© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
This means that the stock is removed from a stock exchange and can no longer be traded.
Delisting typically occurs when a stock no longer meets exchange requirements. Other reasons for delisting may include legal violations, bankruptcy, a decrease in the number of shareholders, and acquisition by another company.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to Veritiv Corporation's Second 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.
Thank you, Felicia, and good morning, everyone. On today's call, you will hear prepared remarks from our CEO, Sal Abbate, followed by our CFO, Steve Smith. After that, we will open the call for 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 the presentation slide. The reconciliation of these non-GAAP measures to the applicable US GAAP measures, are included at the end of the presentation slides, and can also be found in the investor relations section of our website.
I'd now like to turn the call over to Sal.
Thank you, Scott, and good morning, everyone. Thank you for joining us. We are proud to report very strong financial results in the second quarter. We achieved our best adjusted EBITDA in both dollars and margin of any quarter in the company's history, as well as record net income for a second quarter.
Our sales in the second quarter increased by double digits across all of our business segments and 18% overall increase, compared to prior year. Year-over-year sales per day performance has improved every quarter for the last four quarters due to the continued recovery from last year's pandemic-driven lows.
We reported record net income of $26.4 million, and diluted earnings per share of $1.62 for the second quarter. Adjusted EBITDA in the second quarter was also an all-time record of $73.5 million, which was an 85% increase compared to prior year, and a 70% increase compared to the second quarter of 2019. Our quarterly adjusted EBITDA has improved year-over-year in five of the last six quarters.
We continue to see strong sales and earnings growth in our packaging segment. Our packaging sales in the second quarter increased 17% compared to prior year. Our record packaging adjusted EBITDA of $95 million in the second quarter, increased more than double the rate of our sales growth, and was up 37% compared to prior year, and up 46% compared to the second quarter of 2019. Adjusted EBITDA margin increased from 8.9% in the second quarter of 2022, to a record 10.4% in the second quarter of 2021.
Within the packaging segment, our healthcare, transportation, and consumer electronics sectors, drove elevated growth in the second quarter compared to both prior year and the second quarter of 2019. Sales trends to manufacturing customers continued to improve, and increased significantly in the second quarter compared to prior year.
In addition to strong packaging sales, we also saw demand continue to recover across our other business segments in the second quarter. In particular, the pace of recovery for our print and publishing segments has been stronger than expected, which contributed to our favorable results in the quarter. The combination of strong demand and rising supplier costs, have led to several price increases across our product portfolio. While we mitigated our internal cost increases with productivity offsets, we worked closely with both our suppliers and customers to ensure price increases were communicated effectively and with proper notice. As a result of our cost and price management discipline, margins were stable throughout the first half of the year. We are also well positioned to navigate additional market price increases that have been announced for the second half of 2021 and the price volatility that is expected to continue in the near-term.
It's important to recognize that our record earnings performance is not simply the result of temporary benefits or short-term market dynamics. While we acknowledge the benefit of the favorable comparisons to the prior year, our stepwise improvement in earnings performance, has resulted primarily from the cumulative effect of the successful execution of our multi-year strategic initiatives. As a reflection of these efforts, our first half adjusted EBITDA margin improved from 1.6% in 2019 to 2.4% in 2020, and then to 4.1% this year. Our employees have worked hard to drive process improvements across the organization. These enhancements meaningfully contributed to our results and our ability to deliver on our commitments to customers and suppliers.
I'll now turn it over to Steve to provide more details on our financial performance for the quarter. After Steve's remarks, I'll provide some additional perspective on our historic performance. I will also give an updated outlook for the remainder of the year and our priorities as we move forward. Steve?
Thank you, Sal, and good morning, everyone. With Sal having covered consolidated earnings performance, I will provide more details on 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 the same number of shipping days in the second quarter of 2021, as we had in the second quarter of 2020. As a reminder, we had one less shipping day in the first quarter of 2021 than 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 one less shipping day than 2020.
Our packaging segment continues to perform very well, and is the leading driver of the record consolidated earnings performance in the second quarter. Packaging’s net sales in the second quarter were up 17.1%, and core sales were up 15.9% compared to the prior year. Improved demand and upward movement in price continued into the second quarter. We saw growth across all of our end-use sectors compared to prior year. Market price increases across the majority of our packaging products, continued to favorably impact our financial results in the second quarter. Packaging’s adjusted EBITDA was a record high $95 million for the second quarter, which is an increase of $26 million, or 37% compared to prior year. A combination of packaging sales growth, efficient price and cost management, and operational improvements, continue to drive a meaningful change in adjusted EBITDA margin. Packaging's adjusted EBITDA margin increased from 8.9% in the second quarter of 2022, to a record 10.4% in the second quarter of 2021.
Now, moving to our facilities solutions segment. Net sales in the second quarter increased 11%, and core sales were up 7.3% from the prior year, due to the ongoing recovery of our traditional away-from-home sectors. As a result, we're starting to see a mix of customers and products shift back toward our historical blend. Our customers within the education, entertainment, and hospitality sectors, have continued - have begun to recover from the pandemic-driven lows of the prior year, while office and property management customers remain near last year's levels.
Throughout the last 18 months, we delivered critical personnel protective equipment, sanitizers and cleaning supplies, to support our customers. We took calculated risks with inventory on these types of products, to ensure product availability for our customers, despite unprecedented volatility in market demand. As a result of saturated supply chain and product channel, we took approximately $2 million in charges in the second quarter for pandemic-related safety products in our facilities solutions segment. Second quarter adjusted EBITDA for facility solutions was $10.4 million, which was $1 million or 8.8% lower than prior year. Despite the pandemic-related product charges, adjusted EBITDA margin for facilities solutions was 4.6%, and remained elevated from pre-2020 levels due to our multi-year efforts to improve the profitability of this segment.
Shifting now of the print segment, second quarter net sales were up 24.5%, and core sales were up 22.7% from the prior year period, which was better than expected, and what we believe is a temporary pause in the secular decline in the paper industry. Adjusted EBITDA in the second quarter was $18.3 million, an increase of $17 million from prior year. Adjusted EBITDA margin improved from 0.5% in the second quarter of 2020, to 5.2% in the second quarter of 2021. Our multi-year efforts to align this business to market demand, and improve the risk profile of its customer portfolio, have resulted in strong adjusted EBITDA in the second quarter, and our best adjusted EBITDA margin of any quarter on record.
Finishing our segment review, publishing's net sales and core sales increased 19.6% in the second quarter compared to the prior year. The second quarter sales performance for the publishing segment, was also better than expected, due to an accelerated recovery of demand in the book and specialty sectors. Publishing adjusted EBITDA was $3.9 million in the second quarter, an increase of $4.1 million compared to prior year. Adjusted EBITDA margin for the quarter was 2.8%, an improvement of 300 basis points compared to prior year. Our print and publishing segments continue to execute well against their financial objectives. We are proud of the team's strong performance in the first half of the year.
Shifting now to cash flow. Before we examine our second quarter’s free cash flow results, let us take a moment to look back at our 2019 and 2020 free cash flow. This look-back provides context, not only for our second quarter free cash flow comparison, but it also helps to explain our significant net debt reduction. Looking back to 2019 and 2020, the combination of our segment mix transformation, our improved earnings level, and our enhanced working capital discipline, generated roughly $500 million in free cash flow over those two years.
For the quarter ended June 30th of 2021, cash flow from operations was approximately $37 million. Subtracting capital expenditures of about $3 million from free cash flow from operations, we generated free cash flow of approximately $34 million in the second quarter. Due to our ongoing working capital discipline and strong earnings performance in the first half of this year, we are raising our full year 2021 guidance for free cash flow to be at least $110 million. After removing the one-time impact of our 2020 restructuring plan on our 2021 free cash flow guidance, we expect our 2021 normalized free cash flow to be at least $140 million.
At the end of the second quarter, our net debt to adjusted EBITDA leverage ratio, based on our trailing 12 months results, reached a record low 1.7 times, well below our long-term target of three times. As we look back to prior years, our leverage ratio peaked at 5.4 times at the end of the third quarter of 2017, soon after our rigid packaging acquisition of All American Containers.
As we mentioned earlier, strong cash flow generated in 2019 and 2020, and subsequent earnings improvement in 2021, have led to a dramatic reduction in our leverage ratio to 1.7 times. This leverage improvement enabled the simultaneous execution of both our 2020 restructuring plan, and a $100 million share repurchase program. Our 2020 restructuring plan remains on schedule, with the original timeline, and we expect to be substantially complete with the plan by the end of this year. Our restructuring plan costs are lower than original estimates, and our benefits are in line with our expectations. Our share repurchase program is still underway, and we expect to complete the program by the end of this year.
We continue to make capital investments in the business to drive process efficiencies, organic growth, and improved customer experience. We're very encouraged by the progress we've made on these strategic initiatives, while we are also achieving historically low leverage. This low leverage gives us optionality for incremental investments in both organic and inorganic growth.
I will now turn it back over to Sal.
Thank you, Steve. Our performance in the second quarter and over the last 12 months, has signified a meaningful inflection point in the business. We are incredibly pleased with the efforts of our employees to overcome a myriad of challenges during an unprecedented environment as a result of the COVID pandemic.
I'd like now to review the comprehensive and multi-year initiatives that have transformed the company from where we were just a few years ago. Perhaps more importantly, I'd like to share why we believe these improvements differentiate Veritiv as a leader in packaging distribution, and position us for continued acceleration of earnings over the coming years. Over the last three years, we have made fundamental changes to our business, resulting in meaningful adjusted EBITDA performance for Veritiv overall, and adjusted EBITDA margin improvements for all of our segments over the last 12 months. As such, we believe we have reached an inflection point in our overall financial results.
Our adjusted EBITDA margin for the company has more than doubled since 2017, from 2% to over 4%. Packaging is our largest and fastest growing segment, and provides customized solutions to a diversified portfolio of customers, including more than half of the Fortune 500. Our multi-year optimization efforts have resulted in a nearly three percentage point improvement in adjusted EBITDA margin since 2018. Our packaging adjusted EBITDA margin reached 9.8% over the last 12 months, and a record 10.4% in the second quarter.
Our facility solutions segment margin more than doubled from 2.2% in 2018, to 4.8% over the last 12 months. A key driver of improved earnings performance unique to facility solutions, was the decision to exit our low margin and high cost to serve, redistribution business, and other unprofitable customers throughout 2019.
Also in 2019, we centralized cost and price management activities across all of our segments to ensure a more streamlined sales process for both our employees and customers. These process improvements had helped us quickly adjust to inflationary pressures this year. In July of 2020, we announced a restructuring plan in response to the pandemic, and to align our operations with the long-term needs of our growth segments. As Steve mentioned, the restructuring plan expenses are lower than expected. And I would point out, the savings are above our initial estimates, and we are running on schedule.
In the last two years, we also implemented an industry-leading commercial optimization initiatives, such as cost price discipline, and product life cycle management, to further incentivize profitable sales growth. Our print and publishing segments continue to play an important role in our portfolio, and provide earnings and cash flow for the organization. We have derisked and rationalized our portfolio of print and publishing customers and products, resulting in multi-year working capital improvements and favorable bad debt performance. As a result, adjusted EBITDA margins in these segments have improved over the last 12 months compared to the last three fiscal years.
While we are pleased with our print and publishing segments contribution to our business, we are more encouraged by the stepwise change in becoming a predominantly packaging company. Our packaging segment is now the fundamental driver of our overall results. Over time, through a combination of selective divestitures, a packaging acquisition, and an intentional shift in resources toward our growth segments, our packaging adjusted EBITDA has increased from 55% of the company's pro forma adjusted EBITDA in 2014, to 75% over the last 12 months.
This segment mix transformation was a tremendous undertaking for the organization. Our print and publishing segments have made strategic changes to the mix of products, customers, and supply chains to drive positive cash flow. Due to these changes and the growth of our packaging business, the secular market decline in the print industry is significantly less impactful to our results. Our print and publishing segments now have more efficient operating models that are adaptable to future market dynamics to support continued earnings generation. Over that same time period, our adjusted EBITDA has increased from $154 million to $245 million, primarily due to sales growth and margin expansion in our packaging business. The combination of these factors led to a seven-year cumulative average growth rate in adjusted EBITDA of 9% in our packaging segment from 2014 through the 12 months ended June 30th of this year.
As we look forward, our packaging business is well positioned for above-market growth, given our current strength in the industry and our commitment to investment in both organic and inorganic growth. We are an essential partner to our customers, providing customized solutions and services that meet their full spectrum of packaging and supply chain needs. We are intimately involved in product packaging ideation, design and testing, all the way from concept to delivery.
We remain focused on key high growth industry sectors, including healthcare and consumer electronics. We are also investing in sustainable cold-chain products and capabilities to serve sectors such as food delivery. We offer a broad portfolio of both custom and standard packaging products, with in-house expertise that ensures a material agnostic approach to best meet specific customer needs. This comprehensive product offering is supported by a global network of industry-leading suppliers. We continue to invest in selling of supply chain capabilities that will enhance the customer experience and improve our ability to leverage our scale in a highly fragmented and desirable industry. We are encouraged by the stepwise improvement in our recent results, and remain focused on executing against our vision to be the premier provider of packaging solutions in North America.
Now switching to our guidance for 2021. Given our strong performance through the first half of the year, as well as strong earnings prospects for the remainder of the year, we are increasing our full year 2021 adjusted EBITDA guidance to a range of $270 million to $290 million. Because of the expected stability in our tax rate, we are also now adding guidance for both net income and earnings per share. We expect full year 2021 net income to be in the range of $100 million to $120 million, and full year earnings per share to be in the range of $6.25 cents to $7.50. Diluted shares outstanding are expected to be approximately 16 million shares. Despite the pandemic-related headwinds, we expect to report back-to-back record full year net income performance for 2020 and 2021.
As it relates to the second half of 2021, the market is anticipating a very strong holiday season that is expected to drive continued sales growth in our packaging segment. We also expect second quarter adjusted EBITDA margin levels for the packaging segment, to continue for the second half of the year. In addition, the latest market information indicates that recently implemented and announced price increases across a wide array of our product categories, are expected to hold for the remainder of the year, given strong underlying demand and constrained supply. We will continue to work closely with suppliers and customers to ensure market price volatility is managed effectively and with proper notice. As a result of our increased earnings outlook and continued working capital discipline, we are also raising our estimated free cash flow for full year 2021 to be at least $110 million. Capital expenditures for the full year are still expected to be close to $35 million.
This concludes our prepared remarks. Felicia, we are now ready to take questions.
[Operator Instructions] And your first question comes from the line of John Babcock of Bank of America.
Hey, good morning, and thanks for taking my questions, and also congratulations on the quarter. I guess, just starting out in packaging, what are your customers saying on how packaging demand could play out over the balance of the year?
Good morning, John. This is Sal. Thank you for joining. Thanks for the question. We have seen - as you've seen in most of our suppliers’ earnings reports too, packaging demand continued to be strong. Box shipments have continued to be historically strong, although tapering a little bit in the second quarter. We do expect that the second quarter box shipments will continue into the third and then have a very strong fourth quarter, driven primarily by another anticipated strong holiday season, particularly in e-commerce and fulfillment. And so, that is baked into our earnings guidance for the balance of the year.
Okay. Thanks for that. And then with regards to guidance, what factors should we think about that get you to the high end of that range, and also the lower end?
It’s a good question. I think on the lower end of the range, and Steve can speak more to it, but the price increases do have an impact on our LIFO inventory calculations, and that could impact us getting to the lower range. And then also including facility solutions perhaps not recovering as fast as we'd like it to. So, with this new Delta variant strain, we are seeing additional delays to the return to office, and that could suppress our facility solutions to the lower end of our guidance.
On the higher end of the range, John, it would be continued strength in the print segment, where the demand has been very healthy in the second quarter, and price impacts on the second half are expected to be positive for print. And as I mentioned, continued strong demand in the packaging sector segment, will get us to the higher end of the range. Anything to add there?
I'm sorry. John, just one thing to add to the higher end of the range that the first half of this year, we've experienced very limited bad debt expense. And to the extent that that continues for the second half, although not in our guidance, it's possible, and that would also help move us from the mid-point toward the higher end. So, lower bad debt expense.
Got you. That was actually one of my next questions was just on bad debt expense. Where did that stand during the quarter relative to last year?
Yes. So, it was basically zero in the quarter, John. The company has worked incredibly hard through multiple disciplines to try to drive that down, really starting back about four years ago. And so, over the last four years, we've been averaging just over $17.5 million of bad debt. This year the first half was, as I said, basically zero. And in the second half of this year, we have roughly a $9 million, half the average run rate. And we're not experiencing the types of bankruptcies in reserves necessary. And so, there's some upside to it. But one doesn't know because COVID is causing such unusual patterns to our customers.
Okay. And then in terms of other costs, where is the company seeing inflation right now and what are your expectations for the rest of 2021?
So, our primary driver of inflation is obviously cost of goods sold. So, we're seeing cost increases across all of our packaging products, as well as our print products, and some rising costs in facility solutions. And those, we've been able to pass on, as we mentioned, to our customers in a very disciplined fashion. We’ve also seen some wage increase, inflation and fuel inflation. Again, both of those are baked in to our guidance for the second half of the year, but - and we've been actively improving our processes internally to not have to pass those on to our customers. But those are the key factors really, John, that we see for inflation.
Now, there is indications of packaging capacity coming on board in the late third quarter and the fourth quarter that could help tamper down the inflation a bit, although that could have a corresponding increase in print because it's coming from the print industry capacity. So, as our suppliers switch their capacity from print to packaging, packaging should ease, and print may see additional inflation factors.
Okay. Yes, that makes sense. And then next question, just can you talk about the dynamics driving margins in print and publishing? Typically, it seems that margins for these segments move together, while this last quarter, margins expanded in print, but contracted in publishing. So any color you could provide there would be useful.
Yes. The primary difference between packaging and - I'm sorry, between print and publishing is customer mix and industry mix. So, we are seeing a mix to the lower grades in publishing, which is having an effect on their margins versus print.
We also see, John, the bad debt expense that we spoke to a few moments ago, significantly impact those two segments. So if in a particular quarter or half, one of those two segments has a reserve for a troubled account, we'll see that influence their results temporarily. And then on a year-over-year comparison, which is what's happening in publishing, look favorable.
Okay. And then just last question before I turn it over, can you just walk us through kind of the free cash flow guidance overall and kind of the key things to pay attention to there?
Yes. Steve, you want to do that?
Sure. So, we guided as a midpoint, to $280 million of adjusted EBITDA. And we're guiding to at least $110 million of free cash flow, John. So, let me walk us through the five items that are driving the cash uses that are taking us down from 280 to roughly a little over 110. So, that's about $160 million to $170 million of cash usage. So those items are, in order of size, our cash taxes, which in the neighborhood of about $45 million for this year, which, just as a note, is higher than typical given the year's earnings projection, but because we carried forward from 2020, some CARES Act tax cash benefits of about $10 million to 15 million, we're going to have a little higher cash taxes in ‘21 than ’20, as well as a benefit to our shareholders.
So, $45 million of cash taxes, about $35 million of capital expenditures, about $30 million of cash payments for our restructuring that we announced in 2020, about $30 million of cash use for working capital. As our revenue is growing, we're investing in working capital. And then finally, about $20 million of interest expense. If you add those together, you’re a little over 160, and we guided to EBITDA of 280. So that would bring us down to a little bit under 120. So, that's why we said at least 110.
Okay. That's very helpful. All right. Well, thanks again for answering my questions and best of luck for the rest of the year.
Thank you, John.
Thank you, John. And thanks for your questions. In conclusion, the past 18 months have been unprecedented for our employees, customers, and individuals around the world. Over this time, we evaluated how we can improve as an organization to positively impact people and be responsible environmental stewards in the communities where we operate in. In May of this year, we appointed a Chief Compliance and Sustainability Officer, to lead our company-wide environmental, sustainability, and governance initiatives.
We continue to enhance our corporate social responsibility program, by strengthening core foundational elements, such as our health and safety initiatives. The health and safety of our employees is a critical priority of the organization, and we're pleased that during the last three years, our rate of injuries meeting OSHA recordability criteria, was less than one, and a low - a record low so far this year.
We are working to create a more diverse, equitable, and inclusive culture as well. In support of this commitment, we recently signed the CEO Action for Diversity and Inclusion Pledge, and look forward to sharing with, and learning from others in the business community in connection with this important initiative. We also seek innovative opportunities to operate in a more sustainable manner. For example, we recently launched an electric truck pilot program on the west coast, as we consider ways to use more sustainable energy and reduce emissions. We are proud of the actions we are taking, and committed to further progress.
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 November, when we review our third quarter of 2021 results.
And this concludes today's conference call. Thank you for participating. You may now disconnect.