Veritiv Corporation
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[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:]

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.

[Sal Abbate:]

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 multi-year 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.

[Steve Smith:]

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 one last 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 of 2021 will have one less shipping day than 2020. Various different 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 for our segment results, packaging's net sales in the first quarter we're up 6.5% and core sales were 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.

[Sal Abbate:]

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.

[Operator:]

You have a question from John Babcock from Bank of America.

[John Babcock:]

And we talked during the quarter. I guess I just want to start out on in packaging. Obviously you've started to see some improved growth here and it seems like the corrugated markets are plugging right on. How are you kind of thinking about -- you mentioned expecting some sign back half in part through the 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.

[Sal Abbate:]

Great. And 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 are 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 qualms being so volatile versus last year, those numbers are going to be what I would say much higher than other periods. But then we'll 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:]

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

[Sal Abbate:]

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

[John Babcock:]

Okay. That's great. And then just Facility Solutions, in different parts of the country are reopening, the US obviously, 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 how will it look there?

[Sal Abbate:]

Yes. Thanks John. We are 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 MPP, obviously had become a more meaningful portion of our portfolio. And so we see those continuing to grow. And in fact, as businesses reopened 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 2 offices like government. And so we expect those 2 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 are 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:]

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 would be helpful.

[Sal Abbate:]

Sure. I'll start John. I'll ask Steve to provide some commentary as well, but the primary driver of our earnings guidance increases our packaging growth and it really drove a significant portion of our performance over plan 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 we'll see the effects of cost savings from last year's moves. And then lastly our disciplined cost and price management, which frankly we put in place about a year and a half 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 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 the 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 if those are the things that could go right, I think if there were the obvious third or fourth wave of the pandemic, it could create a constraint on the balance of the year. We were not anticipating this. But a wholesale shift to remote working, that could put a strain on our facilities 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 were comfortable moving the range as high as we did. Steve anything to add there?

[Steve Smith:]

Yes. I have 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 corrugated and resin that Sal mentioned really impacting our pre-tax guidance, not so much adjusted EBITDA, because it does get adjusted through the life-of calculation, which we can talk about, but. So, upside on bad debt expense and a little bit of downside on inflationary life-of risk.

[John Babcock:]

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

[Steve Smith:]

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 three 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 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:]

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, Sal, you could talk about really 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.

[Sal Abbate:]

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 that much about the print and publishing side, but we are working, as part of that restructuring plan, 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 vine 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 young history of Veritiv. 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, 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?

[Steve Smith:]

Yes, just on the capital side, Sal. John, as we're thinking about strategic needs, we through our treasury group and Dina Bell, 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 server purchase program because our leverage ratio is so low and the performance is still strong.

[Sal Abbate:]

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 start the year, as well as the significant progress we've made toward our longterm 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 review our second quarter 2021 results. Thank you.

[Operator:]

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