Q4 2022 Veritiv Corp Earnings Call
Good morning.
And welcome to Verrucous corporations fourth quarter and full year 2022 financial results Conference call.
As a reminder, today's call is being recorded.
We will begin with the opening remarks and introductions.
At this time I would like to turn the call over to Scott <unk>, Vice President of Finance and Investor Relations.
Mr. <unk> you may begin.
Thank you Colby and good morning, everyone.
I'm joined on today's call by our CEO has download birthday, and our CFO Steve Smith.
After my remarks southwestern update on full year in fourth quarter business performance.
Followed by Steve who will provide more details on our financial.
After speeds comments that will conclude with an outlook for 2023.
We will then open the call for your questions.
Before we begin please note that some of the statements made in today's presentation regarding the intentions beliefs expectations annual predictions of the future are forward looking actual results could differ in a material manner additional information.
On factors that could cause results to differ from those in the forward looking statements contained in the company's SEC filings.
This includes the risks and other factors described in our 2022 Form 10-K, and the company's other publicly available reports and exhibits filed with the SEC.
Today's call and presentation slides will contain non-GAAP financial measures. The reconciliation of these non-GAAP measures to comparable use Skype 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 sell.
Thank you Scott and good morning, everyone and thank you for joining us.
2022 was another record breaking year of financial performance preventative as we continued to relentlessly execute against their long term strategic and operational objectives.
I am extremely proud of the achievements our company made over the last several years.
During 2022, we focused on our growth objectives and efficiency initiatives.
We divested too low margin non strategic businesses with low synergies come.
Combined or print and publishing businesses for efficiency.
Maintained cost and price management discipline across all of our business segments.
These actions contributed to the best earnings performance for any year, and Barrett of history and above market performance within our packaging segment.
This <unk> was made possible by the hard work of our approach.
<unk> 5000 diverse and talented teammates who focused everyday on delighting our customers.
This morning, we announced record adjusted EBITDA.
Adjusted EBITDA margin.
Net income and diluted earnings per share for both the fourth quarter and the full year 2022.
For the full year of 2022.
We reported year over year organic sales growth of 13.5%.
We achieved record adjusted EBITDA of $518 billion for the year, representing growth of more than 50% compared to the prior year.
2022 also marked the third consecutive year of double digit year over year adjusted EBITDA growth.
Additionally, all three segments reported record full year adjusted EBITDA, Despite the divestiture of our Canada business earlier in the year.
Full year adjusted EBITDA margin it was a record 7.2%.
<unk> approximately 220 basis points of margin expansion over 2021.
Since 2019, we have more than tripled our adjusted EBITDA margin.
During this time, we focused our attention to higher growth and higher margin businesses, while executing our strategic and operational efficiency initiatives.
We believe the majority of the adjusted EBITDA margin improvement over the past several years.
Datable due to the commercial and operational efficiency initiatives, we have undertaken.
I'll provide more details on the strategic initiatives and a few minutes.
Full year 2022, net income was $338 million representing year over year growth of 134%.
The resulting diluted earnings per share was a record $23.29.
And reflects year over year growth of 158%.
Both net income and diluted earnings per share for 2022.
<unk> 10 times higher than our 2020 results.
Adjusted EBITDA outperform the top end of our initial guidance range by nearly 20%.
We increased our guidance three times during 2022 and meaningful exceeded our initial expectations.
This was despite two strategic divestitures during the year that an aggregate contributed approximately $33 million of adjusted EBITDA in 2021.
Net income and diluted earnings per share also be at the top end of our initial guidance range by 35% and 43% respectively.
This past year, we returned over $200 million to shareholders in the form of a share repurchase program and paid our first dividend in December of 2022.
We also invested in the business to improve our value added service offerings.
Including packaging design.
As well as the end to end customer experience.
I'll return on invested capital R. R I C.
The year at a record, 35%, which reflects a nearly six fold increase since 2019 as a result of both working capital improvements and margin expansion initiatives.
For the first time in our history, we established a strategic scorecard.
Lines with management incentives.
We set a target to hire at least 40% of new mid to senior level positions from under represented groups in 2022.
I am proud to say we exceeded this goal.
Workplace safety remains another key area of focus for <unk>.
Our investments and screening supported a safer working environment for our employees and a best in class safety rating across our supply chain network.
As a result, our total injury rate beat it's target for the year.
These metrics are in addition to our corporate sustainability goals.
In 2022, we achieved meaningful progress against our goals.
Our sustainability initiatives support furtive being a better corporate citizen and help our customers achieve their own sustainability goals.
We look forward to providing more details on our 2022 achievements when we publish our annual corporate sustainability report next quarter.
Turning now to the fourth quarter of 2022.
Organic sales grew 1.8% as compared to the fourth quarter of 2021.
This was driven primarily by organic sales growth within our print solutions and facility solutions segments, and was partially offset by lower than expected sales and our packaging business.
Higher market prices drove organic revenue growth during the fourth quarter of 2022, which more than offset weaker volume.
Adjusted EBITDA was a fourth quarter record of $121 million, reflecting growth of slightly more than 4% as compared to the prior year.
Adjusted EBITDA margin was seven 3% for the fourth quarter and reflected that 12 consecutive quarter of year over year adjusted EBITDA margin expansion.
Net income of $72 million was also a record for the fourth quarter, reflecting year over year growth of 26%.
The resulting diluted earnings per share for the quarter was $5.20.
Which was at fourth quarter record and represented growth of 42% versus the prior year.
Sales performance weekend, as we progress through the fourth quarter with the last two weeks of December being unusually weak.
And packaging North American volumes declined in the high single digit range during the fourth quarter with volume down across most industry verticals.
We believe unreliable and inconsistent supply chain conditions led customers to accumulate excess inventory during the last couple of quarters of 2022.
As a result, and consistent with industry trends we.
We believe customers told through their existing inventory and.
And this destocking activity negatively impacted purchasing behavior during the fourth quarter.
The Prince dilution segment experienced a volume decline in the high teens range for the quarter.
We believe print demand stop and and customers work through their existing excess inventory that had built up over the past quarter or two as supplier lead times began to improve.
Finally volume decline in the mid single digits range within facility solutions segment during the fourth quarter.
His strength and away from home categories was offset primarily by lower volume in the personal protective equipment and skincare categories.
Although the effects of customer Destocking were more significant than we anticipated in the fourth quarter.
Preliminary sales results for January and our packaging and facility solutions businesses showed an improvement relative to December .
Early indications support our belief that customer inventory destocking within packaging was more pronounced during the fourth quarter and we expect customer inventories to normalize during the first quarter of 2023.
Within Prince solutions, we believe customer inventory levels will begin to normalize by the end of the second quarter.
A record earnings performance in 2022 demonstrated the strength and resiliency of our diversified business model.
We support a wide range of customers ranging from small businesses to more than half of the fortune 500, with no customer representing more than 5% of total revenue.
We believe our industry vertical exposure is also well balanced and not overweight to any specific industry.
Additionally, we supply a healthy balance of more recession resistant industries, such as healthcare consumer staples and heavy manufacturing.
From a product perspective, only one third of packaging revenue comes from products tied to an underlying commodity index.
The remaining approximately two thirds of our packaging segment revenue comes from products that are not directly tied to an underlying index.
These products are not as susceptible to the volatility we have seen in commodity based products.
As we previously discussed we are now focused on the next wave of strategic initiatives.
These will include further strengthening our strategic sourcing relationships and portfolio management practices.
Enhancing our e-commerce and Omnichannel capabilities.
And evaluating our next generation supply chain model.
While we have focused on product and portfolio rationalization in the past.
We expect our next round of cost and price management initiatives will build upon our prior success by removing high cost to serve products and aligning with strategic suppliers, who provide the best combination of price terms and service.
We believe this will result in better value for our customers.
We are also enhancing our digital capabilities with investments in technology to improve the customer experience with new tools and capabilities that are expected to launch for select Geography's later this year.
To support this digital offering we are also investing in front and back end system enhancements to improve the customer and employee experienced.
Finally, we continued to evaluate ways to optimize our next generation supply chain to meet the evolving needs of our customers and support our digital sales efforts.
Before I turn the call over to Steve to provide more segment level financial performance as well as comment on the balance sheet for the fourth quarter.
I wanted to remind everyone that Steve Smith announced that he plans to retire from Barrett of in the fall of 2023.
Sadly this will be Steve's last earnings call with <unk> I.
I want to personally thank Steve for his dedication.
Loyalty and guidance over his nine year tenure with <unk>.
For those that don't know Steve was the second employee hired when <unk> was formed in 2014.
He will be sorely missed by all levels of the organization.
Best of health and happiness Steve.
After Steve's remarks, I'll provide details on our 2023 guidance, Steve Thanks out and good morning, everyone.
Today, I will provide more details on the fourth quarter and full year performance of our segments as well as updates related to cash flow leverage and capital allocation.
Please note that when we speak to organic results, we are referring to reported results. Excluding the impact of the sales of our freight brokerage business <unk> logistics solutions are Canada business and our role source business.
On a day count basis, I would note that both the fourth quarter and full year of 2022 at the same number of selling days as the previous year.
Looking ahead to 2023, the third quarter of 2023 has one less selling day than the third quarter of 2022.
Turning to segment results.
Packaging revenue, what's $960 million for the fourth quarter.
<unk> revenue declined 10, 2% on a reported basis, but declined 2.4% on an organic basis compared to the prior year.
As Sal mentioned earlier, we experienced a slowdown in sales during the fourth quarter that we believe was the result of customers destocking their inventory and the customer's concern over the uncertain economic environment.
Favorable market pricing in the fourth quarter was more than offset by volume declines.
Volume growth was strongest in our healthcare vertical with mid single digit growth for the fourth quarter.
Fourth quarter sales were strongest within our healthcare wholesale and retail industry verticals.
The strength was more than offset by weakness in manufacturing logistics and food and beverage.
Our corrugated volume performance for the fourth quarter was in line with the market index.
The packaging segment reported fourth quarter, adjusted EBITDA of $95 million, representing the decline of 16% compared to the prior year.
Packaging fourth quarter adjusted EBITDA margin was 10, 4%, which was a 70 basis point decline over the prior year.
Full year 2022, adjusted EBITDA grew to a record $416 million and adjusted EBITDA margin improved 10 basis points to a record 10.6%.
Moving to the facilities solutions segment.
Reported revenue for the fourth quarter declined to 24.1% versus the prior year to set $175 million driven primarily by the divestiture of our Canada business. However.
However, on an organic basis fourth quarter revenue grew 7.5% compared to the prior year.
Facilities solutions fourth quarter revenue continue to benefit from strong away from home activity within the entertainment and hospitality vertical <unk>.
Healthy sales performance within our toll tissues in food service categories helped offset declines within the personal protective equipment and skin care categories.
The fourth quarter adjusted EBITDA for facilities solutions was $16 million, reflecting a decline of nine 8% compared to the prior year.
Note that the prior year included business, we have since the vast it if.
If we exclude the impact of the Canada fail adjusted EBITDA improved a 23% for the fourth quarter on a year over year basis.
Are reported adjusted EBITDA margin for the fourth quarter was an all time high of 9.0%, which was a 150 basis point improvement over the prior year in part due to the divestiture of the lower margin Canada business.
Full year 2022, adjusted EBITDA, and adjusted EBITDA margin, where records at $61 million and seven 8% respectively.
Moving to the print solutions segment.
Fourth quarter reported revenue declined 2.1% to $572 million, while organic revenue increased 7.3% compared to the prior year.
Adjusted EBITDA was a fourth quarter record of $60 million representing year over year growth of 35%.
We believe demand weakened in the fourth quarter S customers worked through their existing inventory levels, which had built up over the past quarter or two.
Favorable market pricing was the primary driver of organic revenue growth for the fourth quarter.
Full year 2022, adjusted EBITDA was a record $240 million representing growth of over 100% compared to the prior year.
Prince solutions full year adjusted EBITDA margin was a record 10.1% in approximately 460 basis points higher than the prior year.
Shifting from the segments earnings results to our consolidated cash flow.
For the fourth quarter cash flow from operations was $93.5 million.
After subtracting $3 $8 million of capital expenditures, we generated free cash flow of $89.7 million during the quarter.
On a full year basis cash flow from operations was $252.4 million in free cash flow was $235 million.
As a result of our record earnings and very strong 2022 cash flow. We ended the year with a healthy balance sheet and a record low net debt to adjusted EBITDA leverage ratio of 0.4 times.
From a capital allocation perspective, we were pleased to pay our very first quarter dividend on December 19th of 63 cents per share and in doing so returned approximately eight $5 million to shareholders during the fourth quarter.
For the full year 2022, we return approximately $209 million to shareholders, including both the dividend payment as well as a 200 million dollar share repurchase program.
We believe our strong financial position provides the company with strategic Optionality and the discipline deployment of capital to drive long term growth and shareholder value.
From an organic perspective, we are making additional technology investments to enhance our commercial capabilities that we believe will contribute to top line growth.
While from an inorganic perspective, we continue to evaluate an active pipeline of opportunities with enhanced capabilities and potential synergies.
As a result of our favorable favorable capital position. We believe we have the flexibility to execute on multiple capital allocation options at the same time.
Finally, Estelle mentioned, our earnings improvement enabled by commercial and operational efficiency initiatives.
Along with a more efficient balance sheet due to divestiture of long lower performing businesses has resulted in significant Roy see improvement.
Rois fee for the year end of 2022 was a record 35% and improvement of 15 percentage points from 2021, and 26 percentage points from 2020.
Before passing the call back to sell let me take a minute and think a few constituents. Since this is my last earnings call.
Sal for listening to all employees, especially the senior team.
Eric for such a smooth transition.
To our board for guidance, especially during the 20, 17% of 2020 years, which were challenging years.
Our largest shareholders for patients during those challenging years, and finally to my fellow employees for the hard work up to today and for your efforts during the next Barrett of chapter.
<unk>.
Well. Thank you Steve for all you've done for <unk> and its stakeholders.
I'm proud of the considerable progress our company has made over the past several years.
Disciplined execution of cost management and capital initiatives <unk>.
Contributed to a net income improvement of $367 million in a diluted earnings per share improvement of over $25 per share since 2019.
We ended 2022 and an exceptionally strong financial position that we believe will.
Will help us contend with potentially challenging year ahead.
I will now provide some color on our segment level thoughts for 2023, and then provide our full year 2023 guidance.
Within packaging, we continue to expect better than market performance in 2023, driven by our value added solutions and broad product mix.
While containerboard prices and customer demand are expected to remain under pressure.
Our enhanced price and category management capabilities will offset this headwind.
We anticipate supplier lead times will also improve relative to last year, which allows for improved inventory levels.
As a result, we believe adjusted EBITDA and adjusted EBITDA margin will both improve relative to 2022.
Facility solutions is expected to outperform the overall market in 2023 by focusing efforts on large and complex customers as well as high growth industry verticals that benefit from our broad product portfolio and supply chain expertise.
Traditional away from home and government verticals are key areas of focus for 2023.
Like packaging, we will continue to work with industry, leading suppliers to obtain value for our customers.
As a result of market outperformance and category management initiatives.
We believe adjusted EBITDA and adjusted EBITDA margin will both improve relative to 2022.
Moving on to print solutions, we expect demand to remain challenged.
Customer inventories are expected to remain elevated during the first half of 2023.
But we believe this situation will stabilise by the end of the second quarter.
As a result, we expect adjusted EBITDA for 2023 to be lower than the prior year.
Despite the decline Prince solutions isn't a fundamentally stronger position than it was a few years ago.
We expect to retain a majority of the adjusted EBITDA margin improvement relative to our pre pandemic levels due to the commercial and operational efficiency initiatives. This business has undertaken over the last several years.
To summarize we expect full year 2023, adjusted EBITDA to be in the range of $430 million to $490 million.
And net income is expected to be in the range of $265 million to $305 million.
Diluted earnings per share is expected to be in the range of $19 to $22 based on 13.9 million fully diluted shares outstanding.
We expect full year free cash flow of approximately $275 million, which we define as net cash provided by operating activities less capital expenditures.
Capital investments for 2023 are estimated to totally to total approximately $45 million to support traditional capital expenditures and technology related investments.
Over the past several years, the disciplined execution of our strategic initiatives as well as improved earnings have.
Have contributed to the significant improvement of our free cash flow.
We believe these actions combined with our low net leverage ratio an ongoing working capital discipline.
Should sustainably generate approximately $275 million of free cash flow.
Even in the event of a mild economic pullback.
While we expect the challenging market in 2023.
Significant improvements we have made to the business over the past years have resulted in a healthier more resilient company.
I remain optimistic about the future for Barrett in and believe we are well positioned to deliver above market growth in 2023.
This concludes our prepared remarks.
Colby, we are now ready to take questions.
I would like to remind everyone in order to ask a question press Star and then a number one on your telephone keypad.
Pause just for a moment to compile the Q&A roster.
Your first question comes from the line of Saundra Liang from Bank of America. Your line is open.
Hi, Good morning file Saddam Steve. This is candy Lee from Bank of America tried clunky announced traveling for the con from congratulations on the quota.
Thank you Sandy.
And good mind.
Good morning.
We are hoping that you could please.
On the potholes in treatment and any panic had some restructuring specifically on any message of projects that you're exploring.
Optimize the warehouses panic at style moving part inclined twenty-three and also your Omnichannel capability and you could talk a little bit about the costume seating arrangements or comment on the next generation of hiking that'll be great. Thank you all.
Yeah sure I'll I'll I'll start the question Sandy and Steve.
Please fill in billing.
The blanks here.
As you recall from our 2022 restructuring plan, which is.
Substantially complete at this point it had a number of initiatives behind it first to your question around our warehouse footprints.
We have taken actually since the beginning of the very existence about 33% of our warehouse footprint out of.
Out of the geographical footprint. So that work continues not as elevated or pronounced as it was over the last couple of years. So we believe that we are we are right size right now, but we continually look at ways to optimize our footprint for example, and.
In 2002, <unk> 2020, or early 2021, we consolidated our print business into 2022 hubs.
Serve the market more efficiently and so we are continuing to look for ways to.
To optimize our footprint within within the supply chain spectrum, though looking to the future. We are considering automation and technology to continued to gain efficiency in our warehouses. So will speak more about that over the coming year or two as those begin.
To roll out.
Another key element of our restructuring and our efficiency initiatives was our cost and price discipline on the commercial side and so we had substantial gains last year and in 2021 from these efforts, but as we've referenced in our last couple of calls we do have ongoing.
Knowing waves of these commercial initiatives with respect to strategic sourcing and category management, particularly in packaging and fills facility solutions. So you will see us speak to those throughout 2023 as a mechanism to combat some of the demand soft.
<unk> and the inflationary pressures out in the marketplace.
And you also mentioned digital commerce, and our Omnichannel capabilities. So in this quarter, we split out R capital between traditional capital So think property plant and equipment warehouse machinery wracking from our cloud computing the cloud computing is really.
Aimed at at two efficiencies one as a front end and one is the back end and it's really about becoming closer to our customers downstream and having better connectivity digitally and allowing a more streamlined ordering mechanism, particularly for our smaller more commodity like customers.
And that will provide us a lower cost to serve ability and on the back office is really about our operating systems and making it a better employee experience, where we tie all of our systems together from our various geographies into one common operating systems. So those are expected to give.
Value and efficiency 2023 and beyond Steve.
Steve anything to it.
Thank you. Thank you very much and then just as a follow up before I turn it over I'm. Just curious if you could comment on how you plan to entertain the margin and pregnant and inclinations I think you mentioned estimate and headwinds up until the second.
<unk>.
Something.
As far as the contract negotiations upon Chang Lang.
Or something that we should keep in mind.
Yeah. Thank thank you sandy.
That is clearly the most challenging part of 2023 really being cause from the.
Spillover from 2022 with respect to inventory. So we do expect the first quarter and frankly, the first two quarters to remain challenge that is reflected in our overall guidance range, but while we expect 2023 to have more acute decline in volume than we've seen in three or four years.
We do expect that to be.
Somewhat somewhat softening as 2024 and beyond.
<unk> and again, that's just this this whip lash effect of the inventory situation from last year. The two things that we are really expecting to help us maintain our print margins. One is this the continued capacity that's come out of the business. So over the last three years about 6% of the capacity.
<unk> has come out each year and while we expected 2023 to be a little less and that there has been an an an.
Unplanned announced clothes are just recently that says capacity.
Coming out of the system for 2023 could be again somewhere around five or 6%.
The other issue around sustainability of pricing is the much.
Needed in long overdue maintenance downtime that the meals are taking to really catch up from the over the under capacity in the overwork, aged from 2021 and 2022 strains supply chain. So those two factors are expected to maintain print pricing in not.
Only in the first half of the year, but most likely the full year. There is always risk with respect to further demand decline that could challenge that but our guidance reflects those two elements being stable.
Regarding prices for two.
<unk> 2023, the third element is that we have combined our print and publishing operations. They used to be two separate businesses and there is further efficiency to gain there and that is why we suggest that we're going to maintain.
The majority of our adjusted EBITDA margin improvements over the last couple of years and 2023.
Yes, Hi, I was just going to supplement that to annual third of Europe . Three points was which is to connect the first question to the second question, which is that because of the operational efficiencies, including the D sees that were consolidated over time, we the the company, including the print segment have lowered the breakeven point.
<unk>.
All the segments, particularly in print so even with volatility in price and volume that you mentioned and points one and two we still will have we believe the majority of the margin improvement in 2003 because of that those cost and operational efficiencies both in the past them and as you mentioned going forward.
Thanks, Steve.
Thank you. Thank you and can talk anything yet.
Thank you thank you sandy.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
There are no further questions at this time I would now turn the call back over to <unk> for any closing remarks.
Thank you Colby.
I want to thank our team members for their hard work and dedication to our customers.
Every day or approximately 5000 world class team members worked tirelessly delivering products and solutions that delight our customers.
Thanks to their dedication earlier this month Verity was named one of fortunes 2000 twenty-three world's most admired companies.
This achievement is truly a testament to our hardworking team members and a milestone for our company.
Thank you all for joining us today.
For our next earnings call in May we will be joined by Eric Guerin, Our current SVP finance, who will assume the role of Chief Financial Officer on March 1st.
We look forward to speaking with you again soon.
Colby This now concludes our call.
This concludes today's conference call you may now disconnect.
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