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spk00: 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 Palfreyman, Director of Finance and Investor Relations. Mr. Palfreyman, you may begin.
spk03: Scott Palfreyman Thank you, Misty, and good morning, everyone. On today's call, you will hear prepared remarks from our CEO, Salah Bate, 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.
spk04: 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 and 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 continue 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 work in 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 ExpedX 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 the UWWH ownership position on our stock of the last few years has been lifted. We believe our share repurchase plan reflects a potentially high-yielding deployment of capital and will 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. Pixel Specialty Solutions, a current supplier to Veritiv, acquired this business as part of larger strategic moves in the print industry. The sale of the role source 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 pre-tax 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 pre-tax 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 one 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 well-being 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?
spk02: Thank you, Sal, and good morning, everyone. With Sal having covered consolidated earnings performance, I will provide an 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 less shipping day in the first quarter of 2021 than 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 one 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 continued to recover, but some areas within the manufacturing, like automotive and aerospace, remained 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 margins. 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 facilities 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 continued to be depressed by market dynamics related to COVID-19. Despite these ongoing market headwinds, first quarter adjusted EBITDA for facilities solutions was a record $11.5 million, or 28% higher than prior year. Adjusted EBITDA margin for facilities solutions of 5.6% remained near record high levels due to our multi-year 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 mixed 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 pre-tax 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 2.0 times, down significantly from 3.5 times 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 31st, 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.
spk04: 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 cost 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 of 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 the 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.
spk00: At this time, if you would like to ask a question, press star 1 on your telephone keypad. Again, that is star and the number 1. You do have a question from John Babcock with Bank of America.
spk01: Hey, good morning, and good job during the quarter. I guess I just want to start out in packaging. You know, obviously you've started to see some improved growth here, and it seems like the corrugated markets are plugging right along. You know, how are you kind of thinking about, I mean, you mentioned, you know, expecting some slowing back half and part due to tougher comps, but also want to kind of get your sense on whether we should now expect, you know, growth to be pretty steadily positive here, you know, or if there, you know, might be reasons to expect, you know, that there could be some kind of fluctuation over time.
spk04: Great. Good morning, John, 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'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 we'll stabilize in Q3 and Q4, but still expect to see growth. We do expect to continue to see, you know, stronger growth in our international business and our rigid business, and that has been really continuing since the latter part of last summer.
spk01: And so what's a reasonable long-term growth rate to assume here, you know, recognizing, you know, obviously I think that could change over time, but, you know, what are you kind of thinking there right now?
spk04: Yeah, we expect our packaging business to grow at, you know, GDP plus, which is, you which is what we've historically targeted.
spk01: Okay, that's great. And then just facility solutions, you know, in different parts of the country are, you know, reopening the U.S. obviously, are reopening right now. And so I just want to get a sense, you know, what you're hearing from customers, you know, what your thoughts are on the trajectory of how that business could improve, you know, and overall outlook there.
spk04: Yeah, 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, skin care, wipes, sanitizers, and those have become a more meaningful, and PPE, obviously, have become a more meaningful product. 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 and hospitality, particularly a 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 in things like concerts and sporting events projected 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.
spk01: Okay. And then next question, you know, you raised your guidance here. I was wondering if you might be able to talk about some of the, you know, some of the factors that are driving that and also, you know, what could go right, what could go wrong. So, you know, obviously we've heard about rising price levels across, you know, a number of the different product lines that you have, you know, particularly on the paper side and corrugated side, you know, and then we've heard about rising fuel prices. So if you could just kind of, you know, go through the different factors that, you know, impact that EBITDA guidance, that'd be helpful.
spk04: Sure. 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. It really drove a significant portion of our performance over plan and the first quarter over estimates. And, again, as we mentioned, we expect those to continue. Also, just continued operational expense efficiencies increased. 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 a full year of cost savings from last year's moves. And then lastly, our discipline 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 on to 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. 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 we're 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, you know, the marketing insights from the market itself, it says that prices should stabilize, you know, 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, 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 things that could go right. I think if there were the obvious third or fourth wave of the pandemic could create a constraint on the balance of the year. You know, and we're not anticipating this, but a wholesale shift to remote working, you know, that could put a strain on our facility solutions business potentially. But I think those are less likely than, you know, 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?
spk02: Yes, Al, just two 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 through the balance of the year. So upside in the fact that we have lower bad debt expense. And then secondly, on the downsides, on the downside rather, there's the inflation and corrugated resin that Sal mentioned really impacting our pre-tax guidance, not so much adjusted EBITDA because it does get adjusted through the LIFO calculation, which we can talk about. So upside on bad debt expense and a little bit of downside on inflationary LIFO risk.
spk01: Okay, that's helpful. And then if you could just talk about the pre-tax flow guidance, you know, with the higher earnings outlook, I assume there are probably – some offsets, you know, perhaps from working capital. But if there's anything else there worth highlighting, that would be useful.
spk02: Sure. So, yeah, 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, three steps to it. First, we start with a midpoint of our revised adjusted EBITDA guidance of $230 million. And then we have five different cash usages, which total about $145 million. Those are CapEx, which we guided to over $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 got it to at least $75 million of free cash flow for the year.
spk01: Yeah, that's right. And then just last question, just wanted to make it a little bit more strategic before I turn it over. I was just wondering if, you know, Sal, you could talk about, you know, really like how you're thinking about the main priorities for this year, you know, what – you know, what you want to accomplish, you know, and this is, you know, incremental to, you know, what you already have in place. So, you know, obviously you're completing the restructuring program, but we want to get a sense for, you know, what kind of the focus is from here.
spk04: Yeah. Sure, John. I think, you know, just as you stated, the successful completion of our restructuring plan, which includes our footprint consolidation to, you know, to right-size 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, you know, kind of a more robust strategy print supply chain model that will continue to drive efficiencies. and our working capital down in that business while serving our customers well. But, you know, 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, you know, 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 the – 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 omnichannel 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 And, Steve, anything to add to that?
spk02: Yeah, just on the capital side, Sal, John, as we're thinking about strategic needs, we, through our treasury group and Guy Nivelle, we're working on an ABL extension. A year ago when we amended our facility, it was a five-year facility. We're going to extend that facility. to give us increased flexibility. And then also, as we mentioned in our prepared remarks, that we're continuing our share repurchase program because our leverage ratio is so low and the performance is so strong.
spk01: Okay, great. Thanks, Steve and Sal. And that's all I can say. Great. Thank you, John.
spk00: Okay.
spk04: 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 continue 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 will review our second quarter 2021 results. Thank you.
spk00: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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