Veritiv Corp (VRTV) 2016 Q1 法說會逐字稿

Good morning and welcome to Veritiv Corporation's first-quarter 2016 financial results conference call. As a reminder today's call is being recorded. We will be 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.

Thank you Kirk 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 2015 annual report on form 10K, and in the news release issued this morning which is posted in the investor section at veritivcorp.com.

Non-GAAP financial measures are included in our comments today and in the presentation slides. The reconciliations 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 investor section of our website.

At this time I'd like to turn the call over to Mary.

Thanks Tom. Good morning everyone and thank you for joining us today as we review our first quarter financial results and full year outlook. We will also provide an update on our ongoing integration initiatives.

We had a good start to 2016 and reported first-quarter consolidated adjusted EBITDA of $35 million, more than a 20% increase year over year. This increase was primarily driven by ongoing strategic management of our customers, suppliers, and product mix, continued improvements in our cost structure and a benefit from fuel. As a result we are reaffirming our full year 2016 guidance of $185 million to $195 million in adjusted EBITDA.

Our reported net sales for the first quarter were $2 billion, down approximately 6% compared to the prior-year period. Our first-quarter revenue was impacted by three main elements; foreign currency, the calendar structure and our core net sales performance. We reported a net sales decline of 5.5% in the quarter, which includes the negative effect of foreign currency and the positive effect of two more shipping days in the first quarter of 2016 compared to the prior-year period.

Excluding the effects of foreign currency and day count differences, our core net sales declined 7.6% from the prior year. This core decline was largely driven by economic softness, continued structural decline in the paper industry and strategic customer choices.

I would like to call attention to the impact of the strategic customer choices, as they amounted to 1.6% of the 7.6% core net sales decline. These proactive choices were made earlier in the integration with the intent to improve adjusted EBITDA as a percentage of net sales for Veritiv as a whole. Most these choices were made in the first half of 2015, and it will take a full year's time to completely lap the decreased volume associated with these proactive choices. As such, we expect the impact of these choices to tail off by the end of the second quarter.

As I shared with you during our March earnings call, the revenue softness in the first couple of months was posing a challenging start to 2016. Despite these top line pressures, we maintained our focus on executing the integration initiatives which kept us on track with both our commitments for 2016 as well as our multi-year plan. Our integration work during the first quarter continued to focus on integrating foundational processes to prepare for the conversion to our common operating system.

As a reminder, this more complex phase of integration work requires a significant investment of resources and time and as such, the pacing of synergy capture during this phase of integration will be more modest than that of previous quarters. This change of pace was expected and is part of our original multi-year integration time line.

To add context to the body of work that is underway, there are two system updates that I would like to highlight. First, we moved the majority of the warehouse business to a single replenishment system. The remaining portion of the business migration will be complete in the second quarter. This single replenishment system will be a key enabler as we began optimizing inventory throughout the supply chain, and position our distribution network for the more complex system and supplier transitions to come.

Second, we completed our planned conversion of two major accounts receivable systems into one. This activity harmonized credit exposure on to one tool, which will enable efficiencies and allow us to have a consolidated view of our customers for credit-based decisions. These initiatives required significant bodies of work, and both went smoothly with minimal disruption to our customers.

By keeping operational excellence as a core value in everything we do, we have been able to prioritize the needs of today and take the steps necessary to create the industry leader of tomorrow. As a result, we remain on plan for our ongoing systems integration projects, and are well on our way to begin the core operating system integration starting later this year.

Looking to the balance of the year, we feel confident about our adjusted EBITDA projections, but recognize that market dynamics will continue to challenge our top line. Similar to 2015 and the first quarter of 2016 we expect economic softness, industry pressures, and currency headwinds to continue throughout the year. We are also sensitive to fluctuations in commodity prices, particularly in paper and resin.

While external factors will play a role in our revenue performance, it is also important to note that the impact of our strategic account choices I highlighted earlier will tail off by the end of the second quarter. All else being equal, the reduced impact from these choices on our net sales will improve revenue comparisons versus the prior year for our print, publishing, and facility solutions business. We believe our facility solutions segment is headed in the right direction from a revenue perspective, and we remain optimistic about the long-term success of this segment.

Now I'll turn it over to Steve who can take you through the details of the first-quarter financial performance.

Thank you Mary, good morning everyone. Let's start with the overall results for the first quarter ended March 2016 compared to the prior-year period. As Mary walked you through earlier, when we speak to core net sales we are referencing reported net sales performance excluding the impact of foreign exchange, and adjusting for any day count differences.

As it relates to day count differences, it is important to note we had two extra shipping days in the first quarter of 2016. We will also have one less shipping day in our fourth quarter, resulting in one more shipping day for the full year relative to 2015.

For our first quarter 2016, we had net sales of $2 billion, down 5.5% from the prior-year period. Excluding the effect of foreign currency and adjusting for day count differences, core net sales declined 7.6%. Peeling back the layers of our core net sales, strategic customer choices and accounting conformity amounted to 2.2% of the core net sales decline. Said differently, removing the strategic account choices and accounting conformity from our core net sales, our revenue decline was 5.4% for the quarter.

As a reminder, we made a decision in the fourth quarter of 2015 to harmonize our shipping terms across the organization. This accounting conformity will affect our year-over-year comparisons in the first, second and third quarters of 2016 until we lap the fourth quarter 2015 decision. Our cost of products sold for the quarter was approximately $1.7 billion. Net sales less cost of products sold was $365 million. Net sales less cost of products sold as a percentage of net sales was 18%, up approximately 50 basis points from the prior-year period.

Adjusted EBITDA for the first quarter was $34.9 million, an increase of approximately 23% from the prior-year period. Adjusted EBITDA as a percentage of net sales for the first quarter increased to 1.7%, up 40 basis points from the prior-year period. As Mary mentioned, the ongoing strategic management of our customers, suppliers and product mix, along with the continued improvements in our cost structure and a $2 million benefit from lower fuel expenses enabled our overall margin improvement in the quarter.

Let's now move into the segment results for the quarter ended March 31. As a reminder, when we speak to core net sales we are referencing the reported net sales performance excluding the impact of foreign exchange and adjusting for day count differences.

In the first quarter, the print segment experienced a 7.5% decline in net sales and our core net sales were off 9.8%. It is important to note that 3% of the 9.8% core net sales decline in this segment was a result of strategic customer choices made by Veritiv during 2015. We expect the majority of the revenue impact from these strategic choices to tail off by the end of the first half of 2016.

In spite of this decline, adjusted EBITDA for the print segment increased about 3% year over year to $16 million, resulting in an increase in adjusted EBITDA as a percentage of net sales of 22 basis points. Strong execution of sourcing initiatives, better customer and product mix, and reduced operating and selling expenses more than offset the volume pressures and continue to increase the adjusted EBITDA.

In the first quarter, the publishing segment had a 15.3% decline in net sales and a 17.8% decline in core net sales. This outcome was particularly affected by declines in market prices and reduced volumes, largely in magazine and insert advertisements, as customers adjusted the promotional mix. Strategic customer account choices and accounting conformity were 3.5% of the core net sales decline. The publishing segment contributed $4 million of adjusted EBITDA in the quarter, with adjusted EBITDA as a percentage of net sales coming in at 1.5%.

In the first quarter our facility solutions group's net sales decreased 2.6%. Adjusting for the negative impact of foreign currency and the positive effect of two more shipping days in the first quarter of 2016, core net sales were off 3.8%. Strategic customer choices were about 1% of the core decline.

Removing the effect of strategic customer choices from core net sales, the sales decline was nearly identical to the reported 2.6% decrease in the quarter. For the first quarter the facility solutions segment contributed $7.4 million in adjusted EBITDA an 8.8% improvement compared to prior year. The facility solutions business had an increase of 26 basis points in this adjusted EBITDA as a percentage of net sales. As expected, facility solutions will continue to benefit from the tail off strategic account choices in the second quarter.

In the first quarter, the packaging segment's reported revenue performance was roughly flat. The segment faced market pressures from declining resin prices, and softer volumes in the manufacturing and food packaging industries that carried into 2016. However, we saw growth in our corrugated sales business, and continue to see strength in our fulfillment sector. Adjusting for currency and day count, core net sales decreased 2.4%. Accounting conformity was 1% of this core decline. I would also like to highlight the impact of falling commodity prices on this segment's core net sales, specifically, resin.

Declines in resin market prices amounted to 1.1% of the core decline. Said differently, removing the effects of accounting conformity and the volatile resin pricing, packaging's core net sales were relatively flat year over year, which was in line with the market. Packaging contributed $46.7 million in adjusted EBITDA for the first quarter, a 2.2% increase from the prior-year period. Adjusted EBITDA as a percentage of net sales increased to 7%, up 19 basis points from the prior-year period. The adjusted EBITDA improvement in this segment was driven by sourcing initiatives and better product mix.

Switching now from our segment analysis, let's take a look at our synergy timeline, balance sheet, cash flow and expectations for the allocation of capital. As a reminder, our forecasted synergy capture for 2016 is approximately 60% to 70% of the ultimate goal, $150 million to $225 million over the five years post-merger.

At the end of March, we had drawn $745 million of the asset-based loan facility, and had available liquidity of approximately $445 million. As a reminder, the ABL facility is backed by the inventory and receivables of the business. Our net leverage ratio -- that is, the ratio of last 12 months of adjusted EBITDA to our ABL net of cash on the balance sheet -- was 3.7 times, down from 4.1 times at the end of last year. We intend to continue debt reduction throughout the year as we prioritize deleveraging our balance sheet.

During the first quarter of 2016, our cash flow from operations was approximately $75 million. If you subtract capital expenditures from our cash flow from operations for the first quarter, we generated free cash flow of approximately $66 million. If you add back the free cash flow, the negative cash impact of restructuring and other integration-related items, adjusted free cash flow for the first quarter would have been $83 million.

We continue to believe that this healthy level of cash flow from operations will allow us to accomplish three priorities. Our first priority is to continue investing in the company. This investment has two elements: one-time integration costs and capital expenditures. We have two types of integration costs. There are those costs that run through the income statement directly, and those that are capital expenditures.

One-time integration costs expected to run through the income statement for 2016 will likely be near the low end of a $40 million to $50 million range. We expect capital expenditures related to integration projects to be in the range of $10 million to $20 million, which will help enable the synergy capture in 2016 and beyond. Similar to 2015, this incremental capital spending is principally for information systems integration.

For 2016 our ordinary course capital expenditures are expected to be approximately $20 million to $30 million. For comparison purposes, first-quarter 2016 capital expenditures totaled nearly $9 million. Of that figure, there were about $5 million related to integration projects.

Our second priority for the use of cash is to pay down debt. As I just mentioned, we have made meaningful and steady progress against this priority since the merger two years ago. And our third priority for the use of excess capital is to return value to our shareholders.

In summary, our improved earnings were primarily driven by a combination of ongoing strategic management of our customers, suppliers and product mix, along with continued improvements in our cost structure. Kirk, we are now ready to take questions.

(Operator Instructions)

Chip Dillon, Vertical Research Partners.

Hi, good morning, Mary and Steve.

Good morning, Chip.

Yes, thank you. First question is on the -- as we think about the out years -- you very clearly laid out the cash that you're spending on the integration and on the capital side, too -- also for the integration and synergy target work. Could you give us a view of how that progresses through 2017 and 2018 on each of those lines, both the expenses I guess of the income statement and those that will be capitalized?

I'm going to ask Steve to take that on, Chip.

Okay, Mary. Chip, we've given the guidance that we expect to spend in the neighborhood of $225 million over the forecast horizon, which we're about halfway through. And through last year end, we've spent a total of $114 million of one-timers at that point.

The way it will play out is, we had said that $55 million of the $225 million was going to be in the form of capital expenditures associated with the synergy capture. That's the rough mix -- roughly $50 million out of $225 million. And that's been borne out so far.

And this most recent quarter, as we mentioned in the script, we had the one-time costs of $13 million, of which the integration-related costs were just about $6 million. About $1.7 million you see on our income statement was restructuring, and then about $5 million hit CapEx.

So in this particular quarter it was around a third. But it will be a third to a quarter of the total spend each of the periods. It fluctuates.

So as we think about that, there was $109 million left in both buckets -- the expense and the CapEx buckets -- before this year. And it looks like you're telling us that this year you're going to spend another -- let's call a mid-point, maybe, I don't know, it looks like $60 million. So it looks like after this year, you will only have $50 million left in 2017 and 2018.

Yes, that's roughly correct. It does decay rapidly, as Mary has mentioned a couple of times. The systems work that we are doing now will enable benefits in later years, so the costs that go with those programs does decay. It falls away in the next couple of years.

Okay, and then just if you could remind us, you had a good cash flow quarter, as you mentioned, but seasonal working capital is a big part of that. And could you just remind us how you see that moving through the rest of the year? I think it -- last year, the only full year we've seen of Veritiv, we saw the working capital pick up in the second half of the year, and that obviously offset some of the benefits in the free -- that took up some of the cash flow.

That's right, Chip; I will comment there. If you look at last year, we generated $83 million of free cash flow in the first quarter. And then in the balance of the year, we had an outflow of $14 million to get to our final point of $69 million for the year.

This year, in the last nine months of the year, we anticipate doing slightly better, on management of that working capital bucket. As we've said and reiterated, we expect $70 million of -- at least $70 million of free cash flow.

And if last year we had an outflow of $14 million in the last nine months, that would have to mean -- and we had $66 million in this year's first quarter -- we would have to be positive in the last nine months of this year in order to hit that target. And that would mean positive versus a negative $14 million.

Okay, got you. And maybe another way to look at that is, if you had the year you had this year -- tell me if I'm putting words in your mouth -- and you have $70 million of free cash flow, if this were a year where you had the integration spending behind you, but let's don't count any of the benefits of the synergies, we won't count any of that, we'll just assume you don't have the money you're spending.

I mean, it looks like you could have -- if I look at this, even at the low end you are spending $50 million. And there might be some tax benefit in that, but it will look like you would be certainly over $100 million in free cash flow this year with no more synergies, but just excluding all the integration activity. Is that fair?

Yes, the math would be, this year, at least $70 million of free cash flow. And this year we've given guidance that we have integration costs of $40 million to $50 million, so the math would actually be $110 million to $120 million of free cash flow.

Although there would be some tax -- you'd have a higher tax bill if you didn't have those expenses. I'm assuming you have -- you are paying cash -- well, it is helping you, there is some tax offset to those expenses, right?

There is, and this year we will be a cash tax payer, to answer your other question.

Okay. And then the last thing, just wanted to thank you for putting in EPS numbers. And I suppose as we look at it, and maybe this will be more apparent in the Q, but I know the overall tax rate looked like it was like, 50% something. But I'm assuming the elements that are truly one-time, that is, the integration expenses and the restructuring charge, that there may be a different tax rate we apply to that. Do you know if that's the case, or am I splitting hairs here?

You're correct; the effective tax rate in the quarter was 56%. For the year, we have suggested that we're going to end in the range of 40% to 45% as an effective tax rate, if things play out as we anticipate.

The biggest impact -- two biggest factors in that 40% to 45% rate are our low level of pretax and some non-deductible items that occur in our financials last year and this year. But as those go away, which they will, we should turn to, over multiple years, meaning the next 2 to 3, to more of a normal effective tax rate in the upper 30%s.

Okay, great, thank you.

(Operator Instructions)

David Mandell, William Blair.

Good morning. Looking at your 2016 EBITDA guidance, what kind of sales expectations are baked into there?

David, so, yes, again, we're upholding our guidance as we announced earlier this year. We made some assumptions that we -- as we came into the year, we still had a drag on the business as a result of choices made in prior year, and expected that the trajectory of revenue would continue to improve as we came out of the first quarter and into the second quarter, and build even stronger as we exited out of the second quarter. So I guess I'd summarize it as an improving trend over the course of the year.

Okay, and then, are you able to discuss what you saw in April as far as sales go?

Not able to discuss it -- what I will say is that we started out the quarter, the first quarter, with January being quite a disappointment, quite frankly, and we continued to see that improve over the course of the quarter, and continues into the second.

All right, thank you for taking my questions.

We have no further questions at this time. I'll turn the call back over to Mary Laschinger.

In closing, I just want to share a perspective. We are very pleased with our first-quarter results.

We recognized that 2016 would be a challenging year with the increasing complexity of our integration, and an unpredictable macroeconomic environment. However, I have confidence in our team to continue to execute on our full-year commitments, keep us on track with our multi-year plan, and deliver value to our shareholders. So we appreciate your support, and again, thank you for joining us today.

This does conclude today's conference call. You may now disconnect.