LSC Communications' (LKSD) CEO Tom Quinlan on Q4 2016 Results - Earnings Call Transcript

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LSC Communications, Inc. (NYSE:LKSD) Q4 2016 Earnings Conference Call February 23, 2017 10:00 AM ET

Executives

Janet Halpin – Senior Vice President, Treasurer and Investor Relations

Tom Quinlan – Chairman and Chief Executive Officer

Drew Coxhead – Chief Financial Officer

Analysts

Charles Strauzer – CJS Securities

Stephen Weiss – Bank of America Merrill Lynch

Jimmy Clement – Macquarie Group

Operator

Welcome to the LSC Communications’ Fourth Quarter 2016 Earnings Conference Call. My name is Cynthia and I’ll be your operator for today’s call. We have just a few announcements before we begin. The slides will advance automatically throughout the presentation. If your screen freezes or the slides do not appear to be advancing as they should, please try exiting the session and restarting as it may be an issue with your connectivity. At the bottom of your screen you will find a Help icon for technical assistance.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Janet Halpin. Janet, you may begin.

Janet Halpin

Thank you, Cynthia. Good morning, everyone, and thank you for joining LSC Communications’s fourth quarter 2016 results conference call. This morning, we released our earnings report, a copy of which can be found in the Investors section of our website at www.lsccom.com.

During this call, we’ll refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statement included in our earnings release and further detailed in our information statement dated September 23, 2016 filed as an exhibit to our current report on Form 8-K filed on September 23, 2016 and Form 10-Q for the period ended September 30, 2016, filings with the SEC and other filings with the SEC. Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP results provide you with useful supplementary information concerning the company’s ongoing operations and is an appropriate way for you to evaluate the company’s performance. They are however provided for informational purposes only. Please refer to the press release and related schedules for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our website in the Investors section a description as well as reconciliations of non-GAAP measures to which we will refer on this call.

We are joined this morning by Tom Quinlan, Drew Coxhead and Kent Hansen.

I’ll now turn the call over to Tom.

Tom Quinlan

Thank you Janet and good morning everyone and thank you for attending this call. While a difficult comparison to last year's fourth quarter we are pleased that the results were in line with our previous guidance, despite challenging market conditions. We've made great strides in our key initiative since last we spoke. As we have continued to address the specific industry challenges that our clients face. A heightened attention to providing supply chain solutions, it's helping increase our clients operating efficiencies, and allowing them to manage and deliver their physical and digital content more effectively.

We have made some significant developments in our publishing and retail portfolios and have paved the ways of opening new revenue streams for LSC. In the book publishing industry, textbook piracy has long been a problem for the industry and is an increasing concern for all publishers. LSC is developing an innovative technologies to help protect our client’s exclusive intellectual property and to stem the tide of piracy.

Another area where we are helping publishers address challenges is in streamlining their asset management work flow. Our ability to house and manage all of our publishing client assets for both print and digital distribution, creates a single workflow designed to increase speed to market and improve efficiencies across the distribution process for publishers. As part of our ongoing commitment to providing our clients with state-of-the-art production capabilities, we are investing in HP digital production technology. This investment expanded upgrades our industry leading digital ink jet book production platform and will further enable our custom supply chain solution book publishers that increased their speed to market, produced high quality products and decrease their total cost of ownership.

Our continued investment in these types of technologies highlights the position LSC holds as an integral partner supporting the present industry for our clients. The momentum is continuing to build towards additional supply chain deals.

With the ongoing transformation that's taken place in the magazine and retail industries. LSC has been taking the necessary steps to diversify our offerings. Similar to our focus on technological advancements in our book publishing platform, we have added new technologies and solutions to a portfolio that enable our magazine, catalog and retail clients to deliver more value to their audiences. In addition to our web and mobile based publications in catalogs we have developed a new working for our clients, the end-to-end fulfillment of subscription boxes.

To our deep understanding of our client's needs, combined with our manufacturing warehouse and fulfillment knowledge we are able to offer a scalable end-to-end solution in this fragmented, fresh and fast growing market. This opens new revenue streams for both LSE and our clients. To support this offering we have aligned ourselves with strategic allies who have extensive experience in the industry standards to manage consumer products. Along with LSC capitalizing on this fast growing market, we are continuing to expand our best-in-class co-distribution services that leverage shared volumes to increase postal discounts and manage costs for our clients.

Additionally, we are leveraging our Continuum acquisition to increase the purchasing power of our client’s procurement and marketing teams. Our Office Products segment continues to remain focused on driving growth from multiple initiatives. Through product design and material optimization, we have enhanced our position as a low cost domestic provider of private label products for customers. We are also capturing market share with a premium branded products across all channels, with particularly strong growth from online retailers. We are continuing to explore multiple opportunities within the industry for synergistic consolidation.

In addition to the accomplishments I have just described, we’ve remained committed to further enhancing our solution portfolio with strategic acquisition opportunities that we expect to benefit all of our stakeholders in 2017 and future years.

Now I'd like to turn the call over to Drew to review the quarters financial results in more detail.

Drew Coxhead

Thank you, Tom. I will be discussing both GAAP results and non-GAAP results. Please refer to the reconciliation of GAAP to non-GAAP results for both the fourth quarter and full year 2016 included in earnings release schedules, as well as, the appendix to the webcast presentation that is posted to the LSC website.

Net sales for the fourth quarter were $919 million, a decline of 8.5% from the fourth quarter of 2015. Adjusting for the December 2, 2016 acquisition of Continuum and the unfavorable impacts of changes in foreign exchange rates and pass-through paper sales, our organic sales decline was 6.3%. This organic decline in net sales was driven by volume declines and price pressure, across the Print segment, particularly in catalogs, magazines and retail inserts and in Europe.

Fourth quarter GAAP net income was $9 million, compared with $38 million in the fourth quarter of 2015. The fourth quarter of 2016 includes interest expense of $18 million related to the debt issued in connection with the October 1st separation from RR Donnelley. While no interest expense was allocated to LSC in the fourth quarter of 2015. Fourth quarter non-GAAP adjusted EBITDA was $80 million, compared to $111 million in the fourth quarter of 2015. Non-GAAP adjusted EBITDA margin in the quarter of 8.7% was to 240 basis points lower than the fourth quarter of last year.

I want to highlight four significant factors unique to the fourth quarter that drove a large portion of the EBITDA decline versus last year's fourth quarter. First, our book publishing business saw a significant spike in sales of adult coloring books in the back half of 2015, as that product craze began to take off. About $7 million of our year-over-year EBITDA decline in the fourth quarter was caused by the drop from that peak in last year's Q4.

Second, normal seasonal ordering patterns results in the mix of education books in the fourth quarter, being heavily weighted to college books needed for the second semester. K-12 book shipments are relatively light in Q4. As a result both sales and non-GAAP EBITDA margin in the fourth quarter were negatively impacted by declines in college books demand, driven by digital substitution, textbook rental programs and piracy. While, we anticipate that these challenges will continue to affect college book demand, there is outsized impact on us in the fourth quarter. Third, we had a LIFO inventory reserve release of $7 million that reduced cost of sales and increased non-GAAP EBITDA in the fourth quarter of 2015. In 2016, we had only a minimal change in our LIFO inventory reserve. So this is a $7 million unfavorable comparison year-over-year.

Finally our expense for healthcare benefits was $7 million higher in the fourth quarter of 2016 compared to the fourth quarter of 2015.

The increase healthcare costs was driven in part by a few unusually large claims that impacted the quarter. Also, our healthcare expense in 2015 was an allocation of the total healthcare expense for RRD. So, the comparison to our now standalone healthcare benefit expense isn't perfect. Healthcare expense is also heavily weighted to the fourth quarter as employees use up their deductibles and is therefore more volatile in Q4 compared to the rest of the year. The impacts of these four items add up to nearly the entire change in non-GAAP EBITDA that we saw in the quarter.

The remaining decrease was attributable to the more typical drivers that we see each quarter. Lower volume and price erosion, mostly offset by productivity improvements and cost reductions.

Now I will discuss net sales, income from operations and non-GAAP EBITDA performance for each of the segments. Net sales in our Print segment were $789 million in the fourth quarter of 2016, a decrease of 9.6% from last year's fourth quarter. After adjusting for the impact of the Continuum acquisition, changes in foreign exchange rates and pass-through paper sales, year-over-year sales decreased by 7.3% on an organic basis.

In CMR, the overall organic decline was 7.7%, driven by volume declines and prices erosion. However, we continue to see growth both in Mexico and in our mail services offerings. In book, we had an organic decrease of 1.2% in the quarter, as continued growth in our supply chain management services, mostly offset the tough quarter-over-quarter comparison in adult coloring books and the decreases in higher education book volume that I mentioned earlier. Our Europe reporting unit experienced 25% of organic decline, largely related to the closure of our U.K. facility. In addition, some customer contracts previously managed by LSC's European operations were assigned to RRD entities as of the spin-off dates, resulting in a $5 million unfavorable impact on net sales in the quarter with minimal impact on earnings.

For the Print segment, GAAP income from operations was $27 million compared to $43 million in the fourth quarter of 2015. Print segment non-GAAP adjusted EBITDA in the quarter was $69 million and the non-GAAP adjusted EBITDA margin of 8.7% for the Print segment, decreased by 170 basis points from the fourth quarter of 2015. Primarily due to a favorable business mix, driven by the education and publishing declines and price erosion, partially offset by productivity improvements, including cost reductions in Europe, driven by the shutdown of our U.K. facility in Q4 last year.

Net sales in the Office Product segment were $130 million, a decreased 0.8% from the fourth quarter of last year. After adjusting for the negative impact of foreign exchange rates, organic sales were flat year-over-year. Sales to the major Office Products retailers were down year-over-year as these customers continue to focus on store consolidation and inventory reductions. These decreases were more significant than we had expected in the quarter, but they were entirely offset by growth with independent distributors and online retailers. We expect these sales trends to continue into 2017 and believe we are well positioned to succeed as sales continue to move online.

Office product segment income from operations was $16 million compared it $10 million in the fourth quarter of 2015. Non-GAAP adjusted EBITDA in the Office Products segment was $20 million for the quarter with a non-GAAP adjusted margin of 15.4%, a 390 basis point increase from the fourth quarter of 2015. This significant increase in non-GAAP EBITDA margin was driven by our ongoing focus on productivity and process improvement, partially offset by price pressures.

Free cash flow for the fourth quarter was $82 million. The fourth quarter is historically the strongest cash flow quarter driven by the seasonality of our working capital requirements. We also had minimal cash tax payments in the quarter since it was our first as a standalone company. Free cash flow in the quarter did reflect interest payments of $7 million and we no longer benefit from the allocated pension income that was presented as a cash inflow pre-spend.

As of December 31, 2016 our gross leverage was 2.1 times within our targeted gross leverage range of 1.7 times to 2.25 times. Given our expectations for continued strong free cash flow, our mix of pre-payable term loans and notes maturing in October 2023 provides us flexibility to continue operating within our targeted leverage range. We ended the quarter with $95 million of cash on hand, $483 million of net available liquidity and nothing drawn on our $400 million revolving credit facility.

On February 2, 2017 we used cash on hand to pay in advance the full $50 million of term loan B required amortization payments for 2017. Our underfunded pension obligations decreased $78 million during the fourth quarter to end the year with a net obligation of $280 million. This decrease was largely due to an increase in the discount rate used to value the obligations. Substantially, all of the pension obligation relates to our U.S. plans, which are frozen with no further benefits being earned.

On January 18th, the board of directors declared a regular quarterly cash dividend of $0.25 per share, payable on March 2 to shareholders of record as of February 15th. The payment of the future dividends will depend on many factors including the company's financial condition, legal requirements and other factors that the board of directors deems relevant. Our intent is to pay a regular dividend at a sustainable level and our debt agreements allowed for dividends well above the current level, giving us flexibility to consider dividend increases in the future.

Lastly, I’ll share some more detail on the full year 2017 guidance that was highlighted in this morning's release. First, we expect net sales between $3.55 billion and $3.65 billion for the year. This range includes expected net sales from Continuum. And reflects the ongoing trends in the Print segment, where we currently expect net sales for each of our product lines to move in line with our long-term guidance ranges during 2017.

In Office Products, we are expecting a decline in net sales to 2017, as the major retailers continue to consolidate stores and trim inventories. We expect our non-GAAP adjusted EBITDA margin to be between 9.75% and 10.25% for the year. Price declines in the Print segment are expected to continue to be within a typical 1% to 2% range in 2017. We are also seeing increased pressure on wages and benefits from tightening labor markets. In addition, employee incentive compensation expenses well below targeted levels in 2016, despite the overall solid performance for the year. We continue to focus on productivity and cost reduction, as well as, growth in new service offerings and expect these efforts to largely offset the negative pressure on margins.

Depreciation and amortization is expected to be in the range of $155 million to $165 million. We expect interest expense in the range of $68 million to $72 million. Our full year non-GAAP effective tax rate is expected to be in the range of 33% to 36%. Capital expenditures are expected to be in the range of $60 million to $65 million, including approximately $5 million in expenditures related to the spin-off from RRD, mostly investments in standalone systems and IT infrastructure.

We expect free cash flow of between $125 million and $155 million. This range reflects the significant increase in cash interest payments, resulting from the debt issued in connection with the spin-off from our RR Donnelley, elimination of the $28 million of operating cash flow from pension income allocations in 2016.

I would also note that we expect the first quarter of 2017 to be the toughest comparison to 2016. In 2016's first quarter, non-GAAP adjusted increased $22 million compared to Q1 2015. Driven in part by strong adult coloring book sales and an earlier than normal ramp up in demand for K-12 educational books. Based on progress so far in Q1, we expect sales from both of these products via more normal levels in Q1, 2017.

Standalone company costs comparisons are also expected to be slightly negative in Q1 before turning slightly positive in Q2 and Q3.

And with that, I will turn the call to Tom for some closing comments.

Tom Quinlan

Thank you, Drew. In closing, I'd like to thank all of our employees for their continued hard working and unwavering focus. As we continue to shape our company's landscape, we remain intent on keeping reliability, integrity and quality of our service at the core of how we engage with our clients.

Cynthia, we’ll now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Charlie Strauzer with CJS Securities. You may begin.

Charlie Strauzer

Hi, good morning. I apologize for the bad connecting. Can you hear me, okay?

Tom Quinlan

We can, Charlie, good morning and can I get some vacation this week with the school, so thank you for joining.

Charlie Strauzer

No worries, no worries. Thanks for having me and just picking up on the Office Products side, I know you’re factoring into guidance fee continued kind of, worked out of inventory at Staples and Depot. Just the tone of you know how that's going and are you starting to see some light at the end of the tunnel there.

Tom Quinlan

Yeah, I would tell you Charlie, that Jim Ellward and Steve Thomas, the two gentleman that run that business for us, they’re doing a heck of a job and I think as we look at it the inroads that we’ve made in ecommerce are really helping out from a branded standpoint. So, we think there's more consolidation to be done from a brick-and-mortar standpoint. But I think when you look at the mass distributors with food stores where we've gotten - where they've been able to get us involved in a bigger areas, that’s helped out a lot.

The exciting thing when you think about it that business what we have as you can see in the great job that the team did in laying out for everybody for presentation. There's a comp out there, another publicly traded company that trades north of 8 times. Based on a – basically it’s the same products and services. So, we're excited about what we believe we’ve embarked on with the Office Products business. Again, when you think about it, right now, its 14% of our top line at the end of 2016, but we think it positions really well not only what I’ll call private label standpoint, but also from a branding standpoint as well.

I know one of the things that we've seen people come across is is just, what happens is the current administration takes any actions in Mexico because we do have operations there. We feel confident that whatever takes place down there, we’re in a good position to continue to serve customers and that has been around for probably 60 years almost. So we don't think that's going to go away overnight, anything that’s going to take place is going to take a while. Quite frankly, where we're really excited about is this does take place. The overseas imports, they have as much or more impact on the Office Products business coming out of Asia than anything, out of Mexico. So, a level playing field for all of us in that respect. It would be really, really nice for the industry.

Charlie Strauzer

And what are you seeing in terms of pickup in potential M&A activity, as you know, small players, given that the impact would that be, have an appetite for that in both the Print and the Office Products segment?

Tom Quinlan

Sure. I think look, past lives, we looked at things that we would move the needle from a large standpoint. As we sit here today with the size that we have, we have many opportunities for us in all the products and service lines that we have as you go down the marketplace there. I think one of the areas where we're really, really excited about is what we've been able to do, when I talk about subscription boxes. The magazine media model continues to evolve and we're developing new technologies and solutions that's going to enable our clients to deliver more value to their clients, advertisers and audiences. So look we're going through a fundamental web, mobile-based publications. We're doing event marketing materials now, without a doubt we’re the best-in-class from a co-distribution service standpoint.

The subscription boxes what they are, it’s a package of retail like sent directly to customer on a recurring basis. Subscription boxes there are marketing strategy and a method of product distribution that we do better than what we believe anybody else. The benefits for a magazine clients is it extends their brands. Manufacturers and retailers, they'll partner and pay to reach the audiences that the publishers have. And engage consumer as we all know leads to higher retention rates. The margins in the subscription boxes versus the other subscription models are far. If you think about the areas that they’re focused on right now, its beauty, travel, technology and cooking and those things from our standpoint involved customers that we have great relationships from a retail standpoint, from a magazine standpoint and it involves ecommerce, design, content creation, packaging, logistics, I mean, the list goes on and on.

So you think about where we could look at things there, there's opportunities for us there. As you think about again, staying on the subject. If you think about what we do with catalogs, again our whole key there is managing the distribution. We produce great quality, lot of us in the industry have great equipment, but the key here is to make sure for catalog or it to be successful is you've got to go ahead and reduce their distribution cost. I think as we think about things, we think we optimize the efficiency better than anybody else as I said. We’re able to combine versions and titles from multiple customers into single mail stream. And if you just think about the postal rates, the other three digit rates, the most expensive and breaking it down into my simple in these terms. We can actually cut that in half by what we can build from a carrier loop rate saturation standpoint and again we're creating a catalog that resonates with the customer, well, the end customer.

The catalog is looking to grab attention in market share for the business. It drives actions, it drives results. There has been people that have gotten away from the catalog. One in particular, going back to a number of years Ron Johnson of JCPenney and we saw the impact even though brick-and-mortar as most of us think there are less than what it used to be, that catalog still causes in action. We may not go into the brick-and-mortar store, but we’re going to take some action on some device to go ahead. So, we think what we're doing by extending the catalog from the mailbox to the inbox is helping there. All of this is going to be done, so that we don't scare anybody. It's going to be done within what we’ve – Drew and I have been publicly talking about the range for leverage. We’ll be between 1.75, 2.25, as we go ahead and look to get this all accomplished.

Charlie Strauzer

That's very helpful. Thank you very much, Tom.

Tom Quinlan

Thank you.

Operator

And our next question comes from Stephen Weiss with Bank of America. You may begin.

Stephen Weiss

Hi, good morning.

Tom Quinlan

Good morning, Steve.

Stephen Weiss

So, I just was hoping sort of wanted to see if you could flush out some of your 1Q commentary a bit more in terms of what it might mean for the trajectory of revenues and EBITDA. Then if you could remind us if there’s any residual comparison issues that occur after the first quarter?

Drew Coxhead

Yeah, sure. I think as I commented in first quarter, comparisons are pretty tough. A lot of its driven really the strong first quarter that we had in a couple of areas last year. But I think as you look at the last couple of quarters and comparisons that we had in 2016, a lot of those same kind of factors are continuing into Q1. We think – as you can see from our guidance, we think a lot of that moderates as you get into the latter part of year, but Q1 does have those tough comparisons, particularly in a couple of big areas in the book business that I mentioned on the publishing side with the coloring books and what we’re seeing in terms of timing, which leaves the college in the first quarter a little bit exposed to the college market. So in terms of standalone company cost, the numbers are getting pretty small at this point. But there is a little bit of negative, just of the synergy cost that we had in Q4 a little bit negative. And when I say a little bit, you're talking about $1 million or $2 million. Actually because of some of the changes in allocations after Q1, we will see things kind of in the same ballpark, but turn slightly positive. By the time, it gets in Q4 of 2017, things are pretty much all comparable.

Tom Quinlan

Stephen, this phenomenon with the coloring books. Look, we've got other opportunities with over publishing, which we came along with Continuum property that we acquired and they're working hard to replicate that. So, thing that we've gone back to them and said, hey it’s great, you have a grand slam, but you need to continue to do that. And believe or not, painting on rocks, stone painting as it's called and I hope we’ll sit here next year and we’d talk about how great that is, yes. But it's something that's new for this magazine to have such an outlier, great performance and then what's the next trick that we're going to come up with. But they're working hard to go ahead and get that out there. So, that we have something every year, that's out there that's performing as well as that did.

Stephen Weiss

I know the book segment obviously has been a big focal point for you. I was wondering if you had any comments on the announcement last month of some of the challenges that Pearson was enduring and that might have an impact on your business?

Tom Quinlan

Yeah. Sure, I mean, any such great clients Pearson and anybody else that we have as close as well we're involved with them. The good thing for us is and I think it's for the rest of the industry that you’ll see the supply chain is completely changing as you think about the publication marketplace. Again, the evolution went from just printing to just being printing now and distribution. Now you've heard talk a lot about buying paper, that's just one part of it. We’ve got many different aspects of the supply chain that we're taking over. We want our customers just to worry about content. You worry about creating great content, we’ll take care of everything else for you and as that starts to take hold, people look to become more efficient, as people look to have more cost taken out their operation. That's where we go ahead and have the benefits take place.

And again, from a book standpoint we can give you and again this carries over to other products, but the savings on paper, procurement costs we provide. The cash flow improvements that you're going to get. Quicker fulfillment rates to customers because of the warehousing that we have. We got increased titles that are going to be available for sale. There will be fewer as stock products, less inventory obsolescence. Obviously, as you think about rebadging of employees or how you take out fixed costs, which again this team here, we've taken the model that we've done here, we’ve taken fixed cost making variable. We're able to use that with our customers. So, unfortunately what I would say is we would like to see all of our customers doing great. But when they don't, we're there to help out and hopefully, give our capabilities and services that are going to enable them to by them some time so they get back in the group.

Stephen Weiss

Did you mention in your guidance what your expectations were for the book segment this year. I might have missed it.

Drew Coxhead

We didn't go through guidance for the specific entities. I did mention that for all of the product lines, within the Print segments that we expect them to be within the longer term guidance ranges that we’ve provided in the in the past, so that will give you the range that we expect for each of them.

Tom Quinlan

Yeah, and from a book standpoint again, we highlight that we’ve highlighted it quite a bit. I mean, unit sales for books were up over 3%, 2016 over 2015. You saw what our growth was. It’s a third straight year that books are doing well. Amazon is opening up a bookstore in Manhattan, a brick-and-mortar. So, book is probably the most consistent, stable product that we have and we’re about five times larger in this area than our next largest competitor. So again, we feel pretty good as far as, what that product can do and there hasn't been any real what the industry calls runner, so or any breakout science fiction content that's been out there. So, I mean, all signs are good there. The piracy that we continue to talk about, we are hoping to create something that could be the industry standard for all of our customers and that's going to help the P&L’s out. So, a lot of opportunities there. Dave McCree and team have a big flashlight on it, I mean, and we know that they’re going to respond favorably. So that's what we're looking to get done.

Stephen Weiss

Then maybe one or two more if I could. On the Office Products, I know you mentioned the ongoing challenges with the consolidation. How is it occurring in the industry, but I was taking a bit by your margin improvements this quarter. Displayed some of the headwinds in the segment. I was just wondering how sustainable we could think of those trends as we head into this year?

Tom Quinlan

One of the, what I hope is many positives coming from the spin is is that we are focused on this business, unlike we were, when we were really $11 billion entity. Again for, fellow I mentioned Jim Ellward, who runs a business for us and Steve Thomas, financial guy. They get the fact that they need to go ahead and match costs to revenues. They’ve been around long enough. They understand it and did a heck of a job in getting ahead of it, as we’re going through things and like any other business, we think we can continue to keep that as we go forward, we got to find new avenues for us in the ecommerce distribution. We’ll look to have acquisitions that makes sense. We've had pretty good success where we’ve been able to acquire things at a higher multiple and take out a number turns out of them. So, again, as you think about all the things we offer to our clients, it comes down to how can it save you money and make you more efficient. We think our Office Products business fits that DNA really well.

Drew Coxhead

I’d just say, on the margins we’ve seen good margin improvement from that segment throughout the year. Fourth quarter was really strong and really driven by good, sustainable productivity efforts, productivity that touches how we do things in the plant, but also productivity that's driven by how we design the product, how we source materials. They look at every aspect of it and some say that they’ve done a really good job. We’re anticipating more progress on margins as we go into 2017. The mix shifts that you're seeing in the channel, don't hurt either there, as you know the online grows and you've got more branded product in that.

Tom Quinlan

So, we haven’t talked about it. We talked a little bit; Drew and I did about the continuing acquisition. It’s a small acquisition, but to have a customized sourcing solution now under our roof on our platform, we think is going to pay dividends for us in the future. Our sales force, the LSC sales forces that’s had the relationships and expertise to free up our clients, so that we can focus on their core competencies. The LSC sales force did this when we were together with RR Donnelley. I guess, going ahead and acquiring, continuing its going to accelerate our entry into the service capability, which is an asset light base model based on systems knowledge and supply chain expertise. So, again as I talk about multiples with different products, look at the multiples that equity investors give to those companies now that provide the service and almost double where we trade at today. So, we're excited about what we can bring there. Rick Lane is going to head that up, we went from zero to a couple of hundred million dollars at the old place. We think over time we can do the same.

Stephen Weiss

All right. Great. Why don’t leave it there.

Tom Quinlan

Thank you.

Operator

And our next question comes from Jimmy Clement with Macquarie Group. You may begin.

Jimmy Clement

Hey guys, thanks a lot for taking my question ahead of time.

Tom Quinlan

Hey, Jimmy, how are you?

Jimmy Clement

Fine, thanks. Tom, what is your rough mix break down within educational books texts, between K-12 and higher ed?

Drew Coxhead

Jimmy, this is Drew. So within the educational blocks we’re much bigger in K-12, if you look them across on an annualized basis compared to the higher ed space. By the K-12 business is a lot more seasonal. So, Q4 that's not necessarily the case, it's a little more shifted towards colleges, I mentioned in my comments.

Tom Quinlan

Just thinking about the other products that in religious, we are main religious players in the book market and starting to do more and more there from a warehouse and fulfillment standpoint. So, again good opportunities there and we've got to continue to develop custom supply chain solutions for the book publishers. So again, they can increase their market, speed to market, decrease their overall cost, with that more meaningful relationship, that they could have with their customer is where we've got to help the industry gets towards at the end of the day.

Jimmy Clement

And Tom, what’s the, if you can share it, what’s the status of conversations with other book publishers to kind of duplicate the Pearson model that you have going on now?

Tom Quinlan

And it’s very full, is probably the way to put it. I challenge the team to come back to me and tell me that we've run out of warehouse space, which would be a real, real good problem for us. So, again we're excited about with those things are out there. It is a service that’s needed. When you look at how we everyone, how content is being handled today. Again go back to the supply chain solutions. We’ve coined the phrase supply chain as a service and we really think that we're on to something in a major way with books and going to continue to get into catalogs, magazines, retail and such as we go through.

Jimmy Clement

Okay. And Drew I apologize if you gave these numbers and I just missed them. But helping to bridge EBITDA to free cash flow, working capital usage, did you have an approximate number that I think you guys discussed on that there probably would be some working capital usage related to the Pearson arrangement.

Drew Coxhead

So we're not anticipating anything too different at this point, Jamie, in terms of if you're looking at our 2017 guidance and the bridge from EBITDA to free cash flow. We’ll have our normal seasonality that we’d expect to see, so you can see probably stronger performance in Q4 than the rest of the year. But not anticipating anything, particularly unusual driven by the supply chain management.

Jimmy Clement

And cash restructuring expenses, did you give an approximate range there?

Drew Coxhead

In line with what we've seen in the last few years, I mean, if you look at over the last few years, you've seen $20 million to $30 million. We have ongoing focus on driving costs out to us at all the pressures that we’ve got on margin and you'll continue to see something in line with history is what we would expect.

Jimmy Clement

Okay, thank you all very much for your time.

Tom Quinlan

Thank you, Cynthia, we’ll wrap it up. Look, we appreciate, hopefully as you heard and can see our approach is consistent and our ability to deliver solutions and cost savings for our clients is going to continue. We’re excited about the opportunities that each of us see for LSC Communications in 2017. Look, I’m confident that we're going to be able to deliver value for all of our stakeholders in 2017.

So, with that, thanks for spending time with us today and hope everybody has a great day. Thank you.

Operator

Thank you, ladies and gentleman, this concludes today's conference. Thank you for participating. You may now disconnect.

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