Veritiv Corp (VRTV) 2016 Q4 法說會逐字稿

Good morning and welcome to Veritiv Corporation's fourth quarter and full-year 2016 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, Sir.

Thank you, Krista, 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 Executive 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, the Risk Factors to be contained in our 2016 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. The 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'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 fourth-quarter and full-year financial results. We will also cover key accomplishments in 2016, provide initial thoughts on some important drivers for our full-year performance, and set our 2017 guidance. Finally, I will provide a quick summary of the contents of our call scheduled for later this morning.

During 2016, we achieved much of what we set out to do, both operationally and financially. For the full year of 2016, net sales were $8.3 billion, down 4.5% compared to prior year. Despite the top-line pressures, we met our 2016 adjusted EBITDA commitment to shareholders and reported consolidated adjusted EBITDA of $192 million, a 5.6% increase year over year and near the upper end of our $185 million to $195 million guidance range.

While revenues were weaker than what we would have liked, revenue trend improvements in higher margin segments, along with accelerated synergy capture and good cost management, helped us meet our commitments. Cumulative synergy captured since the July 2014 merger totaled more than $161 million, so we have now surpassed the lower end of our targeted $150 million to $225 million synergy range that we set in the spring of 2014. We are proud of the team's efforts as we pass this important milestone. From a top-line perspective, our full-year revenue performance was principally driven by the continued structural declines in the print and paper industry and soft economic conditions in some of the other end-markets we serve, partially offset by an increase in our sales per day in our higher margins packaging segment.

Now I would like to review some highlights from 2016, and offer our initial thoughts on 2017. During 2016, we remained focused on executing our integration initiative and also took steps toward our growth initiative. Let me first address our 2016 accomplishments.

During the first half of the year, we moved the warehouse business to a single replenishment system, which is key to optimizing our inventory and positioning our distribution network for the more complex system and supplier transitions to come. We also completed our planned conversion of two major accounts receivable systems into one, which enables efficiencies and allows us to have a consolidated view of our customers-for-credit-based decisions. During the second half of the year we continue to focus on integrating operational and commercial foundational processes to prepare for the conversion to our common operating system. During the fourth quarter, we successfully converted our first few sites.

Also in the second half, we migrated our salesforce into a single commission system and consolidated hundreds of legacy commission plans. This harmonization effort will allow for greater consistency, clarity for sales professionals, and it supports our growth initiatives for the Company as a whole. Looking ahead to 2017, there are a few primary factors that are important to consider when examining the opportunities and the challenges for our business, specifically, the pace of synergy capture, revenue trends, and investment for growth.

In terms of synergy capture, we are now well into the more complex phase of our integration work. This phase requires a significant investment of resources and time and, as such, the pacing of synergy capture will be more modest than what we experienced since the merger closing. This expected change in pacing is part of our multi-year integration timeline.

Regarding revenue trends, we expect the structural industry decline to continue in print and publishing segments. Publishing in particular continues to face industry pressures. Despite the volatility of this segment, it continues to contribute adjusted EBITDA and cash flow to the Company.

On the positive side, 2016 was a key turning point for our facility solutions segment and we have been pleased with both the improving revenue trends and operating results for this segment. Overall we believe our facility solutions business has stabilized and we remain optimistic on the segment's future.

Finally, we plan to continue our investment in organic growth and to further lay the foundation for inorganic growth. As part of the effort to accelerate growth in 2017 and beyond, we are investing in our sales and marketing efforts in our packaging segment to drive organic growth. To enable inorganic growth, we established a strategy team charged with evaluation of opportunities which are now possible because we directed much of our excess free cash flow of the last 30 months toward debt reduction and, combined with increases in adjusted EBITDA, meaningfully lowered our leverage.

So as you can tell, much has been accomplished by the Veritiv Team since the merger, yet we are nowhere near a resting point. We are pleased with the success of the integration to date and the synergy capture and believe that we are well positioned to go after our 2017 objectives. These objectives are challenging by themselves, but when combined with the continuing secular decline in print and publishing and the investments in our future, we are realistic about our earnings improvement possible in 2017 when compared to 2016.

Taking all of our segments into account and the factors that affect their performance, we are expecting our 2017 adjusted EBITDA to be in the range of $190 million to $200 million of adjusted EBITDA. Now I'll turn it over to Steve so he can take you through the details of our fourth quarter and our full-year financial performance.

Thank you, Mary, and good morning, everyone. Let's first look at the overall results for both the quarter and year ended December 2016.

As Mary walked you through earlier, when we speak to core net sales we are referencing the reported net sales performance, excluding the impact of foreign exchange and adjusting for any day count differences. We had one less shipping day in the fourth quarter of 2016 compared to the fourth quarter of 2015. For the full-year 2016, we had one additional shipping day versus full-year 2015.

For the fourth quarter of 2016, we had net sales of $2.1 billion, down 3.7% from the prior-year period, while core net sales declined only 1.9%. While not satisfactory, the trend-line improvement in core sales over the last three quarters is encouraging. Our cost of products sold for the quarter was approximately $1.7 billion. Net sales less the cost of products sold was $379 million. Net sales less cost of products sold as a percentage of net sales was 17.9%, down about 10 basis points from the prior-year period.

Adjusted EBITDA for the fourth quarter was $50.1 million, a decrease of 4.2% from the prior-year period. Adjusted EBITDA as a percentage of net sales for the fourth quarter was 2.4%, consistent with the prior-year period. Ongoing improvements in segment and product mix and continued improvements in our cost structure helped us maintain consistent adjusted EBITDA margins despite the decline in revenues.

For the year ended December 31, 2016, we had net sales of $8.3 billion, down 4.5% from the prior-year period. Our net sales per shipping day were down 4.9% year over year and our core net sales declined 4.4% for the year. I would quickly note that in 2017, we will have two less shipping days in the third quarter and one more shipping day in the fourth quarter, resulting in one less shipping day for our full-year 2017 results relative to 2016.

For 2016, our cost of products sold was approximately $6.8 billion. Net sales less the cost of products sold was approximately $1.5 billion. Net sales less cost of products sold as a percentage of net sales was 18%, up about 10 basis points from the prior-year period. Adjusted EBITDA for the year was $192.2 million, an increase of 5.6% from the prior-year period. Adjusted EBITDA as a percentage of net sales was 2.3%, up about 20 basis points from the prior-year period. Our increased earnings for the full year were a result of a number of factors, including a combination of accelerated synergy capture, strategic mix management and a $6 million benefit from a lower fuel rate versus the prior-year period.

Let's now move into the segment results for both the quarter and year ended December 31, 2016. 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 any day count differences. In the fourth quarter, the packaging segment grew its net sales 2% and core net sales were up 4.3%, which we believe is better than the market performance.

For the year, the packaging segments net sales were up nearly 1% and core net sales were up 1.2%. This segment experienced sales growth in corrugated products, especially in the manufacturing sector. However, we continued to face market pressures from soft demand in the food packaging industry.

For the fourth quarter and full year, packaging contributed $55.8 million and $221.2 million in adjusted EBITDA, down 0.5% and up 4%, respectively. For the quarter, adjusted EBITDA as a percentage of net sales was 7.5%, down 20 basis points from the prior-year period. For the year, adjusted EBITDA as a percentage of net sales was 7.7%, up 20 basis points from the prior-year period. The adjusted EBITDA improvement in the segment for the year was largely attributable to higher net sales and sourcing initiatives.

In the fourth quarter, facility solutions net sales decreased 1.3% and core revenue was roughly flat. For the year, facility solutions net sales decreased 1.4% and core revenue was down 1.1%. For the fourth quarter and full year, facility solutions contributed $12.7 million and $47 million in adjusted EBITDA, up 10.4% and 12.7%, respectively.

Adjusted EBITDA as a percentage of net sales increased in nearly 50 basis points for both the quarter and the year. This margin improvement was due to many factors, including core vendor and private brand alignment, along with reductions in both selling and delivery expenses. I should note that our facilities business generates roughly 20% of its revenues from Canada, and that business has had a nice rebound after a difficult 2015.

In the fourth quarter, the print segment had a 7.2% decline in net sales and our core business was off about 5.6%. For the year, the print segment had a 6.9% decline in net sales and our core business was down the same 6.9%. For the fourth quarter and full year, print contributed $21.1 million and $76.8 million in adjusted EBITDA, down 3.2% and 2.8%, respectively. Both customer and product mix and reduced operating and selling expenses partially offset volume and pricing pressures.

In the fourth quarter, the publishing segment had a 12.4% decline in net sales and a 10.9% decline in its core business. This soft revenue to performance was particularly affected by secular declines in both market prices and market volumes. The volume reductions were particularly pronounced in book, magazine, and direct mail as customers adjusted their promotional mix. For the year, the publishing segment had a 15% decline in net sales while the core performance was off 15.3%. For the fourth quarter and full year, publishing contributed $7.2 million and $23.6 million in adjusted EBITDA, down approximately 38% and 32%, respectively.

Today we are providing 2017 guidance for an adjusted EBITDA range for synergies, capital expenditures, and free cash flow. As Mary mentioned, we expect adjusted EBITDA for 2017 to be in the range of $190 million to $200 million, which reflects an expectation of a continued decline in revenues and performance from our print and publishing groups. For 2016, our synergy capture efforts were once again a meaningful driver of our adjusted EBITDA performance.

As a reminder, these synergy percentages are calculated using the cumulative effect of synergy benefits already achieved in 2014 through 2016, measured against the high end of the range. Said differently, we are quoting the cumulative effect, not the incremental effect in comparing our performance to the high end of the multi-year synergy range.

For the full-year 2016, we made significant progress against our long-term goals and were able to capture just over 70% of the high end of our cumulative forecasted synergy range, $150 million to $225 million which is ahead of our initial plan. As Mary mentioned, we have now surpassed the lower end of the synergy target range that we made and the spring of 2014. We reach this accelerated level of synergy capture largely from strong execution of our sourcing initiatives. We do not anticipate this accelerated pace to carry over into 2017, as we continue with the next phase of the integration.

In 2017, our focus will be on process enhancements and information systems as well as the continued consolidation of our distribution center footprint. These efforts will require significant time and investment. Those investments will enable further efficiencies in future years. Our expectation for total synergies over the multi-year forecast remains unchanged. Also, expectations for net synergy capture for 2017 remain in the range of approximately 80% to 90% of the ultimate goal of $225 million.

Let's shift now to our balance sheet and cash flow. At the end of December, we had drawn approximately $727 million of the asset-based loan facility and had available borrowing capacity of approximately $430 million. As a reminder, the ABL facility is backed by the inventory and receivables of the business.

For 2016, we decreased our net-debt-to-adjusted-EBITDA leverage ratio about 70 basis, points from 4.1 times to 3.4 times. At the time of the merger, our net leverage ratio was 5.5 times. Our strategic goal is a net leverage ratio of around three times. Overall, we have been pleased with our deleveraging initiatives.

For the year ended December 31, 2016, our cash flow from operations was $140 million. Subtracting capital expenditures from cash flow from operations for 2016, you would find we generated free cash flow of approximately $99 million, which was better than our expectations, mainly due to the timing of payments of business transactions and related payments at year end. Adding back the $63 million cash impact of restructuring, integration, and other related items, adjusted free cash flow for 2016 would have been approximately $162 million. For 2017, we currently anticipate at least $60 million of free cash flow, once again, defined as cash flow from operations less capital expenditures.

The level of free cash flow from the last 30 months has allowed us to accomplish two objectives. First, we have invested in the Company. That investment has two elements, one-time integration costs and capital expenditures.

We have two types of integration costs. There are those that run through the income statement directly and those that are within capital expenditures. One-time integration costs expected to run through the income statement in 2017 will be between $40 million and $50 million. 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 2017 and beyond.

Similar to 2016, this incremental capital spending is principally for information systems integration. For 2017, our ordinary [course] capital expenditures are expected to be approximately $20 million to $30 million. For comparison purposes, in 2016 capital expenditures totaled $41 million for the full year. Of that spending, there was about $25 million related to integration projects.

Our second major use for our excess cash has been to pay down debt. As I mentioned a few moments ago, we have made meaningful and steady progress against this priority since the merger 2.5 years ago. Krista, we are now ready to take questions.

(Operator Instructions)

John Babcock, Bank of America Merrill Lynch.

Good morning, guys. Just one quick question here. We have clearly heard quite a bit about price increases in containerboard and also some other grades out there, and I was just wondering if you could talk about the impact of that on earnings in 2017 and also if you could generally review the sensitivity to pricing changes that I think you guys have discussed a little bit in the past.

Well, thank you, John. So yes, we have experienced, in the fourth quarter, a price increase in corrugated boxes, as you saw from an industry announcement, and I think they've also announced a second one here in the first quarter. Embedded in our earnings in the fourth quarter is some element of that price increase, not the full impact. In terms of what we see is that we would expect to pass that price increase along and have fairly stable margins. So we didn't see a material impact yet in the fourth quarter but would expect to see an ongoing impact as we head into the first quarter.

Okay.

Which would give us some uplift on the revenue front and hopefully maintain our margins.

Okay. And on that point, have you started passing on the price increase that was essentially effective this week on to customers at this point? And if so, and maybe this isn't the case, but if you have, then how receptive have they been to those price hikes?

So we have begun doing that and it's difficult to say how receptive -- it's probably too soon to tell, John. We were successful with the first round. I think the jury is out yet in terms of the second round of increases.

Okay. Thanks for that. And with regards to Facility Solutions, this is clearly an area that you guys have been trying to improve. And I was wondering if you could provide a little bit more color as far as your expectations for the segment in this year ahead, whether the progress will be modest or if you expect some more significant improvement there.

So you're right. It is a segment that we've been in turnaround mode and feel good about the progress that we made and, in fact, did show double-digit improvement in earnings year-over-year in 2016. We would expect 2017, as I've shared in the past, is that we would become -- get closer and closer to the industry growth rates, which is closer to GDP and continue -- we had margin improvement in the fourth quarter and would expect that would at least maintain itself going into 2017.

Okay. Great. And then another question, if you could review some of the key assumptions of that you have in the 2017 guidance, and also if there's anything that we should be mindful of with regards to the first quarter, particularly with only two weeks left, at this point.

Yes. With regards to our guidance, we have downward pressure in our Print and Publishing businesses, as we have had over the course of time. We anticipate benefit from synergies, although maybe not at the same rate that we saw in the prior two years. So that's a plus in terms of the earnings. But we're also beginning to make organic investments, in particular in our Packaging business. So those are probably the three primary drivers that are impacting our guidance. So again, pressure -- downward pressure on Print, upward benefits from synergies, and downward pressure in earnings because of investments to support more aggressive growth in our Packaging business.

Okay. And in1Q, is there anything you guys can share at this point?

As we wrapped up the fourth quarter, business was pretty stable to trending up in some of our segments and we're seeing that continuing.

Okay. On working capital, it was a source of cash in 2016. What are your expectations for 2017 there?

Steve?

So the way that we think about it is the fact that in 2016, much like with synergies that Mary mentioned, we tried to accelerate, where possible, any actions we can in future years into current year. So in 2016, we took the action to work hard on accounts payable, as well as inventory. And in the year, we had some benefits from inventory, particularly in our Print segment, which you'll see in our balance sheet and cash flow, but also we stretched our payables at year end. And if you think about that, what's probably happening a bit is that some of the cash flow that would've otherwise naturally fallen into 2017 has been pulled a bit into 2016. So he way we think about it is if you look at the $99 million of free cash flow in 2016 and you take our guidance of at least $60 million in 2017, you'd see we'd be averaged in the neighborhood of about $75 million per year over those two years, which we feel is a reasonable level over time at this business model. So that's our thought on working capital for 2017.

Okay. Appreciate it. Thanks. That's all I have for now.

Ryan Merkel, William Blair.

Thank you. Good morning, everyone.

Good morning, Ryan.

Just following up on the prior question about what's embedded in 2017 guidance, could you be a little more specific? What are you assuming that the publishing industry and the print industry declines in 2017?

Well, Ryan, I would first of all state that there's -- there was RISI out there estimating in the print space, I think it's about 3% to 4%. It's not been that way for the last several years, not really, and so we're estimating that the decline is going to be similar to what we actually experienced in the second half of 2016 for both businesses.

Okay. So for the second half of 2016 for Print and Publishing, the growth rates that we saw there for your business you are assuming continues in 2017?

In the Print space, yes, maybe some modest improvement in Publishing.

Got it. Okay.

One of the things that we're seeing, in particular in the Print space, is there's been downward pressure on pricing. Because of the excess capacity with the mill system and running at rates, utilization rates of 90, and probably less in some product categories, pricing has actually had a negative impact on us that's actually not reported. RISI generally reports more volume than price.

Got it. Okay. And then for the Packaging business, I'm expecting that will grow in 2017. Should we expect GDP growth as a base case for the industry?

I think that's a reasonable assumption. I really am pleased still, if you look at our fourth-quarter numbers, if you look at it on an adjusted for the per day and currency, we actually grew substantially better than the industry, which was modest, but we are anticipating a like a GDP growth type scenario.

Okay. Should we be viewing 2017 as a transition year? You mentioned Print will be down, benefits from synergies but a lower rate, increasing investments. What I'm getting at is when we get into 2018 and beyond, should we be back to growing EBITDA mid-single digits, maybe a bit better, because this year you're guiding flattish EBITDA growth?

Ryan, I think that's a pretty good assumption. And we've been guiding toward that for the last year, actually, because we recognized that 2017 was going to be a pivotal year for us. Because by the end of 2017 we will have all of our -- the entire Company, 75% of the entire Company, on a single operating system, and going through that change is significant. That, coupled with where we are with the Print business and our ability to grow Packaging at the rates we are, I would say it is absolutely a plateau year and would hope to be building upon that going forward.

All right. And just lastly, the investment that you discussed in packaging, sales, and marketing, can you just put maybe some dollar figures on that, some timing and a little more specifics as to what exactly you're doing there?

Yes. Absolutely. The investment amount, I'm just going to give you a number plus or minus, as much as $10 million, plus or minus a few million around that number. So it's significant and the investment cuts across in many areas.

It's investment in people, like sales professionals, in particular, as well as support staff to support large national programs where we're growing with our large national customers. We're also making investments in specialists to support our specialty packaging part of our business, as well, and as well as investments in our strategy overall for the organization to try and accelerate growth for the long-term future of the Company.

Okay. Very good. Thank you.

You're welcome.

This concludes the question-and-answer session. I will now turn the call over to Mary for closing remarks.

Thank you for your questions this morning. I would just wrap it up by saying overall, our 2016 financial results came in more or less what we had planned, despite the challenging fourth quarter. With the uncertain macroeconomic picture as a backdrop, we continue to execute on our multi-year plan. And I wanted to say thanks to the entire Veritiv team, because I believe we are well positioned to deliver on the 2017 commitments that we have just outlined.

Before ending today's call, I do want to invite you to attend our strategy and optimization call, where we will highlight Veritiv's longer term strategic plans and expectations for further efficiencies. We are looking forward to sharing these concepts with you, which should result in exciting new opportunities for the Company and further enable Veritiv's long-term success. The discussion will begin today at 11:00 AM. And for additional information, please visit the Investors section of our website, at veritivcorp.com. If you are unable to join the call next, a replay will be posted on the same website.

Again, thank you for joining us today. And we look forward to talking to you again in May, as we wrap up our first quarter 2017 results. And hopefully, many of you can participate with us at 11:00 this morning. Thank you and have a great day.

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