarter and the favorable impacts of market price increases were even more pronounced in the third quarter of 2021 than in the first half of the year.
Demand across our end use customer sectors continued to be favorable in the third quarter and was particularly robust in our consumer electronics healthcare in a manufacturing customer sectors.
And the third quarter, we reported our best packaging adjusted EBITDA and adjusted EBITDA margin of any quarter and the company history.
A combination of timely pass through of market price increases operational improvements and ongoing benefits of the 2020 restructuring plan drove an adjusted EBITDA margin of 11% in the third quarter of 2021 compared to 10.1% in the third quarter of 2020.
A combination of sales growth and adjusted EBITDA margin improvements drove packaging adjusted EBITDA, two $107 million in the third quarter, a 25% increase over prior year.
And our facilities solutions segment net sales in the third quarter increased slightly at 0.4%, while core sales decreased 1.2% compared to prior year.
Sales of our traditional away from home products continue to improve as travel entertainment and hospitality activities resume.
As expected sales of our COVID-19 related categories like personal protective equipment and Sanitizers have declined from the temporarily elevated levels experienced last year.
The pace of sales recovery in our office like customers sector remained slow in the third quarter.
Third quarter adjusted EBITDA in our facilities solutions segment was $13.4 million, an increase of 2.3% compared to prior year.
Despite the lack of recovery and away from home office activity favorable product mix in our ongoing selling and supply chain efficiency programs drove a record adjusted EBITDA margin of five 8%, which was slightly better than prior year.
Moving out to our print segment.
Net sales in the third quarter for print increased five 9% and core sales were up five 2% compared to prior year due to price and to a lesser degree volume.
This revenue increase over the prior year period was only our second quarter of revenue growth in the last seven years.
It followed revenue growth in the second quarter of this year.
Demand in the third quarter remained elevated particularly across coated paper grades.
Supplier mill capacity in inventories continued to be constrained, which drove market price increases across all major paper grades during the quarter.
The combination of sales growth.
<unk> pass through of market price increases and the carryover benefits of 2020 restructuring plan helped to drive all time record highs and both adjusted EBITDA and adjusted EBITDA margin for the print segment in the third quarter.
Adjusted EBITDA third quarter was $26.6 million triple the $8.8 million reported in the prior year.
Adjusted EBITDA margin increased significantly to 6.9% in the third quarter of 2021 compared to only two 4% in the third quarter of 2020.
Our publishing segment reported both net and core sales increases of 25.1% in the third quarter compared to the prior year.
The 25% increase was the highest quarterly revenue growth and the segments history.
Elevated demand in our education books and advertising customer sectors was the primary driver of the year over year increase in sales.
Third quarter adjusted EBITDA for publishing was three $9 million or 11.4% higher than prior year.
Publishing adjusted EBITDA margin was 2.6% in the third quarter of 2021 compared to 2.9% in the third quarter of 2020.
Moving now to cash flow.
For the quarter ended September 30th of 2021 cash flow from operations was approximately $42 million subtracting capital expenditures of about $5 million from cash flow from operations, we generated free cash flow of approximately $37 million in the quarter.
As a result of our strong earnings performance in the third quarter, we're raising our full year 2021 guidance for free cash flow to be at least $120 million.
After removing the one time impact of the 2020 restructuring plan, we expect our 2021 normalised free cash flow to be roughly $150 million.
The 2020 restructuring plan is on budget and is scheduled to be substantially completed this year.
At the end of the third quarter, our net debt to adjusted EBITDA leverage ratio based on trailing 12 months reached a record low of 1.5 times ship.
Shifting now to capital allocation.
We are pleased to report that we completed our $100 million share repurchase program by the end of September.
During the course of the program, we repurchased approximately 1.7 million shares at an average price of about $58 per share, which reflects an 11% reduction in shares outstanding.
In addition to deploying capital for repurchase of our own shares we continued to make capital investments in the business to drive process efficiencies organic growth and an improved customer experience.
However, some capital projects have been delayed during 2021 due to the mark constraints, such as the availability of materials and labor.
As a result, we now expect full year 2021 capital expenditures to be approximately $25 million or about $10 million decrease from our originally anticipated levels.
Given our load net leverage we continue to consider inorganic growth opportunities as well as other uses of capital that will generate incremental shareholder value.
At this time I will turn it back to south to provide more details on both our market expectations and guidance cell.
Thank you Steve.
We will now shift focus to talk about the market dynamics, we expect to see for the balance of the year.
Or a large domestic supplier base sheltered us from the heightened challenges experienced in the international supply chain by many of our competitors.
While not immune to the current supply chain challenges, we have been making strategic inventory investments, particularly in packaging to help minimize the impact to our customers.
However, we do expect broader supply chain constraints to continue in the fourth quarter and first half of next year, which could impact product availability and lead times.
As we look to the balance of 2021 for our packaging segment, we expect market demand to continue to be relatively strong in the supply chain to remain tight to healthy demand an extended supplier lead times across several product categories.
In anticipation of this extended lead time environment, we have intentionally invested an additional inventory to support our customers through the currently constrained environment and to prepare for the seasonal increase in volume expected during the holiday shopping season.
While there has been some minor relief in certain areas of the supply chain limited manufacturing capacity and healthy demand is expected to support pricing at current levels.
As a result, the carryover effect of recent price increases should continue into the first half of 2022.
We expect sales in our facility solutions segment to continue to improve as travel entertainment and hospitality activities returned closer to Prepandemic levels.
We anticipate a slow pace of recovery and those products traditionally sold into the office environment.
That slow recovery will we believe continue for the remainder of 2021 and into at least the first half of 2022.
Therefore, we project sales growth for our facility solutions segment in 2022 to be in line with the broader away from home market.
For our print segment, we expect the supply of paper and the overall market to remain constrained and therefore demand is expected to outpaced supply.
We have navigated multiple price increases across all paper grades. So far this year and have received notification of an additional price increase impacting some grades that will be implemented during the fourth quarter.
Current operating rates and constrained capacity from our print suppliers are really expect to continue into at least the second quarter of next year.
Given a record year to date performance as well as our current expectations for the market conditions for the remainder of this year, we are increasing our full year 2021, adjusted EBITDA guidance to a range of $315 million to $330 million.
We now expect full year 2021, net income to be in the range of $130 million to $145 million and full year diluted earnings per share to be in the range of eight to $9.
As Steve mentioned earlier capital expenditures for the full year are now expected to be around $25 million.
As a result of our increased earnings and a reduction in capital outlay. This year. We are also raising our estimated free cash flow guidance for full year 2021 to be at least $120 million.
This concludes our prepared remarks.
Patricia we are now ready to take questions.
Thank you and as a reminder to ask a question you will need to first start one on your telephone again, that's star one on your telephone please stand by wealthy compiled acute any roster.
Yes first question comes from the line now so John Dot Com from Bank of America. Your line is open.
Good morning, and thanks for taking my questions I guess just to start out talking about the supply chain and I know you elaborated on this on the call for a bit but now could you just talk about like generally into different areas on which that's impacting your business and also how are you doing in terms of keeping their facilities stocks.
Given these challenges.
Good morning, John Thanks for the questions to sell it.
It really varies by business segment, I'll start with packaging, but we did we did make a conscious.
We did make a conscious investment in our packaging inventory really as far back as the first quarter and we've been building inventory along the way in anticipation of a strong second half so well I mentioned, we're not immune to the supply chain challenges and packaging. We've we've had a little bit more protection and relief from actions we took.
Earlier in the year.
We do have a little less impact.
Driven by our mainly domestic supply bass and packaging and so while we're while we're experiencing the same constraints corrugated markets and tapes.
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We're fearing a little bit better and packaging than in other areas.
And of course, the inventory investments are benefiting our customers and that's why our volume growth in the third quarter may look a little stronger than the overall box shipment market expectations or highlights that we saw on the on.
On the moving on to print I mean print is definitely a constrained environment. The capacity that's been taken out of the industry is impacting all of our suppliers and obviously ourselves in our in our competitors and now we do feel like our our strategic alignment with a couple of really strong suppliers has helped buoy that a little bit for.
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But we are definitely seeing the price increases outpace the demand I am sorry to supply and that and that's creating a tough environment to to serve the market. Most most.
Suppliers are on allocation and we're ferring.
As best we can with within print facility solutions has not been a problem obviously in the COVID-19 products, we've been well stocked you've seen them at some adjustments we've made over the year with respect to facility solutions and so.
We feel like we're well positioned to handle the demand in that market relatives, who where we're seeing some constraints. We did see some constraints earlier in the year, but particularly maybe heightened in the second quarter versus the third in a rigid business, particularly from some of the supply that comes from Asia, That's really where we have the most dependency.
From from an international supply chain, but has not prevented us from seeing double digit growth.
In those categories as well as those end use sectors. So now and on the on the bright side I mean, there is some some relief being indicated now bye.
By some of our suppliers, particularly in areas like films and resin based products and that could start to show some some ease.
As early as the first quarter.
Okay touch very helpful. And then can you also just talk about where you are seeing the most cost inflation right now and also I don't know if you might be able to help us kind of quantify how that would impact of business on an annual basis.
Yeah, I'll I'll give you the kind of the general answers and Steve can give you some of the specifics on the quantitative impact on but.
We're seeing that we've seen multiple price increases in the packaging environment and that's been steady that's been as as you know John it's been each and every quarter since last Q4, and so that's sort of been a steady diet of increases that we've been able to pass on in a timely manner.
And it is really across almost every product category.
And the print sector, it's been more pronounced in the last two quarters. So we saw escalating prices in Q2, and Q3 and of course as I mentioned that is going to continue into Q4 and that is.
Across all grades, but more pronounced in the coated paper grades and Steve maybe you can give give.
A feel for the overall impact quantitatively sure cells. So John the way to think about it maybe is that we think of product inflation, which is the vast majority of our.
Cos, that's roughly 80% of our sales.
As the biggest concern for inflation.
As Sal mentioned, we've been very disciplined about our pass through of supplier driven price increases youll reflect back that an 18 early 19, we struggled with that as a company and we've significantly improved processes such that those pass through now are more timely.
And therefore, our margins aren't suffering and so on our prepared remarks, we commented on that fact.
Separately.
A much smaller components cross our labor costs roughly in the neighborhood of 10% of sales.
We have.
Been ahead of that we've been accruing during this year for incremental incentives tour labor pool, and that has been communicated to our colleagues and employees and that's helping us with retention.
It's a.
We've tried to be employee friendly and many actions we have to reduce those inflationary labor costs through efficiencies, we've offset the vast majority of that so we're not passing it through to our customers. Then lastly, a small percentage of our cost the neighborhood, 1% to 3% are fuel and third party freight there has been a few million.
<unk> of fuel costs incremental this year over prior and in the quarter a couple million Bucks.
But we've been able to because of our own fleet offset some laugh again through efficiencies and optimization of our supply chain. So those are the big three if you have further questions. We can answer those.
Yeah, No I think that's pretty health overall in terms of inflation.
As far as the different segments I mean, do you have a sense, whether or not you gain sharing the quarter I mean, I think especially like in print and publishing it seemed like.
You are trends there, but what happened broadly in the marketplace. Obviously there were there was some impact from from the price in front, but just kind of curious.
Why I guess your numbers varies so much from the market overall.
Yes, John.
John starting with the print segment I think we're keeping up with the market.
Demand and the market volume growth and of course, we're passing on the price increase so we're getting some lift from placed as well.
Recall that we did have we did we did clothes are Barrett have expressed stores last year. So we are comping against that from a volume perspective that does distort the numbers a little bit and then of course, the sale of a role source business earlier this year in the first quarter, but when you when you strip out those too.
Independent dynamics, where we actually believe we are facing a little bit the end of the market on the volume front and then keeping up with the price increases on the packaging segment. We do believe that our volume is outpacing the broader market. If you look strictly at the F.
FBA box shipments you know our volume as Steve mentioned would indicate that.
We we outpaced the flatness that the market experienced in the in the third quarter I think that's a combination of our strategic choices around and new sectors and the dynamics within those so for example, we did see a higher lift and heavy manufacturing think transportation that was a bit slower last.
Dear so that has helped us outpaced the market obviously, our focus on value added services on the front end and then bundling.
Are rigid business with our flexible business has all helped see healthy volume growth along that and then lastly, as we mentioned the investments in inventory more pronounced the packaging have helped it.
Really meet that the.
The anticipated demand and the increased demand and that's why there might be an imbalance between what we're seeing in terms of mill shipments and our ability to satisfy our our unique demand with our customer base.
That's very helpful and now as we look ahead to 2022, what are some of the key factors, we should be considering in our forecasts and then also could you help us understand that benefit you're getting from to pass through of price increases.
Yes, so really for most of the businesses, we do and we do anticipate.
The supply chain constraints and the labor shortages that are that are suppliers are experiencing to continue at least through the first quarter most likely into the first half now if we maintain the levels that we are at now with respect to volume and price the first half will be.
A solid and strong first half of the year. So that's across the board for all of our businesses.
On the packaging front, we do expect healthy demand to continue through 2022.
At least from what we're hearing and seeing from our customer base.
And we do expect in the facility solution side, because we haven't talked much about that this morning.
Some recovery more recovery then we saw this year in the office like environment and the return to offices in government clearly not at Prepandemic levels, but certainly stronger than we saw in 2020 and now in 2021.
And Sal I'll, just add to that John.
Two items to think about it you were thinking about 22 over 21.
There is this whole lapping affect both of price increases and a restructuring benefits that aren't fully impacting 2021. So we'll get some carryover benefit and 22 for both of those important factors as it relates to margins and secondly, free cash flow free cash flow of 22 over 21 should benefit from the lower.
<unk> cash costs, which we incur in 2021. So those are two other things to consider.
Gotcha and are you able to comment on on the impact of the Passover the price increases.
Yeah.
We've seen a little bit of a slowdown or at least we haven't seen anything formally announced for the balance of Q4 and into early Q1, but as Steve Just mentioned, we would expect the the impact of the second half of 2021 to be a benefit in the first half of 2022 and.
So we don't see any anticipated changes there now we have heard.
Of some rumblings with regard to non cost of goods sold.
Ah cost increases from our suppliers and as we've mentioned on most of these calls throughout the year, we've put efficiency plans in place or 2020 restructuring plan has helped offset those and we have not had to pass those on to our customers, but if we begin to take on cost increases from suppliers that are unrelated to just product costs.
That will that will really trigger a need to look hard at whether or not we need to pass those on to our customers.
Okay. That's right and then just last question I was wondering if you could provide kind of a typical free cash flow bridge.
Sure is.
So here you are talking about from adjusted EBITDA down to free cash flow.
Yep.
Okay very good.
So.
If you.
If you say we have a.
315 to 330 million of adjusted EBITDA I'll walk you through the net income and then to cash flow. So two steps at 315 to 330, let's pick a midpoint of 323, John you'll have five items that will reduce us down to the neighborhood of $135 million the midpoint of the.
Net income guidance those five items are briefly restructuring of about 15 million.
Depreciation and amortization of about 55 million.
Interest expense of about $20 million.
Taxes of about 50 million.
Then other a small bucket of things, mostly LIFO of about $45 million. So that will bring it down from the mid point of 323 to about $3 38 of net income. So we guided through 130 to 145 from there. The next step in the second step is just thinking through the add back of the non.
Cash items, there I mentioned that depreciation and amortization of 55 million and and we also have bad that expense this year.
About 10 much reduced from prior years, so that's about 65 million.
We have cash costs of capital expenditures, we guided too and updated number of about 25 million and then finally, we have working capital use this year of about 40 million.
As Sal mentioned, we are investing little bit, particularly in the inventory for packaging, that's 65 million. So so happens just.
That the bat add back's equal to the subtraction of cash so that the the sum of 138 is both the figure for our net income as well as our free cash flow guidance. So we said at least 120, a free cash flow this year and there was a little bit of upside to that.
Gotcha, alright, well thanks for all the help.
Thank you John.
Thank you and your next question comes from the line of Michael Assessor. Your line is open.
Hi, guys. Congrats on a very strong quarter I want to add.
Similar question to one of Jon's question, but just maybe in a different way. So if we you obviously had.
Very strong quarter from Ah EBITDA perspective over over $93 million. If we were to just take that figure and annualize. It what are the main reason that would not be the correct way to look at it went thinking about a normalized EBITDA for barracks Sal.
Like from your.
Remark that.
Maybe it would just be at this quarter was out.
Out of the ordinary from a from a demand perspective, but is there is that correct is there anything else that is there any other reason it wouldn't be correct just to Andrew.
Annualize that 93 million and thinking about normalized EBITDA for Barracuda.
[noise], Yes, Michael is Sal good morning, and thank you.
We normally speak to the seasonal patterns over adjusted EBITDA in halves.
Because there is some inter quarter or intra quarter noise. So what we typically look at is the pattern of each one versus age too and as we've mentioned before even even last year. We did expect it to be different it turned out to be more historically accurate our normal which was about.
41, 59, so we have 41% of our adjusted EBITDA in the first half, 59% second half and that's really the best gauge of if you wanted to take one individual quarter half and normal is it for the year that'd be the way to look at it. If you. If you took while Steve maybe you can add.
Syria, where historically that 94 million.
Would be with respect to the seasonal pattern of Q3, and then we can talk about I'll come back and comment a little bit about our guidance and what that means maybe I'll do that now so.
Our guidance for the year at 315 to 330 would take our normal pattern for Q4 of about let's just say, 30% of adjusted EBITDA and if you add that to the full year adjusted EBITDA year to date of 227.
It gets you in that $350 to three range somewhere in that midpoint of 322 323, and that's that's where we're coming up with our full year full year guidance.
Okay Larry.
Oh, sorry go ahead, yeah, no no no I just I was waiting to see if there are further follow up questions on that go ahead, Michael No no I don't have any follow up questions that was that was that was helpful. By any additional remarks, you want to add.
That'd be great as well.
Now we are fine with that Michael Thank you.
Okay, great. Thanks, Congrats again.
Thank you Michael.
And there are no further questions I would now like to turn to call back to solid batting for closing remarks.
Great well, thank you Michael and John for your questions.
As we conclude today's call I'd like to highlight the significant contributions of our employees to support the needs of our customers we.
We recently celebrated appreciation weeks for both our customer experienced team and our truck driving team. These.
These teams have remained resilient and steadfast in their commitment to first class customer experiences.
The safety of employees remains a top priority.
Consistent with past trends, we continue to improve on our safety performance metrics and drive a culture of continuous improvement.
Thank you again to all of our employees for everything you do.
For those joining us on the call today, please stay healthy and safe and we look forward to talking with you again early next year, when we will review our fourth quarter and full year 2021 results.
That concludes the call.
Thank you and this concludes today's conference calls. Thank you all for participating you may now disconnect.
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