Veritiv Corp (VRTV) 2015 Q3 法說會逐字稿

Good morning, and welcome to Veritiv Corporation's third-quarter 2015 conference call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. At this time, I'd like to turn the call over to Tom Morabito, Director of Investor Relations. Mr. Morabito, you may begin.

Thank you, Ian, 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 Steve Smith, our Chief Financial Officer. Afterward, 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 2014 Annual Report on Form 10-K and in the news release issued this morning, which is posted in the Investors section at VeritivCorp.com.

Non-GAAP financial measures are included in our comments today and in the presentation slides. A reconciliation of these non-GAAP measures to the applicable GAAP measures are included at the end of the presentation slides and can also be found in the Investors section of our website.

At this time, I would like to turn the call over to Mary.

Thanks, Tom. Good morning, everyone, and thank you for joining us today. We are pleased with our third-quarter 2015 financial results, which we will review in detail today. We will also cover key developments in the quarter and provide an update on our ongoing integration efforts.

For the third quarter of 2015, net sales were approximately $2.2 billion, down roughly 7% from the prior year. Despite the net sales decline, we reported consolidated adjusted EBITDA of approximately $61 million, about an 18% increase year over year. This increase was primarily a result of our continued Company-wide focus on synergy capture and efficiency improvement. Customer mix decisions and a benefit from lower fuel prices also contributed to the improved earnings.

For the year, we remain on track to reach the mid to higher end of our adjusted EBITDA guidance. There were two main factors that drove the year-over-year decline in net sales for the third quarter. First, our core performance, which excludes the effect of foreign currency and day-count differences, accounted for 5.5% of the revenue decline. This decrease was attributable to domestic softness in the industrial sector, challenging economic conditions in Canada, and a continued decline in the paper industry.

As a reminder, it's important to note that the overall decline in our core business performance includes the impact of strategic voluntary decisions to be more selective with our revenue streams. Our revenue performance reflects decisions that were made in previous quarters and it will take a full year's time to fully lap the decreased volume associated with those decisions. However, we continue to see the benefits of these decisions through margin improvement reflected in improved adjusted EBITDA as a percentage of net sales for both our print and publishing segments, and Veritiv as a whole.

Second, currency headwinds, primarily associated with the weakened Canadian dollar negatively impacted the top line by 1.6% in total. Facility Solutions was especially impacted as approximately 20% of that segment's revenue stream is generated in Canada, which accounted for roughly half of that segment's revenue decline in the quarter. As I mentioned last quarter, 2015 is a foundational year for Veritiv. And I'd like to share a few of our recent milestones and upcoming developments that are important for our long-term goals.

First, we successfully completed the migration of the remaining information technology systems under the transition services agreement, marking 100% completion and eliminating Veritiv's dependence on International Paper for IT services and support. The completion of this separation from International Paper was especially important because it positioned us to make a decision on our common suite of information technology applications and core operating system.

We have since finished our assessment of our core operating systems and have chosen the best elements of both legacy operating systems. And, we will be upgrading our current warehouse management system across our distribution network. This approach requires less change and is more cost effective than a new ERP system, and provides a best-in-class suite of applications to operate the business, minimize risk, and develop a sustainable platform for the future. We will begin systems transitions in the first part of 2016.

We've also made significant progress on our sourcing strategies, which have been a key driver of our 2015 synergies and improved earnings. We are currently in the implementation phase and have adjusted our product mix in certain categories to better support and deliver a comprehensive suite of products. These choices allow us to focus on our key supply partners and continue to ensure that we have the inventory of high-quality products available for our customers. These relationships have created greater value for our customers, suppliers, and Veritiv, which is consistent with our synergy plan.

Finally, we are on schedule to establish Veritiv's internal control environment under the Sarbanes-Oxley guidelines by the end of this year. This has been a substantial undertaking and we're pleased with our progress to date.

Before I turn it over to Steve, I'd like to summarize by saying we've come a long ways since the merger and I'm pleased with the integration work we have accomplished thus far. I would like to thank the entire Veritiv team for their continued hard work and dedication. It is through their steady execution that we are able to solidify Veritiv as a leading distribution solutions company.

Now, Steve is going to take you through the details of our third-quarter financial performance.

Thank you, Mary, and good morning, everyone. Let's first look at the overall results for both the quarter and nine months ended September 30 of 2015, with the year-to-date financials compared to the prior-year period on a pro-forma basis as if the merger had occurred at the beginning of the prior year.

For the third-quarter 2015, we had net sales of $2.2 billion, down 7.1% from the prior-year period. Net sales per shipping day was also down 7.1% year over year. Excluding the effect of foreign currency, net sales declined 5.5%. Our cost of products sold for the quarter was approximately $1.8 billion. Net sales less cost of products sold was $394 million. Net sales less cost of products sold as a percentage of net sales was 17.8%, up approximately 88 basis points from the prior-year period.

Adjusted EBITDA for the third quarter was $60.6 million, an increase of approximately 18% from the prior-year period. Adjusted EBITDA as a percentage of net sales for the third quarter increased to 2.7%, up 58 basis points from the prior-year period. In other words, despite a core revenue decline of 5.5%, Veritiv improved both its adjusted EBITDA and adjusted EBITDA margin as a percentage of net sales.

These increases were accomplished through a combination of market, customer, and product choices, our continued Company-wide focus on efficiency improvements, and a strong management -- program management of the integration. For the nine months ended September 30, 2015, we had net sales of $6.5 billion, down 6% from the prior-year period. Our net sales per shipping day was down 5.5% year over year. The difference in these rates of decline is attributable to the day-count difference in the first quarter of 2015 when we had one less shipping day compared to the prior nine-month period.

This day-count difference only exists in the first quarter of 2015, but it will impact all of our 2015 year-to-date comparisons versus 2014 and will generate a drag on the full-year revenue comparison of about 40 basis points. Adjusting for both currency and an identical day-count basis, net sales declined 4.3% year to date. For the nine-month period, our cost of products sold was approximately $5.4 billion. Net sales less cost of products sold was approximately $1.2 billion. Net sales less cost of products sold as a percentage of net sales, was 17.8%, up 84 basis points from the prior-year period.

Adjusted EBITDA year to date was $129.7 million, an increase of over 14% from the prior-year period. Adjusted EBITDA as a percentage of net sales increased to 2%, up 36 basis points from the prior-year period. We're pleased with this continued improvement in our earnings and margins.

Let's now move into the segment results for both the quarter and nine months ended September 30, 2015, again, with the year-to-date financials compared to the prior-year period on a pro-forma basis as if the merger had occurred at the beginning of the prior-year. In the third quarter, the Print segment experienced a 12.1% decline in net sales. Removing the impact of foreign currency, our Print revenue was off about 11%. It is important to note that nearly one-half of the third-quarter revenue decline in this segment was the result of voluntary strategic customer choices made by Veritiv earlier in the year.

Year to date, the Print segment experienced an 11.1% decline in net sales. Adjusting for currency and one extra day in the prior period, the Print segment's sales were off 9.7% year to date. In spite of these declines, adjusted EBITDA for the Print segment increased 13.2% year over year, to $23.2 million, in the third quarter, resulting in an increase in adjusted EBITDA as a percentage of net sales of 62 basis points.

Year-to-date adjusted EBITDA for the Print segment increased 13.3% year over year to $57.1 million, resulting in an increase in adjusted EBITDA as a percentage of net sales of 50 basis points. A combination of better customer product mix, and lower operating and selling expenses, more than offset the volume pressures and led to the growth in adjusted EBITDA.

In the third quarter, the Publishing segment had a 10.4% decline in net sales. Removing the impact of foreign currency, our Publishing segment was down 10.1%. This decline was particularly affected by reduced volumes in magazine and insert advertisements, as customers adjusted their promotional mix.

Year to date, the Publishing segment experienced a 6.6% decline in net sales and was off 5.9% after adjusting for foreign currency and one more day in the prior year. This segment contributed $9.3 million of adjusted EBITDA in the quarter, which was about a 1.1% increase from the prior-year period and largely a result of operating expense reductions and margin improvements. Adjusted EBITDA as a percentage of net sales was 3.1%, up 35 basis points versus the prior-year period. Year-to-date adjusted EBITDA was $23.1 million and flat year over year. Adjusted EBITDA margins for the nine months improved 17 basis points from the prior-year period.

In the third quarter, our Facility Solutions group declined 7.2% in net sales and contributed $12.7 million in adjusted EBITDA. As Mary mentioned, about 20% of that segment's revenue stream is generated in Canada and the weakened Canadian dollar particularly impacted the top line for this segment. Removing the effect of foreign currency, net sales for the quarter declined 3.7%, or about one-half of the reported rate.

For the third quarter of 2015 compared to the prior year, the Facility Solutions business saw adjusted EBITDA as a percentage of net sales decline by 51 basis points. This decline was similar to the second quarter and was largely due to lower sales in the Canadian market, which had not yet been offset proportionately by operating expense reductions. Year-to-date, Facility Solutions declined 7.1% in net sales and contributed $30.2 million of adjusted EBITDA. Excluding currency impacts and the effect of one extra day in the prior year, net sales declined 3.9%.

Third-quarter and year-to-date revenue and earnings declines in our Facility Solutions group continue to be driven by a combination of factors, including softness in the Canadian business and the weakened Canadian currency. In the face of these challenges, we remain focused on refining our decisions around markets, customers, and products, and improving our supply chain efficiencies.

Although our Packaging group's third-quarter revenue appears roughly flat on a reported basis, net sales excluding the impact of foreign currency actually increased about 1.6% for the third quarter. Despite other dynamics that impacted the top line of this segment, we saw strength in our performance in the fulfillment sector. More specifically, Packaging faced market pressures from an unfavorable economic trend in the industrial sector. As a result, the net sales decline of approximately 40 basis points from the prior-year period was affected by softer volumes in equipment and food packaging.

The impact of declining prices in the resin market also contributed -- continued in the third quarter, driving flat sales in films, despite an increase in volume. Year to date, packaging net sales were also roughly flat, and net sales excluding foreign currency impacts on a comparable-day basis increased 2.4%. Packaging contributed $59 million in adjusted EBITDA for the third quarter, resulting in a 11.3% increase year over year. Adjusted EBITDA as a percentage of net sales increased to 8.2%, up approximately 86 basis points from the prior-year period.

Year to date, Packaging also contributed $156.5 million of adjusted EBITDA, resulting in a 13.8% increase year over year. Adjusted EBITDA as a percentage of net sales increased to 7.5%, up 89 basis points from the prior-year period. The adjusted EBITDA growth in this segment continues to be attributable to better product mix and lower operating expenses.

Switching from our segment analysis, let's take a look at our progress on synergies, and then touch on our balance sheet, cash flow, and expectations for the allocation of our capital. For 2015, we originally forecasted synergy capture of approximately 25% to 35% of the ultimate goal of $150 million to $225 million over the five years post-merger. Through the first nine months of 2015, we have kept the momentum established in 2014 and we continue the pace ahead of our plan. For this year, while our synergy pacing is ahead of plan, we believe that our ultimate multi-year aggregate goal should remain unchanged, as integration gets more challenging. We expect to provide actual full-year synergy capture when we report full-year 2015 financial results in early 2016.

Turning to our balance sheet. At the end of September, we had drawn approximately $770 million of the asset-based loan facility and had available liquidity of approximately $450 million. As a reminder, the ABL facility is backed by the inventory and receivables of our business.

Shifting now to cash flow. For the nine months ended September 30, 2015, our cash flow from operations was about $130 million. Removing the effect of capital expenditures and the cash impact of restructuring and other integration-related items, adjusted free cash flow was about $155 million. We continue to believe this cash flow from operations will allow us to accomplish three objectives.

Our first priority is to continue investing in the Company. Along those lines, capital expenditures totaled nearly $12 million for the quarter and $34 million year to date, with about $7 million and $23 million related to integration projects for the quarter and year to date, respectively. As a reminder, we have two types of one-time integration costs: those that run through the income statement directly, and those that are within capital expenditures. At this time, we believe one-time integration costs that will run through the income statement for 2015 will be between $50 million and $60 million. Our second priority is to pay down debt, and our third priority is then to return value to shareholders.

In summary, we are pleased with our third-quarter earnings. Our improved earnings were primarily driven by margin improvement due to market, customer and product mix, and synergy capture. Looking forward, we continue to expect to reach the middle to higher end of our range for adjusted EBITDA of $165 million to $175 million for the full-year 2015.

Ian, we are now ready for questions.

(Operator Instructions).

Keith Hughes, SunTrust.

Thank you. You had $8 million of integration costs, I believe, as you back out of the EBITDA is that part of the $50 million, $60 million that you refer to for this year? What other categories are you referring to in that number?

I will turn this over to Steve. Thank you Keith. Good morning.

Steve we had merger integration costs in the period of $8.3 million. And the way the calculation works for adjusted EBITDA is those are added back to get to the $60.6 million.

Okay, so I guess my question is you had referred to one-time cost, I believe this year, of $50 million to $60 million. I assume that includes those expenses. What other expenses are included in that one-time cost number you get?

There are those kinds of cost as well as those similar costs year-to-date, that is the period cost for the third quarter. Then you also have the capital expenditures, which are one-time, not the ongoing in nature.

Okay.

I could give you those one-time integration related CapEx costs for both the quarter and year-to-date. Those are $7 million for the quarter and $23 million for the year-to-date.

Okay, thank you. And going into the fundamentals, there have been a few on the paper side of your business there has been some weak earnings releases here of late. I just -- get your feel for that market. I understand that your numbers are obscured because there are some customer rationalization going on and other issues. But, what is your feel for that market right now?

Keith, you're talking about the overall paper industry?

Yes. The pricing and I know you play only part of it, but what is you view?

We continue to see and experience and expect that industry is going to continue to decline in the range of 4% to 6%. I think that has been consistent with what we have seen over the course of the last few years since, frankly since 2010 and 2011.

I think that another dynamic that is being impacted in the industry though is currency, which is impacting probably domestic producers more than -- in addition to the market issues themselves. There are several dynamics going on in the industry today

Okay. Final question. I know you are going to give us the synergy number you achieved for 2015 at the next earnings release. If you just look from a big picture as you end this year, what types of things will have been completed in 2015 and what types of things would you be working on in 2016?

Keith, as we mapped out our overall integration plan and synergy capture, they came in three large buckets. SG&A was the largest followed by procurement or sourcing and rationalization, followed by non SG&A, which is really fixed costs.

What we're seeing the benefit on since the merger is a big portion of the SG&A benefits. This year the sourcing benefits are coming into place. And next year we will begin to see especially toward the latter part of the year, more of the non SG&A related with fixed cost.

Will the SG&A under this be completed by 2015?

No. It will not. There are really -- it is spread out over the course of a couple of years. Due to the way the integration flows and system's integration, warehouse consolidations and so forth.

Okay, thank you.

(Operator Instructions).

Chip Dillon, Vertical Research Partners.

Good morning. First question is you reiterated the total CapEx number for this year of $50 million to $60 million. I know $20 million of that is the ongoing peace. How would you see that total CapEx evolving in 2016 and 2017? As it seems right now I imagine is going to tail off as you get your systems in place, et cetera.

I will turn that over to Steve.

Chip, the total CapEx will decay as the integration CapEx falls off in 2016 and 2017. The ongoing CapEx element of that, might actually slightly increase over time for the simple reason that for some of our IT systems, we will have additional modules and seat licenses that will be in place post the integration. The ordinary CapEx, which in past had run in that $25 million to $30 million range, might step up somewhat.

Okay, got you. When do think you'll be done with the non-normal CapEx? Is that going to be another couple of years we'll see that or more?

You would expect to see at least through 2016 and 2017, there might be a very small tail in 2018 but principally done in 2016 and 2017.

Okay that is helpful. Then just looking at the numbers. I know last year, not to get too picky, but you did $40 million in adjusted EBITDA in the fourth quarter. And this year if you sort of hit the let's say $170 million to $175 million for the year that would suggest flat to maybe up $5 million.

One possible drag I guess could be the LIFO charge. I only say that because I guess you have no idea what that's going to be or maybe you do. I know it's been a benefit year-to-date, but it tends to equalize if I'm not mistaken. Are you building in a negative LIFO into the $40 million to $45 million that you are implicitly implying for the fourth quarter?

Two thoughts on the two elements of your question, Chip. First with regard to the pattern of earnings in the fourth quarter and then secondly with regard to LIFO. On the first of those two, the pattern in the last couple of years has been for us to generate roughly 74% or 75% of the full year's adjusted EBITDA in the first three quarters. And so your math that you used to get to the figure for the fourth quarter this year is consistent with that. We're not commenting on the very specifics of the quarter, but we did give you the full-year guidance.

Second of all, with the LIFOs adjusted is removed from any calculation of adjusted EBITDA, but as it relates to anticipating LIFO adjustments it's very hard to know. Because it's based on the inventory purchases of the period and the movement of the whole inventory portfolio during that period relative to the prior sequential quarter. It's really hard to predict what LIFO charge or benefit we might get in a quarter.

Got you, okay. And then last question. In a general sense, you mentioned, I think in the print segment, that 5% or 6% of the points of revenue decline was tied to shaky unprofitable business. How long -- I know you probably can't get rid of everything you maybe plan on, day one there might be contracts or other issues. But when you think you will be through with that and especially in that segment and the facilities segment?

Chip, first of all I would say largely we're through with that in both segments. And feel comfortable about where we are today. There could be some unforeseen credit risk decisions that we may choose to make down the road. But where we stand today in both of those segments we believe that trimming that portfolio is about where we want it to be.

As I mentioned though there is -- it takes 12 month to work through it from a year-over-year basis. So we're beginning to see and in fact even the facilities business if you look at that business today, we've already beginning to see stabilization of that business if you adjust for the FX. We see something similar in the print space.

It seems like you all have made some big decisions regarding what kind of a platform you are going to have and who your suppliers are. As I think about it, on one hand you guys have -- there's a tremendous investment in, on the ground stuff, whether it's trucks and people to drive them and warehouses. On the other hand is this technology element as we see Amazon go up everyday and Macy's go down in another area. But you still, like those two companies are moving stuff from others who make it to others who use it.

My question is how do feel -- how important is this technology element and the Internet interface becoming? And do you feel that you've have settled on a future there where you feel like you've got a very user-friendly interface that will keep -- that could actually give you a competitive edge?

Yes. There's a couple of our -- the question impacts a couple parts of our business. First of all in most of our space, certainly some of these big fulfillment homes -- houses that you mentioned they are targeting a different customer segment then we are. If you take print as an example, we are not shipping a ream or two of paper. We're shipping a pallet of paper.

From a competitive standpoint we recognize that threat does exist but today the way it exists it is in different spaces. And technology will continue to be an important element of it. Today we have about 25% to 30% of our total buy is going to our e-commerce platform today already. And so that will continue to be something that, we look at in terms of capabilities and so forth.

On the flip side of that, Chip, the e-commerce fulfillment of products on an e-commerce platform and the delivery and the supply chain of that is also an opportunity for us in our packaging business. And in fact we saw significant growth in the fulfillment area of packaging in the third quarter targeting toward those kinds of customers in particular that are doing more and more e-commerce, smaller order type of activity. So there's both a long-term potential threat as well as a near-term and longer-term opportunity for us.

Okay. Thank you very much.

There are no further questions. I will now turn the call back over to Mary Laschinger.

Thank you for everyone for your questions. I would just like to close by saying that as each quarter passes with this great new Company we have, Veritiv grows stronger and stronger. As we have worked through this over the course of the last almost 18 months, we have found that there are many forms of strength. Throughout the year we found strength in numbers, strength in adaptability, and strengthen in our unity.

It's been great to see the two organizations come together and the power that that brings. The economic environment in the industry pressures we face are challenging. Yet we have maintained our focus, have embraced change, and continue to keep our customers at the forefront of our operations. Through the hard work and determination the Veritiv team has answered each of these challenges making substantial progress against our integration initiatives and our financial goals.

I like to thank all of our employees for their continued support and most importantly, their passion, our passion to win. I'm confident we will continue this momentum into the fourth quarter and deliver on our commitments and finish strong in 2015. Thanks again everyone for joining us today.

This concludes today's conference call. You may now disconnect.