Veritiv Corporation

Good morning, and welcome to Veritiv Corporation's fourth quarter and full year 2022 financial results conference call. As a reminder, today's call is being recorded. We will begin with the opening remarks and introductions. At this time, I would like to turn the call over to Scott Palferman, Vice President of Finance and Investor Relations. Mr. Palferman, you may begin.

Thank you, Colby, and good morning, everyone. I'm joined on today's call by our CEO Sal Avate and our CFO Steve Smith. After my remarks, Sal will share an update on full year and fourth quarter business performance, followed by Steve, who will provide more details on our financials. After Steve's comments, Sal will conclude with an outlook for 2023. We will then open the call for 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 are forward-looking. Actual results could differ in a material manner. Additional information on factors that could cause results to 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 2022 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.

Thank you, Scott, and good morning, everyone, and thank you for joining us. 2022 was another record-breaking year of financial performance for Veritiv, as we continue to relentlessly execute against our long-term strategic and operational objectives. I am extremely proud of the achievements our company made over the last several years. During 2022, we focused on our growth objectives and efficiency initiatives. We divested two low-margin, non-strategic businesses with low synergies combine our print and publishing businesses for efficiency, and maintain cost and price management discipline across all of our business segments. These actions contributed to the best earnings performance for any year in Veritiv's history and above market performance within our packaging segment. This success was made possible by the hard work of our approximately 5,000 diverse and talented teammates who focus every day on delighting our customers. This morning, we announced record adjusted EBITDA, adjusted EBITDA margin, net income, and diluted earnings per share for both the fourth quarter and the full year 2022. For the full year 2022, we reported year-over-year organic sales growth of 13.5%. We achieved record adjusted EBITDA of $518 million for the year, representing growth of more than 50% compared to the prior year. 2022 also marked the third consecutive year of double-digit year-over-year adjusted EBITDA growth. Additionally, all three segments reported record full year adjusted EBITDA, despite the divestiture of our Canada business earlier in the year. Full year adjusted EBITDA margin was a record 7.2%, representing approximately 220 basis points of margin expansion over 2021. Since 2019, we've more than tripled our adjusted EBITDA margin. During this time, we focused our attention to higher growth and higher margin businesses while executing our strategic and operational efficiency initiatives. We believe the majority of the adjusted EBITDA margin improvement over the past several years is sustainable due to the commercial and operational efficiency initiatives we have undertaken. I'll provide more details on these strategic initiatives in a few minutes. Full year 2022 net income was $338 million, representing year-over-year growth of 134%. The resulting diluted earnings per share was a record $23.29 and reflects year-over-year growth of 158%. Both net income and diluted earnings per share for 2022 were approximately 10 times higher than our 2020 results. Adjusted EBITDA outperformed the top end of our initial guidance range by nearly 20%. We increased our guidance three times during 2022 and meaningfully exceeded our initial expectations. This was despite two strategic divestitures during the year that, in aggregate, contributed approximately $33 million of adjusted EBITDA in 2021. Net income and diluted earnings per share also beat the top end of our initial guidance range by 35% and 43%, respectively. This past year, we returned over $200 million to shareholders in the form of a share repurchase program and paid our first dividend in December of 2022. We also invested in the business to improve our value-added service offerings, including packaging design, as well as the end-to-end customer experience. Our return on invested capital, or ROIC, ended the year at a record 35%, which reflects a nearly six-fold increase since 2019 as a result of both working capital improvements and margin expansion initiatives. For the first time in our history, we established a strategic scorecard that aligns with management incentives. We set a target to hire at least 40% of new mid to senior level positions from underrepresented groups in 2022. I am proud to say we exceeded this goal. Workplace safety remains another key area of focus for Veritiv. Our investments and training supported a safer work environment for our employees and a best-in-class safety rating across our supply chain network. As a result, our total injury rate beat its target for the year. These metrics are in addition to our corporate sustainability goals. In 2022, we achieved meaningful progress against our goals. Our sustainability initiatives support Veritiv being a better corporate citizen and help our customers achieve their own sustainability goals. We look forward to providing more details on our 2022 achievements when we publish our annual corporate sustainability report next quarter. Turning now to the fourth quarter of 2022. Organic sales grew 1.8% as compared to the fourth quarter of 2021. This was driven primarily by organic sales growth within our print solutions and facility solutions segments and was partially offset by lower than expected sales in our packaging business. Higher market prices drove organic revenue growth during the fourth quarter of 2022, which more than offset weaker volume. Adjusted EBITDA was a fourth quarter record of $121 million, reflecting growth of slightly more than 4% as compared to the prior year. Adjusted EBITDA margin was 7.3% for the fourth quarter and reflected the 12th consecutive quarter of year-over-year adjusted EBITDA margin expansion. Net income of $72 million was also a record for the fourth quarter, reflecting year-over-year growth of 26%. The resulting diluted earnings per share for the quarter was $5.20, which was a fourth quarter record and represented growth of 42% versus the prior year. Sales performance weakened as we progressed through the fourth quarter, with the last two weeks of December being unusually weak. In packaging, North American volumes declined in the high single digit range during the fourth quarter, with volume down across most industry verticals. We believe unreliable and inconsistent supply chain conditions led customers to accumulate excess inventory during the last couple of quarters of 2022. As a result, and consistent with industry trends, we believe customers sold through their existing inventory and this destocking activity negatively impacted purchasing behavior during the fourth quarter. The print solution segment experienced a volume decline in the high teens range for the quarter. We believe print demand softened and customers worked through their existing excess inventory that had built up over the past quarter or two as supplier lead times began to improve. Finally, volume decline in the mid single digits range within facility solutions segment during the fourth quarter as strength in away-from-home categories was offset primarily by lower volume in the personal protective equipment and skincare categories. Although the effects of customer destocking were more significant than we anticipated in the fourth quarter, preliminary sales results for January in our packaging and facility solutions businesses showed an improvement relative to December. Early indications support our belief that customer inventory destocking within packaging was more pronounced during the fourth quarter, and we expect customer inventories to normalize during the first quarter of 2023. Within print solutions, we believe customer inventory levels will begin to normalize by the end of the second quarter. Our record earnings performance in 2022 demonstrated a strength and resiliency of our diversified business model. We support a wide range of customers, ranging from small businesses to more than half of the Fortune 500, with no customer representing more than 5% of total revenue. We believe our industry vertical exposure is also well balanced and not overweight to any specific industry. Additionally, we supply a healthy balance of more recession resistant industries such as healthcare, consumer staples, and heavy manufacturing. From a product perspective, only one third of packaging's revenue comes from products tied to an underlying commodity index. The remaining approximately two thirds of our packaging segment revenue comes from products that are not directly tied to an underlying index. These products are not as susceptible to the volatility we have seen in commodity-based products. As we previously discussed, we are now focused on the next wave of strategic initiatives. These will include further strengthening our strategic sourcing relationships and portfolio management practices, enhancing our e-commerce and omnichannel capabilities in evaluating our next generation supply chain model. While we have focused on product and portfolio rationalization in the past, we expect our next round of cost and price management initiatives will build upon our prior success by removing high cost to serve products and aligning with strategic suppliers who provide the best combination of price, terms, and service. We believe this will result in better value for our customers. We are also enhancing our digital capabilities with investments in technology to improve the customer experience with new tools and capabilities that are expected to launch for select geographies later this year. To support this digital offering, we are also investing in front-end and back-end system enhancements to improve the customer and employee experience. Finally, we continue to evaluate ways to optimize our next generation supply chain to meet the evolving needs of our customers and support our digital sales efforts. Before I turn the call over to Steve to provide more segment-level financial performance, as well as comment on the balance sheet for the fourth quarter, I want to remind everyone that Steve Smith announced that he plans to retire from Veritiv in the fall of 2023. Sadly, this will be Steve's last earnings call with Veritiv. I want to personally thank Steve for his dedication, loyalty, and guidance over his nine-year tenure with Veritiv. For those that don't know, Steve was the second employee hired when Veritiv was formed in 2014. He will be sorely missed by all levels of the organization. Best of health and happiness, Steve. After Steve's remarks, I'll provide details on our 2023 guidance. Steve?