Veritiv (VRTV) Q4 2021 Earnings Call Transcript

Veritiv (VRTV)
Q4 2021 Earnings Call
Mar 01, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Veritiv Corporation fourth quarter and full year 2021 financial results call. As a reminder, today's call is being recorded. We will begin with the opening remarks and introductions. At that time, I would like to turn the call over to Scott Palfreeman, director of finance and investor relations.

Mr. Palfreeman, you may begin.

Scott Palfreeman -- Director of Finance and Investor Relations

Thank you, Angie, and good morning, everyone. I'm joined on the call today by our CEO, Sal Abbate; and our CFO, Steve Smith. 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 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 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. These -- 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'll turn the call over to Sal.

Sal Abbate -- Chief Executive Officer

Thanks, Scott, and good morning, everyone. 2021 marked another successful year of relentless execution against our multi-year strategy. This morning we are reporting record net income and diluted earnings per share for both the fourth quarter and the full year. The commercial, operational, and back-office changes we made, and we will continue to make, significantly improve the fundamentals of our business and lay the foundation for future growth.

Over the last two years, we have consistently driven earnings and margin improvements enterprisewide. The fourth quarter of 2021 marks our eighth consecutive quarter of year-over-year improvement in adjusted EBITDA margin despite a constrained and challenging supply chain environment for all of our stakeholders. We achieved comprehensive improvements across the business, which drove year-over-year adjusted EBITDA margin expansion across every reporting segment for the full year 2021. This morning, I'll share highlights from our most recent quarter and full year results.

And Steve will then provide a more detailed financial update, and then we'll conclude our prepared remarks by sharing our outlook for full year 2022. In the fourth quarter of 2021, we reported net income of $57 million, about an 80% increase compared to prior year. Our record earnings performance was supplemented by the completion of our share repurchase program, which drove diluted earnings per share of $3.67 in the fourth quarter, or nearly double what we had reported in the prior year. Our adjusted EBITDA for the quarter was $116 million, or about a 90% increase compared to prior year.

We also reported an adjusted EBITDA margin of 6.2% in the fourth quarter of 2021, compared to 3.8% in the fourth quarter of 2020, a more than two percentage point improvement. Supplier-driven price increases across many of our product lines continue to drive revenue growth in the fourth quarter. I will speak more of these and other inflationary factors shortly. Adjusted for day count, volume also increased slightly compared to the prior year.

As a result, sales in the fourth quarter reached $1.9 billion, or roughly a 14% increase compared to prior year. For full year 2021, we reported record net income of $145 million and diluted earnings per share of $9.01, more than a fourfold increase compared to prior year. Our sustainable and stepwise improvements in net income and diluted earnings per share are the result of fundamental changes to the business and diligent efforts to improve the quality of our earnings. Our full year 2021 adjusted EBITDA was a record $343 million, or 83% above prior year.

Over the last three years, adjusted EBITDA margins have grown from 2% in 2019 to 3% in 2020, and now to 5% in 2021. Product price inflation by way of supplier-driven cost increases continue to be the most significant source of inflation within our business. We work closely with our suppliers and customers to ensure product cost increases were passed through efficiently and with proper notice. Our constant price discipline has ensured that recent improvements in adjusted EBITDA margins were not unfavorably impacted by the historic number of price changes we and our customers are experiencing.

We also continue to see other drivers in inflation consistent with the broader market. Increases in wages and other related supply chain costs continued to impact distribution expenses. However, operational improvements throughout our business offset a portion of these expenses. Recall that Veritiv manages its own extensive delivery fleet and coast-to-coast warehouse network, which helps to mitigate many of the supply chain disruptions that impacted our customers across North America.

While supply chain challenges continue to impact product availability from our suppliers, we invested in strategic inventory positions where possible to minimize the effect of extended lead times to our customers. For packaging, our fourth quarter performance built on the progress made in prior quarters. We reported over $1 billion in sales in the fourth quarter and showed further adjusted EBITDA dollar and margin expansion above prior period highs. This marks our 11th consecutive quarter of year-over-year improvement in packaging adjusted EBITDA margin.

We saw strong revenue growth across all major packaging product categories and customer sectors in the fourth quarter. The frequency and the magnitude of supplier-driven price increases accelerated in the fourth quarter across our broad portfolio of packaging products and was a meaningful driver of the 15% increase in revenue compared to prior year. After adjusting for price, volume growth from our customers was more modest in the fourth quarter but, we believe, better than the broader packaging market. Volume growth is strongest within the wholesale, retail, logistics, and manufacturing customer sectors.

In 2021, we further established our position as the leading provider of packaging, distribution services, products, and solutions in North America. As a trusted leader, we supply more than half of the Fortune 500, as well as a broad range of smaller companies with a comprehensive suite of packaging products and services. Our packaging adjusted EBITDA for full year 2021 was $394 million, which equates to 70% of total adjusted EBITDA for our reported segments. We will continue to make investments in above market packaging growth and shift our segment portfolio toward these higher growth, higher margin businesses.

I'll now turn over to Steve to provide more details on our performance. Steve?

Steve Smith -- Chief Financial Officer

Thank you, Sal, and good morning, everyone. Today, I will be providing more details on the fourth quarter and full year performance of our segments, as well as other financial updates. As I go through the results, note that our fourth quarter had one less selling day this year than last year due to the timing of the New Year's holiday. Daily sales figures provided are adjusted for the difference in selling days and other factors.

Now for our segment results. Packaging daily sales increased 17.2% in the fourth quarter compared to prior year. Efficient pass through of price increases drove a significant improvement in revenue across all major product categories and customer sectors within this segment in the fourth quarter. Volume growth was also positive in the fourth quarter, driven by customers within the wholesale, retail, logistics, and manufacturing sectors.

The combination of cost and price discipline and the full realization of benefits from the 2020 restructuring plan drove our best ever quarter for adjusted EBITDA dollars, as well as adjusted EBITDA margin for our packaging segment. We reported packaging adjusted EBITDA of $113.1 million in the fourth quarter, or improvement of 33.7% compared to prior year. Adjusted EBITDA margin was 11.1%, or an increase of 150 basis points from 9.6% in the fourth quarter of 2020. Full year 2021 adjusted EBITDA and adjusted EBITDA margin for our packaging segment were $393.5 million and 10.5%, respectively.

Both figures represent record full year performance. Shifting now to our Facility Solutions segment. Daily sales in our Facility Solutions business grew 2.6% in the fourth quarter compared to prior year. Sales in our entertainment and hospitality customers improved in the fourth quarter, which is an indication of some recovery in our traditional away-from-home sectors.

However, the pace of sales recovery in our office-like customer sector remains slow. As our prior year's fourth quarter sales were temporarily elevated due to COVID-related products, this year's fourth quarter sales were up against a tough year-over-year comparison. As planned, multi-year commercial and operational improvements drove all-time records in both adjusted EBITDA and adjusted EBITDA margin for our Facility Solutions segment in the fourth quarter and full year 2021. Compared to prior year, adjusted EBITDA and adjusted EBITDA margin for our Facility Solutions more than doubled in the fourth quarter at $17.4 million and 7.5%, respectively.

Full year 2021 adjusted EBITDA and adjusted EBITDA margin in our Facility Solutions segment was $52.7 million and 5.9%, respectively. In our print segment, daily sales in the fourth quarter increased approximately 20% compared to prior year. After adjusting for the divestiture of our [Inaudible] business in the first quarter of 2021, organic daily sales increased approximately 25% in the fourth quarter, driven by gains in both price and volume, which we believe was better than the broader market. Tightness in the paper market did not show any signs of easing in the fourth quarter.

In fact, demand in the fourth quarter was healthy across all major grades of paper while domestic and international supply chain challenges continue to limit supply. The combination of market dynamics, our commercial discipline, and strategic positioning of inventory drove fourth quarter adjusted EBITDA of $38.8 million and adjusted EBITDA margin of 9.2% in our print segment, approximately a threefold improvement on both metrics. Full year 2021 adjusted EBITDA for the print segment was $96 million and adjusted EBITDA margin was 6.5%, both all time records by significant amounts. Our publishing segment experienced many of the same market dynamics as our print segment.

We reported fourth quarter daily sales growth of 15.3%, driven by price and to a lesser extent, volume. Publishing volume growth was principally driven by demand in our education, retail, and grocery customer sectors. Adjusted EBITDA in the fourth quarter was $5.8 million and adjusted EBITDA margin was 3.6%. Full year adjusted EBITDA and adjusted EBITDA margin for our publishing business was $18.7 million and 3.1%, respectively.

Moving now to cash flow. In preparation for the expected increase in seasonal demand in the fourth quarter, we made investments in packaging inventory to help mitigate some of the effects of extended supplier lead times and supply chain challenges on our customers. Those investments in combination with sales growth of about 14% led to a roughly $30 million net use of working capital in the fourth quarter. Cash flow from operations for the year was $155 million and free cash flow was $134 million.

Our fourth quarter earnings performance drove a further reduction to our net debt to adjusted EBITDA leverage ratio to a record low of 1.1 times well below our long-term target of three times. As a reminder, we ended 2019 at 4.1 times and 2020 at 2.1 times. Our record low net leverage was accomplished despite using $100 million to complete a share repurchase program during 2021. Earlier today, we announced that our board of directors has authorized a new $200 million share repurchase program, which was enabled by both our significant earnings improvement and our low leverage ratio.

In 2022, we will continue to invest in the business and expect capital expenditures to be approximately $35 million. Our recent earnings performance has significantly improved our pace of leverage reduction. This exceptionally low leverage provides more optionality, additional investments in technology to enhance our commercial capabilities, operating efficiency, and the customer experience are included in our capital expenditure guidance. I will now turn the call back over to Sal to provide more details on our outlook for the year.

Sal?

Sal Abbate -- Chief Executive Officer

Thank you, Steve. As we look to the year ahead, we will continue to shift more fully toward investments in above-market packaging growth. We expect inflationary factors to continue throughout 2022. Supplier-driven price increases are currently expected to continue through at least the first half of the year.

We will continue to work closely with suppliers and customers to ensure product price increases are passed through efficiently and with proper notice. Our large domestic supplier base continues to provide differentiated value to our customers during the ongoing challenges experienced in the international supply chain by many of our competitors. However, we expect broader supply chain constraints to continue, resulting in extended lead times through at least the first half of 2022. Wages, supply chain costs, and other inflationary factors will likely have a more significant impact on our results in 2022 than 2021.

We will continue to drive operational efficiencies to mitigate these costs where possible. However, given the historic level and rapid rate of increases, we may be forced to pass any unmitigated cost increases onto our customers. Corrugated producers have announced the fourth containerboard increase in 18 months, which is expected to go into effect in the second quarter. This increase in combination with other supplier-driven price increases across many of our packaging products are expected to drive strong revenue growth, particularly in the first half of the year.

Current market consensus indicates that customer demand is likely to taper later in the year, which could drive more modest volume growth in our packaging segment compared to prior year. Although smaller, our Facility Solutions segment is stronger due to strategic choices made in 2019 around unprofitable customers, which accelerated the results we see today. In 2022, we expect sales to improve as travel, entertainment, and hospitality activities return closer to pre-pandemic levels. While we do not expect a full recovery in office building activity during 2022, we project modest sales growth for the Facility Solutions segment, which is in line with the broader away-from-home market expectations.

For print, the market tightness resulting from healthy demand and limited supply is expected to continue throughout 2022. As a result, the market is forecasting additional price increases, which we expect will drive strong revenue growth for the first half of the year and maintain print adjusted EBITDA margins at least equal to prior year levels. We expect full year adjusted EBITDA margins for all segments to remain at or above prior year levels due to cost and price management initiatives and ongoing efficiency programs designed to mitigate the impacts of inflation. Given all of these factors, we expect our full year 2022 net income to be in the range of $210 million to $250 million, and approximately 60% improvement over prior year; our diluted earnings per share to be in the range of $13.50 to $16.25 based on an estimated $15.5 million fully diluted shares outstanding; and adjusted EBITDA to be in the range of $395 million to $435 million, which equates to a 20% to 25% increase over 2021.

As Steve mentioned earlier, we expect capital expenditures for the year to be around $35 million. As a result of our increased earnings expectations for 2022, we are estimating our free cash flow to be approximately $200 million. Given the significant reduction in our net leverage, we have meaningful strategic and financial optionality not previously afforded to us. As Steve mentioned, we just announced a $200 million share repurchase authorization from the board.

In addition, we will continue to pursue both organic and inorganic growth opportunities that can build on our industry leading size and scale in the packaging sector. As you've heard on the call today, we achieved record financial results in 2021, well above any previous year's performance across multiple measures. We are even more pleased that we have sustained earnings and margin gains over the past five quarters due to our growth and operational efficiencies, including our effective cost and price discipline. We thank all of our employees for their hard work and dedication to our customers over the past year.

Lastly, we look forward to building on our success in the year ahead and remain committed to advancing our strategic initiatives to further establish our position as a leading provider of packaging solutions. This concludes our prepared remarks. Angie, we are now ready to take questions,

Questions & Answers:

Operator

[Operator instructions] You do have a question from the line of John Babcock with Bank of America. Please state your question.

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

Good morning and thanks for taking my questions, everyone. I guess just to start out, with the EBITDA guidance for 2022, it sounds like a decent bit of the growth relative to 2021 is going to be driven by both sales growth. Could you just provide some sense on kind of the breakdown there, like how much is going to come from the sales growth versus margin improvement? It sounds like overall you're expecting margins to be pretty consistent overall in 2021, but just want to get a little bit more clarity there.

Sal Abbate -- Chief Executive Officer

Sure. Good morning, John. This is Sal. Yeah, you're spot on.

So our growth this year is really driven by continued inflationary price increases that have been recently announced really across all of our business segments. But we do also expect volume growth, particularly in packaging and Facility Solutions in 2022. So we expect our Facility Solutions growth to be at or maybe slightly above the market rates and then packaging as well. Similar to 2021, we expect our volume to be slightly ahead of the overall market growth rates for volume.

On the -- sorry, on the print and the publishing sectors, we do have pricing growth built in to 2022. On the volume side, it's really going to be dependent on the supply base. And the fact that, well, we had a very healthy 2021 for both volume and price in print in 2021, the inventory positions that we started the year out in 2021 are are no longer at the same levels, both at the supplier levels and at the distributor level. So that could have an effect on 2022.

But again, your assumptions on our margin rate are consistent where we expect them to be at or slightly ahead of 2021.

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

Gotcha. Thank you. And then with regards to packaging, I think you've mentioned that you're expecting some slowing in growth as the year goes on. Could you just talk about that? How much of that is based on comps here of the year versus potential changes in the marketplace?

Sal Abbate -- Chief Executive Officer

Yeah, so, most of that is due to potential changes in the marketplace. And we've had fairly steady comps in our packaging business. We've had very low customer churn rates, so we've got more predictability as we look forward into our growth levels. We do expect growth in the second half, John.

Just not as pronounced as the first half and certainly from what we're seeing both in the fourth quarter and then carrying on into the beginning of 2022. So again, growth higher in the first half, then seasonally typical, followed by tapering growth in the fourth -- in this -- in the third and fourth quarter, but still a growth number in the mid to low single digits in the second half.

Steve Smith -- Chief Financial Officer

And so maybe because of that, John, we could comment about the pattern of our 2022 guidance because it's principally driven by packaging as it relates to EBITDA. So let's take a moment, John, and do that. Historically, we've seen a distribution of first half-second half adjusted EBITDA to be around the neighborhood of 41-59, meaning 41% of our earnings in the first half of the year, historically, and 59% in the second. Currently, we're expecting a different mix for 2022, given the price increases, particularly in packaging.

And so we're expecting that in the first half of the year, to average around $100 million of adjusted EBITDA per quarter. And that might give us a slightly different pattern then in adjusted EBITDA first half versus second half versus historical patterns.

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

OK. Just a bit curious. I mean, the slowdown in volume growth on the second half though, what kind of the premise behind that assumption?

Sal Abbate -- Chief Executive Officer

I think we're basing that on what we are hearing from the market insight groups and their projections for -- s you recall, John, are our volume assumptions are a combination of box shipments and overall GDP. And so, they're mainly based on the box shipment forecast for the full 2022 year, which are expected to be pretty much flat for the year. And so our volume growth is expected to be, 102 basis points better than that overall number for the full year.

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

OK. Interesting. Thanks for that. And then the next question.

especially with what's going on, right now, from a geopolitical standpoint, won't you be able to provide some census to your exposure to oil costs? So for example, if there's like a $10 change in oil prices, what impact that might have on earnings and also what's baked into your guidance as of now?

Sal Abbate -- Chief Executive Officer

Yeah, John, so I'll answer first in a broader sense, and then get more specifically and have Steve comment on the specific impact financially. As you probably know, we don't have any significant business in either Russia or Ukraine, nor do we rely on either of those countries for our international supply of products. So from a micro environment specific to Veritiv, we don't have much exposure at all with respect to both sales and then supply. Obviously, we aren't immune to the overall geopolitical and macro economic implications from the current crisis and conflict.

And so energy is, as you mentioned, and fuel is really our largest risk alongside cybersecurity, and we are actively taking measures to ensure that we're well protected in that regard. But Steve can speak specifically to the impact that fuel that fuel would have, and it is relatively minor, but it's important to note.

Steve Smith -- Chief Financial Officer

Yes. Thanks, Sal. So, John, the view on fuel and really fuel and third-party carrier expenses is that we have built some inflation into our guidance already for 2022. So let me take a moment and explain.

We have less than 5% of our total costs are related to fuel and third-party expenses. And as you know, fuel prices went up last year, nearly 50% in the fourth quarter and about 30% for the year. But we make customer deliveries, mostly on our own fleet. And so while we've seen an increase in third-party freight costs and rates, we expect that third-party freight and fuel will cause earnings pressure in the mid-teens, millions of dollars, so in the neighborhood of $15 million.

But we've built that into our guidance for 2022 at this time. So unless there's significant upside pressure on fuel beyond where we are today, then we've already considered that in our guidance.

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

Gotcha. And so that was what you're assuming -- sorry to kind of pound on this, but I mean, is that kind of largely assuming around $100 a barrel kind of pricing, roughly in that range?

Steve Smith -- Chief Financial Officer

Yeah. Yes, more or less, yes.

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

Yeah. Awesome. And then just on the labor front, you did mention that you're seeing some pressures there. Could you provide some sense as to the magnitude of, where you expect labor costs to be this upcoming year versus last year?

Sal Abbate -- Chief Executive Officer

Yeah, so first, just overall on the labor retention rates have actually been quite positive throughout 2021. So we haven't seen the great resignation that many other companies are experiencing. We've mentioned before that our driver base is stable and long tenured, and so we've been keeping up it, particularly in 2021 and now into 2022, we've been making sure that we've been keeping up with the wage increases and the market rates and staying competitive in the market. And for 2022, we've built about two percentage points higher than typical in those hourly warehouse and truck driver jobs.

And so we believe that's competitive. We've also over the last two years, we've paid a performance bonus to that group of folks. And we've now made that permanent as part of our profit sharing plan for 2022. So we continue to put mechanisms in place that keep us as an attractive employer, and that's reflected in our higher tenure and lower turnover rates.

And by the way, John, those wage rates I mentioned are also in the guidance that we provided.

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

OK. And then the last question before I turn it over, just from what I recall and obviously correct me if I'm wrong here, but I thought you had changed your incentive structure over the last year or two years or so in packaging to try to spur growth there. Just want to get a sense for how effective that has been, in terms of driving volume growth and whether there are any further adjustments that need to be made.

Sal Abbate -- Chief Executive Officer

Yeah -- no, that's right, John, we made the we've been making minor shifts for the last several years. The major shift came at the beginning of 2021, and it did include a growth-oriented component of the commission plan. And so we believe that was one significant reason we saw not only the focus on growth, but also the focus on specific sectors and in our services business as well. And so while we will continue to trim tab those, as the years go on, we believe that our current composition that really incentivizes our sales team on growth and margin rate is really helping drive the connectivity between our strategic initiatives and their focus.

And I might also add that also applies to Facility Solutions and to print. And so we've been able to be flexible with those plans to align with our strategic initiatives and then cascade and communicate those throughout the sales force. So we constantly remind our folks what's important to the company and how to get paid around that.

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

OK. Thanks for all the help.

Sal Abbate -- Chief Executive Officer

Sure. Thank you, John.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Scott Palfreeman -- Director of Finance and Investor Relations

Sal Abbate -- Chief Executive Officer

Steve Smith -- Chief Financial Officer

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

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