Q1 2022 Veritiv Corp Earnings Call
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Good morning, and welcome to the Verity of corporations first quarter 2022 financial results conference call.
Today's call is being recorded we will begin with opening remarks and introductions at this time I would like to turn nickel ore stockpiled Friedman Vice President of Finance and Investor Relations. Mr. Paul Freedman you may begin.
Thank you Vic and good morning, everyone.
I'm joined on today's call by our CEO Sallow buffet and our CFO Steve Smith.
After my remarks, Sal will share an update on first quarter business performance, followed by Steve who will provide more details on our financials.
After steves comments, Sal will conclude by providing a brief strategic update and revised outlook.
We will then open the call for your questions.
Before we begin please note that some of the statements made.
Okay.
So on the statements made in today's presentation regarding the intentions beliefs expectations and predictions of the future are forward looking and actual results could differ in a material manner.
Additional information that could cause results to differ from those in the forward looking statements is contained in the company's SEC filings.
This includes the risks and other factors described in our 2021 Form 10-K, and the Companys other publicly available reports and exhibits filed with the SEC.
Today's call and presentation slides will contain non-GAAP financial measures the.
A reconciliation of these non-GAAP measures to comparable 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 will turn the call over to Sal.
Thanks, Scott and good morning, everyone.
This morning, we reported record results across almost all of our key financial metrics for any quarter in <unk> history. Despite the first quarter typically being our weakest quarter of the year due to the seasonality of our business.
Our commercial effectiveness continue to drive sales and margin improvement and strong revenue performance in all our business segments contributed to these results in the first quarter.
The combination of our industry, leading supply chain network and strategic partnerships with world class suppliers.
Loud us to navigate the ongoing supply chain challenges in the broader market and mitigate some of the inflationary impacts to our customers.
As a result of our commercial and supply chain efforts, we reported double digit revenue growth and above market organic volume growth in all of our segments and further establish our position as the leading provider of business to business packaging solutions.
Net income in the first quarter was $79 million or nearly four times, what we reported in first quarter 2021, and diluted earnings per share were $5.12 compared to $1 28 in first quarter 2021.
Our net income and diluted earnings per share results in the first quarter were all time records for any quarter in company history.
First quarter, adjusted EBITDA was $120 million or double the performance from the prior year period.
Adjusted EBITDA margin in the first quarter was six 4%, which marks the ninth consecutive quarter of year over year improvement in adjusted EBITDA margin.
This trend of delivering consecutive record financial metrics demonstrates the sustainability of our performance.
Our earnings in the first quarter and consistent improvements over the last two years are a direct result of disciplined execution against our strategic initiatives to improve the efficiency of our operations and how we support the needs of our customers.
Our commercial initiatives continued to drive value through effective cost and price management in a highly volatile environment.
These industry, leading system and process related improvements enabled the recovery and long term sustainability of margins.
In the first quarter supplier driven price increases continued to be the most significant driver of inflation across our business, particularly within our print and packaging segments.
While product demand from our customers continues to outpace supply across most product categories. Additional inflationary factors are contributing systemic cost increases driven by higher wages fuel and other supply chain costs.
We continue to work closely with our suppliers and customers to ensure timely pass through of the historic level of product cost increases that we and our customers have experienced.
Our own delivery fleet and coast to coast network of warehouses continued to provide a competitive advantage and helped to organically grow our market share.
We continued to strategically leverage our size and scale to efficiently navigate the constrained supply chain environment and support the needs of both our suppliers and customers.
Supplier lead times remained elevated well above historical levels.
As a result, we maintain strategic inventory positions where possible to minimize the effects of the extended lead times on our customers.
Shifting now to an update on our packaging business.
We reported just over $1 billion in packaging revenue in the first quarter, which was a record high for this typically seasonally low quarter.
Packaging revenue increased 17% in the first quarter of 2022 <unk>.
Driven by a combination of supplier cost pass through an above market volume growth.
We saw elevated year over year volume growth in our retail and logistics customer sectors as consumer demand continued to outpace supply across several product categories.
Our comprehensive spectrum of packaging products and supply chain solutions provided a differentiated level of inventory to our diverse customer base that spans from small businesses to more than half of the fortune 500.
We reported packaging adjusted EBITDA of nearly $100 million in the first quarter of.
25% increase compared to prior year.
Our ongoing commercial initiatives drove a record first quarter adjusted EBITDA margin of nine 7% in our packaging segment.
The first quarter now marks our 12 straight quarter of year over year improvement in packaging adjusted EBITDA margin and illustrates our commitment to long term and sustained improvements in both our packaging earnings growth and profitability.
As we look ahead to the long term needs of our print and publishing customers.
We have decided to combine these two segments into one.
The newly combined segment is called print solutions.
This change provides additional flexibility and how we service our customers and aligns internal expertise across businesses that operate in complementary and adjacent industries.
These businesses have served an important role in our portfolio over the years. Despite the headwinds that are operating in an industry that has been in secular decline for more than a decade.
We have fundamentally changed the business model to reflect the new realities of this industry.
These businesses have made proactive and dramatic improvements to profitability.
Working capital and the quality of their balance sheet, while also providing a significant source of free cash flow.
Even in times of Great performance and favorable market conditions, we continued to make this segment more efficient.
For the first quarter of 2022, our newly combined print solutions segment generated both record adjusted EBITDA of $55 million and record adjusted EBITDA margin of nine 2%.
We are very pleased with the first quarter results of our print solutions segment and will continue to evolve the business to align with the needs of the industry.
I'll now turn it over to Steve to provide more details on our financial performance Steve.
Steve Thank you Sal and good morning, everyone.
Today, I will provide more details on our segments results in the first quarter as well as other updates related to the balance sheet and capital priorities.
As I go through the results note that our first quarter had the same number of selling days as last year's first quarter.
Moving now to our segment results.
Revenue in our packaging segment increased 17, 4% compared to prior year due to an increase in both volume and price.
Year over year volume growth in the first quarter 2022 was slightly better than fourth quarter 2021.
We experienced double digit revenue growth across all product categories and customer sectors with elevated volume growth in our retail and logistics customer sectors.
The combination of strong revenue growth in commercial and operational improvements drove first quarter, adjusted EBITDA of $97 $4 million, an improvement of $19 million or 25% above prior year.
Packaging adjusted EBITDA margin was nine 7% a record high for the first quarter and 60 basis points higher than prior year.
Moving now the facilities solutions.
Our facility solutions segment showed signs of recovery in the first quarter as away from home activity resumed across the broader marketplace.
Facility solutions revenue in the first quarter increased 11, 3%, primarily due to higher volume.
As part of the volume improvement was driven by refill refill activity with large entertainment and hospitality venues.
Strong volume growth from our traditional away from home product categories fully offset lower sales from COVID-19 related products like PPE and hand sanitizers.
Adjusted EBITDA for facility solutions was $13 $4 million in the first quarter or 16, 5% above prior year.
Facility solutions segment, adjusted EBITDA margin was five 8% or 20 basis points above prior year.
Efforts to align our products and capabilities with targeted customer sectors has driven sustained adjusted EBITDA margin improvements above pre COVID-19 levels. Despite the return to our historical mix of products for this segment.
Shifting to our newly combined print solutions segment.
First quarter revenue for print solutions increased 26, 6% compared to prior year due to both industry wide price increases and volume growth.
After removing the impact of the roll source divestiture on the prior year organic daily sales increased 34%, which we believe is better than the market.
A portion of the year over year improvement was due to lower prior year comparisons.
Our print solutions segment generated $54 $6 million of adjusted EBITDA in the first quarter compared to $17.4 million in the first quarter 2021.
Adjusted EBITDA margin was nine 2% in the first quarter compared to three 7% in the first quarter 2021.
Domestic demand remained very strong in the first quarter and continued to outpace both domestic and international supply.
Our scale and strong supplier relationships provide a unique market advantages that lead to further improvements in adjusted EBITDA margin for the segment.
Moving now to cash flow.
In the first quarter, we maintained certain investments in packaging in inventory to help mitigate some of the effects of extended supplier lead times and supply chain challenges on our customers.
Those investments together with consolidated sales growth of approximately $300 million led to a roughly $15 million net use of free cash flow in the first quarter.
As we begin to lap the effect of price increases from the prior year, we expect the combination of higher earnings and lower working capital to generate approximately $250 million of free cash flow for full year 2022.
Our net debt to adjusted EBITDA leverage ratio remained at a historically low one one times well below our long term target of three times.
Our record low net leverage continues to provide both financial and strategic Optionality and development of capital and deployment of capital to support our long term financial objectives and enhanced value to our shareholders.
We continue to make investments in organic growth that leverage our size and scale to enhance the customer experience.
We expect to spend approximately $30 million on capital projects this year.
We also remain focused on inorganic growth opportunities that could provide synergistic value or build on our existing portfolio of products and capabilities.
In March we announced a 200 million dollar share repurchase program and have repurchased approximately $53 million of our shares through may six.
I'll now turn the call back over to south to provide more details on our strategic priorities and outlook for this year. So.
Thanks, Steve.
As we shift to the next phase of our multiyear strategy, we are optimistic about the quarters and years ahead.
Our recent actions support our long term goal to deliver above market packaging growth and build further on recent adjusted EBITDA margin improvements.
Last week, we completed the sale of our business in Canada.
For the full year 2021, our Canadian business represented approximately 15% of our total employee base.
10% of total sales and less than 9% of our consolidated adjusted EBITDA.
Our sales mix in Canada was also highly concentrated across lower margin products and customer sectors and less than 20% of sales were and what we would consider core packaging product categories.
This strategic divestiture aligns with other historical moves to shift our portfolio more fully towards higher growth and higher margin businesses.
The proceeds from the sale of Canada will be used to support our active $200 million share repurchase program and fund strategic capital priorities.
We are committed to making investments in the business that will further differentiate us in the industry and drive above market organic growth.
We have made several system and process enhancements over the years that provide a more streamline and consistent experience for our customers.
We engaged leaders across the enterprise to identify opportunities to further improve the customer experience and overall satisfaction.
We are now making additional investments in technology that will facilitate an end to end digital experience and will provide our customers with improved visibility and connectivity.
As a result of these initiatives, we have established a robust process to identify modify and monitor our performance to meet or exceed customer expectations throughout the full spectrum of customer interactions.
We believe that the combination of our investments in technology and the strategic alignment of resources will improve the customer experience customer retention rates and enables share of wallet gains.
Our value added service offerings continued to be an important driver of above market growth.
Approximately 50% of our packaging business is customized to meet the specific needs of our customers.
Our industry, leading portfolio of services supported by product and sector specific specialists are essential to ensure we remain aligned to the unique needs of our customers.
We continue to make investments in these capabilities, which we believe will expand our market share in higher growth and higher margin businesses.
Providing a portfolio of products and solutions that support our customers' sustainability goals remains a key differentiator in our go to market offering.
Our sustainability commitments were recently published in our 2021 corporate social responsibility report, which highlights the foundational work, we completed last year to drive our own ESG initiatives and outlines our longer term ESG goals.
We also remain focused on inorganic growth opportunities that could build on our capabilities or drive synergistic value.
With our active pipeline of scope and scale targets, we have established a prudent and disciplined approach to assess potential acquisitions.
Our significant improvements in both earnings and net leverage provides additional optionality as we evaluate targets for strategic fit.
We are resolute in our vision to further our position as the leading provider of business to business packaging solutions.
Consistent and sustained improvements in earnings and margins over the last eight quarters illustrate our commitment to both commercial and operational excellence.
Looking forward, we have identified additional initiatives that we believe will continue margin growth.
Earlier this year, we launched a new round of initiatives as part of this next wave of commercial optimization to build on recent adjusted EBITDA margin improvements.
These multiyear initiatives will drive the next level of cost and price discipline across our packaging and facility solutions segments.
I'd now like to share an updated outlook for the remainder of the year.
For packaging customer demand continues to outpace supply and supplier driven price increases have continued into the second quarter.
In addition market dynamics continued to be volatile.
For example, the most recent corrugated market price increase went into effect just recently in the second quarter.
Increases for other packaging product categories have been implemented or announced for the second quarter and will drive continued growth in the second half of 2022 and have a carryover effect on sales into 2023.
In facility solutions demand has risen which we believe is due to reopening momentum that is expected to further strengthen for the balance of this year.
We've seen an accelerated return in large entertainment and hospitality customers trending towards pre pandemic levels, which in turn will deliver an increased replenishment cycle.
Supplier driven price increases continued in our facility solutions segment, as well, but to a lesser degree than our packaging and print solutions segments.
For print solutions domestic demand remains very strong and continues to be considerably outpace domestic and international supply.
We believe demand will help sustain at least this level of revenue for the balance of the year, but revenue improvement will depend largely on product availability.
As a result price and margin improvements are now expected to carry into 2023.
We expect our above market volume performance to continue due to scale advantages and strategic supplier relationships.
This combination of strong revenue growth as.
As well as commercial and operational initiatives.
We are now expected to drive adjusted EBITDA margins at or above prior year levels in each of our segments for the remaining quarters of the year.
Given our strong financial performance, so far this year and favorable outlook for the remainder of the year. We now expect full year 2022, net income to be in the range of $270 million to $305 million.
We estimate diluted earnings per share for 2022 to be in the range of 18 to $21 based on approximately $14 7 million fully diluted shares.
Adjusted EBITDA for 2022 is now expected to be in the range of $445 million to $485 million.
And free cash flow is expected to be approximately $250 million with capital expenditures estimated to be approximately $30 million.
We are pleased with our first quarter results and look forward to seeing the long term benefits from our next wave of initiatives.
This concludes our prepared remarks.
We will now open the call for questions.
Thank you.
Everyone. If you would like to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question Jess breast it bounces.
Again to ask a question just press star one at night telephone keypad, they will pause for just a moment to compile the Q&A roster.
Yeah.
Your first question comes from the line of John Babcock Your line is open.
Good morning, and thanks for taking my questions.
Yes. The first question I had I just wanted to better understand the.
Primary drivers.
The year over year improvement in earnings if you could break it down by price volume and some of your internal initiatives that would be helpful.
Yes.
Sure sure John Good morning, This is Sal and I'll I'll start the question and Steve as usual can build on it.
For the for the total company specific to price and volume. It was 25, roughly 25% volume and I'm, sorry, yes, 25% volume and 75% price so about a quarter volume in and three quarters priced at deferred a little bit by segment. So we did see actually enhanced volume.
<unk> in our facility solutions business that was more like 80 20.
Actually volume to price.
And in terms of the EBITDA margin growth. It really is a continued function of our cost and price discipline that we've alluded to over the last say six to eight quarters and so those those efforts really started back in 19, and 20 and now we're kind of reaping the residual benefits from that quarter over quarter.
Quarter, and we're also seeing sort of the lapping of the 2021 price increases that were prevalent throughout the year and so this first half at least this first quarter.
Is really seeing the inflationary cost of goods sold increases we incurred last year carryover into 2022, yes.
Yes, Sal and adding to that John the the gross profit driven by the components of revenue of both volume and price drove almost all of the improvement over the prior year the <unk>.
Other incremental Benny.
Benefits included some storage savings as you know John we've reduced our footprint meaningfully and continue to do so and that contributed in our operating expense reductions and then we also had some lower bad debt expense over the prior year through good works.
Many of employees.
We've reduced our bad debt to nearly zero. So the combination of gross profit dollars supply expense reduction, particularly storage and bad debt expense those all contributed to our performance quarter over quarter Alright.
Alright. Thank you that's helpful and then just as it pertains to the price component.
Should we think about that especially as we start to lap the price increases say all of those suddenly get into an environment, where pricing is more stable.
What effect does that have on margins and or your ability to capture additional EBITDA.
So John in the guidance that we provided we're really only baking in the announced price increases to date and this last one that actually in corrugated anyway that happened in the early part of the second quarter. So so our guidance reflects only the known items.
For today looking forward and we really do believe that there is probably more.
<unk> increased probability than decreased probability for the balance of the year, we're not quite ready to two to give guidance on 2023, but as I look out through the balance of 2022.
We feel like price increase is probably a higher a higher likely of an outcome than a decrease in a decreasing market. Obviously, we we will negotiate.
<unk> with our suppliers and make sure that we can pass on a pass along what's appropriate to the market, particularly in this hyper inflationary period.
But where we really do expect year over year improvements in adjusted EBITDA margin that we saw in the first quarter to remain in the balance of the year.
Okay. That's helpful.
And then out of curiosity, you talked a bit about your distribution footprint, particularly as it pertains to principal actions I was wondering just overall across the entire company I mean, how happy are you with your current distribution setup.
Setup.
And it doesn't make sense to expand into new geographic markets at this point in time.
To drive organic growth or is that not necessarily an opportunity that really exists.
John Thanks for the question I think if you think about our 'twenty two restructuring plan, we rebalanced our footprint based on what we thought our next three to five year.
Capabilities would need and so we're I think we're pleased with where we are right now.
There's a few other residual I think outcomes from that restructuring plan from a footprint perspective, but we did exit roughly 30 facilities and 30 offices from that restructuring plan and believed it was the right footprint for what we're experiencing now we are we are covering every major market and most.
Frankly minor markets in the U S. But we're absolutely open to the possibility of growing in other markets. If we need to so whether it's two expansion here, we often we often look for ways to expand our footprint in a market. If we acquire a large piece of business or are we.
Have a co packing kitting opportunity and so we're very flexible with respect to how we think about our footprint and how fungible it needs to be.
And John I'll, just add a flip side of that as you've read in Sao commented in his script that we the company.
Took an action to strengthen our geographic footprint in Canada in the quarter.
Cause of that particular business unit.
Didn't have the kinds of ROIC that we as.
The company demand of our businesses.
And the the the lack of concentration.
Geographically of customers and the lengths of distribution routes that we had including the inventory carry we had in some remote locations didn't lend itself to a productive business model from our perspective, and so as we look at those opportunities in the U S.
We do as Sal said, which is we look closely at the opportunities, but we cover most markets.
Okay.
And the next day is kind of on a question I was just wondering if you might be able to talk.
Talk about the demand level to manage our Santa crossed the different packaging substrates that you have.
And if there are any indications of a slowdown in any of those categories that'd be helpful. So I guess just.
Just broader commentary there would be useful.
Sure John if I think about our I'll, maybe address our end use sectors first and I would tell you in the first quarter, we saw double digit revenue growth across every end use sector that we that we track and so heavy manufacturing light manufacturing food and beverage wholesale retail.
Were all up.
Frankly relatively similarly across.
Across our geographies consumer.
Electronics specialty retail.
At home fulfillment services, all really strong from an end use sector perspective, and similarly by product category, we did see.
Double double digit growth across every product category and so as I think about the question around what is the rest of the year look like we don't see a lot of we don't see any slowdown frankly into the second quarter and our demand rates remain high across all those end use sectors and our core product categories.
And that really is what is reflected in our in our strong guidance for the balance of the year.
We realize we mentioned maybe on the last call John we really think that the.
This supply demand imbalance is going to continue and so there is still a pretty healthy backlog, both at our suppliers and within <unk> in the packaging business and certainly in the print.
Print segment as well and so you've got the kind of the flushing through of the backlog in combination with continued strong demand and so we believe that the.
The balance of the year should should see continued growth.
Alright very helpful. That's all I have for questions.
Great. Thank you John .
Again, everyone. If you would like to ask a question just Brazos Taiwan dollar.
Oh and Keybanc.
Yeah.
Presenters there are no further questions over the phone and I will now turn the call over back to Mr. <unk>.
Great. Thank you Vic.
But we are pleased with our start to the year and believe we are well positioned to deliver strong performance for the remainder of 2022.
I want to thank all of the women and men at <unk> for their hard work and dedication in making these continued exceptional results possible.
Thanks to all of you again for joining US this morning, and we look forward to speaking with you again soon when we announced our second quarter results in August .
Thank you.
This concludes today's conference call you may now disconnect.
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