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spk01: Good morning and welcome to Veritas Corporation's second quarter 2022 financial results conference call. As a reminder, today's call is being recorded. We will begin with open remarks and introductions. At this time, I would like to turn the call over to Scott Palfreyman, Vice President of Finance and Investor Relations. Mr. Palfreyman, you may begin.
spk02: Thank you, Julie, and good morning, everyone. I'm joined on today's call by our CEO, Sal Abate and our CFO, Steve Smith. After my remarks, Sal will share an update on second quarter business performance, followed by Steve, who will provide more details on our financials. After Steve's comments, Sal will conclude by providing an update on our revised outlook.
spk05: We will then open the call for your questions. Before we begin, please note
spk02: that some of the statements made in today's presentation regarding the intentions, beliefs, expectations, and or predictions of the future are forward-looking. Actual results could differ in a material manner. Additional information on factors that could cause results that differ from those in the forward-looking statements is contained in the company's SEC filings. This includes the risks and other factors described in our 2021 Form 10-K. and the company's other publicly available reports and exhibits filed with the SEC. Today's call and presentation slides will contain non-GAAP financial measures. The reconciliation of these non-GAAP measures to comparable 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 will turn the call over to Sal.
spk07: Thank you, Scott. Good morning, everyone, and thank you for joining us. Today, we are proud to report another quarter of strong financial performance highlighted by double digit organic revenue growth and the highest levels of adjusted EBITDA and net income for any quarter in the company's history. Adjusted EBITDA in the second quarter was a record $136 million, representing an 85% increase compared to the prior year. The second quarter marked the eighth consecutive quarter of year-over-year adjusted EBITDA dollar growth. Second quarter adjusted EBITDA margin was 7.5%, which was more than a 300 basis point improvement compared to the prior year. For the first half of 2022, adjusted EBITDA was $256 million, a 92% increase compared to the first half of 2021. Net income in the second quarter was $91 million, reflecting growth of more than three times that of the second quarter of 2021. The resulting diluted earnings per share in the second quarter were $6.12 compared to $1.62 in the second quarter of 2021. It's worth noting that net income for the first half of 2022 was approximately $170 million, which was greater than the full year 2021. We believe that two straight years of consistent improvement in earnings growth and nearly three years of adjusted EBITDA margin growth demonstrates the sustainability of our performance. Despite the challenging supply chain environment, we achieved year-over-year top line revenue growth in each of the past five quarters, driven by both volume and price. Additional factors behind our consistent financial performance include the continued execution of our commercial, operational, and back office strategic initiatives. Over the past few years, we worked diligently to streamline our operating model and to reduce our expense base, which helped enable sustainable and profitable sales growth. In the second quarter, we continued to see strong revenue growth in our packaging segment. Packaging revenue grew nearly 10% compared to the prior year and adjusted EBITDA increased 14% to $108 million. This marked the 10th consecutive quarter of year-over-year adjusted EBITDA dollar growth for this segment, highlighting the ongoing impact of our commercial excellence and supply chain initiatives on our segments. Packaging's adjusted EBITDA margin was 10.8% in the second quarter. After removing the impact of our divestiture of Canada, organic packaging revenue in the second quarter increased 15% compared to prior year. The segment's above-market revenue growth was driven by specialized and customized solutions provided to customers in the manufacturing, food and beverage, and healthcare industry verticals. Our sustainable solutions, along with our front-end design, Custom kitting and inventory management value added solutions also contributed to our strong revenue growth during the second quarter. Today, approximately 50% of our packaging segments revenues are generated by solutions customized to meet the specific needs of our customers. We are especially well equipped with product and industry vertical focus specialists who navigate the complex needs of each customer. While not immune from the effects of supplier price and wage inflation, we have made significant process enhancements over the last several years to offset a portion of their impact. We've strategically exited certain businesses with lower growth and return profiles, such as previously announced divestiture of our Canada business. These types of actions have positioned the company to perform well in both volatile and challenging environments like the COVID-19 pandemic. We believe these strategic actions will continue to allow Veritiv to outperform many competitors in the event of an economic slowdown. I'll now turn it over to Steve to provide more details on our financial performance for the second quarter. After Steve's remarks, I'll provide an updated outlook for the remainder of the year. Steve?
spk06: Thank you, Sal. and good morning, everyone. I will provide more details on our segment performance, as well as updates related to cash flow, leverage, and our share repurchase program. As we review these results, please note that when we speak to organic results, we are referring to the reported results, excluding the impact of the sale of our Canada and WorldSource businesses. Additionally, our second quarter of 2022 had the same number of selling days as the last year. Starting with the packaging segment, on a reported basis, second quarter revenue increased 9.5% compared to the prior year, while organic revenue increased 15.2%. Second quarter organic revenue growth was primarily driven by higher market prices and, to a lesser extent, volumes. Revenue in the second quarter increased across all product category and industry verticals. We saw double digit revenue growth in key industrial verticals such as manufacturing, food and beverage, and healthcare. We reported double digit sales growth in nearly all of our broad range product categories led by corrugated, cushioning, kitting, and specialty items. Strength in the U.S. market of mid-single-digit volume growth was somewhat mitigated by softness in Asia due to COVID-19-related economic shutdowns. For the second quarter, the packaging segment reported adjusted EBITDA of $108.4 million, which was an improvement of 13.6% compared to the prior year and the 10th consecutive quarter of year-over-year adjusted EBITDA dollar growth. Packaging's adjusted EBITDA margin was 10.8%, a record for the second quarter, and 40 basis points higher than the last year. Shifting to the facilities solutions segment, reported revenue for the second quarter declined 12.9% compared to the prior year, to $195.8 million. When adjusted for the Canada business sale, organic revenue increased 8.4% versus last year. As a reminder, the Canada business was primarily within the facility solutions and print solutions segment and highly concentrated across lower margin products, customers, and industry verticals. Our facility solutions segment benefited from the strong return of away-from-home activity within the entertainment and hospitality verticals. Robust sales performance in away-from-home products, such as towels, tissues, food service, and can liners, was partially offset by the expected lower sales in COVID-19-related personal protective equipment. Second quarter adjusted EBITDA for facility solutions was $16 million. an improvement of 53.8% over the prior year. The resulting adjusted EBITDA margin for the second quarter was a record 8.2%, which was a 360 basis point improvement over the prior year. For print solution segment, second quarter reported revenue increased 21.3%, while organic revenue increased 28.5% compared to the prior year. Although second quarter print volume declined in the mid single digit range versus the prior year, price remained strong as supply chain disruptions continued. In the second quarter, print solutions generated record adjusted EBITDA of $60.5 million and an adjusted EBITDA margin of 10.2%. Over the last several years, we have fundamentally changed the operating model of this segment to anticipate market changes and proactively lower risk and improve profitability. These foundational changes to our operating model, in addition to favorable market conditions, have enabled us to sustain our performance at higher than historic levels.
spk05: Moving now to cash flow.
spk06: For the quarter ended June 30th, 2022, cash flow from operations was $68.2 million. Subtracting capital expenditures of $2.2 million from cash flow from operations, we generated free cash flow of $66 million in the second quarter. Our net debt to adjusted EBITDA leverage ratio, based on our trailing 12-month results, was a record low 0.7 times, well below our long-term target of three times. Our historically low leverage profile and strong free cash flow generation continues to provide financial and strategic optionality to support our long-term organic and inorganic growth objectives. I'll conclude with a share repurchase update. We are pleased with the progress we've made with our $200 million 2022 share repurchase program. Through the end of the second quarter, we repurchased approximately 780,000 shares, or roughly 5% for our fully diluted shares and have $95 million remaining under the program.
spk05: I'll now turn the call back to Sal to provide an updated outlook for the rest of the year. Sal? Thanks, Steve.
spk07: In summary, we are pleased with our second quarter performance collectively and across each of our business segments. We have meaningfully improved the fundamentals of the business through relentless execution of our multi-year strategic initiatives. which further enhanced our ability to solve our customers' complex problems while driving efficiencies within our business and reducing our leverage. One key strategic initiative was our 2020 restructuring plan where we rebalanced our warehouse footprint to better align with the long-term needs of our packaging customers. From the summer of 2020, when we announced the plan, through the end of the second quarter of 2022, we have exited approximately 45 warehouses across our network. Another initiative was the reduction of our distribution and back office expenses to align with the ongoing needs of the business. Finally, we have also strategically exited certain lower margin businesses, such as the recent sale of our Canada business. The benefits from these strategic initiatives are not one time in nature, and we expect residual benefits from these actions going forward. These multi-year efforts have allowed us to continue to improve adjusted EBITDA margins despite the volatility in the supply chain. Our financial discipline has also prepared us to effectively manage our business through future market volatility. As the market anticipates a broader economic slowdown, I would note our strategic actions have put us in an exceptionally strong financial position. While we have not seen an economic slowdown yet, as evident by our results, we are prepared with a fortified balance sheet to not only weather a potential economic slowdown, but also to capture value for our shareholders. As I've mentioned before, our diverse portfolio of products, industry verticals, and customers provides a degree of earning stability as we are not overweighted in any one industry vertical or customer. Additionally, unlike some competitors, our performance is not heavily correlated to the commodity markets. We also have the advantage as a distributor to have low capital needs and a highly flexible operating model which allows us to adjust to changing market conditions faster than a manufacturer. Additionally, our customer base spans from small businesses to more than half of the Fortune 500, with no customer representing greater than 5% of total revenue. We are also growing in industries such as healthcare and consumer staples, which are historically more resilient in economic downturns. I would now like to talk about our outlook for the rest of the year. Given our strong performance through the first half of the year, and despite the divestiture of our Canada business, we are increasing our full year 2020 adjusted EBITDA guidance from a range of $445 million to $485 million to a range of $475 million to $505 million. This reflects a $25 million increase to the midpoint of our prior adjusted EBITDA guidance to $490 million. We expect full year 2020 net income to be in the range of $285 million to $315 million, which is more than double 2021 net income. We expect full year diluted earnings per share to be in the range of $19.50 to $21.50, again, more than double 2021. Diluted shares outstanding are expected to be approximately 14.7 million shares. Finally, we continue to expect estimated free cash flow of approximately $250 million and capital expenditures of approximately $30 million for the full year 2022. To provide some visibility at the segment level, starting with the packaging segment, we expect market demand to remain stable and supplier lead times to continue to improve. While our outlook does not reflect any meaningful price changes for the remainder of the year, we will continue to manage through any future changes efficiently and with proper notice to our customers. In facility solutions, we believe we will continue to see strength in away-from-home verticals. Traditional industry verticals such as travel, entertainment, restaurants, and hospitality are trending toward their pre-pandemic levels, helping to partially offset declines from COVID-19-related personal protective equipment. We have fundamentally changed this business through our commercial excellence and supply chain initiatives as well as the recent divestiture of our Canada business. We believe these actions will continue to improve our margins throughout the rest of the year. Switching to our print solution segment outlook. Domestic demand continues to significantly outpace supply due to the systemic shift of milk capacity away from traditional paper grades. We expect the current print market dynamics to continue for the balance of 2022 and well into 2023. As such, we believe our print business will continue to produce adjusted EBITDA margins well above historical levels. As the leading provider of comprehensive business-to-business packaging solutions, we will continue to stay relentlessly focused on the execution of our next wave of long-term strategic initiatives and providing a best-in-class experience for our customers. This concludes the prepared remarks. Julie, we are now ready to take questions.
spk01: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Thank you. Your first question comes from John Babcock from Bank of America. Please go ahead.
spk04: Hey, good morning. Thanks for taking my questions. Just starting out, I was wondering if you might be able to provide some clarity on the drivers of the guidance increase. I assume Part of it comes from the strong 2Q results, also potentially the paper price increases, but any other color there would be helpful.
spk07: Sure, John. Good morning. This is Sal. Yes, well, let me clarify one thing for the remainder of the year. What it does not include is any unannounced price increases. So the second half of the year, we have no price increases for any of the businesses in the numbers we provided. Each segment will be greater than last year. despite the candidate divestiture. If I break it down by business line or by segment, you know, packaging will continue to see growth. We expect a healthy holiday season this year. And I know while the market had taken a step back in Q2 in terms of box shipments, we do expect, and I think the market does expect, a little bit of strength going into the back half of the third quarter and into the fourth quarter and margins holding with still supply and demand imbalances in packaging, although greatly improving. Fast week, we expect to see a steady increase in sales approaching pre-pandemic levels in most verticals with the exception of office. And that's consistent with what we've seen in Q2 and carrying into Q3. And in the print segment, we continue to see a significant imbalance between supply and demand And we basically have our third and fourth quarters estimated to be our allocation as we don't see any influx of imports from either, you know, from Asia to help the situation. And so we expect a strong Q3 and Q4 and frankly would be stronger had we had more access to product for print. So those are the drivers of the strength in the second half of the year. Steve, anything to add to that? Nothing at this time, Sal.
spk04: Okay, that's helpful. And then, you know, just next on packaging, I wanted to kind of get a sense for what you're seeing from a demand perspective there. I mean, any color you could provide on how growth trended from month to month in the quarter. And then also if you could just comment if you're seeing any sort of slowing. You know, I know we've heard that from a number of producers, you know, during the quarter. So any additional points on that, you know, would be useful.
spk07: Sure, John. I'll separate it between kind of our domestic and core traditional business and then the international business. So in the U.S. business, particularly in corrugated and flexibles, we actually saw what I would call a healthy volume number for the second quarter compared to what we're seeing in the market, particularly on box shipments. So our second quarter volume in packaging U.S. was about 3%. And then combining price, it takes you up to the 15% or so organically that Steve mentioned. So we are seeing above market performance and volume. It wasn't as strong as the first quarter, but we definitely saw volume growth in the second quarter versus the market. As we both mentioned, driven by our diversity across all product lines, customers, but in particular, food and beverage, healthcare, and heavy manufacturing. The areas where we saw maybe less strength were international, and that's mainly hampered by the Chinese COVID-19 shutdowns. And so our international supply chain and our international business is heavily weighted toward Asia. And so that business actually did see volume declines in the second quarter, but we believe them to be artificially suppressed from the COVID-19 pandemic. And then in our origin business, not as strong as the first quarter. again, driven by some challenges in the international supply chain. But all in all, for packaging, we did see above-market growth in volume, particularly here in the U.S.
spk04: Okay. And, you know, I recognize it's probably still too early to provide 2023 guidance, but I was wondering if you could kind of talk about different scenarios that might play out for the business over the next couple of quarters, and particularly should the macro environment continue to soften?
spk07: Yeah, so first I'll comment, John, that we don't have a recession built in to the back half of 2022. While we're not prepared to give 2023 guidance yet, I will provide maybe some general color overall. You know, we do expect, and maybe I'll break that down by segment because there's more clarity in some than others. You know, we do expect the imbalance of supply and demand and print to carry through the end of 2022. into 2023. So, you know, the probability of that supply chain rebalancing and becoming healthy again in the next six to nine months isn't clear to us. And so, you know, we see elevated demand and shortened supply and that going into 2023. It's hard to say in packaging what's going to happen in 2023. And so I'll refrain from those comments until most likely our November call. But we do again see continued improvement on the FS side as businesses are getting back to a healthy return to pre-pandemic level. So we see that continuing into the balance of the year with a relatively strong demand into the holiday season. What I can comment on is maybe some of our margin sustainability going into 2023 and the back half of 2022. And those are those four initiatives that we continue to mention First is our cost and price discipline. And, you know, we do have future waves of improvements inside the company with respect to cost and price discipline that is excluding anything that might happen from a market price increase. We have our 2020 restructuring plan that will continue to drive improved margins in the back half of 2022 and into 2023. And that's primarily coming from our supply chain operations and back office initiatives. We'll have the segment mix improvement, and that is higher margin customized packaging solutions driving the third and fourth quarter into next year. And then lastly, the divestiture of our lower margin ROIC businesses like Canada, Rolls-Royce, Saufel, they continue to have margin accretion going into the second half of the year and into next year. I might also mention just in our packaging business that Recall that we are less beholden to the commodity markets, commodity markets being kind of resin-based and corrugated, which are less than 35% of our portfolio, and the other 65% come from the ancillary packaging products where we have highly customized solutions and things like kitting and automation. And so that will help continue to drive margins north in the second half of the year and tailing into 2023. Steve, anything to add to that?
spk06: So just taking a look at the balance sheet as we look at the different scenarios for 23, as we commented in our prepared remarks, John, as you well know, the balance sheet net leverage is down to 0.7. So should there be a macro-driven softness in 23, we feel pretty well prepared from that perspective.
spk04: Gotcha. And actually, just on that point on the balance sheet, it did look like your long-term debt declined. Just want to clarify, did you pay down a meaningful amount of debt or was there some timing at stake there?
spk07: Steve, you want to take that? Yeah, sure, Sal.
spk06: So we did pay down debt. The proceeds from the Canadian asset sale came in during the quarter. We used some of those proceeds for the ongoing share purchase program, and both the increased income statement performance, the LTM EBITDA, as well as the reduction of debt is what led to that lower leverage, John.
spk04: Okay. Yeah, I wasn't just talking about the ratio, but also the absolute amount. It looked like that declined about, I think, $100 million or so.
spk06: Mm-hmm. Yes. Okay.
spk04: All right. So out of curiosity, I mean, is there like an absolute level of debt you guys are, you know, comfortable at? I mean, you're already, you know, pretty low overall from a leverage standpoint. But, I mean, is there, you know, kind of a level where you'll bottom out here or, you know, how should we think about that?
spk07: Well, John, we, you know, we have signaled that historically we look for, you know, to be under three times leverage. As you pointed out, we're significantly below that. So we do have some optionality and our long-term goal is to remain you know, around three times plus or minus. So that does give us some capital allocation decisions to make here over the next six to nine months. Things that we've mentioned before, our M&A pipeline is active and we're actively looking for attractive both scale and scope opportunities with that regard. Steve, anything you want to add to that? No, Sal.
spk04: All right, thanks. And then just my last question, I was wondering if you could kind of walk through the typical free cash flow bridge and then I'll turn it over. Absolutely.
spk06: So, sure. So, John, let's do it in two steps as we think about it. Let's take adjusted EBITDA down to net income and then from net income to free cash flow so we can give you the whole walk. As Sal mentioned, the midpoint of the range now in adjusted EBITDA is $4.90. And to get to the midpoint of that income range of 300, the reduction of 190 has four elements to it. We have DNA that's in the neighborhood of 50 million, interest expense that's now running only 15 million, other expenses, mostly LIFO, are about 25 million, and then taxes will be approximately 100 million. So those four items are 190, and that takes us from the 490 midpoint of EBITDA to approximately 300 of net income. From net income to free cash flow then, we'll go from 300 million to approximately 250. That happens also to have four items that are larger items, and the sum total of those items is about 40 million net reduction. First, you have the add-backs of DNA of 50 million, the subtraction of non-cash items like bad debt and deferred taxes of about 20 million, We guided again to the CapEx of approximately $30 million use, and then the use of working capital given the revenue increase of about $40 million. So a net of those four items is about a $40 million use, which takes us from the $300 to about $260. So we guided to approximately $250. Okay, perfect.
spk05: Thank you. Sure.
spk01: Your next question comes from George Staffos from Bank of America. Please go ahead.
spk03: Hi, everyone. Good morning. Thanks for taking my question. I guess the first question I had, guys, and I know it's very difficult to be able to look out this far with any kind of precision, but what gives you comfort in when the supply chains might open up in print or said differently, why it'll be very tight and you'll be on allocation through the end of the year? Any thoughts on that? And then I had a couple of quick follow-ons.
spk07: Yeah, good morning, George. Thanks for the question. You know, with respect to, say, the balance of the year in print, just in dialogue with our domestic suppliers and our key European suppliers, and given the fact that capacity continues to come out, at least of the U.S. supply chain, you know, that gives us the predictability and visibility that says the supply chain isn't going to improve before the end of the year. As we think about what might change that, obviously a demand slowdown would create that in a macroeconomic way. But the additional imports from Asia would really be the tipping point to, I would say, dramatically change the current imbalance. And that supply chain takes a good six months to fill. And there's still challenges with containers and product on the water. And so that's what's giving us, I guess I would say, comfort or angst that the supply chain will remain tight at least for the next, you know, call it six to nine months.
spk03: Okay. Sal, on that point, have you been in touch with some of the Asian paper producers to have that view? And also, are your folks talking to, you know, cargo vessel companies and so on to get a triangulation relative to what your print customers are saying in North America and Europe?
spk07: Yeah, I mean, we are absolutely reaching out to all outlets to try to understand the situation. We're doing a comprehensive study, actually, over the next several months that will really help us inform our 2023 through 2025 guidance and what that long-term capacity, demand, and supply balance look like. And so we'll be in better shape, George, to comment on that in the November timeframe.
spk03: Okay. Appreciate that. Switching gears and forgive the elemental question. So there have been some recently announced price increases in box board, I think like in the last 24, 48 hours. Recognizing a corrugated is going to be more important. Does that affect your business at all in terms of what might be happening in the folding carton business or not really? And then could you remind me what is left on the process improvement, what's left on the benefits from the restructuring that could benefit results in 2022, the rest of the year, and really more importantly from our Venture Point 23 and beyond. Thank you.
spk07: Sure, George. I'll take the first half of the question regarding packaging and specifically price increases, and maybe I'll comment on all the segments. And then, Steve, I'll turn it over to you to give some color on the process improvement benefits, at least for the balance of the year. You know, as I mentioned earlier, George, we do not have any further price increases in the numbers we provided today for guidance and packaging, frankly, or print or facility solutions. But I would tell you that because of this imbalance that we continue to see in the supply chain, particularly in packaging and print solutions, you know, we would be on the higher end of the guidance in that we would expect increases more than we would expect decreases. in the next five months, four or five months. So while we didn't bake it necessarily into our guidance range, you know, we do believe that it would be on the higher end of the range if those price increases continue to come through, and we would appropriately pass those on like we have over the last several years.
spk03: Right, but just one quick, I mean, what happens in box board have a significant effect in your business relative to corrugated or not so much?
spk07: Not as much as corrugated, no. No, we're much more heavily weighted corrugated, for sure.
spk03: Thank you. Thank you. And on processing?
spk06: Yeah, so there's several elements to that. Sal mentioned the restructuring plan of 2020 that trickled into this year. So there's a small charitable benefit, George, to 23 and beyond here. We also have the segment mix helping the consolidated margins. As you know, we divested of a lower margin, lower ROIC business in Canada. That will carry forward into future years. And we also are seeing that the cost and price discipline that we put in place as markets as there's been volatility in prices in the market, is also being carried over into future years. So while not an operational efficiency, it's a back-office efficiency that we didn't enjoy three to four years ago that we do enjoy now.
spk05: Thank you, Steve. I'll turn it over.
spk01: And there are no further questions at this time. I will turn the call back over to Sal Abate for closing remarks.
spk07: Thank you, Julie. Well, we are on track for another record year of financial performance, thanks to our talented and customer-focused employees that are helping lead the way. I would like to thank all of our employees for their dedication to delighting our customers and delivering an outstanding quarter. Julie, that concludes our call. Thank you.
spk01: This concludes this conference call. You may now disconnect.
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