Veritiv Corp (NYSE:VRTV) Q4 2022 Earnings Call dated Feb. 28, 2023.
Corporate Participants:
Scott Palfreeman — Vice President, Finance & Investor Relations
Salvatore A. Abbate — Chief Executive Officer
Stephen J. Smith — Chief Financial Officer
Analysts:
Sandra Liang — Bank of America — Analyst
Presentation:
Operator
Good morning. And welcome to Veritiv Corporation’s Fourth-Quarter and Full-Year 2022 financial results conference call. As a reminder, today’s call is being recorded. We will begin with the opening remarks and introductions. At this time, I would like to turn the call over to Scott Palfreeman, Vice-President of Finance and Investor Relations. Mr. Palfreeman, you may begin.
Scott Palfreeman — Vice President, Finance & Investor Relations
Thank you, Colby. And good morning, everyone. I am joined on today’s call by our CEO, Sal Abbate and our CFO, Steve Smith. After my remarks, Sal will share an update on full-year and fourth-quarter business performance, followed by Steve, who will provide more details on our financials. After Steve’s comments, Sal will conclude with an outlook for 2023. We will then open the call for 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 are forward-looking. Actual results could differ in a material manner. Additional information on factors 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 2022 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. The reconciliation of these non-GAAP measures to comparable US GAAP measures are included at the end of the presentation slides and can also be found in the Investor Relations section of our website.
At this time. I will turn the call over to Sal.
Salvatore A. Abbate — Chief Executive Officer
Thank you, Scott. And good morning, everyone, and thank you for joining us. 2022 was another record-breaking year of financial performance for Veritiv as we continue to relentlessly execute against our long-term strategic and operational objectives. I am extremely proud of the achievements our company made over the last several years.
During 2022, we focused on our growth objectives and efficiency initiatives. We divested two low-margin, non-strategic businesses with low synergies, combined our print and publishing businesses for efficiency, and maintained cost and price management discipline across all of our business segments. These actions contributed to the best earnings performance for any year in Veritiv’s history and above market performance within our Packaging segment. This success was made possible by the hard work of our approximately 5,000 diverse and talented teammates who focus every day on delighting our customers.
This morning, we announced record adjusted EBITDA adjusted EBITDA margin, net income, and diluted earnings per share for both the fourth-quarter and the full-year 2022. For the full-year 2022, we reported year-over-year organic sales growth of 13.5%. We achieved record adjusted EBITDA of $518 million for the year, representing growth of more than 50% compared to the prior year. 2022 also marked the third consecutive year of double-digit year-over-year adjusted EBITDA growth. Additionally, all three segments reported record full-year adjusted EBITDA despite the divestiture of our Canada business earlier in the year. Full-year adjusted EBITDA margin was a record 7.2%, representing approximately 220 basis-points of margin expansion over 2021.
Since 2019, we have more than tripled our adjusted EBITDA margin. During this time, we focused our attention to higher-growth and higher-margin businesses while executing our strategic and operational efficiency initiatives. We believe the majority of the adjusted EBITDA margin improvement over the past several years is sustainable due to the commercial and operational efficiency initiatives we have undertaken. I’ll provide more details on these strategic initiatives in a few minutes.
Full-year 2022 net income was $338 million, representing year-over-year growth of 134%. The resulting diluted earnings per share was a record $23.29 and reflects year-over-year growth of 158%. Both net income and diluted earnings per share for 2022 were approximately 10 times higher than our 2020 results. Adjusted EBITDA outperformed the top-end of our initial guidance range by nearly 20%. We increased our guidance three times during 2022 and meaningfully exceeded our initial expectations. This was despite two strategic divestitures during the year that in aggregate contributed approximately $33 million of adjusted EBITDA in 2021. Net income and diluted earnings per share also beat the top-end of our initial guidance range by 35% and 43% respectively.
This past year, we returned over $200 million to shareholders in the form of a share repurchase program and paid our first dividend in December of 2022. We also invested in the business to improve our value-added service offerings, including packaging design, as well as the end-to-end customer experience. Our return on invested capital or ROIC, ended the year at a record 35%, which reflects a nearly six-fold increase since 2019 as a result of both working capital improvements and margin expansion initiatives. For the first time in our history, we established a strategic scorecard that aligns with management incentives. We set a target to hire at least 40% of new mid to senior level positions from underrepresented groups in 2022. I am proud to say we exceeded this goal.
Workplace safety remains another key area of focus for Veritiv. Our investments in screening support a safer work environment for our employees and a best-in-class safety rating across our supply-chain network. As a result, our total injury rate beat its target for the year. These metrics are in addition to our corporate sustainability goals. In 2022, we achieved meaningful progress against our goals. Our sustainability initiatives support Veritiv being a better corporate citizen and help our customers achieve their own sustainability goals. We look-forward to providing more details on our 2022 achievements when we publish our annual corporate sustainability report next quarter.
Turning now to the fourth-quarter of 2022. Organic sales grew 1.8% as compared to the fourth-quarter of 2021. This was driven primarily by organic sales growth within our Print Solutions and Facility Solutions segments and was partially offset by lower-than-expected sales in our Packaging business. Higher market prices drove organic revenue growth during the fourth-quarter of 2022, which more than offset weaker volume. Adjusted EBITDA was a fourth-quarter record of $121 million, reflecting growth of slightly more than 4% as compared to the prior year. Adjusted EBITDA margin was 7.3% for the fourth-quarter and reflected the 12th consecutive quarter of year-over-year adjusted EBITDA margin expansion. Net income of $72 million was also a record for the fourth-quarter, reflecting year-over-year growth of 26%. The resulting diluted earnings per share for the quarter was $5.20, which was a fourth-quarter record and represented growth of 42% versus the prior year. Sales performance weekend, as we progressed through the fourth-quarter, with the last two weeks of December being unusually weak.
In Packaging, North American volumes declined in the high-single-digit range during the fourth-quarter, with volume down across most industry verticals. We believe unreliable and inconsistent supply-chain conditions led customers to accumulate excess inventory during the last couple of quarters of 2022. As a result, and consistent with industry trends, we believe customers sold through their existing inventory, and this destocking activity negatively impacted purchasing behavior during the fourth-quarter.
The Print Solutions segment experienced a volume decline in the high-teens range for the quarter. We believe print demand softened and customers worked through their existing excess inventory that had built-up over the past quarter or two as supplier lead times began to improve. Finally, volume declined in the mid-single-digit range within Facility Solutions segment during the fourth-quarter, as strength in away-from-home categories was offset primarily by lower volume in the personal protective equipment and skin care categories.
Although the effects of customer destocking were more significant than we anticipated in the fourth-quarter, preliminary sales results for January in our Packaging and Facility Solutions businesses showed an improvement relative to December. Early indications support our belief that customer inventory destocking within Packaging was more pronounced during the fourth-quarter and we expect customer inventories to normalize during the first-quarter of 2023. Within Print Solutions, we believe customer inventory levels will begin to normalize by the end of the second-quarter.
Our record earnings performance in 2022 demonstrated the strength and resiliency of our diversified business model. We support a wide range of customers ranging from small businesses to more than half of the Fortune 500 with no customer representing more than 5% of total revenue. We believe our industry vertical exposure is also well-balanced and not overweight to any specific industry. Additionally, we supply a healthy balance of more recession-resistant industries such as healthcare, consumer staples and heavy manufacturing.
From a product perspective only one-third of Packaging’s revenue comes from products tied to an underlying commodity index. The remaining approximately two-thirds of our Packaging segment revenue comes from products that are not directly tied to an underlying index. These products are not as susceptible to the volatility we have seen in commodity-based products. As we previously discussed, we are now focused on the next wave of strategic initiatives. These will include, further strengthening our strategic sourcing relationships and portfolio management practices, enhancing our e-commerce and omnichannel capabilities and evaluating our next-generation supply-chain model.
While we have focused on product and portfolio rationalization in the past, we expect our next round of cost and price management initiatives will build upon our prior success by removing high cost-to-serve products and aligning with strategic suppliers who provide the best combination of price, terms and service. We believe this will result in better value for our customers. We are also enhancing our digital capabilities with investments in technology to improve the customer experience with new tools and capabilities that are expected to launch for select geographies later this year. To support this digital offering, we are also investing in front-end and back-end system enhancements to improve the customer and employee experience.
Finally, we continue to evaluate ways to optimize our next-generation supply-chain to meet the evolving needs of our customers and support our digital sales efforts. Before I turn the call over to Steve to provide more segment level financial performance, as well as comment on the balance sheet for the fourth-quarter, I want to remind everyone that Steve Smith announced that he plans to retire from Veritiv in the fall of 2023. Sadly, this will be Steve’s last earnings call with Veritiv. I want to personally thank Steve for his dedication, loyalty and guidance over his nine-year tenure with Veritiv. For those that don’t know, Steve was the second employee hired when Veritiv was formed in 2014. He will be sorely missed by all levels of the organization. Best of health and happiness, Steve. After Steve’s remarks, I’ll provide details on our 2023 guidance. Steve?
Stephen J. Smith — Chief Financial Officer
Thanks, Sal. And good morning, everyone. Today, I will provide more details on the fourth-quarter and full-year performance of our segments, as well as updates related to cash-flow, leverage and capital allocation. Please note that when we speak to organic results, we are referring to reported results excluding the impact of the sales of our freight brokerage business, Veritiv Logistics Solutions, our Canada business and our RollSource business. On a day count basis, I would note that both the fourth-quarter and full-year 2022 had the same number of selling days as the previous year. Looking ahead to 2023, the third-quarter of 2023 has one less selling day than the third-quarter of 2022.
Turning to segment results. Packaging’s revenue was $916 million for the fourth-quarter. Segment revenue declined 10.2% on a reported basis, but declined 2.4% on an organic basis, compared to the prior year. As Sal mentioned earlier, we experienced a slowdown in sales during the fourth-quarter that we believe was the result of customers destocking their inventory and the customers’ concern over the uncertain economic environment. Favorable market pricing in the fourth-quarter was more than offset by volume declines. Volume growth was strongest in our healthcare vertical, with mid-single-digit growth for the fourth-quarter. Fourth-quarter sales were strongest within our healthcare, wholesale and retail industry verticals. This strength was more than offset by weakness in manufacturing, logistics and food and beverage. Our corrugated volume performance for the fourth-quarter was in-line with the market index.
The Packaging segment reported fourth-quarter adjusted EBITDA of $95 million, representing a decline of 16% compared to the prior year. Packaging’s fourth-quarter adjusted EBITDA margin was 10.4%, which was a 70 basis-point decline over the prior year. Full-year 2022 adjusted EBITDA grew to a record $416 million and adjusted EBITDA margin improved 10 basis-points to a record 10.6%.
Moving to the Facility Solutions segment. Reported revenue for the fourth-quarter declined 24.1% versus the prior year to $175 million, driven primarily by the divestiture of our Canada business. However, on an organic basis, fourth-quarter revenue grew 7.5% compared to the prior year. Facility Solutions fourth-quarter revenue continued to benefit from strong away-from-home activity within the entertainment and hospitality vertical. Healthy sales performance within our towel, tissues and food-service categories, helped to offset declines within the personal protective equipment and skin care categories. The fourth-quarter adjusted EBITDA for Facility Solutions was $16 million, reflecting a decline of 9.8% compared to the prior year. Note that the prior year included business we have since divested. If we exclude the impact of the Canada sale, adjusted EBITDA improved 23% for the fourth-quarter on a year-over-year basis. Our reported adjusted EBITDA margin for the fourth-quarter was an all-time high of 9.0%, which was a 150 basis-point improvement over the prior year, in-part due to the divestiture of the lower-margin Canada business. Full-year 2022 Adjusted EBITDA and adjusted EBITDA margin were records at $61 million and 7.8% respectively.
Moving to the Print Solutions segment. Fourth-quarter reported revenue declined 2.1% to $572 million, while organic revenue increased 7.3% compared to the prior year. Adjusted EBITDA was a fourth-quarter record of $60 million, representing year-over-year growth of 35%. We believe demand weakened in the fourth-quarter as customers work-through their existing inventory levels which had built-up over the past quarter or two. Favorable market pricing was the primary driver of organic revenue growth for the fourth-quarter. Full-year 2022 Adjusted EBITDA was a record $240 million, representing growth of over 100% compared to the prior year. Print Solutions full-year adjusted EBITDA margin was a record 10.1% and approximately 460 basis-points higher than the prior year.
Shifting from the segment’s earnings results to our consolidated cash-flow. For the fourth-quarter, cash-flow from operations was $93.5 million. After subtracting $3.8 million of capital expenditures, we generated free-cash flow of $89.7 million during the quarter. On a full-year basis, cash-flow from operations was $252.4 million and free cash flow was $235 million. As a result of our record earnings and very strong 2022 cash-flow, we ended the year with a healthy balance sheet and a record-low net-debt to adjusted EBITDA leverage ratio of 0.4 times.
From a capital allocation perspective, we were pleased to pay our very first-quarter dividend on December 19 of $0.63 per share. And in doing so, returned approximately $8.5 million to shareholders during the fourth-quarter. For the full-year 2022, we returned approximately $209 million to shareholders, including both the dividend payment, as well as a $200 million share repurchase program. We believe our strong financial position provides the company with strategic optionality and the disciplined deployment of capital to drive long-term growth and shareholder value.
From an organic perspective, we are making additional technology investments to enhance our commercial capabilities that we believe will contribute to top-line growth. While from an inorganic perspective, we continue to evaluate an active pipeline of opportunities with enhanced capabilities and potential synergies. As a result of our favorable capital position, we believe we have the flexibility to execute on multiple capital allocation options at the same time.
Finally, as Sal mentioned, our earnings improvement enabled by commercial and operational efficiency initiatives, along with a more efficient balance sheet due to divestiture of lower-performing businesses has resulted in significant ROIC improvement. ROIC for the year ended 2022 was a record 35%, an improvement of 15 percentage points from 2021 and 26 percentage points from 2020.
Before passing the call-back to Sal, let me take a minute and thank a few constituents, since this is my last earnings call. Sal, for listening to all employees, especially the senior team. Eric, for such a smooth transition. To our Board, for guidance, especially during the 2017 to 2020 years, which were challenging years. Our largest shareholders, for patience during those challenging years. And finally, to my fellow employees for the hard work up to today and for your efforts during the next Veritiv chapter. Sal?
Salvatore A. Abbate — Chief Executive Officer
Thank you, Steve, for all you’ve done for Veritiv and its stakeholders. I’m proud of the considerable progress our company has made over the past several years. Disciplined execution of cost management and capital initiatives contributed to a net income improvement of. $367 million and a diluted earnings per share improvement of over $25 per share since 2019. We ended 2022 in an exceptionally strong financial position that we believe will help us contend with potentially challenging year ahead.
I’ll now provide some color on our segment level thoughts for 2023 and then provide our full-year 2023 guidance. Within Packaging, we continue to expect better than market performance in 2023, driven by our value-added solutions and broad product mix. While containerboard prices and customer demand are expected to remain under pressure, our enhanced price and category management capabilities will offset this headwind. We anticipate supplier lead times will also improve relative to last year, which allows for improved inventory levels. As a result, we believe adjusted EBITDA and adjusted EBITDA margin will both improve relative to 2022.
Facility Solutions is expected to outperform the overall market in 2023 by focusing efforts on large and complex customers, as well as high-growth industry verticals that benefit from our broad product portfolio and supply-chain expertise. Traditional away-from-home and government verticals are key areas of focus for 2023. Like Packaging, we will continue to work with industry-leading suppliers to obtain value for our customers. As a result of market outperformance and category management initiatives, we believe adjusted EBITDA and adjusted EBITDA margin will both improve relative to 2022.
Moving on to Print Solutions. We expect demand to remain challenged. Customer inventories are expected to remain elevated during the first-half of 2023. But we believe this situation will stabilize by the end of the second-quarter. As a result, we expect adjusted EBITDA for 2023 to be lower than the prior year. Despite the decline, Print Solutions is in a fundamentally stronger position than it was a few years ago. We expect to retain a majority of the adjusted EBITDA margin improvement relative to our prepandemic levels due to the commercial and operational efficiency initiatives this business has undertaken over the last several years.
To summarize, we expect full-year 2023 adjusted EBITDA to be in the range of $430 million to $490 million, and net income is expected to be in the range of $265 million to $305 million. Diluted earnings per share is expected to be in the range of $19 to $22 based on 13.9 million fully-diluted shares outstanding. We expect full-year free cash flow of approximately $275 million, which we define as net cash provided by operating activities, less capital expenditures. Capital investments for 2023 are estimated to total approximately $45 million to support traditional capital expenditures and technology-related investments.
Over the past several years, the disciplined execution of our strategic initiatives, as well as improved earnings, have contributed to the significant improvement of our free cash flow. We believe these actions, combined with our low net leverage ratio and ongoing working capital discipline, should sustainably generate approximately $275 million of free cash flow, even in the event of a mild economic pullback. While we expect a challenging market in 2023, the significant improvements we have made to the business over the past years have resulted in a healthier more resilient company. I remain optimistic about the future for Veritiv and believe we are well-positioned to deliver above-market growth in 2023.
This concludes our prepared remarks. Colby, we are now ready to take questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Sandra Liang from Bank of America. Your line is open.
Sandra Liang — Bank of America — Analyst
Hi. Good morning, Sal, Scott and Steve. This is Sandy Liang from Bank of America. George as you know is traveling for the conference. Congratulations on the quarter.
Salvatore A. Abbate — Chief Executive Officer
Thank you, Sandy. And good morning.
Sandra Liang — Bank of America — Analyst
Good morning. We were hoping that you could please comment on the process improvements and any benefits from restructuring, specifically on any message [Phonetic] of projects that you’re exploring to further optimize the warehouse footprint if that’s still moving forward in 2023? And also, your omnichannel capabilities, if you could talk a little bit about the cloud computing arrangements or comment on the next-generation supply-chain, that would be great. Thank you all.
Salvatore A. Abbate — Chief Executive Officer
Yes, sure. I’ll start the questions, Sandy, and Steve, please fill-in the blanks here. So as you recall from our 2022 restructuring plan, which is substantially complete at this point, it had a number of initiatives behind it. First, to your question around our warehouse footprint, we have taken actually since the beginning of the Veritiv existence about 33% of our warehouse footprint out of the geographical footprint. So that work continues. Not as elevated or pronounced as it was over the last couple of years. So we believe that we are right-sized right now, but we continually look at ways to optimize our footprint. For example, in late 2020 or early 2021, we consolidated our print business into 2022 hubs to serve the market more efficiently.
And so we’re continuing to look for ways to optimize our footprint. Within the supply-chain spectrum, though, looking to the future, we are considering automation and technology to continue to gain efficiency in our warehouses. So we will speak more about that over the coming year or two as those begin to rollout.
Another key element of our restructuring and our efficiency initiatives was our cost and price discipline on the commercial side. And so we had substantial gains last year and in 2021 from these efforts. But as we’ve referenced in our last couple of calls, we do have ongoing waves of these commercial initiatives with respect to strategic sourcing and category management, particularly in Packaging and Facility Solutions. So you will see us speak to those throughout 2023, as a mechanism to combat some of the demand softness and the inflationary pressures out in the marketplace.
You also mentioned digital commerce and our omnichannel capabilities. And so, in this quarter, we split out our capital between traditional capital, so think, property, plant and equipment warehouse, machinery racking from our cloud computing. The cloud computing is really aimed at two efficiencies; one is the front-end and one is the back-end. And it’s really about becoming closer to our customers downstream and having better connectivity digitally and allowing a more streamlined ordering mechanism, particularly for our smaller more commodity-like customers and that will provide us a lower cost-to-serve ability. And on the back-office, it’s really about our operating systems and making it a better employee experience where we tie all of our systems together from our various geographies into one common operating system. So those are expected to give us value and efficiency, 2023 and beyond.
Steve, anything to add?
Stephen J. Smith — Chief Financial Officer
No, that’s right, Sal.
Sandra Liang — Bank of America — Analyst
Thank you. Thank you very much. And then just as a follow-up, before I turn it over, just curious if you could comment on how you plan to retain the margin improvement in Print Solutions. I think you mentioned there are some headwinds, up until the second-quarter. Is there something as far as the contract negotiations or contract lengths or something that we should keep in mind? Thank you.
Salvatore A. Abbate — Chief Executive Officer
Yes. Thank you, Sandy. Yes, that’s clearly the most challenging part of 2023, really being caused from the spillover from 2022 with respect to inventory. So we do expect the first-quarter, and frankly, the first two quarters to remain challenged. Now, that is reflected in our overall guidance range. But while we expect 2023 to have more acute decline in volume than we’ve seen in three years or four years, we do expect that to be somewhat softening as 2024 and beyond approaches. And again, that’s just this whiplash effect of the inventory situation from last year.
The two things that we are really expecting to help us maintain our Print margins. One is just the continued capacity that’s come out of the business. So over the last three years, about 6% of the capacity has come out each year. And while we expected 2023 to be a little less than that, there has been an unplanned announced closure just recently, that says, capacity coming out-of-the system for 2023 could be again somewhere around 5% or 6%.
The other issue around sustainability of pricing is the much needed and long overdue maintenance downtime that the mills are taking to really catch-up from the over — the under-capacity and the overworkage from 2021 and 2022 strained supply-chain. So those two factors are expected to maintain Print pricing in not only in the first-half of the year, but most likely the full-year. There’s always risk with respect to further demand decline that could challenge that, but our guidance reflects those two elements being stable regarding prices for 2023.
The third element is that we have combined our print and publishing operations. They used to be two separate businesses. And there’s further efficiency to gain there, and that is why we suggest that we’re going to maintain the majority of our adjusted EBITDA margin improvements over the last couple of years in 2023.
Stephen J. Smith — Chief Financial Officer
Yes, Sal, I am just going to supplement that, on third of your three points was — which is to connect the first question to the second question, which is that because of the operational efficiencies, including the DCs that were consolidated over-time, we, the company, including the Print segment, have lowered the breakeven point of all the segments, particularly in Print. So even with volatility in price and volume that you mentioned in points one and two, we still will have we believe the majority of the margin improvement in ’23 because of that, those cost and operational efficiencies, both in the past and then as you mentioned, going-forward.
Salvatore A. Abbate — Chief Executive Officer
Thanks, Steve.
Sandra Liang — Bank of America — Analyst
Thank you. And good luck on the year.
Stephen J. Smith — Chief Financial Officer
Thank you.
Salvatore A. Abbate — Chief Executive Officer
Thank you, Sandy.
Operator
[Operator Instructions] There are no further questions at this time. I would now turn the call-back over to Sal Abbate for any closing remarks.
Salvatore A. Abbate — Chief Executive Officer
Thank you, Colby. I want to thank our team members for their hard work and dedication to our customers. Every day our approximately 5,000 world-class team members work tirelessly, delivering products and solutions that delight our customers. Thanks to their dedication, earlier this month, Veritiv was named one of Fortune’s 2023 World’s Most Admired Companies. This achievement is truly a testament to our hard-working team members and a milestone for our company. Thank you all for joining us today. For our next earnings call in May, we will be joined by Eric Guerin, our current SVP of Finance, who will assume the role of Chief Financial Officer on March 1. We look forward to speaking with you again soon. Colby. This now concludes our call.
Operator
[Operator Closing Remarks]