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Veritiv (NYSE:VRTV)
Q4 2019 Earnings Call
Feb 27, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning and welcome to Veritiv Corporate's fourth-quarter and full-year 2019 financial results conference call. As a reminder, today's call is being recorded. [Operator instructions] At this time, I would like to turn the call over to Tom Morabito. I would like to turn [Audio gap] director of investor relations.

Mr. Tom, you may begin your call.

Tom Morabito -- Director of Investor Relations

Thank you, Heather, and good morning, everyone. Thank you all for joining us. Today, you will hear prepared remarks from Mary Laschinger, our chairman and chief executive officer; and Gui Nebel, our vice president of financial planning and analysis and treasurer. Steve Smith, our chief financial officer is recuperating from a medical procedure, and we look forward to welcoming him back soon.

Following the prepared remarks, 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, risk factors contained in our 2019 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 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 Mary.

Mary Laschinger -- Chairman and Chief Executive Officer

Thanks, Tom. Good morning, everyone, and thank you for joining us today as we review our fourth-quarter and full-year 2019 financial results. We will also provide some thoughts on the important drivers of our expected full-year 2020 performance and share guidance for the year. Our company consolidated fourth-quarter and full-year 2019 results were highlighted by strong free cash flow as well as improved adjusted EBITDA margins in Packaging and Facility Solutions.

However, challenges in our Print and Publishing segments negatively impacted our overall revenues and earnings for both the quarter and year. Consolidated reported net sales for the fourth quarter were $1.8 billion, down nearly 18% compared to this prior-year period, with our core revenues also declining at the same rate. All four of our segments experienced revenue declines this quarter, some of the revenue decline was planned as we made strategic customer choices in Facility Solutions, Print and Publishing that impacted the quarter. Consolidated adjusted EBITDA for the fourth quarter was $47 million, down about 18% year over year.

The reduction in earnings was largely due to declines in Print and Publishing, somewhat offset by improved margins and lower supply chain and selling expenses. However, adjusted EBITDA margins improved in all four of our segments. Our reported net sales for the year were $7.7 billion, down about 12% compared to the prior-year period, and core revenues have decreased at about the same rate. The revenue decline was largely driven by the Print and Publishing segments.

However, Packaging and Facility Solutions were also down year over year. Adjusted EBITDA for 2019 was $156 million, down nearly 16% year over year. The earnings decrease was driven by the revenue declines, mainly in Print and Publishing, partially offset by improved margins, lower supply chain and selling expenses and lower bad debt expenses. Now I'd like to shift to review the performance by segment.

In the fourth quarter, Packaging core revenues were also down 7% year over year as market conditions in the U.S. further eroded, coupled with price pressures in some product categories. The U.S. market has weakened over the past year with industry box shipments slowing and corrugated pricing down in the second half.

Pricing for resin-based products were also down in the second half. For the year, Packaging core revenues were down 2.6%, which we believe was in line with the market. Packaging adjusted EBITDA decreased 3.6% year over year in the fourth quarter and decreased 1% for the full-year 2019. The strong margin management kept our adjusted EBITDA relatively flat to prior year despite the revenue decline and the negative impact of increased storage costs experienced in the first half of the year due to certain financing leases being replaced by operating leases.

In addition, Packaging's adjusted EBITDA margins increased from 7.1% in the fourth quarter of 2018 to 7.4% in the fourth quarter of 2019. For full-year 2020, we expect Packaging revenues to decline in the first half of the year, but this -- and was slightly positive compared to 2019. And for adjusted EBITDA margins to improve from last year as we continue to focus on operational and selling-related efficiencies. Moving on to our Facility Solutions segment.

As stated in prior quarters, we are repositioning this segment for success by making strategic customer choices to better align with our supply chain strengths as well as the market, product, and customer dynamics. These choices negatively impacted our top line results with a fourth-quarter decline of 19% in core revenues year over year. For full-year 2019, core revenues were down 9%. These choices have resulted in facility solutions becoming a smaller, but more profitable business, as demonstrated by our fourth quarter and full-year 2019 results.

In the quarter, our adjusted EBITDA increased of more than 4% year over year due to lower supply chain and selling expenses as well as improved margins from our strategic repositioning. For full-year 2019, adjusted EBITDA increased about 14%. For 2020, we expect Facility Solution revenues to see declines similar to the full year of 2019. And however, we expect to see a similar adjusted EBITDA level as 2019 due to improved customer mix and supply chain efficiencies, and despite the lower volumes.

Switching to our Print segment. Secular declines driven by lower demand, disintermediation and industry consolidation continued to affect our revenues. Print core revenues declined 25% in the fourth quarter and 21% for the year. This decline was driven by a combination of market dynamics and certain supplier and customer actions that disproportionately impacted our results as well as our choices to manage credit risk.

All these actions have improved the quality of our accounts receivable portfolio and have significantly reduced bad debt charges to their lowest levels in nearly four years. The Print segment's adjusted EBITDA was down nearly 21% in the fourth quarter and 33% for the year due to the revenue decline and margin pressure, partially offset by lower expenses. We expect secular industry trends will continue to negatively impact Print's revenue in '20. However, we expect the industry decline to be less and that we will perform closer to the overall market as we lap several onetime items that affected 2019 results.

The ongoing optimization efforts to reduce costs will only partially offset the earnings impact of the volume declines in 2020. Moreover, taking all these factors into account, we expect Print's adjusted EBITDA rate of decline in 2020 to be similar to that of 2019. In light of the structural decline and ongoing uncertainty in the industry, we will continue to adapt our infrastructure to changes in the business. The Publishing segment core revenues decreased nearly 32% in the fourth quarter and about 22% in 2019.

Similar to Print, Publishing was impacted by continued secular declines in market volumes, but also by these changes in order patterns due to customer consolidations and other factors as well as for credit reasons. Adjusted EBITDA in the segment decreased 13.5% in the fourth quarter and 13% for the year due to the reduction in revenue, slightly offset by improved pricing and cost management. However, our adjusted EBITDA margins did improve for both the quarter and the year. For 2020, we expect Publishing's revenues to decline at a slower rate than 2019 based on industry estimates.

We also believe that earnings could have a modest decline in 2020 based on the variable nature of our expenses in this business and our overall cost management. And now turning to a brief update on our strategy, including our optimization initiative and our 2020 guidance. We previously outlined our strategy to transition the company into a higher growth, higher margin businesses by investing in Packaging and provided value-added services, protecting our leadership positions in Facility Solutions, Print and Publishing and optimizing our business processes post integration. We successfully implemented our optimization plans in 2019, and we will continue doing so in 2020, which is reducing cost and working capital and improving margins.

So, while our optimization initiatives are minimizing the earnings impact of the structural decline in Print and Publishing, in the near term they are not enough to drive substantial improvement in consolidated adjusted EBITDA dollars. We expect to change this dynamic over time. But doing so this year would be challenging given the expectations for Packaging industry growth dynamics. Considering all these factors, we are expecting our 2020 and adjusted EBITDA to be in the range of $140 million to $155 million.

Key drivers of our guidance includes an expectation that Print and Publishing industry have normalized to historical levels of decline and that we perform closer to those levels. We also anticipate an improvement in the Packaging industry in the second half of the year and further reductions in costs and improved margins from our ongoing optimization initiatives. The guidance does not include potential impact to our business related to the coronavirus. Our optimization efforts had a significant positive impact on free cash flow.

2019 was also a record year of free cash flow as we generated $247 million compared to negative $30 million in 2018. The improvement was due to both volume declines and post-integration working capital process improvements, which resulted in a meaningful lowering of accounts receivable and inventory. So, as we indicated on the third quarter call, we do not expect to repeat this free cash flow performance in 2020, and we believe the annual level of sustainable free cash flow is approximately $50 million to $75 million. For 2020, we expect free cash flow to be at least $60 million.

Now I will turn it over to Gui, and so he can take you through the details of our fourth-quarter and full-year 2019 financial performance.

Gui Nebel -- Vice President of Financial Planning and Analysis and Treasurer

Thank you, Mary, and good morning, everyone. We will first review the overall results for the fourth quarter and full year ending December 31, 2019. As we review these results, please note that when we speak to core net sales, we're referencing the reported net sales performance, excluding the impact of foreign exchange and adjusting for any day count differences. And so it relates to day count, we had the same number of shipping days in fourth-quarter 2019 as we had in the fourth-quarter 2018.

Additionally, we had the same number of shipping days during 2019 as we had in 2018. Consolidated net sales for the fourth quarter were $1.8 billion, down 17.7% from the prior-year period, with core revenues declining at the same rate. Our cost of products sold for the quarter was approximately $1.5 billion. Net sales less cost of products sold was $356 million.

Our net sales less cost of products sold, as a percentage of net sales, was 19.4%, up 150 basis points from the prior-year period, largely due to improvements in Pricing, in both segment and customer mix. Consolidated adjusted EBITDA for the fourth quarter was $47.2 million, down $10.4 million or 18% versus the prior-year period. Adjusted EBITDA, as a percentage of net sales, for the fourth quarter was 2.6%, same as the prior-year period. Consolidated adjusted EBITDA in the fourth quarter declined approximately 10.4 million year over year.

Higher corporate and other expenses resulting from a larger unwind of our incentive compensation plan accrual in the fourth quarter of 2018 drove over 40% of the decline. The balance of the decline was mostly driven by the decrease in Print and Publishing segments' earnings. For the year ended December 31, 2019, we had net sales of $7.7 billion, down 11.9% from the prior-year period. Our sales declined 11.7% year over year.

For the year, our cost of products sold was approximately $6.2 billion. Net sales less cost of products sold was approximately $1.5 billion. Net sales cost of products sold as a percentage of net sales was 19%, up about 130 basis points from the prior-year period. Adjusted EBITDA for the year was $165.9 million, a decrease of 15.9% from the prior-year period.

Over 80% of the earnings decrease was driven by the lower earnings from the Print and Publishing segments. Adjusted EBITDA as a percentage of net sales was 2%, down 10 basis points versus the prior year. Let's now move into the segment results for both the fourth quarter and year ended December 31, 2019. In the fourth quarter, Packaging net sales and core revenues were also down 7.4% and 7.3%, respectively, as market conditions in the U.S.

further eroded, coupled with price pressures in some product categories. For the year, Packaging segment's net sales were down 2.8% and core revenues were down 2.6%. For the fourth quarter, Packaging contributed $62.4 million in adjusted EBITDA, down 3.6% from the prior-year period. Adjusted EBITDA as a percentage of net sales was 7.4%, up 30 basis points from their prior-year period.

The increase was due to improved margins from our customer mix and process improvements in margin management. For the full year, packaging contributed $243.5 million in adjusted EBITDA, down 1.3% from the prior-year period. Adjusted EBITDA as a percentage of net sales was 7.1%, up 10 basis points from the prior-year period. Now, similar to the fourth quarter, the increase was due to higher margins from our customer mix and process improvements in margin management, both partially offset by the higher storage cost impact, especially in the first half of the year from certain financing leases being replaced by operating leases.

In the fourth quarter, Facility Solutions net sales and core revenues both decreased 19.2%. The revenue decline was due to our repositioning of this segment for success by making strategic customer choices to better align with our supply chain strengths as well as market, product and customer dynamics. For the year, Facility solutions sales have decreased 9.9% and core revenues decreased 9.4%. For the fourth quarter and full year, Facility Solutions contributed $9.6 million and $33.1 million in adjusted EBITDA, up approximately 4% and 14%, respectively.

Adjusted EBITDA as a percentage of net sales, increased 80 basis points to 3.6% in the quarter and 60 basis points to 2.8% for the year. The earnings increase was primarily driven by lower supply chain and selling expenses as well as improved margins from our strategic repositioning. In the fourth quarter, the Print segment experienced a 25.4% decline in both net sales and core revenues. This decline was driven by a combination of market dynamics and certain supplier customer actions that disproportionately impacted our results as our choices made to manage credit risk.

And for the year, the Print segment had a 21.4% decline in net sales and core revenues were down 21.2%. For the fourth quarter and full year, Print contributed $13 million to $43.1 million in adjusted EBITDA, down nearly 21% and 33%, respectively. The earnings impact of the sales decline in margin pressure was only partially offset by lower expenses. In the fourth quarter, Publishing net sales and core revenues both decreased 31.7% from the prior-year quarter.

The lower revenue was due to continuous secular declines in market volumes, changes in order patterns due to customer consolidation and other factors as well as credit reasons. For the year, the Publishing segment had a 21.7% decline in both net sales in core revenues. For the fourth quarter and full year, Publishing contributed $6.4 million and $21.4 million in adjusted EBITDA, down 13.5% and 13%, respectively. The decrease in adjusted EBITDA can be attributed to the reduction in volume, slightly offset by improved pricing and cost management.

Shifting now to our balance sheet and cash flow. At the end of December, we had drawn approximately $673 million against the asset-based lending facility and had available borrowing capacity of approximately $282 million. As a reminder, the ABL facility is backed by our inventory and receivables of the business. At the end of December, net debt to adjusted EBITDA leverage ratio was 4.1 times, down from 4.7 times in the prior-year period.

I would also note that our long-term net of current portion on the balance sheet has dropped 23% year over year from $964 million to $742 million. For year ended December 31, 2019, cash flow from operations was approximately $281 million. Subtracting capital expenditures of about $34 million from cash flow from operations, we generated free cash flow of approximately $247 million. If we add back the roughly $52 million of cash items due to acquisition, integration and restructuring activities, adjusted free cash flow for 2019 would have been approximately $299 million.

Our strong cash flow in 2019 was primarily due to the lowering of both accounts receivable and inventory which combined, are down approximately $406 million versus the prior year, enabled by volume reductions and process improvements. As Mary mentioned, while we experienced strong free cash flow in 2019, we do not expect to repeat this level of performance in 2020. We believe the annual level of sustainable free cash flow is also approximately $50 million to $75 million. This range uses current levels of adjusted EBITDA and assumes no working capital benefit.

Once again, we anticipate at least $60 million of free cash flow in 2020. Also for 2020, our total capital expenditures are expected to be approximately $40 million. That concludes our prepared remarks. Operator, we're now ready to take questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from John Babcock with Bank of America.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Good morning. Thanks for all the details. First of all, you did quickly reference the coronavirus. I was wondering if you could talk about the impact of that, and what you've seen so far, particularly, I guess, as it pertains to Packaging and Facility Solutions?

Mary Laschinger -- Chairman and Chief Executive Officer

Yes. Good morning, John. So we have not seen any impact to date, obviously, in our -- because it's early on in our performance. And we would expect minimal impact even going forward.

But let me explain where we might see some impact, but of course, it's very difficult to judge. It could come in three ways. First of all, we do have an international business that we operate out of China that supports some technology companies that are manufacturing over there. Our -- and so to the extent that people are not working over there, could impact the supply chain.

The latest word we had on that is that they are going back to work in the course of the next couple of weeks. But it could have some impact in the near term, although we don't believe it to be material to us. The second area where it could impact us is we do source materials from China, in particular, for our rigid Packaging business. It's about -- it's not a huge amount, but it could impact that.

But again, we expect that to have a nominal impact. The third area that it could, which is very unpredictable, is in our -- and both of those, first of all, are in our Packaging business. The third area, also in our Packaging business, which is very difficult to assess is if global supply chains were interrupted supporting the manufacturing companies that we support. Again, we haven't seen any indication of that yet, John.

But if it got that bad, I guess, it could have some impact on us, although again we don't believe it would be significant. And the last area that's more domestic related is -- affects our Facility Solutions business, where we provide service to cruise lines theme parks, those kinds of venues. If people choose to stop visiting or reduced activity, it could have a modest impact on our FS business. But again, at this point in time, we're not expecting a material impact to the company at this time.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Got you. And I assume the aforementioned impact on Facility Solutions is already in the guidance?

Mary Laschinger -- Chairman and Chief Executive Officer

No, it's not because we haven't seen an impact to it as of yet.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Gotcha. And then next, I was wondering if you could just kind of provide a quick update on how the optimization efforts are going in particularly relative to your expectations?

Mary Laschinger -- Chairman and Chief Executive Officer

So I -- our optimization -- yes, so our optimization efforts are going very, very well. So if you go back to 2018, I think we announced that we felt there was at least $100 million of optimization benefits coming from both cost reduction and margin improvement. And then -- I think, at a later point, and maybe it was early '19, we said we thought we could improve our adjusted EBITDA $30 million to $50 million due to those benefits. Where we are, John, is that we have already met that $100 million of optimization benefits that we committed to.

We do see more upside to that, and we haven't signaled what that is but we feel that there is more, which we mentioned in our comments today. So it has gone very, very well, both in terms of improving margins and reducing costs as well as reducing working capital driving the cash flow that you saw this year that was generated. So we're executing, I think, exceptionally well on the three levers of commercial, operational excellence of supply chain and back office. And there is more upside, as we mentioned in the new comments.

As it relates to the EBITDA commitment we made, we caveated that with the uncertainty around Print. And given the tremendous step back we had with the Print and Publishing business in 2019, we would not expect to meet that $30 million to $50 million EBITDA improvement in the time frame that we had put out there, and so it will be delayed for sure. We haven't come back out and said to what -- at what point. But that has been the only negative in terms of those commitments made, is the Print and Publishing revenue and margin declines.

John Babcock -- Bank of America Merrill Lynch -- Analyst

OK. Thanks a lot. And then just on Packaging, clearly, there were some revenue declines in the second half of 2019 and it sounds like you're expecting more declines in the first half. First of all, I guess, could you quantify, essentially, what sort of declines you're thinking about first half? And then it does sound like you are expecting growth for year as a whole.

And on that point, I was wondering if you could kind of talk about what you can do and what levers you have to pull to catalyze growth in Packaging going forward?

Mary Laschinger -- Chairman and Chief Executive Officer

Yes. So yes, we did see an increasing level of decline in the second half, as I mentioned, driven by both volume and price in the Packaging space. And I know you're familiar with the industry dynamics and I think you've seen reports. Our -- some of the benchmarks we use is what's going on in the corrugated market as well as resin-based products.

So as we look at the first half of the year, we would expect -- in general, let me talk about 2020. We're expecting a negative growth in the first half of the year, probably not too different than what we experienced in the second half of '19 and then we're expecting that to improve over the course of the year and anticipating being slightly positive at the end of the year. We do have several levers to pull to drive growth in the business. First of all, just all the work done around optimization in the past year have gotten us more focused in better understanding the business and managing the business.

And then an offshoot of that is we actually anticipate our margins continuing to improve as well. And so even if the top line is challenged, our total gross margin dollars, we will continue to improve based on just managing the business better at post integration. We also have specific programs that we've launched because we are a sizable player in the marketplace to -- that ranges from growing within existing accounts as well as capturing new accounts as well as putting more focus on some of our national accounts because we're one of the few national players in the marketplace today. And so we feel between process improvements and structures, driving a more focused agenda, we believe that we can generate more positive growth toward the end of the year and with positive growth in margins as well.

One of the things that we've addressed in the optimization efforts is better management on both cost and price to -- once we got to integration, which is delivering benefits, and you can see it in our margins.

John Babcock -- Bank of America Merrill Lynch -- Analyst

OK. And then the next, I was just wondering if you could talk about the factors impacting free cash flow, working capital on some of the other items.

Mary Laschinger -- Chairman and Chief Executive Officer

So I will talk about working capital in general, and then Gui can talk about free cash flow. So on the working capital, again, we saw improved -- significant improvement in our accounts receivable as well as inventory levels. And it was the result, not only of volume declines, but process improvements throughout the entire supply chain from order to cash, in particular, on accounts receivable, as well as having better line of sight of our inventories. I guess -- and again, as we continue to get better information post-integration, because we're on common systems, we're integrated.

So we're able to bring, as we work through order to cash process improvement that's generated improvements in DSO. And as we've worked through the supply chain improvements with the completion of mostly of the network consolidations, installing most of the warehouse management systems onto one, and having a better line of sight of our inventory. We're able to take working capital out at a level that we haven't been able to prior to the integration. So these -- those are the big levers on working capital, and I will let Gui speak to just the overall cash flow of the business.

Gui Nebel -- Vice President of Financial Planning and Analysis and Treasurer

So John, you saw that for the year, the cash -- the free cash flow is strongly driven by the performance in working capital. One of the comments we made is that we are not expecting to see a similar benefit into 2020. So let me walk you a little bit through how we're thinking about 2020. We gave the guidance range between 140 to 155 million of adjusted EBITDA.

If you take the midpoint of that cash interest based on our ABL balance, you would get to somewhere between $25 million to $30 million of use of cash. We talked about a CapEx of about $40 million. So if you do the math, you get to about $80 million before a few items. So we said we're not expecting a material source or use of working capital for 2020 and you will also read once our 10-K is out that integration and restructuring plans related to the merger are complete.

So we're not expecting any cash outflows related to those items. So the difference between the -- about $80 million that I just walked you through is at least $60 million is driven by cash taxes and maybe some minor cash associated with small add backs or running down of accrued liabilities.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Yes. Then just one last question before I turn it over. I was just wondering if you could kind of talk about, clearly, there's still decent gap between EBITDA and adjusted EBITDA. Over time, how investors should kind of think about whether that gap will close?

Mary Laschinger -- Chairman and Chief Executive Officer

Yes. Let me start out. So first of all, based on what the comments we just made, and we look at this as a quality of earnings, there's actually is a material change between '18 and '19 and then '19 to 2020. And so there is -- and so if you go and look in the filings we've had or that we had, you will see that the quality of earnings is now almost doubled year over year.

Gui Nebel -- Vice President of Financial Planning and Analysis and Treasurer

Yes, just one more item. We talked about $52 million of cash items related to integration and restructuring that impacted our cash flow for 2019 though -- that number is going to be a lot closer to 0 as we look into 2020.

John Babcock -- Bank of America Merrill Lynch -- Analyst

OK. Great. Thanks for your help.

Mary Laschinger -- Chairman and Chief Executive Officer

Great.

Operator

At this time, I would now like to turn the call back over to our CEO, Mary Laschinger, for closing remarks.

Mary Laschinger -- Chairman and Chief Executive Officer

Well, thank you, John, for your questions and for all those who are on the call today. Our 2019 results are highlighted, again, by our strong free cash flow and a subsequent reduction in debt as well as improved adjusted EBITDA margins in three of our coresegments. In addition, the Veritiv team has done an excellent job executing our optimization plan, which has resulted in significant cost reductions and margin improvements as well as improved working capital and cash flow, offsetting a portion of the gross profit dollar declines we had in our Print and Publishing businesses. During 2020, we will continue to adapt to the ongoing structural decline in the Print and Publishing industries, and we believe these efforts, combined with our continued execution of our optimization initiatives and the transformation of our portfolio mix to higher growth, higher margin benefits -- higher margin businesses will drive benefits for us in the year.

So again, thank you for joining us today on the call and we look forward to speaking with you in May as we share our first-quarter 2020 results. Have a good day.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Tom Morabito -- Director of Investor Relations

Mary Laschinger -- Chairman and Chief Executive Officer

Gui Nebel -- Vice President of Financial Planning and Analysis and Treasurer

John Babcock -- Bank of America Merrill Lynch -- Analyst

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