Image source: The Motley Fool.
Veritiv Corp (VRTV)
Q2Â 2020 Earnings Call
Aug 5, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the Veritiv Corporation's Second Quarter 2020 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 Tom Morabito, Director of Investor Relations. Mr. Morabito, you may begin.
Tom Morabito -- Director, Investor Relations
Thank you, Ian, and good morning, everyone. Thank you all for joining us. Today, you'll hear prepared remarks from Mary Laschinger, our Chairman and Chief Executive Officer; Sal Abbate, our Chief Operating Officer; and Steve Smith, our Chief Financial Officer. Afterwards, 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, subsequent quarterly reports on Form 10-Q 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 US 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 A. Laschinger -- Chairman and Chief Executive Officer
Thanks, Tom. Good morning, everyone, and thank you for joining us. I hope each of you and your families are doing well. As a company, we remain focused on ensuring the safety and well-being of our employees, while continuing to safely and effectively serve our customers. During today's call, in addition to reviewing our second quarter 2020 financial results, we will provide an update on the actions we have taken to help mitigate the impact of COVID-19 and provide our perspective on the remainder of the year.
Turning now to our results for the quarter. Our consolidated second quarter 2020 results were highlighted by solid adjusted EBITDA and strong free cash flow despite a significant decline in revenue. The cost saving and cash preservation actions we took in the quarter to alleviate the impact of COVID-19, along with our ongoing efficiency programs, led to improved margins and reduced our cost structure. Consolidated net sales and core revenues for the second quarter were $1.4 billion, down about 28% compared to the prior year period. COVID-19 significantly impacted our second quarter volumes and revenues across all of our segments with some segments impacted more than others.
Consolidated adjusted EBITDA for the second quarter was approximately $40 million, down only 8% year-over-year despite the revenue decline. The earnings decline was largely due to the impact of volume declines associated with COVID-19 as well as the continued structural challenges in the paper industry. The revenue pressures were partially offset by improved margins and lower supply chain and selling expenses.
I would now like to turn it over to Sal Abbate, our Chief Operating Officer, who will take you through our second quarter performance by segment.
Salvatore A. Abbate -- Chief Operating Officer
Thank you, Mary, and good morning all. Starting with packaging, in the second quarter, core revenues were down approximately 11% year-over-year, largely due to the impact of COVID-19. Market conditions in the US continue to be challenging, particularly in the industrial manufacturing sector. Industry box shipments and prices in the corrugated category were both down in the second quarter, contributing to an overall market decline.
While our fulfillment and e-commerce businesses performed well, it was not enough to offset the pressures in industrial manufacturing. Packaging's adjusted EBITDA increased nearly 7% year-over-year. Our business efficiency initiatives improved margins and lowered our expenses, resulting in Packaging's adjusted EBITDA margins improving from 7.4% in the second quarter of 2019 to 8.9% in the second quarter of 2020.
Moving on to our Facility Solutions segment, core revenues were down approximately 34% year-over-year, also impacted by COVID-19. While personal protective equipment and hygiene-related categories had a strong quarter, this revenue increase was more than offset by a steep revenue decline in our traditional away-from-home product categories. As we expected, second quarter revenue was impacted by the strategic choices we made in 2019 to better align this segment with our supply chain strength as well as market, product and customer dynamics.
Our adjusted EBITDA increased over 37% year-over-year due to improved margins from these strategic choices, which lowered supply chain and selling expenses. These choices made Facility Solutions a smaller, more profitable business as demonstrated by our results over the past 18 months.
Switching to our Print segment, COVID-19 and ongoing secular pressures continue to affect our core revenues, which declined approximately 46% in the second quarter. As a result, adjusted EBITDA was near break-even.
The Publishing segment's core revenues decreased approximately 43% in the second quarter due to COVID-19 and continued secular declines in market volumes. Publishing's adjusted EBITDA was also near break-even due to reduced revenue and increased bad debt expense.
Now, I'll turn it over to Steve Smith so he can take you through the details of our second quarter 2020 financial performance.
Stephen J. Smith -- Senior Vice President and Chief Financial Officer
Thank you, Sal, and good morning, everyone. We will first review the consolidated results for the second quarter ending June 30th of 2020. As we review these results, please note that when we speak the core net 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 the same number of shipping days in the second quarter of 2020 as we had in the second quarter of 2019. For the remainder of 2020, each quarter will have the same number of shipping days as the previous quarter. But as we have an extra shipping day in the first quarter of this year, for the full year 2020, we will have one more day than 2019.
Both consolidated net sales and core revenues for the quarter were $1.4 billion, down 28% from the prior year period. Our cost of products sold for the quarter was approximately $1.1 billion. Net sales less cost of products sold was $298 million. Net sales less cost of products sold as a percentage of net sales was 21.2%, up 210 basis points from the prior year period, largely due to improvements in pricing as well as both segment and customer mix.
Consolidated adjusted EBITDA for the second quarter was $39.8 million, down $3.5 million or 8.1% versus the prior year period. The earnings decline was largely due to the effect of COVID-19 on volumes in Print and Publishing, partially offset by strong margin management and lower supply chain and selling expenses. Consolidated adjusted EBITDA as a percentage of net sales for the second quarter was 2.8%, up 60 basis points from the prior year period.
Let's now move into the segment results for the second quarter ended June 30th of 2020. Packaging net sales and core revenues were down 11.3% and 11.1% respectively as the market conditions in the US further eroded, coupled with pricing pressure in some product categories. Packaging contributed $69.9 million in adjusted EBITDA, up 6.7% from the prior year period. Adjusted EBITDA as a percentage of net sales was 8.9%, up 150 basis points from the prior year period.
Facilities Solutions net sales were down 35% and core revenues decreased 34.4%. The revenue decline was due to both the effect of COVID-19 as well as our strategic repositioning of this segment. Facilities Solutions contributed $11.4 million in adjusted EBITDA, up 37.3% year-over-year. Adjusted EBITDA as a percentage of net sales increased 290 basis points to 5.6% in the quarter.
The Print segment experienced a 46.6% decline at net sales and a 46.4% reduction in core revenues. These declines were driven by the effect of COVID-19 and the ongoing secular decline in the market. Print contributed $1.3 million in adjusted EBITDA, down from $12.3 million in last year's second quarter.
Publishing net sales and core revenues both decreased 43.4% from the prior year quarter. The lower revenues were due to the effect of COVID-19 and the ongoing secular decline in the market. Publishing had an adjusted EBITDA of a negative $200,000, down from a positive $5.6 million in last year's second quarter.
Shifting now to our balance sheet and cash flow. At the end of June, we had drawn approximately $580 million against the asset-based lending facility and had available borrowing capacity of approximately $246 million. As a reminder, the ABL facility is backed by the inventory and receivables of the business and, earlier this year, we refinanced and extended the facility to 2025. At the end of June, our net debt to adjusted EBITDA leverage ratio was 2.8 times, down from 4.0 times in the prior year. Our long-term debt not including the current portion has dropped 20% year-over-year from $850 million to $652 million.
For the quarter ended June 30th of 2020, cash flow from operations was approximately $142 million. Subtracting capital expenditures of about $6 million from cash flow from operations, we generated free cash flow of approximately $136 million. Our strong free cash flow in the quarter was primarily due to the lower inventories and accounts receivable, which was due to lower volume reductions.
I now will turn the call back over to Mary.
Mary A. Laschinger -- Chairman and Chief Executive Officer
Thanks, Steve. And shifting now to our outlook for the rest of the year, we expect to see further impacts on our business related to COVID-19 in the second half of 2020. The environment remains dynamic, and there's still significant uncertainty. As a result, we are planning for continued softness in the business. While the second half of the year is usually stronger for Veritiv, this year, we anticipate earnings will be down from the first half.
Our segment assumptions for the second half of the year include the following. We expect Packaging's revenues and earnings to be comparable to the first half as industrial manufacturing remains challenged. We anticipate e-commerce and fulfillment to continue to perform well. We expect Facility Solutions revenues to be comparable to the first half of the year and for earnings to be slightly weaker. The extended work-from-home guidelines for many of our customers, coupled with the postponement of large venue entertainment events, lead us to believe that it could take some time before this business recovers.
The structural decline of Print and Publishing will continue from our current levels, and we are not expecting a second half recovery in revenue or earnings for this segment. Given the difficulties facing our customers in these segments, we foresee an increased risk of higher bad debt charges and bankruptcies. On a more positive note, both of these segments continue to generate positive free cash flow.
On a consolidated basis, we expect adjusted EBITDA in the second half of the year to be lower than both the first half of 2020 and the second half of 2019, driven by Print and Publishing. In these segments, we are expecting lower volumes in revenue, pricing risk from excess inventory and capacity in the industry and the potential for higher bad debt expenses. We are, however, expecting to see strong performance in free cash flow, driven by lower inventories and accounts receivable.
As we mentioned in our first quarter call, we took several temporary actions in April to reduce costs and preserve cash in light of COVID-19. The organization has done an excellent job managing through the past several months. The business has stabilized at a new level. And with this in mind, we decided on the following permanent actions, which were described in our 8-K filed last month.
First, we reduced our US salaried workforce by approximately 15% and eliminated some positions in Canada. Second, we will close certain warehouse facilities this year, the majority of which are smaller more remote locations as well as all of our print mini distribution centers. We expect these actions to generate between $80 million and $90 million in annualized savings, and that we will incur charges between $75 million and $90 million in connection with this restructuring, which should be substantially completed by the end of 2020.
Additionally, we continue to assess alternatives to restructure our integrated supply chain in an effort to facilitate better alignment with the supply chain needs of our customers by segment and with a view toward reducing complexity and lowering overall supply chain cost. This review is still in process and is separate from the 2020 restructuring plan described earlier, which was initiated primarily in response to the COVID-19 pandemic. We believe our substantial liquidity and flexible business model position us well to continue managing the structural changes in our business as well as the impact of COVID-19. Additionally, the permanent actions we are taking to better align our cost structure with ongoing business needs will help ensure the long-term success of our business.
This concludes our prepared remarks. And Ian, we are now ready to take questions.
Questions and Answers:
Operator
[Operator Instructions]Your first question comes from the line of John Babcock with Bank of America. Your line is open.
John Babcock -- Bank of America -- Analyst
Good morning and thanks for taking my questions. Just wanted to start out. I mean, in Print and Publishing, with the decline that you've seen, and clearly they have been very sharp, how is this causing you to reevaluate your business? I know in the past have been kind of discussed that maybe at some point in time or at least I guess speculated by the investment community that and maybe you might decide to divest the business whether or not there is even a buyer out there who knows, but how are you thinking about those businesses in light of the challenges that you've seen recently?
Mary A. Laschinger -- Chairman and Chief Executive Officer
Yeah. John, as you know, this has been an ongoing challenge with the continued structural decline. We continue to look at the business that, first of all, generates positive cash flow to support many of these initiatives that we have under way. But we're continuing to downsize the supply chain to match what's going on with that industry and continuing to take out costs both from a overhead standpoint as well as direct costs associated with that business. And we certainly have our challenges with us, but we also think of that business might -- I think we're at a very low point for that business currently with a lot of excess inventory in the system. And so, the outlook for next year may not be as negative as what we're seeing for the balance of this year just because as the industry adjusts, I think there's going to be some potential upside relative to where we are right now.
So, again, continued focus on driving cost out both direct to the segment as well as indirect and corporate overhead cost to align with the business. The work we announced in the 8-K back in March is still under way to determine if we're better off operating that business differently from the Packaging business in an effort to reduce the complexity overall for the business and reducing costs.
John Babcock -- Bank of America -- Analyst
Okay. That's helpful. And then, with regards, I guess, to the same Print and Publishing business here, I mean, we saw earnings get pretty significantly compressed in the quarter. I guess like with -- assuming there will be some recovery, however modest it may be in volumes over the coming quarters, but how does that potentially incremental -- incrementally better revenue even if it is still negative, help contribute to better margins?
Mary A. Laschinger -- Chairman and Chief Executive Officer
Yeah. A small move in revenue in that segment has a significant impact on the earnings. And so, a small move does benefit overall quite substantially should that happen.
John Babcock -- Bank of America -- Analyst
Okay. So, we should expect somewhat better margins, I guess, in 3Q and 4Q, assuming there's any sort of bounce from back-to-school and other maybe election-driven trends?
Mary A. Laschinger -- Chairman and Chief Executive Officer
John, I would say that that's going to somewhat be dependent on the level of bad debt, which we've been -- the business has done a tremendous job of managing that, but that would be a risk factor that we outlined.
John Babcock -- Bank of America -- Analyst
Okay. That's great. And then, you talked about rather, I guess, releasing the 8-K, your logo, and so I just want to get a little bit more kind of color on this. I mean, with plans to reduce the US workforce, I mean, how are you thinking -- which areas, I guess, are you planning to focus on there and ultimately how might that impact your ability to grow and kind of patching [Phonetic] in Facilities Solutions as you think out longer-term if at all?
Mary A. Laschinger -- Chairman and Chief Executive Officer
Yeah. So, first of all, the reduction of 15% was broad-based. However, there were significant differences in terms of the level of reduction based on either the business or the level activity in any given function. And so, we're gearing the organization to make sure that we have the right resources in our growth segments in Packaging and FS. And so, obviously we saw fewer reductions in those areas versus what we saw on the Print and Publishing space. So it was broad-based but across functions and segments, but the degree of difference between them was significant.
John Babcock -- Bank of America -- Analyst
Okay. And then...
Mary A. Laschinger -- Chairman and Chief Executive Officer
And does not believe it will -- and John, most importantly, do not believe it will inhibit our ability to grow Packaging or FS.
John Babcock -- Bank of America -- Analyst
Okay. And then, just last question on Facilities Solutions. I was wondering if you might provide any sort of breakdown by end market, I mean obviously like we've seen in some areas of the economy. And I know in the past we're talked about how crew ships, for example, are kind of part of the mix there in schools and other kind of public venues. And so, want to get a sense for how much of that business is exposed to the public venues versus some of the other businesses that may not have seen as much of a hit to volumes.
Mary A. Laschinger -- Chairman and Chief Executive Officer
Yeah. I'm going to ask Sal to answer that question.
Salvatore A. Abbate -- Chief Operating Officer
Good morning, John. So, in the Facility Solutions business, we're relatively diversified. So, there isn't any one segment that is weighted to really impact the segment overall. The issue with the second quarter is that almost all of our business -- our business customers, industries were impacted equally. So, large venue entertainment obviously was impacted. The cruise lines are not going to sail again until now the fourth quarter, they had moved it to the third quarter. Now they've pushed it out to October, so we're impacted by that.
On the higher education and elementary education, there's indications across many states that it'll be an online format at least for the first month-and-a-half or so. So that will impact our second half performance as well as our property management and office and government business industries, which are continuing to work from home. And so, we do see a slight uptick in June and in July, but nothing compared to last year. And so, we're bracing for a more protracted decline in that industry, not as severe as the second quarter, but we will go with how the customer base and the market industries go for the second half.
John Babcock -- Bank of America -- Analyst
Okay. Thanks for the detail, Sal. And actually I did -- just want to ask one more question. I was just wondering there if you could perhaps kind of talk about the trends that you're seeing in Print and Publishing so far in kind of the third quarter and same in Packaging as well.
Mary A. Laschinger -- Chairman and Chief Executive Officer
Sal, you want to speak to Packaging?
Salvatore A. Abbate -- Chief Operating Officer
Yeah. So, packaging has been has -- it has improved again through the second quarter, so June was better than the first couple of months of the second quarter, and -- but we do anticipate the second half to be in line with the first half. So, in Packaging, there's nothing material that would be significantly different than the first half.
Mary A. Laschinger -- Chairman and Chief Executive Officer
And on the Print side, John, we are seeing a modest improvement at this point in time, but not something that we would say is a trend yet.
John Babcock -- Bank of America -- Analyst
Okay. Fair enough. Appreciate all the details, and good luck for the quarter.
Mary A. Laschinger -- Chairman and Chief Executive Officer
All right. Thank you.
Operator
There are no...
Mary A. Laschinger -- Chairman and Chief Executive Officer
Okay. There are no further questions, correct?
Operator
There are no further questions at this time. I turn the call back over to you, Mary.
Mary A. Laschinger -- Chairman and Chief Executive Officer
All right. Thank you. In wrapping up our quarter of comments here, our consolidated second quarter 2020 results were highlighted by what we believe is a solid adjusted EBITDA and strong free cash flow as our strategy around our segments, actions we've taken to mitigate the impacts of COVID-19 and the ongoing efficiency progress improved our margins and reduced our cost structure. In addition, our strong free cash flow allowed us to significantly reduce our debt levels. I'm really pleased with the second quarter results, and I'm proud of Veritiv team members who have done an excellent job navigating through these unprecedented and challenging times. While our business is certainly being impacted, we believe our substantial liquidity, the actions we are taking to better align our cost structure with the ongoing business needs and the flexibility of our business model position us well to continue managing the impact of COVID-19 and ensure our long-term success.
So, thank you again for joining us today. Please stay healthy and safe, and we look forward to speaking with you in November as we share our third quarter 2020 results. And that ends our comments, Ian.
Operator
[Operator Closing Remarks]
Duration: 24 minutes
Call participants:
Tom Morabito -- Director, Investor Relations
Mary A. Laschinger -- Chairman and Chief Executive Officer
Salvatore A. Abbate -- Chief Operating Officer
Stephen J. Smith -- Senior Vice President and Chief Financial Officer
John Babcock -- Bank of America -- Analyst
