Essendant To Take More Actions As Q2, 2016 Disappoints
By Andy Braithwaite.
US office supplies wholesaler Essendant has announced a number of initiatives to improve profitability after a challenging second quarter saw earnings slide.
Essendant’s Q2 adjusted EBITDA of $50.9 million was about 23% lower than last year’s figure while adjusted earnings per share (EPS) were $0.55, some way short of the market consensus estimate of $0.83. The company admitted the result was disappointing and “well below” expectations.
The wholesaler also reduced its full-year earnings outlook, slashing its adjusted EPS forecast from $3.20-$3.40 to the $2.15-$2.30 range, while also lowering the top end of its full-year sales estimates.
“In light of the challenges we faced in the quarter and our reduced outlook for the balance of the year, we are accelerating efforts to advance our strategy, improve margins and reduce costs,” said CEO Bob Aiken.
“We plan to execute these actions while reducing our inventory levels over the balance of the year to improve the company’s return on investment – building on our core capabilities while increasing operating and working capital efficiency is the right path forward,” he continued.
“With the common platform implementation of our office products and janitorial/sanitation businesses now complete, several large account wins on-boarded and our industrial business making progress in its recovery plan, our company’s core capabilities continue to offer a competitive advantage in the marketplace.”
A look at Essendant’s Q2 results (vs Q2 2015) in more detail.
Company sales: $1.35 billion, a 0.9% year-on-year increase driven by the Nestor Automotive division acquisition in 2015 and growth in traditional office products, partially offset by the sale of Azerty de Mexico business last year.
Office products (excl. paper): + 1.1% to $210 million
Cut-sheet paper: +16.6% to $99 million
Technology: +3.3% to $341 million
Furniture: -5.4% to $74 million
Janitorial/Breakroom: -0.9% to $367 million
Industrial: -4.1% to $144 million
Automotive: +25.9% to $81 million
Gross profit: -6.8% to $195.8 million
Adjusted EBITDA: -23% to $50.9 million
Adjusted net profit: -34.2% to $20.3 million
The double-digit declines in the EBITDA and net profit numbers stemmed from the lower gross profit which was down about $15 million in dollar terms versus Q2 last year.
Essendant said this was due to a number of factors: a higher mix of lower margin products such as paper and print consumables; customer consolidation, with larger customers having lower profit margins; increased margin pressure to keep and convert customers.
Essendant has announced a number of actions to reduce costs, increase margins and improve free cash flow. These include:
Further headcount reductions to simplify the organisation. These will come on top of the 11% reduction in salaried headcount since the beginning of 2015.
A reduction in the distribution centre footprint (details will be provided in due course).
Aligning pricing with cost to serve: this includes obtaining rates “commensurate with value”, reducing freight costs and focusing purchasing volume with key suppliers.
Reducing inventory purchases by $100 million by the end of the year. This will lower the amount Essendant receives in supplier allowances, but is seen as the “right thing to do” from a return-on-invested capital (ROIC) standpoint. This will help drive $150 million of expected free cash flow by the end of the year (the company had negative free cash flow of $32.5 million in the first half of the year).
The wholesaler also said it will focus on three key areas in the second half of this year. These are:
Applying resources to channels with the best prospects for profitable growth, namely e-tail, vertical markets (with an enterprise accounts focus) and strategic jan/san customers. This also means aligning with resellers that are gaining share in the office products and jan/san categories.
Capturing more gross margin dollars through “more effective” pricing, merchandising excellence and earning a greater share of the industry “profit pool” for the value it provides.
Continuing to reduce the cost structure, through the simplification of the business and rationalising the distribution footprint, already referred to above.
A tough quarter for Essendant with margins really coming under pressure, and CEO Bob Aiken has wasted no time announcing a further set of cost-reduction and profitability measures.
One bright spot was the increase in core office products as contract wins at the end of last year fully ramped up in the second quarter. However, winning new business, in particular larger accounts, has led to a hit on profitability. Essendant is now looking to make up for this through pricing and, seemingly, charging more for its services – that might affect smaller customers, in particular.
Jan/san sales haven’t taken off again following the move to the common ordering platform and that must be an area of concern as this category was really driving top-line growth prior to the changes.
Finally, suppliers will be taking careful note of the inventory reduction initiative and the plan to drive volume through key vendor partners. These will no doubt have ramifications for a number of manufacturers that supply Essendant.