Neil Russell - SVP, Corporate Affairs Mary Laschinger - Chairman and CEO Steve Smith - CFO

Taylor Saunders - Barclays David Mandell - William Blair

Good morning. And welcome to Veritiv Corporation's First Quarter 2015 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introduction. At this time, I would like to turn the call over to Neil Russell, Senior Vice President of Corporate Affairs. Mr. Russell, you may begin.

Thanks Mitchell, 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. The news release is posted in the Investor section at veritivcorp.com and on the Veritiv IR app which can be downloaded from the iTunes App Store and Google Play. 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 would like to turn the call over to our Chairman and Chief Executive Officer, Mary Laschinger.

Thanks, Neil. Good morning, everyone. And thank you for joining us today as we review our first quarter 2015 financial results. We will also cover key developments in the quarter and provide an update on our ongoing integration efforts. Veritiv is off to a strong start in 2015. We finished the quarter ahead of last year reporting consolidated adjusted EBITDA of $28 million, a 19% pro forma increase year-over-year. This favorable increase was primarily a result of continued cost reductions related to our integration initiatives. We remain on track with our long term goal to improve adjusted EBITDA by an incremental $100 million over the first few years post merger and to deliver $150 million to $225 million in net synergies within the first five year's. For the first quarter 2015 net sales were approximately $2 billion, down 4.5% from prior year which was inline with our expectations. Regarding the net sales decline, I would like to take this opportunity to walk through three factors that drove the year-over-year decline in the first quarter. Each factor represents about one-third of the total decline. First of all, due to this year's calendar structure we had one less shipping day in the first quarter of 2015 compared to the number of shipping days in the first quarter of 2014. Secondly, currency headwinds primarily associated with the weakening of the Canadian dollar negatively impacted the topline. And finally, secular decline in the paper industry continued to impact our print solutions and publishing and print management businesses. These declines were partially offset by strong results in our packaging segment. We feel good about our efforts to optimize the balance between revenue and profit improvement while driving cost reductions related to our integration activities. Building on our success in 2014, we made further progress toward our integration goals in the first quarter of 2015. And as a result, we remain on track with our overall integration plans. We continue to execute integration projects smoothly and with minimal disruption to our customers. This progress is all thanks to our dedicated Veritiv team and their commitment to operational excellence and to our customers. As I mentioned last quarter, the synergies to be realized through 2015 and beyond will be derived from integration activities that are more complex than the work we completed in 2014. These activities require greater investment and more time to implement which means the associated synergies will be realized over an extended timeframe. This is all consistent with our earlier guidance. One integration milestone we achieved in the first quarter that relates to this process was a launch of our new internal consolidated sales reporting. Consolidated sales reporting is a critical tool for us. It provides information about revenue and margins both across the organization as a whole and within certain geographies and customers and so on. It allows us to see in clear terms where we are winning and where new opportunities may exist. Another first quarter milestone I'm proud to share is that we executed a uniform performance management process that established a pay for performance culture in the company. The process involved goal setting that was aligned both lender and shareholder interest and more specifically we set performance goals that supported our adjusted EBITDA target. Looking ahead we have several integration milestones earmarked for the completion by early fall including common invoicing to our customers, and the separation of our financial and information systems from international paper company. 2015 is a foundational year for Veritiv. Our team is hard at work behind the scenes executing projects to meet our integration milestones on schedule and to help the company operate more efficiently and effectively overall. Our work is centered on standardizing processes and technology networks, as well as completing other activities that will help us build the platform for synergy capture in 2016 and beyond. I am pleased with the integration work we have been able to achieve so far and I remain confident in our plan and the ability of our talented Veritiv team members to deliver on that plan. Now I will turn it over to Steve so he can take you through the details of our first quarter financial performance.

Thank you, Mary, and good morning everyone. For our first quarter 2015 on a pro forma basis, as if the merger had occurred at the beginning of 2013; we had net sales of $2.1 billion, down 4.5% from the prior year period. However, our net sales per shipping day were down 2.9% year-over-year. I would note that this day count difference will not exist in future quarters, but it will impact all of our 2015 year-to-date comparisons versus 2014, and will generate a drag on the full year revenue comparisons of about 40 basis points. Our cost of products sold for the quarter was approximately $1.8 billion. Net sales less cost of product sold was $376 million. Adjusted EBITDA for the quarter was $28.4 million, an increase of 18.8% from the prior year period. Adjusted EBITDA as a percentage of net sales increased to 1.3% up 26 basis points from the prior year period. As Mary said, we are pleased with the results. Our improved consolidated results were primarily driven by both our synergies from integration initiatives and lower fuel prices. Let's now move into the segment results for the quarter ended March 31, 2015 on a pro forma basis as if the merger had occurred January 1 of last year. In the first quarter, the print segment experienced a 9.8% decline in net sales. Removing day count and foreign exchange impacts, our print revenue was off about 7.4%. Embedded in that revenue decline is impact of dis-synergies related to the merger of approximately 1%, excluding the three factors of day count, currency, and dis-synergies. Our revenue decline in the print segment was about 6.5%. In spite of these declines, adjusted EBITDA for the print segment increased 12.4% year-over-year to $15.5 million. This increase in adjusted EBITDA was partially a result of customer and product mix changes, as well as operating expense reductions that more than offset the decline in revenue. The publishing segment had a 2.1% decline in net sales with the decline mostly due to day count effect. This segment contributed $6.5 million of adjusted EBITDA which was a 10.8% decrease year-over-year. The decline in earnings was largely the result of a decision to adjust the way Veritiv handles higher risk accounts. Facility Solutions declined 6.7% in net sales, and contributed $6.8 million in adjusted EBITDA. Excluding the effects of day count and currency, the segment was off about 3% year-over-year in revenue. The core sales decline of about 3% was principally due to our exceeding of some unprofitable accounts in the prior year. Despite the decline in net sales, the Facility Solutions business saw improvements in adjusted EBITDA as a percentage of net sales for the first quarter with an increase of 14 basis points. This improvement occurred as a result of improved customer mix, as well as operating expense reductions. Our Packaging segment saw a strong performance in the first quarter. Net sales per shipping day were up 3.4% over the prior period. For the first quarter, currency translation resulted in the equivalent of a 1.1% drag on revenue year-over-year, which means we grew this segment by 4.5%, which was we believe above the market growth rates. Additionally, Packaging also contributed $45.7 million of adjusted EBITDA in the first quarter, resulting in a 13.9% increase year-over-year, and an improvement in adjusted EBITDA as a percentage of net sales of 72 basis points. The adjusted EBITDA improvement in this segment was attributable to both increased sales, including growth within key customer verticals, such as food and manufacturing, and a reduction in operating expenses. Now we will switch from our segment analysis to look at four elements of our financials, our trajectory and synergies, our balance sheet, cash flow, and the allocation of our capital. We continue to expect next synergy capture for 2015, of approximately 25% to 35% of the ultimate goal of $150 million to $225 million over the five years post merger. As a reminder, we will be updating our synergies progress annually and we'll provide the actual full year net synergy capture achieved when we report full year 2015 financial results in early 2016. Turning to the balance sheet. At the end of March, we had drawn approximately $800 million of the asset based loan facility and had available liquidity of approximately $400 million. As a reminder, the ABL facility is backed by the inventory and receivables of our business. Shifting now to cash flow. For the first quarter of 2015, our net cash flow from operations was $92 million. Adjusting for capital expenditures and the cash impact of restructuring and other integration related items, adjusted free cash flow was $106 million. It is important to note that the strong first quarter cash flow performance was a result of several factors, including our normal seasonality, improved earnings and a slight change in our payables pattern. Seasonality plays an integral role in our quarterly cash flow pattern, with the first quarter likely to be the strongest period of inflow during 2015. As we continue to better understand the working capital patterns of the combined companies and as integration expenses tail-off over the next couple of years, we will be in a better position to manage and predict future cash flows especially on a quarterly basis. At this point, we believe we will have positive cash flow for the full year 2015, including the drag associated with the one time integration costs. As many of you know, we have two types of integration costs. Those that run through the income statement directly, and those that are within capital expenditures. We believe these one time integration costs that will run through the income statement for 2015, will be between $50 million and $60 million this year, with exact timing of some of those expenses hard to predict due to the many initiatives being managed. Capital expenditures totaled nearly $10 million for the first quarter with about $8 million related to the integration projects. For the year, we continue to expect ordinary course capital expenditures to be approximately $25 million in 2015. In addition, we expect incremental capital expenditures related to the integration projects to be in the range of $30 million to $40 million, which will help enable the synergy capture in 2015 and beyond. This incremental capital spending is principally for information systems integration. All of these capital expenditures amounts are consistent with our prior disclosures. Moving forward, we continue to believe that cash flow from operations to impart to an anticipated improvement in adjusted EBITDA will allow us to accomplish three objectives. First, fund the spending associated with costs of achieving synergies, second, to pay down debt, and third, to grow the overall value of the enterprise. So, in summary, as Mary mentioned earlier, our results this quarter were principally driven by cost reductions and lower fuel prices. We continue to make progress toward delivering net synergies in the range of $150 million to $225 million. With that, I will now turn the call back over to Mary, and our operator Mitchell for questions-and-answers.

Thank you, Steve. Mitchell, we're ready to take questions.

[Operator Instructions] Your first question comes from Scott Gaffner from Barclays. Your line is open.

Good morning, Scott.

Mr. Gaffner, are you on mute?

Sorry about that. This is Taylor, actually on for Scott, this morning.

Good morning, Taylor.

How are you guys?

Fine, thank you.

So I just wanted to start and look at the segments, first, so you talked a little bit about how Packaging did versus the market. I believe it outperformed a little bit excluding some of the items that you mentioned, the day count and FX. I was wondering if you could do the same thing, provide the same level of detail for the remaining segments, particularly against print and publishing, how those segments did versus the market excluding the FX and the day count issues?

Sure. So, first of all, let's talk about the print and publishing business. So as we shared in our talking points, FX and the day count, if you adjust that in print, it's at 7.4% decline. But we also made some choices impacting customer mix and profitability that brought it down to 6.5%. So, hopefully those numbers work, or resonate. And then on the publishing front, the decline of 2%, just over 1.5% of that was due to the day count and there was no FX. So, we were roughly about 1.5% down year-over-year, which is significantly better than the market performance that approximately negative 5%. And then on the Facility business, again we reported roughly a 7% decline, of which if you back-out the day count and the currency impact, it takes us down to 3% decline which is certainly greater than the market because we're projecting that the market probably grew about 2% inline with GDP or somewhere in that range. That decline is a result of a lot of the efforts that we took - initiatives that we undertook later last year where we were trying to correct the portfolio for improved profitability, which is why you see the profit on a per unit basis is actually improving. I'd also like - and I should have mentioned this with the print segment, even though our print revenue is down, adjusting for those factors about 7%, our profitability is up in print because of some of the choices that we made.

Okay, perfect. That’s very helpful. And I guess on Facility Solutions, you mentioned the actions that you took last year and I believe that 3% decline is inline with what you guys were talking about last quarter so that's good. Should we assume then that you have finished walking away from any unprofitable business in that segment, and that’s all behind you?

Taylor, we are not done there yet, we are hopeful that we continue to make headway in terms of profitability and earnings impact. But we anticipate that there could still be some more downward pressure in this segment.

Okay. And then just lastly on the key milestones that you mentioned, the upcoming milestones on the common invoicing to customers and the separation of information on financial systems from IP. Any sort of timing you can give us on when we should expect to see some progress being made there or should we just expect an update next quarter I guess.

We'll certainly give an update next quarter but we anticipate that both of those elements that I mentioned, as well as there is a lot of other smaller items initiatives around the business. But those would certainly impact late second quarter and into the third quarter.

Okay, perfect. I will turn it over. Thanks very much.

Thank you.

[Operator Instructions] Your next question comes from David Mandell from William Blair. Your line is open.

Good morning. Do you think that gross margin sequentially stepped up pretty nicely, is this a new run rate that's sustainable or this is kind of step up driven by seasonality or something else?

Well, it should be more sustainable and frankly speaking we would expect it continue to get better. Seasonality sometimes can have some impact on gross margins but the biggest drivers on our gross margins in the business are really the cost reduction initiative and the other initiatives associated with the integration. And we are continuing to see improvement because of customer mix. We’ve made some tough choices in both our Facility business and our Print business to try to get that trend in the right direction. So we are optimistic that it's sustainable and will continue to improve.

That's good to hear. And then can you speak kind of sales trends within the quarter if the quarter started or ended stronger, weaker?

Well, it started actually stronger and finished weaker which was a bit surprising to us frankly because of the weather challenges in January and February. But we saw more softness in the later part of the quarter than in the first part of the quarter.

Thank you for taking my questions.

David, I want to come back also to your prior question around profitability trends. There is one dynamic that I would like to bring out to your attention regarding our packaging business. We've got continued good mix in that business but we are also going to be seeing downward pressure on commodity prices in the business which may have some pressure on margins overtime. And again that's yet to be seen but you can imagine with what happened with fuel, resin and other commodities that are coming down and that has an impact on our selling prices which does sometimes flow into not only the topline but into the margin line as a result of mix.

All right. Thank you.

[Operator Instructions] I don't have any further questions at this time. I will turn the call back over to Mary Laschinger for closing remarks.

Thank you, Mitchell. Well, thank you everyone for your questions. I would like to close by saying that we continue to make good progress against our financial and integration goals. This is not without a lot of hard work required to help us overcome some of the unique challenges and industry pressures that we face everyday that we’ve mentioned earlier. As and we are doing that as we continue to integrate our company and work toward our synergy goals, we are addressing these challenges by implementing segment strategies as a combined company and working towards optimizing our supply chain while keeping our customers in the center of our work. I'm really pleased with what we are able to achieve in the first quarter of 2015, and we wouldn’t have been able to do this work without the team of our dedicated Veritiv employees and I would like to thank them for their hardworking commitment to our success. We're off to a great start for the year, and the Veritiv team and I look forward to continuing to execute on our integration and synergy capture plans for 2015. Thank you for joining us today.

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