Q2 2019 Earnings Call
Welcome to the LSC Communications second quarter 2019 earnings Conference call. My name is <unk> and I will be your operator for today's call. We have just a few announcements before we begin.
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Good morning, everyone. Thank you for <unk>.
Let's see communication.
Quarter 2019 results conference call.
This morning, we released our earnings report a copy of which can be.
Asked her section of our website.
Regarding your staffing your that Alex.
Uh huh.
During the call well refer to forward looking statements that are subject I'm sorry, okay.
Oh gosh, please refer to the cautionary statement.
<unk> earnings release.
Sales in our funds.
Oh that's separate.
Sure.
As well as in our other filings with SEC.
Further we will discuss non-GAAP financial information, we believe the presentation of non-GAAP or south.
Hmm.
Concerning the company's ongoing operation.
Oh, that's an appropriate way for you to start valuing the company performance.
They are how however provided for informational purposes only.
Please refer to the reconciliation to GAAP.
Okay.
Our earnings release schedule as well.
Took a webcast presentation that a person to sell it.
We're joined this morning by Tom Quinlan sure Okay.
I will now turn the call over to Tom.
Thank you Janet good morning, everyone given the multitude of recent events I want to leave plenty of time for your questions, but I wanted to start off by outlining some steps we have already taken to better position the company going forward.
First we address the need for additional liquidity by amending our credit agreement. This amendment provides us the financial flexibility, we need to take the necessary strategic actions to address the changing demand that we are seeing in parts of the business, while continuing to deliver high quality and superior service to our clients.
Secondly, we recently announced the plant closure of our production facility in Torrance, California.
We have entered into an agreement to sell the land and building in Torrance and we expect to receive no net proceeds of approximately $35 million by the end of the year.
These are just two of many actions we are taking to improve margins and reduce leverage in the near term.
We understand that time is up yes, I mentioned that we need to continue taking quick and decisive actions to deliver long term value for all of our stakeholders.
Now I will hand, the call over to drew to take us through the details of our second quarter results and then we will open it up for questions drew.
Thank you Tom our second quarter results are consistent with the preliminary results, we announced on July 23rd.
Our book and office products segments performed in line with expectations in the second quarter. However, second quarter results were negatively impacted by the significant volume declined in magazines catalogs and logistics that more than offset the solid performance in the other segments.
Consolidated net sales for the second quarter were $869 million, a decrease of 7.7% from the second quarter of 2018.
Adjusting for the impact of acquisitions dispositions changes and pass through paper sales and foreign exchange rates, our organic net sales decline was 4.2%.
We reported a second quarter GAAP net loss of $24 million compared to net income of $8 million in the second quarter of 2018.
The GAAP net loss for this year's second quarter includes the impact of a $17 million pre tax impairment of intangible assets in the magazines catalogs and logistics segment.
As well as $6 million of pre tax restructuring charges and $5 million of pre tax merger transaction costs.
Second quarter non-GAAP , adjusted EBITDA was $53 million compared to $77 million in the second quarter of 2018.
non-GAAP adjusted EBITDA margin in the quarter of 6.1% was 210 basis points lower than the second quarter of last year.
The decrease in non-GAAP adjusted EBITDA margin was primarily due to the significant volume declines in magazines catalogs and logistics and unfavorable mix of work in the book segment and wage increases implemented in response to the tight labor market conditions affecting certain of our manufacturing and distribution facilities.
These factors were partially offset by strong margin performance in office products and cost control initiatives at both the operating and the corporate level.
Now I will discuss net sales income from operations and non-GAAP EBITDA performance for each of the segments.
Net sales in our magazine catalogs and logistics segment were $380 million in the second quarter of 2019.
A decrease of 5.3% from last years second quarter.
After adjusting for the impact of acquisitions dispositions and pass through paper sales year over year net sales decreased by 8.8% on an organic basis.
This organic decline reflects the volume declines driven by the impact of digital disruption a demand for printed materials.
For the magazines catalogs and logistics segment GAAP loss from operations was $42 million compared to a net loss from operations of $6 million in the second quarter of 2018.
Segment non-GAAP adjusted EBITDA in the quarter was negative $9 million at non-GAAP adjusted EBITDA margin was negative 2.4%.
The non-GAAP adjusted EBITDA margin decreased 610 basis points compared to the second quarter of 2018. The margin decline reflects the significant drop in volume during a period, where we were not able to move quickly to reduce costs due to restrictions and uncertainties related to the planned merger and an unfavorable mix of work.
For the bulk segment, we had a 5.1% organic increase in net sales for the quarter.
The organic increase was driven by strong performance across multiple products. We saw particular strength in K 12 education book volume.
Related to new adoptions in Texas, and California solid performance across the trade vertical as well as growth in our services offerings.
For the book segment GAAP income from operations was $18 million compared to income from operations of $19 million in the second quarter of 2018.
Segment non-GAAP adjusted EBITDA in the quarter was $32 million and non-GAAP adjusted EBITDA margin was 11.1%.
The non-GAAP adjusted EBITDA margin decreased 210 basis points compared with the second quarter of 2018, primarily due to wage increases we have implemented to attract and retain employees and facilities most impacted by the tight labor market.
Net sales in the office products segment were $139 million, a decrease of 9.7% from the second quarter of last year. After adjusting for the impact of changes in foreign exchange rates sales decreased by 9.5% primarily related to.
Really related to reduced volume and low margin commodity products, partially offset by the impact of price increases to pass along the higher costs for material and freight continued strong growth in the E Commerce channel and a favorable mix between branded and private label product sales during the quarter.
Office products income from operations was $13 million flat with the second quarter of 2018.
non-GAAP adjusted EBITDA in the office products segment was $17 million for the quarter also flat compared to last years second quarter.
non-GAAP adjusted EBITDA margin increased 120 basis points to 12.2% due to a combination of price increases to pass through higher material costs, the favorable mix of branded versus private label sales and synergy actions associated with the acquisition of quality Park.
Free cash flow for the second quarter was a positive $6 million compared to a usage of $19 million in the second quarter of last year and free cash flow for the 12 months ended June Thirtyth 2019 was $116 million.
The improvement in free cash flow for the quarter was primarily driven by working capital improvements.
Capital spending in the quarter was $21 million up $4 million from last year's second quarter as we continue to invest in automation productivity and cost savings initiatives.
As of June Thirtyth 2019, our gross leverage was 3.4 or five times.
We expect our leverage to be approximately three times at the end of the year as free cash flow generation net proceeds from the merger termination fee and the Torrance sale will reduce leverage.
At June Thirtyth 2019, net available liquidity was $60 million with $150 million drawn on our $400 million revolving credit facility as discussed earlier the company amended its credit agreement effective August Fiveth 2019, if the amendment were in effect as of June Thirtyth 2019, net available liquidity would have increased to $126 million.
We believe the amendment provides us with the financial flexibility needed to implement our restructuring and cost reduction plans to drive significant margin improvement going forward.
The maturity date of the revolving credit facility remains September Thirtyth 2021.
And the outstanding principal amount required amortization payments and maturity date of the term loan facility remain the same.
We estimate that our net pension liability, including both qualified and non qualified plans was approximately $100 million as of June Thirtyth 2019, and improvement of $37 million from December 31, 2018.
We estimate that our qualified pension plan funded status improved to 99.4% as of June Thirtyth 2019, a 170 basis point improvement since the beginning of the year.
Also as a reminder, there are no funding requirements related to the qualified plan for 2019 and the nonqualified pension plan obligations are paid as they become due we continue to expect to make cash payments of approximately $6 million related to the nonqualified plan in 2019.
Lastly, I'll share some more detail on the full year 2019 guidance that reflects the impact of the expectation for the continued negative trends in the Mcl segment in the second half of the year.
Moving to the specifics of the guidance, which is consistent with the guidance that we announced on July 20 Threerd.
First we expect net sales between $3.45 billion and $3.55 billion for the year.
We expect non-GAAP adjusted EBITDA to be between $200 million to $240 million for the year.
We expect net pension income to be $35 million, excluding pension settlement charges.
We expect our non-GAAP adjusted EBITDA, excluding that pension income to be between $165 billion to $205 million depreciation and amortization is expected to be in the range of 155 million to $125 million, we expect interest expense to be $75 million to $79 million. Our full year non-GAAP effective tax rate is now expected to be in the range of 30% to 35%.
We expect capital expenditures to be in the range of $75 million to $85 million.
We expect free cash flow to be between 60 million and $100 million to free cash flow guidance includes the $45 million of gross proceeds received in connection with the merger agreement termination.
Less estimated transaction cost of $20 million to $25 million.
The $35 million expected net proceeds from the sale of the land and building in Torrance, California is not included in free cash flow, but will be used to reduce debt.
We expect full year average diluted shares outstanding to be $34 million to $35 million.
And with that ill return the call to Tom for some closing comments. Thanks drew before we open up the line for questions. We would like to thank all the employees and clients for the dedication through all the merger related news.
Operator, we will now open up the line for questions.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the Q press pound sign or hash key there may be a slight delay before the questions are now if you are using a speaker phone you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on your Touchtone phone.
And our first question comes to Us from Charlie Strauzer from Cts Charlie Your line is open.
Hi, good morning.
We're in Charlotte.
So Tom if you could maybe expand a little bit more on some of the actions you can take kind of keep both the delevering process underway here and maybe I know you can't really get the specifics on closures and other things like that but maybe a little bit more color there on the on the roadmap if you could.
Yes sure Charlie Thank you.
So look I think when you when you think about it.
Well as we said here last October in the fourth quarter.
We knew we had to have a backup plan just in case the transaction got locked in.
Or something else may pop up so.
We did this and primarily two ways first of in brought in an outside company less than the fourth quarter to help us look at the entire platform to see where we can become more efficient and ship the company's culture. The way, we think about cost and how we could even bring more efficiencies sort of platform. If the deal went forward, we would turn over the findings of the closing of the transaction. If the deal did not go forward. We would have a plan at least that we could immediately put in place to get back. The time, we lost operating under the interim operating covenants that were required under the transaction I think I've talked to some of you we called the project edge, which stands for employee driven to generate excellent it's working.
The invepar effort involved the entire workforce ideas, we generated at the facility level and in painstaking detail. We reviewed all these ideas is a rigorous process in place to make sure that we implement approved ideas and tracked the savings.
There were going to get from these ideas.
So we feel pretty good about fars where that is disciplined in its consistency and we're doing an unorganized manner.
So we expect to generate.
Again improve as drew said improve margins there generate free cash flow for the second way in which we look this.
I wanted to be prepared if in fact, we were going to remain a standalone company is something that I'll call game theory.
The announcement today of the closing of the Torrance facility was part of those efforts that we contemplated.
When you think about it were 15 days since the announcement that the deal will not go forward and we've already executed on the closure of a facility, which will be monetized for significant amount of money and then over the next couple couple months, we're going to continue to execute on this business initiatives that we developed over the last nine months.
Again, some of them that you will see.
I'm going to happen in quick fashion certain of these facilities are in good locations and bills. If we'll be able to act quickly on those others may not be.
May take longer but.
We've identified opportunities on the balance sheet to generate cash those are going to be a little bit more complex. It will take a little longer to come from position.
But we're looking for quick wins quick paybacks and continued include the platform to make sure that we can sustain long term growth.
And if you look at the the other assets that you have I mean, obviously you books is performing well magazine catalog logistics is not.
Office products seems to be holding up okay.
Basically if and when it came to you with a bid would you entertain pretty much a bit for any pieces piece of the company or is it just sort of pieces that you wouldn't wouldn't touch.
Yes look we always look at everything that we have I mean, we're not.
We run this is good fiduciary is I would tell you look whats broke right now is the magazine catalog logistic segment that we've got to fix.
To your point books and office products are doing well, we got to get them to do even better.
No I underestimated the back half drop off in magazines and catalogs.
We.
On top of the decline that we experienced in 2018, it's not cyclical it is structural and we've got to go ahead and make sure.
That we go after the costs on a platform that we did in over the last nine months to get it back to where it needs to go we've got a great.
We got eight of the top 10 top publishers that are on our platform, which is great. But they are also as you read in the advertisements in the paper.
A lot of their publications are going digital.
Were huge player in small magazine publisher area.
Large expense they are doing better and we got to continue to make sure with there for that catalogs are thinner there's still challenged with their much. There's a lot more direct mail going out, which we don't play in.
And quite frankly look over the last nine months a lot of clients put decisions on hold.
Because of the uncertainty of the transaction those clients now are engaging us with new opportunities and we've got to go ahead and get those and bring those in and if you look at the first half. If you look at the second quarter as drew said were down $24 million in EBITDA.
Were down $24 million in Mexico, and logistics, we haven't talked in a year to year.
And.
We changed the way June can't have changed the way we report our numbers how we've segmented. So I think we've got more transparency more clarity to you. So you can see that we've got a broken part of the business that we're going to go ahead and fix and again hopefully take account the benefits that we're seeing from.
Books and office products as we go through things.
Great that's helpful. Thanks, Tom.
Thank you Charlie.
Thank you as a reminder to ask a question. Please press star one on your Touchtone phone. Our next question comes to US from Bill Mastoris from Baird. Your on your line is open.
Thank you very much Tom on the roadmap to returning to your target leverage I'm wondering how much of that is our operational improvements how much of that might be more asset sales where their facilities our businesses.
And then on the cost reduction side is that going to involve a lot of cash restructuring charges and I am sure that was part of the motivation for.
On the credit Amendment and then also if you could just comment on maybe the amount of energy away from the operations that was consumed by the quad merger that would be greatly appreciated and were there any lost customers that might have.
Maybe gone another way because of that.
Yes. Thank you I mean, what I would tell you as far as starting maybe.
Reverse order for Jess.
With salespeople operation people, especially as most of you know fuel the target.
Obviously, personalize things and worry about what it means for them. So we had that.
I would say that we did lose some salespeople.
The good part is on and the July we started getting phone calls back from some of those people said, Hey look if we're going to remain by ourselves like it come back. So that was good. So there is an energized salesforce affiliate fully engaged.
Leadership teams aligned and motivated and driven to make this work.
We didnt I wouldn't say, we lost customers, but I would say customers are.
Customers for what we're playing in right now are having difficult times still transitioning from physical to electronic.
And we've got a we're right in the midst of that but the good part is what we'd do they make money off of so we've got to continue to make sure that we can go ahead and have them have their revenues increased.
Make sure that they're able to continue to have good businesses as as people think about the supply chain here I would say I think the first part of your question look we I would say that nothing that we're looking at.
It's going to impact our core business as it relates to asset sales.
There's no.
Some noncore sales of assets that were looking at that we're going through.
But the bulk of bulk of where we're going to get the get the free cash flow is going to come from.
What I'll say cost savings as a result of being more efficient and then looking at some of the facilities that we have in certain locations that we think we can monetize.
And what would be that timeline eventually getting back to your target leverage range.
You'll be three times at the tail end of the year I mean are we looking at a two to three year time horizon or is this maybe much longer grind.
Hey, Bill this is drew I want to address that.
A couple of your thing so yes, we do expect to be at three times at the end of the year, we expect to make continued progress from from there.
And we have put out specific guidance for the future years, but we'll continue to progress towards that that that range is obviously going to take some time, it's not an overnight effort, but we do think that.
The actions, we're taking will cost will drive some significant improvement in the margin performance.
In the near term I want to address your question about restructuring costs. Two there will be we expect some uptick in restructuring cost as you look.
Into the rest of these this year and.
Look forward into next year, we do expect those costs to be higher than what we've historically seen.
In terms of cash restructuring costs, we did in the credit agreement Amendment get some more flexibility to do that as you mentioned.
Well just from what were the.
The actual headline number that the financial covenants, but also we were able to make a change and how EBITDA as calculated so that we can.
Have more flexibility to do restructuring versus acquisitions and synergy. So total add backs to EBITDA under the agreement are the same but we have more flexibility to do that restructuring kinds of things that we really do need to do.
To drive the margin.
Margins back to where they should be in magazines catalogs and logistics to build look we this tremendous urgency to take cost out to decrease leverage deliver on our guidance that we've shown you.
The same time, we're going to continue to empower employees to make sure. The processes, we have are needed and.
Continue to look to eliminate anything right now that's on needed.
Okay, and Tom maybe following up on on your response.
Two to one of my questions and that is how much of that digital business are you capturing when some of your customers are making that transition.
On the books side, we've got.
What I'll call, we'd like to call. The harvest platform. Its really allows publishers a unified platform, where they can store manage and distribute their content efficiently through harvest publishes distribute to contract with us to over 200 channel partners. It's customized managed made at Medidata for each channel, we're able to monitor the sales across channels. So they can allow quick reactions. If they lose their box on one of the sites the buybacks and other exceptions were able to go ahead and show them the new tools with new tools. How they can go ahead and have that changed we've got the what I'll call the unique.
Intercept tech solution, which is really that we've set up to allow publishes the to help identify piracy.
In the market and paves the way for direct linkage to know your customer. So I think on the book side, we really were positioned really well there to handle that.
Magazine side.
We've got some tools there with we've made an investment in a company called mass.
That helps us there on a catalog side really excited about what our digital lizard.
Platform can do from that standpoint, because we can have what I'll call.
Not direct mail pieces something more involved in a direct mail piece, but it allows the buyer the retail on the buyer to have a direct connection and we can track that as that goes forward. So.
Again, I think where we do some things really really well we're going to continue to do those things really well we've got to continue to get this platform to be whether the cost match the revenues and right now it's not.
Thanks for all the color I really appreciate it guys. Thank you very much.
Thank you as a reminder to ask your question. Please press star one on your Touchtone phone. Our next question comes from Michael Mccaffery from Shenkman Capital. Your line is open.
Thanks, I was wondering if can you frame the asset sale expectations for us at least in the short term you indicated that.
Much like the Torrance situation, you're focused on some short term near term singles.
Some quick wins.
Is there any way you can frame.
Expected proceeds in overweight.
Over the next couple of quarters or how to think about that.
Yes, what I would say come November .
We should be able to come back to you.
As I said, the urgency that we have to where we have some other numbers to talk to you about in other valuations that we have.
Trust me, we get it and we're looking at.
As quickly as we can.
With all that said.
Drew said, we were looking at three times, which we feel good about it into the year, we want to beat that so what is it that we've got to do both from an EBITDA standpoint, as well as from an asset sale standpoint to.
What I'll say is build trust with you because we I know.
The rightfully so have lost it so what is it.
That's going to take for us to get that back and I think as we get to.
For us we can November we will be able to come back and share with you.
What I would say hopefully is a lot more of what we've been working on.
Okay, and I guess.
Similar question on the Opex side is there a certain cadence we should think about.
As far as.
Cost reductions.
Yes, if the cadence if by that you mean are we going to have these announcements that are going to come out periodic am I going to put a number out there no doubt that that will not take place, but on the earnings call. We will continue to be transparent and candid again I think the way we've broken out our reporting.
Allows you to really clearly visibility that we see taken place.
In the in the business, so you'll be able to to to see what you got there.
Again, I think as you think about magazine catalog logistics.
Let's not lose sight logistics did really well logistics really had a good first half of the year.
Compared to when I think you comp against some other companies that are out there that play play in this market. We have done a really good job reducing cost while building in industry best practices.
We benefited from a very strategic approach to the transportation market by focusing on balancing current market favorability would a desire to maintain long term strategic partnerships.
George I think will impact galvin have done a great job of making that happen. We've done acquisitions. There we've been integrated them. We're reaping the benefits from that we've got to look for other things to do in logistics, we've got reverse logistics going on.
With a major retailer, which is starting to pay some dividends.
What more can we do outside the physical print.
From a logistics standpoint, so theres some exciting things there.
Well I guess way that the cadence question I guess part of that was I would assume that theres certain.
Personnel decisions that are.
Have been made are going to be made in terms of workforce reduction and so.
Is that something that has.
Should we expect that to happen immediately obviously some of the other cost initiatives will probably take some time to achieve but I would imagine at least on the.
The employee side.
That would be typically is one of the first things that happens.
Look we were.
We follow the warn notice obviously like everyone else does and when we have those situations, we obviously have to announce them publicly.
Where we're manufacturing company at the end of the day, we are not.
What I'd say the support staff is not a lot so and.
These are serious decisions, we go through and there is.
You're never going to hear me get ahead of it.
Because I don't think thats.
Fair to anybody, but look when we announced when you see plant closures Torrance Torrance is probably approximately 200 people in TARP. So I mean, not a good day.
Hi, good day for them, but or us and not decisions that.
We take lightly but those things are now what we're looking at across the platform as you think about where our revenue has fallen off.
Great all right. Thank you for the time.
Thank you.
Thank you as a reminder, at this time, if you would like to ask your questions. Please press star one on your Touchtone phone.
At this time I see no further phone questions. However, I do see that there may be some web questions Janet I'd like to turn the call back over to you.
Thank you.
That's fine I don't think we'll be taking any further questions.
Thank you everybody for joining and appreciated and we look forward to talking to you in a in early November . Thank you.
Thank you ladies and gentlemen. This concludes today's webcast. We appreciate your participation you may now disconnect.