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Good morning and welcome to Veritiv Corporation's Fourth Quarter and Full Year 2020 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'd like to turn the call over to Scott Palfreeman, Director of Finance and Investor Relations. Mr. Palfreeman you may begin.
Thank you Jack 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; 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 the presentation slides. 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.
At this time I'd like to turn the call over to Sal.
Thank you, Scott. Hello and thank you for joining us this morning. Before I review our financial results, I'd like to share a brief update on how our organization has responded to the challenges resulting from the ongoing pandemic. The health and safety of our employees remains of vital importance. Very early on, our IT team facilitated work-from-home capabilities for all of our office-based personnel to ensure minimal disruption to the services our customers have grown to expect.
The organization responded quickly to ensure the necessary personal protective equipment; sanitizers and related materials were available for Veritiv's essential workers and customers. All of our facilities have remained operational throughout the pandemic with no service disruptions.
We are pleased to report that the internal safety metrics have improved for the third straight year which reflects our long-term commitment to safety. In fact our employees have reduced recordable injuries to their lowest levels in the history of our company. Having accomplished all of this we remain flexible and responsive to the needs of employees and customers as market dynamics continue to evolve.
Switching now to a review of our performance, we finished 2020 with record adjusted EBITDA in the fourth quarter and record net income for both the quarter and full year. We also finished with record free cash flow for the full year of $266 million. Despite significant market volatility and headwinds, the fundamentals of our business continue to improve in a step-wise manner.
Deliberate changes to customer, product and segment mix have been an essential part of our strategy. These strategic choices have enabled margin expansion a healthy balance sheet and the lowest debt leverage in our company's history. On the tactical side in recent years, we have improved the quality of our accounts receivable portfolio and reduced our bad debt expense.
These efforts have favorably impacted earnings by lowering quarterly bad debt expense again in the fourth quarter, despite pandemic-related customer liquidity challenges. Our full year 2020 bad debt expense was down 17% compared to the prior year and the best performance in four years.
In short despite the myriad of challenges brought on by COVID-19, I'm pleased with the team's significant progress in 2020 towards our vision of becoming a leading provider of value-added packaging products, services and solutions the remainder of our segments executing against their strategic priorities.
As we move into the fourth quarter and full year results, I will cover our consolidated earnings performance and key business highlights. I'll then turn the call over to Steve for more details on our segment results, balance sheet and cash flow.
As we discuss the results, we'll provide comparisons of sequential quarterly trends that we are seeing within the business, in addition to the usual year-over-year comparisons. After Steve's comments, I'll provide an update on our 2020 restructuring plan, and an outlook on our 2021 projected performance and anticipated market dynamics.
Turning now to our results for the full year and fourth quarter, full year 2020 adjusted EBITDA was $188 million, reflecting a 20% increase over prior year. Our adjusted EBITDA margin rate reached 3%, which was approximately one full percentage point better than last year and the highest in company history.
Our fourth quarter results were highlighted by sequential, and year-over-year growth in packaging revenues, substantially improved consolidated adjusted EBITDA and positive free cash flow.
Our fourth quarter revenues continued to improve from the COVID-driven lows of the second quarter. And that trend along with meaningful cost reductions contributed to both favorable adjusted EBITDA comparisons versus the fourth quarter of 2019 as well as the third quarter of 2020.
Supply chain, corporate and selling expense reductions, contributed to better operating leverage in the fourth quarter and sequential improvement in adjusted EBITDA dollars and margin rate. As a result, consolidated adjusted EBITDA was $62 million in the fourth quarter, a 31% improvement over prior year.
Our adjusted EBITDA margin was 3.8%, which was an improvement of approximately 120 basis points over the same period. Our packaging segment saw demand continue to improve during the second half of 2020, resulting in fourth quarter sales per day growth of 8% compared to the third quarter, and growth of 4% compared to the prior year period.
Our comprehensive customized solutions and cold chain capabilities drove strong sales performance in the food processing delivery, specialty retail, and health care sectors. We also participated in the accelerated e-commerce growth.
The industrial manufacturing end-use sector continues to show sequential improvements in revenue trends. And we have not yet seen that sector's order pattern return to pre-COVID levels.
Rigid packaging demand continues to drive strong sales growth for the packaging segment, which experienced double-digit growth in the fourth quarter compared to prior year. We continue to be pleased with our investments in rigid packaging, which has further expanded our packaging product offering.
Now, Steve will review our financial performance in more detail.
Thank you, Sal, and good morning everyone. As we review these results please note, that when we speak to the core net sales, we are referring to 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 fourth quarter of 2020, as we had in the fourth quarter of 2019. As a reminder, we had an extra day in the first quarter of 2020. So for the full year of 2020, we had one more shipping day than in 2019.
First quarter of 2021 will have one less shipping day than the first quarter of 2020. With Sal having covered consolidated earnings performance, I will provide an overview of consolidated sales results and review our segment performance as well as our balance sheet and cash flow statements.
The Veritiv consolidated net sales in the fourth quarter were down 10.5% and core sales were down 10.7% from the prior year period. Full year 2020 net sales were down 17.2% and core sales were down 17.4% from 2019, due to both, market headwinds from the COVID-19 pandemic and secular declines in the Print and Publishing industries.
Consolidated core sales decreased -- sorry increased 2.9% sequentially from the third quarter to the fourth quarter primarily due to improving trends in the Packaging and Publishing segments.
Moving now to our Packaging segment, net sales in the fourth quarter were up 4.3% and core sales were up 4.1% compared to the prior year. Packaging revenues were bolstered this quarter, by growth in food processing delivery and specialty retail sectors.
We continue to invest in our rigid packaging business, in which we experienced double-digit sales growth in the quarter compared to the prior year. Our packaging presence outside of North America, particularly in Asia has also been a source of accelerated growth and diversification. Sales trends continue to improve with our industrial manufacturing customers but volumes in the sector have not yet returned to pre-COVID levels.
Packaging adjusted EBITDA in the fourth quarter was $84.6 million, a 35.6% increase compared to the prior year. Our return to year-over-year packaging sales growth coupled with efficient and responsive operations have driven a step change in adjusted EBITDA margin. Given these improvements, Packaging's adjusted EBITDA margins increased from 7.4% in the fourth quarter of 2019 to 9.6% in the fourth quarter of 2020. Packaging's net sales for the full year were down 3.8% and core sales were down 4% compared to the prior year largely due to the market headwinds related to the COVID-19 pandemic. Full year Packaging adjusted EBITDA was a record $300 million, a 23% increase compared to 2019. Adjusted EBITDA margin for the year was 9% an all-time high and nearly 200 basis points improvement compared to the prior year.
Now, shifting to our Facility Solutions segment. In the fourth quarter net sales were down 13.3% and core sales were down 13.6% from the prior year period. Traditional away-from-home sectors continue to be depressed by current market dynamics related to COVID-19. However, personal protective equipment and hygiene-related product sales remained strong. Supply of PPE improved, which generated a sales lift in the fourth quarter as we cleared back orders for these products.
Fourth quarter adjusted EBITDA for the segment was $8.1 million, which is 15.6% lower than prior year due to inventory charges taken related to market saturation on select COVID-19 related categories. The Facilities Solutions segment made significant changes in its operating model over the last two years. The strategic choices made over this time frame have improved our gross margins and lowered selling costs and supply chain expenses. Two areas of meaningful improvement in operating efficiency have been handling and delivery. These improvements continue to make Facility Solutions a more profitable business. These strategic choices were substantially complete by the end of 2019. So the year-over-year lapping effect on sales concluded at the end of 2020.
Facility Solutions net in core sales for the year were down 22%. Despite the sales decline adjusted EBITDA for 2020 was $41.6 million, which is an improvement of 25.7% compared to the prior year. The performance reflects our efforts to improve the profitability of this segment's business model through strategic choices and operational efficiencies.
Moving now to the Print segment. Fourth quarter and net -- fourth quarter net and core sales were both down roughly 28% from the prior year period. Adjusted EBITDA was $12.4 million and adjusted EBITDA margin improved from 2.6% in the fourth quarter of 2019 to 3.5% in the fourth quarter of 2020. The Print business has continued to quickly adjust its costs to align with volume trends. For the year, both net and core sales declined 31% due to both the ongoing secular decline and the effects of COVID-19. Print adjusted EBITDA for the full year 2020 was $33.7 million. Adjusted EBITDA margin was 2.3% which was slightly better than prior year.
Publishing net in core sales in the fourth quarter declined 27% from the prior year, but improved 19% sequentially from the third quarter to the fourth quarter due to stronger than expected book and grocery demand. Net in core sales in 2020, both decreased 32% from the prior year. Adjusted EBITDA was $12.8 million for the year. As with our Print segment, the lower revenue was due to both the ongoing secular decline in the market, as well as the effect of COVID-19.
Adjusted EBITDA for Publishing was $5.9 million for the quarter, while adjusted EBITDA margin improved from 3.3% in the fourth quarter of 2019 to 4.1% in the fourth quarter of 2020. The Print and Publishing segments continue to play an important role for Veritiv and our customers. Our actions over the last several years to improve the quality of the customer portfolio minimize the impact of bad debt. We are pleased with the bottom line performance of these segments in a year of significant market volatility and will continue to rapidly adapt to market changes in this space.
Shifting now to the balance sheet and cash flow statements. At the end of December, we had drawn approximately $520 million against the asset-based lending facility and had available borrowing capacity of approximately $342 million. As a reminder, the ABL facility is backed by the inventory and receivables of the business.
At the end of the quarter, our net debt to adjusted EBITDA leverage ratio was 2.1 times, down from 4.1 times in December of 2019 and improved from the prior sequential quarter. Our long-term debt, not including the current portion has declined 21% year-over-year from $742 million to $589 million.
For the year ended December 31, 2020, cash flow from operations was approximately $289 million. Subtracting capital expenditures of about $23 million from cash flow from operations, we generated free cash flow of approximately $266 million. Our strong free cash flow performance was primarily due to strong earnings and the ongoing efforts to improve working capital.
I will now turn the call back over to Sal.
Thanks, Steve. Before we move to your questions, I'd like to provide an update on the restructuring plan that we announced last year and our outlook for 2021. The plan was originally announced in July and updated later in the year in response to the impact 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 with ongoing business needs. I'm pleased to say the restructuring plan is on schedule and on target. We expect this restructuring plan to be substantially complete by the end of this year.
As we move to a more comprehensive outlook for 2021, we expect consolidated revenues to be relatively flat to prior year, with varying performance by segment. During the first half of the year, revenue is expected to be unfavorably impacted by the effects of the COVID-19 pandemic across all segments, with the exception of packaging. However, we like most companies anticipate a broader economic rebound in the second half of the year.
Based on these factors, we expect income before taxes for full year 2021 to be in the range of $60 million to $80 million and adjusted EBITDA to be in the range of $195 million to $205 million. Our strategic initiatives will continue to drive the results in the coming year. We will remain focused on investments in high-growth sectors, margin and cost management and a disciplined approach to bad debt.
We expect our 2021 free cash flow to be at least $75 million, driven by earnings and continuing working capital discipline. We will continue to invest in business growth and expect capital expenditures for the year to be approximately $35 million. We also announced today that the Board of Directors has approved a $50 million stock repurchase program, a combination of improved earnings, record free cash flow and low leverage ratios, allows us now to reinvest in our business and return capital through a share repurchase program. Our management team and Board of Directors are committed to initiatives with the highest return on investment, as well as prudent capital management. We believe this stock repurchase program accomplishes both of these objectives. This concludes our prepared remarks.
Operator, we are now ready to take questions.
Certainly. [Operator Instructions] John Babcock with Bank of America. Your line is open.
Good morning, and thanks for taking my questions. Starting out, I was wondering, if you could begin with the restructuring plan. Just talk about generally, what's left to be done there?
Good morning, John. This is Sal. And the restructuring trend that we announced last year had many facets. We had made some comprehensive pay program changes and those are substantially done and in play for 2021 and beyond. We also announced location warehouse closures and consolidations to really map to our future packaging and facility solutions footprint. And those are -- we accomplished about 20% of last year, with the balance of that expected for this year. And then the third component, the third largest component was the reduction in force last summer from coronavirus and that is complete. And so we anticipate that by the end of this year, we will complete that 2020 restructuring program for the most part less Steve about, I don't know $5 million or $10 million in 2022.
That's right, Sal. Yes.
All right. Thank you. And then another piece, I wanted to ask about, was really just what you're seeing so far in 1Q on the packaging side, particularly as it pertains to growth there. I mean, what we're hearing in the market is that the containerboard sector is continuing to see strong growth. And so I was wondering, if that's what you're seeing as well, and if you might be able to provide more color around that? And then also, if you could talk about some of your other packaging substrates and how those are paring to?
Yes. What I'll say John is that, it started in the second half of last year. And so we saw the momentum build in the third quarter, and obviously in the fourth quarter with the results that we shared this morning. And we do see at a high level the first quarter continuing that trend. And so we are really reflecting the market dynamics that you're seeing in the broader market. And that is across, just about all substrates. I mean, we do have some areas where they're dependent on certain large either customers or end-use segments like aerospace that haven't yet rebounded. But for the most part, we are tracking at, or maybe slightly ahead of the market depending on the category.
That's helpful. And then you've probably been following the market very closely and there have been a number of price increases announced across various different grades given supply-demand fundamentals as well as some of the inflation we're seeing out there. With these price increases being announced in the paper grades and also in containerboard, can you just remind us how these flow through to results?
Yes. Yes, I'll start and then Steve, if you want to add some color commentary there. But we have seen increasing pricing pressures for many of our product lines, most notably in corrugated and resin and most recently, as you mentioned John, some of the paper grades. And it's really driven by manufacturing input costs including freight. We will pass these on accordingly, and we've been able to do that over the last 18 months or 24 months with our increased discipline in our cost and price management both with our suppliers and our customers.
And then furthermore, because we have our own freight -- fleet, we don't quite see the freight increases that some of the manufacturers have seen. So we do have inflation built into the plan, but we do have plans to weather that through a combination of cost reductions as well as passing on most of that onto our customers.
And John --
Yes. Go ahead, sorry.
I was going to add that, to the extent that the rate of inflation and any of the commodity like products is greater than we anticipated in our plan, you see that impacting in the form of LIFO generally, the pre-tax income that we guided to. But it's an add-back to adjusted EBITDA, so you would not see it necessarily impacting adjusted EBITDA.
Got you. That's helpful. Just on the resin side quickly. I mean, we have heard of some shortages there. Is that something that is impacting Veritiv?
We have not seen at least through today. We have not seen any impact basically driven by our ability to have stocked up before the winter storms hit. And so we haven't seen the impact of that yet, John. We did see some impact to the winter storms in February, but we were able to react to that through some of our locations. And to the extent our customers were down we were down. But for the most part, we don't expect it to materially impact our Q1 performance.
Okay. Could you talk a little bit more about that the impact on performance?
Yes. It was about a half a dozen locations that were shut down because of the road conditions and the impact of the ice storms. And typically, we'll deliver through that if our customers are open. But in those southwest markets in particular that are not equipped to handle the snow and ice so the Southern Tennessee markets, the Texas market we saw some closures there, Arkansas. But again a small impact in relation to our overall business.
And then next just on the inflation side of things. I mean, we are hearing some conversations at least from investors and perhaps more broadly from the market about what direction inflation may take in 2021. How are you thinking about that? And how is that baked into your guidance?
So as Steve mentioned, I mean, we've got some inflation built into the budget for a variety of categories including freight. And so two ways to mitigate that; one is through pass-throughs to our customers, and for the most part again as I mentioned earlier our discipline there allows us to do that; and then secondarily, just our ongoing continuous improvement around cost reduction.
And so we have in conjunction with the restructuring plan last year, we have launched a more comprehensive continuous improvement program that will continue to keep ourselves out in front of the inflation maybe not fully this year depending how quickly it ramps up. But that program should continue to have cost reductions throughout not only the segments in supply chain and selling and administrative costs, but also in our corporate areas.
And John, we would add to that also that to the extent that we're seeing any kind of inflation in the fuel area, we're not seeing it quite yet. But if we were that would be an impact that we measured in millions of dollars for us not even $10 million. So there is that possible risk. At an extreme movement, we would have in place some protection against rising fuel costs. And we could go into that detail later if you'd like.
Yes. That would be great. And then just last question before I turn it over. You do have CapEx a bit above -- guided to be a bit above 2020 levels. Can you just talk about some of the investments that are driving it?
Sure, John. Most of those investments will be in our warehouses for various technology and food grade enhancements as well as overall IT and technology enhancements across the board on the customer-facing side. That's where the predominant capital expenditures will be in 2021.
Okay. Great. Thanks for the detail.
You bet.
There are no further questions at this time. I will now turn the call back over to CEO, Sal Abbate for final remarks.
Well, thank you for your questions. Well 2020 was a historic year for Veritiv. About one year ago, we asked all of our office employees to move to a virtual work environment. At the same time, we put in place the necessary precautions and protocols to ensure the health and safety of our essential employees throughout our supply chain network in continuity of our service to our customers.
In a year of widespread uncertainty as well as significant changes at working at home, our employees showed resilience and adaptability. Due to the diligent efforts of our employees, all our operations have remained open throughout pandemic. I'd like to thank our employees for their efforts and accomplishments in 2020.
As we stated before, we will continue to adapt to the needs of our employees and customers and look forward to another great year. Thank you again for joining us on the call today. Please stay healthy and safe and we look forward to talking with you in May when we review our first quarter 2021 results. Thank you.
This concludes the Veritiv Corporation's fourth quarter and full year 2020 financial results conference call. We thank you for your participation. You may now disconnect.