Veritiv Corp

NYSE:VRTV

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, and welcome to Veritiv Corporation's First Quarter 2021 Financial Results Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions.

At this time, I would like to turn the call over to Scott Palfreeman, Director of Finance and Investor Relations. Mr. Palfreeman, you may begin.

[Scott Palfreeman, executive]

Thank you, Misty, and good morning, everyone. On today's call, you will hear prepared remarks from our CEO, Sal Abbate; and our CFO, Steve Smith. After that, we will take your questions.

Before we begin, please note that some of the statements made in today's presentation regarding the intentions, beliefs, expectations and/or predictions of the future by the company and/or management are forward-looking. 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, but is not limited, to risks and other factors described in our 2020 annual report on Form 10-K and in the news release issued this morning, which is posted in the Investor Relations section at veritivcorp.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the applicable 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'd like to turn the call over to Sal.

[Salvatore Abbate, executive]

Thank you, Scott. Good morning, everyone, and thank you for joining us. Before I review our record first quarter earnings, I will provide a few updates on our business as they relate to our capital and portfolio objectives, including our share repurchase efforts and the sale of a small component of our Print segment. I will also provide an update on our sustainability efforts. After my remarks, Steve will walk through our segment results as well as our balance sheet and cash flow performance. We will also provide an update to our outlook for the full year.

The results in the first quarter continued to reflect progress toward our multiyear strategy to drive profitable growth and become a leading full-service provider of packaging products and supply chain solutions. Each of our segments is executing on their strategic objectives and contributing to the profitability improvements reflected in the results.

Strong earnings and disciplined working capital management allowed us to reduce net leverage and expand capacity to deploy capital in support of our strategic priorities.

Earlier this year, we announced a $50 million share repurchase plan to return value to shareholders. Through the end of the first quarter, we repurchased approximately $25 million of our shares, including approximately 550,000 shares from UWWH, the holding company owned by Bain Capital and Georgia-Pacific.

To provide some additional context, Bain Capital and Georgia-Pacific were previously the owners of Unisource Worldwide. When Unisource Worldwide and xpedx merged to create Veritiv Corporation in July of 2014, UWWH held 49% of the shares of the new public company. Over time, UWWH liquidated portions of its stake in the company and sold all of its remaining shares in the first quarter of this year.

As a result of this exit, partially facilitated by our share repurchase program, the downward pressure of a UWWH ownership position on our stock over the last few years has been lifted. We believe our share repurchase plan reflects a potentially high yielding deployment of capital and we'll continue to execute against our plan.

As part of our efforts to focus on our core businesses, we recently completed the sale of our specialized paper converting business, Rollsource, which was an operating unit within our Print segment. The transaction was completed at the end of March. Pixelle Specialty Solutions, a current supplier to Veritiv, acquired this business as part of larger strategic moves in the print industry.

The sale of the Rollsource specialty business will allow Veritiv to become even more focused on our core product and service offerings and will not have a material impact on Veritiv's future earnings.

Moving now to our first quarter financial results. We are pleased to report that the record financial performance from the fourth quarter of 2020 continued into the first quarter of this year. Robust packaging sales growth, stronger than expected print and publishing results and operational efficiencies across the business led to adjusted EBITDA improvements across all segments compared to the prior year.

As a result, both pretax income and adjusted EBITDA reached record highs for the first quarter of $30 million and $60 million, respectively. This reflects a $30 million improvement in pretax income and a $23 million increase in adjusted EBITDA or plus 64% compared to prior year. Adjusted EBITDA margin remained at a record high of 3.8% in the first quarter, which was an improvement of 170 basis points compared to prior year.

Our Packaging segment also achieved record adjusted EBITDA in the first quarter of $78 million, reflecting a 31% increase over prior year. Continued improvement in demand and additional lift in price drove sales growth of 8% in the first quarter of 2021 compared to prior year when adjusting for 1 less shipping day.

Similar to last quarter, our customized solutions and capabilities in the food processing, specialty retail, consumer electronics and healthcare sectors continue to drive strong sales performance and favorable customer mix.

The ongoing shift by consumers to e-commerce remains a source of volume across several of our end-use sectors. Our automotive and aerospace manufacturing customers continue to recover, but at a slower pace than the general manufacturing sector and have yet to return to pre-COVID levels.

We continue to closely monitor inflationary changes across our product portfolio and operations. Thus far, we have successfully mirrored recent supplier product cost increases to our customers in a timely manner, which has led to stable margins across all business segments through the first quarter. More specifically, corrugated sales were strong in the first quarter due to both demand and multi-quarter industry-wide price increases.

Weather-related impacts in February led to manufacturing production constraints, particularly with our suppliers of resin-based products. Fortunately, our national supply chain network ensured that the weather-related impact to our customers was minimal. Because we are a national distribution company with no customer accounting for even 5% of our revenues, weather did not have a material impact to our financial results in the first quarter.

I would now like to shift to a brief update on our efforts around sustainability. We view sustainability as more than a value add or a premium solution. It is a core responsibility, one that contributes to the wellbeing of our business, our people and our planet. Our team has been committed to helping our company and customers reduce environmental impacts for over a decade. We recently published an updated corporate social responsibility report, which can be found in the Corporate Responsibility and Investor Relations sections of our website. We are proud of our progress and eager to do even more.

Now Steve will provide additional details on our financial performance for the first quarter. Steve?

[Stephen Smith, executive]

Thank you, Sal, and good morning, everyone. With Sal having covered consolidated earnings performance, I will provide enough overview of consolidated sales results and review our segment performance as well as changes in both our balance sheet and cash flow statements.

As we review these results, please note that when we speak to core sales, we are referencing the reported net sales performance, excluding the impact of foreign exchange and adjusting for any day count differences.

As it relates to day count, we had 1 less shipping day in the first quarter of 2021 that we had in the first quarter of 2020. All remaining quarters this year have the same number of shipping days as prior year. And as a result, full year 2021 will have 1 less shipping day than 2020.

Veritiv consolidated net sales in the first quarter were down 8.7% and core sales were down 7.9% from the prior year due to both continued market headwinds from the COVID-19 pandemic across our non-packaging segments and continuing secular decline in the print and publishing industries.

Going to our segment results, Packaging's net sales in the first quarter were up 6.5% and core sales were up 7.5% compared to the prior year due to strong demand and upward movement in price. We continue to see robust demand from our food processing, specialty retail and healthcare customers, which were enabled by our specialized capabilities in those sectors.

Our manufacturing sector continue to recover, but some areas within the manufacturing like automotive and aerospace remain below pre-COVID levels. Packaging's adjusted EBITDA was a record $78 million for the first quarter and increased 31% compared to prior year. Packaging's sales growth, coupled with efficient and responsive operations, continues to drive a meaningful change in adjusted EBITDA margin. As a result of these improvements, Packaging's adjusted EBITDA margins increased from 7.4% in the first quarter of 2020 to 9.1% in the first quarter of 2021.

Moving to our Facility Solutions segment. In the first quarter, both net sales and core sales were down roughly 21% from the prior year period as traditional away-from-home sectors continue to be depressed by market dynamics related to COVID-19.

Despite these ongoing market headwinds, first quarter adjusted EBITDA for Facility Solutions was a record $11.5 million or 28% higher than prior year. Adjusted EBITDA margin for Facility Solutions of 5.6% remained near record high levels due to our multiyear efforts to improve the profitability of this business through price discipline, operating efficiencies and a focus on certain end use sectors.

Operating margins continue to benefit from a likely temporary mix shift toward customers and end use sectors like healthcare and food service that were less impacted by COVID-related closures.

Shifting now to the Print segment. First quarter net sales were down 28.5% and core sales were down 27.9% from the prior year period, which was better than expected. Adjusted EBITDA was $12.3 million, while adjusted EBITDA margin improved from 2.5% in the first quarter of 2020 to 3.8% in the first quarter of 2021. Ongoing efforts to quickly align this business to market demand as well as historically low bad debt expense drove the segment's margin improvement.

Publishing's net sales declined 11.2% and core sales declined 9.7% in the first quarter compared to the prior year. The first quarter sales performance for the publishing segment was better than expected due to an accelerated recovery of demand in the education and grocery sectors.

Adjusted EBITDA for publishing of $5.1 million for the quarter was nearly 42% better than prior year, while adjusted EBITDA margin improved from 2.2% in the first quarter of 2020 to 3.4% in the first quarter of 2021.

We are encouraged by the recent financial performance of the Print and Publishing segments despite COVID-related and ongoing secular volume declines. These segments continue to play an important role in our portfolio and are delivering on their strategic and financial objectives early in 2021.

Because of the improved performance across all our segments, let me take a moment to comment on the downstream effect on our effective tax rate. Given our strength in earnings, our pretax and after-tax earnings are higher. Therefore, our tax rate is becoming less volatile. Similar to the first quarter, we expect our effective tax rate for 2021 to be in the high 20% to low 30% range.

Shifting now to our balance sheet and cash flow. At the end of the first quarter of 2021, we had drawn approximately $534 million against the asset-based lending facility and had available borrowing capacity of approximately $344 million. As a reminder, the ABL facility is backed by the inventory and receivables of our business.

At the end of the quarter, our net debt to adjusted EBITDA leverage ratio was 2.0x, down significantly from 3.5x at the end of the first quarter of 2020.

At the end of the first quarter, our long-term debt not including the current portion declined about 19% year-over-year from $740 million to $601 million.

Our credit profile has improved meaningfully over the last 12 months as our long-term debt has declined and our earnings have improved. Our lenders are pleased with this outcome. We are working with our lenders to adjust our ABL to reflect this improved credit profile. We will share more information when this process is completed.

For the quarter ended March 31, 2021, cash flow from operations was approximately $13 million. Subtracting capital expenditures of about $6 million from cash flow from operations, we generated free cash flow of approximately $7 million.

I will now turn the call back over to Sal.

[Salvatore Abbate, executive]

Thank you, Steve. Before we move to your questions, I'd like to provide an update on our 2020 restructuring plan and our 2021 guidance. As a reminder, the 2020 restructuring plan was originally announced in July of 2020 in response to the impacts of the COVID-19 pandemic on our business, including the acceleration of the secular decline in the print and publishing industries.

The plan was designed to better align our cost structure and distribution network with the ongoing needs of the business. The restructuring plan remains on schedule, and we still expect it to be substantially complete by the end of 2021. We are pleased to report that due to the diligent efforts by the organization, the level of costs incurred under the restructuring plan is lower than originally expected and now estimated to be in the range of $70 million to $87 million, an approximately 12% reduction from our previous estimate.

Let's shift now to our outlook for 2021. Given the strong performance in the first quarter and earnings prospects for the remainder of the year, we are increasing our earnings guidance for 2021. Growth in our Packaging segment is expected to continue for the remainder of the year.

Note that because of our Packaging segment began its recovery in the second half of 2020, we anticipate that the rate of year-over-year growth is likely to be stronger in the first half or 2021 than the second half of 2021.

As it relates to revenue expectations for our other segments, the timing and level of recovery from the effects of COVID-19 will be mixed and remain uncertain. Components of our Facility Solutions business like entertainment, hospitality and office buildings are not expected to begin to recover in a meaningful way until the second half of 2021.

As a result, we now expect income before taxes for full year 2021 to be in a range of $95 million to $115 million and adjusted EBITDA to be in the range of $220 million to $240 million. We remain focused on investments in high growth sectors and will continue to respond quickly to inflationary impacts across our businesses.

Our 2021 free cash flow is still expected to be at least $75 million and capital expenditures for the year of approximately $35 million remain on track. This concludes our prepared remarks.

Misty, we are now ready to take questions.

[Operator]

[Operator Instructions] You do have a question from John Babcock with Bank of America.

[John Babcock, analyst]

Great job during the quarter. I guess I just wanted to start out on -- in packaging. Obviously, you've started to see some improved growth here, and it seems like the corrugated markets are [ pulling ] right along. How are you kind of thinking about -- I mean you mentioned expecting some [indiscernible] in the back half in part due to tougher comps, but also want to kind of get your sense on whether we should now expect growth to be pretty steadily positive here or if there might be reasons to expect that there could be some kind of fluctuation over time?

[Salvatore Abbate, executive]

Great. Thanks for the question. We expect packaging growth to continue through the year. If you look at the market indicators, they point to continued growth, but not quite as strong as Q4 and then the first half of the year. So we expect to grow alongside and slightly better than the market as reflected in our Q1 performance. And we're encouraged by the fact that the overall indicators actually have ticked up for the balance of the year. And so that is reflected in our forecast.

Obviously, the second quarter, because of the anomaly of the COVID-19 comps being so volatile versus last year, those numbers are going to be, what I would say, much higher than other periods, but then will stabilize in Q3 and Q4, but still expect to see growth.

We do expect to continue to see stronger growth in our international business and our rigid business and that has been really continuing since the latter part of last summer.

[John Babcock, analyst]

And so what's a reasonable long-term growth rate to assume here, recognizing -- obviously that can change over time, but what are you kind of thinking there right now?

[Salvatore Abbate, executive]

Yes. We expect our packaging business to grow at GDP plus, which is what we've historically targeted.

[John Babcock, analyst]

Okay. That's great. And then just Facility Solutions, different parts of the country are reopening -- the U.S., obviously, are reopening right now. And so just want to get a sense, what you're hearing from customers? What your thoughts are on the trajectory of how that business could improve and overall outlook there?

[Salvatore Abbate, executive]

Yes. Thanks, John. We're really pleased with where Facility Solutions is in this first quarter of 2021 despite the impacts of COVID-19 on the profitability side of the equation, for sure. And we have seen a higher growth rate in our COVID-related hygiene products, skincare, wipes, sanitizers and those have become a more meaningful -- [ and PP, ] obviously have become a more meaningful portion of our portfolio. And so we see those continuing to grow. And in fact, as businesses reopen in a more fulsome way, we expect accelerated growth in those categories.

The caveat here is that entertainment, hospitality, particularly large venue where we tend to play more readily is a slower return than we originally anticipated and now most likely more into the middle of the third quarter than the beginning of the third quarter, and particularly in the office space and areas where we rely on folks returning to offices like government.

And so we expect those to rebound from where they are, but not reach pre-COVID levels for quite some time. But in the second half of the year, we are expecting a rebound in our cruise line business. Obviously, transportation has already started to pick up and now we're hearing signs of the entertainment industry starting to return. And you're seeing some additions and things like concerts and sporting events projecting to be at full capacity in the fall. And so that's what our projections are based on for the balance of the year for Facility Solutions.

[John Babcock, analyst]

Okay. And then the next question, you've raised your guidance here. I was wondering if you might be able to talk about some of the factors that are driving that and also what could go right? What could go wrong? So -- obviously, we've heard about rising price levels across a number of the different product lines that you have, particularly on the paper side and corrugated side. And then we've heard about rising fuel prices. So if you could just kind of go through the different factors that impact that EBITDA guidance. That would be helpful.

[Salvatore Abbate, executive]

Sure. I'll start, John, and I'll ask Steve to provide some commentary as well. But the primary driver of our earnings guidance increase is our packaging growth, and it really drove a significant portion of our performance over plan and in the first quarter over estimates. And again, as we mentioned, we expect those to continue.

Also just continued operational expense efficiencies and cost management are now continuing into the second quarter and then projected to continue for the full year. So we're seeing the effects and will see the effects of a full year of cost savings from last year's moves.

And then lastly, the -- our disciplined cost and price management, which frankly we put in place about 1.5 years ago and continues to be well managed by the team and well-orchestrated and communicated both with our suppliers and with our customers and the ability to pass those cost increases onto our customers has been a key element of being able to take our guidance up.

Now we also are talking to our suppliers and making sure that these cost increases are justified on behalf of our customers. And when we look at inflation and the potential for price increases in the future, and I'll talk about more of our materials versus fuel for a minute, we do believe that we're getting close to the apex of the price increases that were driven by things like shortages due to storms and just overall heated up and frankly pent up demand from the pandemic.

And so we believe we're at the apex. And when we look at the insights from -- the marketing insights from the market itself, it says that prices should stabilize in the middle part of the year and continuing on for the balance of the year. And so that's reflected in our upward guidance with respect to earnings.

Certainly fuel, we expect to take some increases in the fuel arena. And -- but recall, on the freight side of the business, because we have our own fleet, we're relatively sheltered from the impact of what's happening in the heated up freight markets.

So those are the -- I think -- and so those are the things that could go right. I think if there were some -- the obvious third or fourth wave of the pandemic could create a constraint on the balance of the year. And we're not anticipating this, but a wholesale shift to remote working, that could put a strain on our Facility Solutions business potentially. But I think those are less likely than the goodness that we have built in our guidance, and that's why we're comfortable moving the range as high as we did.

Steve, anything to add there?

[Stephen Smith, executive]

Yes. Sal, just 2 supplemental thoughts. The first one being on the reason for the increase in that, we had a very low bad debt expense, John, in the first quarter and we anticipate at this time that continuing for the balance of the year. So upside in the fact that we have lower bad debt expense.

And then, secondly, on the downside rather, there's the inflation in the corrugated resin that Sal mentioned really impacting our pretax guidance, not so much adjusted EBITDA because it does get adjusted through the [ LIFO ] calculation, which we can talk about. But -- so upside on bad debt expense and a little bit of downside on inflationary [ LIFO ] risk.

[John Babcock, analyst]

Okay. That's helpful. And then if you could just talk about the free cash flow guidance. With the higher earnings outlook, I assume there are probably some offsets, perhaps from working capital, but if there's anything else there worth highlighting, that would be useful.

[Stephen Smith, executive]

Sure. So yes, it is driven, John, by the cash flow upside associated with performance. So let me just walk you through the guidance that we provided of at least $75 million. And it has just a couple of 3 steps to it. First, we start with a midpoint of our revised adjusted EBITDA guidance of $230 million. And then we have 5 different cash usages, which total about $145 million. Those are CapEx, which we guided to of $35 million.

Interest expense, which is coming down because of lower borrowings and lower interest rates of about $20 million. Cash taxes, which are up this year over prior to around $45 million. Restructuring cash payments, as Sal mentioned in our script that we are anticipating completing the bulk of our 2020 efforts in 2021 and that will cost about $35 million of cash.

And then last but not least, a little bit of working capital use of about $10 million as our packaging business grows, and we have to support that growth with working capital associated with inventory and receivables. So those items, sum total is $145 million. You subtract that from the starting point of $230 million, and you get about $85 million. So we guided to at least $75 million of free cash flow for the year.

[John Babcock, analyst]

Yes. That's great. And then, just last question, just want to make it a little bit more strategic before I turn it over. I was just wondering if, Sal, you could talk about really like how you're thinking about the main priorities for this year. What you want to accomplish? And this is incremental to what you already have in place. So -- obviously, you're completing the restructuring program, but we want to get a sense for what kind of the focus is from here.

[Salvatore Abbate, executive]

Yes. Sure, John. I think -- just as you stated, the successful completion of our restructuring plan, which includes our footprint consolidation to rightsize our North American footprint to align with our packaging business. And that's going very well.

And we didn't talk much about the print and publishing side, but we are working as part of that restructuring plan a -- kind of a more robust print supply chain model that will continue to drive efficiencies and our working capital down in that business while serving our customers well.

But the bigger strategic initiatives beyond those more tactical, operational initiatives are really driving packaging growth in those sectors that we've talked about. And in particular, the front end. So if you recall, we launched our wine agency model earlier in the year and late last year. That's really focused on the front of the packaging business, which is on design and testing and kind of concept to delivery and packaging. Continued growth with new customers and synergies from our rigid acquisition, AAC, which is doing incredibly well, and then continued growth across the globe with our specialty retail and our consumer electronics business in our packaging business. So those are our core, what I would call, organic growth initiatives.

And then obviously, with where we are with our leverage ratio and our cash position, we always look at opportunities for inorganic growth as well. And we have the ability to do that more so now than we have, frankly, in the history -- in the young history of Veritiv.

So those are -- and then I guess, lastly, I would say, threading through all of that, is our focus on our digital technology solutions and making sure we're keeping pace with where the future of the business is going and providing omni-channel solutions to our customers in a more digital way. And so we've got significant investment earmarked for this year and beyond with respect to our technology.

And I think that -- again, the -- putting the integration behind us and now focusing more on our transformation and in particular technology, I think, is going to be a big area for us and will really help accelerate our growth as well as do that in a very cost-effective way.

And Steve, anything to add to that?

[Stephen Smith, executive]

Yes. Just on the capital side, Sal. John, as we're thinking about strategic needs, we -- through our treasury group and [indiscernible], we're working on an ABL extension. A year ago when we amended our facility, it was a 5-year facility. We're going to extend that facility to give us increased flexibility. And then also, as we've mentioned in our prepared remarks that we're continuing our share purchase program because our leverage ratio is so low and the performance is still strong.

[Operator]

And there are no questions.

[Salvatore Abbate, executive]

Great. Thank you, Misty. Well, to wrap up, in the first quarter, we achieved record earnings and saw profitability improvements across each of our segments. We exited a non-core asset in our Print segment and successfully executed against our shareholder repurchase program. We are pleased with our strong performance to start the year as well as the significant progress we've made toward our long-term financial and strategic goals.

We also continued to drive improvements in our sustainability and corporate responsibility initiatives. In 2020, Veritiv established a working group to more effectively guide the company's efforts regarding sustainability. This group is working with internal and external stakeholders and our senior management team to further develop our sustainability goals. I look forward to collaborating with our team, customers, suppliers and local communities throughout this journey, so we can be careful stewards of the world together.

Thank you, again, for joining us on the call today. Please stay healthy and safe, and we look forward to talking with you again in August when we'll review our second quarter 2021 results. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.