Cenveo, Inc. (NYSE:CVO) Q4 2016 Earnings Conference Call February 23, 2017 9:00 AM ET
Rob Burton – President
Bob Burton – Chairman and Chief Executive Officer
Scott Goodwin – Chief Financial Officer
Mike Burton – Chief Operating Officer
Pete Lukas – CJS Securities
Kevin Cohen – Imperial Capital
Matt Swope – Robert W. Baird
Brian Dennis – Cowen
Good morning, and welcome to Cenveo’s 2016 Fourth Quarter and Full Year Results Conference Call. Today’s host will be Mr. Robert G. Burton, Sr., Chairman and CEO of Cenveo. This call is scheduled to last approximately one hour and is being recorded. Mr. Burton will speak, and then the call will open for a question-and-answer session.
I will now turn the call over to Cenveo.
Thank you, and good morning, everyone. This is Rob Burton, and welcome to Cenveo’s 2016 fourth quarter and full-year results conference call. Today’s call will be hosted by Robert G. Burton, Sr., the Company’s Chairman and Chief Executive Officer, and other members of the senior management team.
Before I turn the call over to Mr. Burton, I’d like to remind everyone that certain materials covered on today’s call are considered forward-looking and are covered under the Safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995. Also any forward-looking estimates given on today’s call will exclude any effects of restructuring, impairments and other related acquisition charges. For further details regarding these factors, please reference pages six and seven of the Company’s press release that was issued last night. I also will like to reference you all to our 8-K that was also filed last night and the supplemental disclosure of slide deck that was provided as well.
And with that, I’ll turn the call to Mr. Burton.
Thank you, Rob. Good morning, ladies and gentlemen. This is Bob Burton speaking, and as most of you know, I am the CEO and Chairman of Cenveo, and I also like to remind you that I’m the largest individual Cenveo stockholder with about a million shares, and a growing Cenveo bondholder for the past several years.
And you should be aware and I’d mentioned this a couple of times, but I think it is appropriate especially with what we have going on today, that you should be aware that all of our senior managers and that’s all meaning the 100% continue to purchase our Cenveo stock, every month through our employee stock purchase plan and I was looking at the numbers, this morning and we also have the senior executives, which is a 100% and we also have 700 other employees who are purchasing our stock. So when I say we purchasing our stock, I mean all of the Cenveo senior managers and also the 700 employees and that just shows you that, those individuals understand of the direction of the Company and where we’re going. And I will tell you, that I’ve mentioned that, during the year I’ll buy in the open market when I’m allowed to and add $100,000 blocks of Cenveo stock.
So I’m an active buyer and will continue to purchase the stock because of the belief and the plan that we have. And it’s just – I think it’s important to advise you our shareholders that the business plan that we have is one that we believe in very strongly and the one that encourages us to continue to buy our stock. And we’ve been at several places running these business and I can think of one the World Color situation, where we had bumps in the road and this World Color and KKR and I still get Christmas cards that are positive and not the ones that have excess in pieces of cold in them, and thank us for the opportunity of being part of a company.
So today our conference call will be in the same format of the previous calls. We’ll spend more time on the – less time on the general operation and more time on the Q&A. But before we start, I want to mention because of the complexity of the fourth quarter and what happened with the lack of merger – of the merger that did not occurr, that we will be talking and we’ve broken down the segments of who is going to present what.
So because of the complexity in the fourth quarter and our $50 million cost savings plan, which I think you’ll be very pleased with and realize how much work we’ve already done, we’ve broken this down into some different segment parts and we’re going to have Scott Goodwin, our CFO who is going to talk about the fourth quarter results and then he is also going to go through the merger issue, and talking about the $17 million shortfall that we had last year, because that merger did not take place. And the $8 million that we’re expecting that we need to cover for this year and then he will cover his normal financial material that he reports on in prior meetings.
Then Mike Burton, our Chief Operating Officer is going to talk about the $50 million plus plan and I think you’ll be pleased with this, on the progress that we’ve made. And the details of how we’ve broken this down with our objective of being to achieve the $180 million to $200 million EBITDA run rate in the year 2018. But Mike will talk about the $25 million in 2017 and also another $25 million plus in 2018. And then, I’ll take a look at and give the forecast along with Scott on our full year guidance of sales, EBITDA, capital expenditures and margins, the normal report that we give you based upon what we see right now.
So, we have a lot of material to cover. You start-off with the fourth quarter and the fourth quarter was not where we wanted to be, but it was out of our control. And those of you that run businesses before understand, when you have these large obstacles you start scrambling, which we did with our cost cutting immediately. And I think you will see that and as we talk about as we move into the year, I think you’ll feel a lot better about where our Company is going and what we’ve been able to accomplish.
So with that, we’re going to open it up with our CFO, Scott Goodwin. Scott?
Thank you, Mr. Burton and good morning, everyone. Today, I’m going to provide a brief overview of our fourth quarter 2016 financial results, discuss select financial highlights from the quarter, and later on provide some additional comments on our full-year 2017 guidance.
I’d like to remind everyone that our reported and comparative results exclude our Packaging Business, which was sold in the first quarter of 2016 and has been classified as a discontinued operation in all periods presented. And that our fourth quarter 2016 and full-year results have one less week of operations than our 2015 fourth quarter and full-year results.
Our fourth quarter and full-year performance was significantly impacted by the lower demand in our office products and wholesale envelope product lines due to cost savings and inventory reduction initiatives being taken by our customers in that marketplace.
For example, two of our top accounts both announced cost actions during 2016 that in the aggregate were more than $500 million. To better highlight the impact these two product lines have had on our operating performance this year, our net sales for the fourth quarter in these two specific product lines were down over 20% compared to the prior year.
Our adjusted EBITDA within these two product lines was down approximately $17 million for the full-year of 2016 as compared to the full-year 2015. Additionally, our fourth quarter comparable performance was also impacted by the closure of our coating operation that we have discussed previously, which occurred during the second quarter of 2016.
Our coating operation contributed net sales of approximately $6 million and adjusted EBITDA of approximately a $1.5 million in the fourth quarter of 2015, which did not recur in the fourth quarter of 2016.
These two items have unfortunately overshadowed a strong performance in our direct mail envelope product line, which exceeded our expectations in 2016 and our Print and Label product lines performing relatively in-line with our expectations for the year.
I will now turn your attention to the highlights of our results of operations for the fourth quarter. Net sales were $417.2 million compared to $479 million in the prior year. A decrease of $61.7 million or 12.9%.
The primary drivers of this decrease were the one less week, the office product and wholesale envelope performance and the closure of our coating operation that were all just discussed. Our gross profit was $63.6 million compared to $78.1 million in the prior year, and our gross margins decreased to 15.2% from 16.3% in the prior year. These declines were driven by our lower sales volumes.
SG&A expenses were down $8.2 million to $42 million compared to $50.2 million in the prior year. This decline was primarily driven by lower selling expenses due to our lower sales volumes and lower incentive compensation for 2016 as compared to 2015. As a percent of sales, SG&A expenses for the fourth quarter were 10.1% down from 10.5% in the prior year.
Restructuring, impairment, and other charges for the fourth quarter were $3.7 million compared to $1 million in the prior year. With that increase being attributed to the initial severance charges recorded on our 2017 profitability improvement plan. Our net cash payments related to restructuring and integration activities for the quarter were $3.6 million compared to $1.7 million in the prior year.
Interest expense for the fourth quarter decreased $5 million to $19.8 million from $24.8 million in the prior year. We had a weighted average interest rate of 6.5% for the fourth quarter of 2016 compared to 7.1% in 2015.
Our weighted average debt outstanding was slightly less than $1.1 billion in the fourth quarter of 2016 compared to over $1.2 billion in 2015. Cash paid for interests was $7.3 million in the fourth quarter of 2016 compared to $16.9 million in 2015.
Turning to our cash flow highlights for the quarter, cash provided by our continuing operating activities was $36 million in the fourth quarter of 2016 compared to $14.7 million in the prior year. The improvement in our cash flows from the prior year is primarily due to the improvements of our working capital position partially offset by lower contributions from our operating results. Cash paid for pension and post-retirement plans during the fourth quarter was approximately $400,000, for both 2016 and 2015.
For the fourth quarter of 2016, cash paid for income taxes was approximately $800,000, compared to approximately $500,000 for the fourth quarter of 2015. During 2016, we utilized over $112 million of our federal net operating loss carry forwards, primarily in connection with the sale of our Packaging Business and gains recorded on addressing our 2017 maturities at discounted rates.
We now have approximately $220 million of existing federal NOL’s still available to us. And as a result, we believe we will not be a significant cash tax payer for at least the next three years.
Our cash flows related to investing activities for the fourth quarter of 2016 reflect our gross capital expenditures of $10 million. And our cash flows related to the financing activities for the fourth quarter, primarily reflect the repurchase of $5.7 million of our 7% convertible notes at par, and $7 million of our 8.5% notes at discounted rates during the quarter.
In addition, we completed the tender offer for approximately $20 million of our remaining 11.5% notes during the fourth quarter, and have subsequently began the tender process for the remaining portion, which we expect to complete in the next couple of weeks. Once we complete the final tender offer, only $5.5 million of our 7% convertible notes will be set to mature this year. We expect to address that small remaining maturity with our cash flows from operations, either before or at maturity in May of 2017.
As of February 20, we had approximately $80 million of available liquidity under our ABL facility. Overall, we’re taking actions necessary to overcome the operational challenges presented to us in the back half of 2016, as evidenced by our 2017 profitability improvement plan that Mike will discuss momentarily. Our team is committed to that plan, and we remain focused on continuing to be a valued customer and supplier to our partners.
And with that, I’ll turn the call back over to Mr. Burton.
I might add, when we talked about back half and the fourth quarter that we were right on target there for six months and it’s that merger that caused the issues and the $17 million shortfall that we had. But we are right on target and the positive things that we see that Mike’s going to talk about now on the cost savings, really makes us feel good about getting the run rate achievement and where we are going to be at in a couple of years. Mike?
Great. Thank you and good morning. I’ll be spending the next few minutes reviewing the details of our extensive profitability improvement plan, which is highlighted on Slide 5, of the presentation deck, which accompanied the press release last evening. Improving profitability is the number one goal for the leadership team at Cenveo. In response to the changing dynamics in the office products segment, we’ve made the executive decision to evaluate our entire operating structure. Although, we believe that our challenges are largely isolate to one segment of our business, we have taken this opportunity to rightsize our back office functions in geographic footprint to put us in the best position possible to grow our EBITDA to over $180 million run rate existing 2018.
Our track record regarding profitability improvement and cost reductions is truly second to none, we have successfully implemented numerous profitability programs in our 11 year tenure at Cenveo. This is most recently evident in 2013 and 2014 timeframe, when we acquired National Envelope, through that acquisition and subsequent profitability improvement plan, we consolidated eight facilities into our operation in a compressed time period. As a result of that plan, we saw direct envelope EBITDA margins improve from roughly 6% throughout 2014 to an average of over 10% for the subsequent six quarters.
During that same period of time, our overall Cenveo EBITDA margins improved over 100 basis points. While our current challenge is not a – is a reaction to a market condition and not business integration, the process which we will attack (0:16:14) this cost will remain relatively the same.
Throughout this profitability plan, there are two overarching themes. The first is to eliminate cost, while improving our customer experience, the customer has to come first. If any aspect of the profitability improvement exercises impact our customer experience it is immediately taken off the table. This is a non-negotiable point with our operating teams.
The second aspect of the exercise is limiting the amount of disruption to our employee base. We firmly believe, that we have the best operators and the sales professionals in our industry. When this $50 million plan is fully executed, we will have strengthened the foundation of Cenveo.
Our platform and operating teams will be in a much better position to respond to our constantly evolving market place. However, during this period, it’s critical that we move quickly through these disruptions. Our employee base understands that every action taken is done as expeditiously as possible with a long-term strength and profitability of some bail with the ultimate goal.
We started developing this plan, as soon as we realized the office product segment disruption had the potential to be a prolonged period of contraction. In response to the failed merger, the two largest companies in this segment both organizations announced very aggressive cost cutting plans. Between the two companies, they publicly announced there were $500 plus million in reduction programs.
The impact to our office products division was felt immediately, and the subsequent quarters impacted us drastically. Cenveo’s EBITDA in Q3 and Q4 were affected from this action. We started to develop the framework of our $50 million cost cutting program, during the latter part of Q4. The plan, I discussed today is a result of extensive planning. And many of the aspects of the program have already been initiated, the timing of the benefits will be spread over 24 months. We expect to see $25-plus million of benefit of the plan in 2017 and the remaining $25 million is expected to be realized in 2018.
The profitability plan has four main components. The first is facility rationalization, right sizing our footprint and evaluating opportunities to consolidate and eliminate overhead cost is a process that we regularly go through. As part of this plan, we have already announced two plant shutdowns. The Buffalo plant closure was announced last week and it’s directly a result of the disruption related to the office product segment. The second closure, which was announced earlier in 2017 was our Portland, Oregon print facility. This plant’s lease was expiring at the end of 2017 and the work has now been placed in other regional print facilities.
These two consolidation announcements will not be the last of 2017. We are currently evaluating additional consolidations that will be part of the master $50 million profitability improvement plan. The second aspect to the plan is reduction of SG&A. All components of SG&A are under review and they will be reduced in some form or fashion.
The third item is head count reductions outside of consolidations. At the end of the day, we will do more with less. Leveraging the resources of Cenveo as a whole, will allow us to accomplish more work with reduced resource costs. And the final bucket of profitability improvement action is operational efficiencies. These actions range from the plant overtime reductions to select equipment rebuilds that will drastically increase equipment throughput. We have currently limited the list of profitability improvement projects to 50 core initiatives, so we could remain focused.
The savings associated with each project has been embedded by Cenveo’s senior management team. Each project has endured multiple challenge sessions during which the benefit calculation and more importantly the timing associated with each project was reviewed by peers and management. This was the case with all of our key 2017 initiatives. We review the progress in each of these projects regularly to ensure that we are tracking to meet our project expectations and hold firm accountability for each action taken.
The structure behind our profitability plan is more robust than any plan that we have implemented in the last 11 years. As of today, over 30% or $15 million of the actions have been implemented. At the end of the day, we plan to exit 2018 with an annual EBITDA run rate of a north of $180 million plus. We are building the infrastructure for the future today and we are moving as quickly and as effectively as possible.
And with that, I’ll turn the call back to you.
Thank you, Mike. Rob, do you want to add some comments here, please?
No. Again, I think talk about stuff that’s in – already have been said but I’ll also repeat it and hopefully summarize it quickly for you, folks again. Despite the challenges we had in the office products and wholesale marketplace, we actually had a pretty solid year last year as evidenced by our direct mail business, print business and label operations.
We also had a very solid year of cash flow from operations of about $50 million, which is actually up $35 million from 2015 and we expect the number to grow in 2017, as you heard from Scott middle of the guidance but we think the number to grow in 2017.
Total debt was down by over $178 million last year. And by the end of February of this month actually, we will have retired all the 11.5% notes. So owing to this from May will be about $5 million of the 7% notes going forward. And then on the cost savings plan, again we don’t like to do this, but it’s sort of a reality of our business. Of the $50 million, a lot of the stuff is identified over $40 million to-date. $15 million, as Mike said, has already been implemented. And quite honestly folks this is not going to be huge cash cost for us as a business. We’re estimating less than $10 million of cash cost to implement a $50 million plan.
So again, while this is not funded due, we have a plan, it’s being enacted and it’s in front of us. So, I think we feel – again, we’re not pleased with our numbers for Q4. Again, nobody is around this table, but feel very optimistic that the plan we have in ahead of us, will give us a 2017, and more importantly a great exit, as we exit sort of 2018, in terms of getting the full $50 million behind us. So I’ll turn it back to you sort of go through the guidance at this point of the call.
Yeah. And just to add another comment, people who’ve been with us on other investments, know that we really don’t use consultants, and that because it costs a lot of money. And really we think we know most of the cost cutting, but we’re working with some people here, who have a different platform on a different set of exposures, that we haven’t had because of size. And I have been pleasantly surprised about the savings that we have been to able to see, and what we’re anticipating seeing, over this joint venture that we have with some of these individuals. But we’re very positive about the cost savings, and we’ve been doing that, we did it the day, we got here and we do it every place we go. But this one is one that we’re right on target and the points that Mike and Rob have made are for real and the fact that we’ve already got lot of them already indentified, and moving is a big positive element.
So let’s talk a little bit about the guidance, and this guidance is based upon what we’ve seen, and what we’re cutting out, and we were flat with $125 million, and when the other $25 million will occur. And as in the past, we’ll update you on the calls, and if there’s any changes in these. But if we look at the revenue numbers, we’re at the $1.6 billion kind of number, and we have as Mike mentioned, we really have a without a doubt, the best sales organization in this industry.
And while we’ve taken a while to get there because we wanted to find the best, and we have diversified, and been able to focus and using all the current skills and tools that we have to really make our sales group as Rob mentioned, we had a pretty good year this last year except for this one major issue. But the sales number is $1.6 billion for the year and we’re looking at the EBITDA number of $150 million for the full-year and now I’ll let Scott talk about the other two parts.
Thank you, and I’d like to add some further background on our initial 2017 guidance. I want to spend a few minutes reviewing the key assumptions, which can be found on Slide 3 of the presentation deck that accompanied last night’s press release. As Mr. Burton just mentioned, our initial guidance for 2017 is for net sales of approximately $1.6 billion and adjusted EBITDA of $150 million, which is an adjusted EBITDA margin of 9.4%.
We are also anticipating generating at least $40 million of adjusted free cash flow during 2017. Our cash flow guidance measures for 2017 outside of our working capital benefits are as follows. We expect cash paid for interest of approximately $70 million, cash paid for pension and other post retirement plans of approximately $8 million. Cash paid for restructuring and integration of approximately $12 million and net capital expenditures of approximately $20 million.
I’ll remind everyone that we do not expect to be a significant cash tax payer in 2017. In regards to our net sales expectation of $1.6 billion, which is a slight decline of approximately 3.5% from 2016. The key drivers are the continued declines expected during the first half of 2017 within our office product and wholesale envelope operations. The runoff of $12.5 million of net sales that will not repeat in 2017 related to our coating operation and continued price pressures and the plant closure in our commercial print operation. We expect these items will be slightly offset by continued mid-single digit sales growth and direct mail envelopes.
In regards to our adjusted EBITDA guidance of a $150 million and further highlighted on the adjusted EBITDA bridge located on Slide 4 of the presentation deck, our reported $144 million of adjusted EBITDA for 2016 will be further impacted by the first half expected declines associated with our continuing operations, which is primarily within our office product and wholesale envelopes, for which we specifically have forecasted a decline of approximately $8 million.
And non-recurring items, primarily the closure of our coating operation, which generated $7 million in the first half of 2017. We believe those two pressures over the first six months of 2017, will be offset by our expected realization of approximately $25 million of our $50 million profitability improvement plan throughout 2017. These three areas are the primary drivers from the $144 million in adjusted EBITDA in 2016 to our guidance of a $150 million in 2017.
And with that I’ll turn the call back over Mr. Burton.
Thank you, Scott. Just to reemphasize, what we’ve been saying here. This issue that happened in the fourth quarter and we’ve talked to all our employees about this, that’s behind us. We are not focusing on that, where you can always learn from these operations and when you have these kind of issues, but we’re totally focused on the first quarter of this year and how well we’re going to get done with the budget reductions and the cost that we have and the run rate. Those are all our primary focuses, right now, but rest assured with our field operations and everybody involved, we are looking at the first quarter and the first half and the full-year of 2017 and this other issue is behind us, and hopefully we’ll get that behind us, sooner than later.
So without that, I guess we’ve done 30 minutes here and we’ve got some for Q&A, and that’s what you wanted. So now operator, why don’t we open up the call for a QA please.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Charles Strauzer with CJS Securities.
Hi, good morning, guys. It’s Pete Lucas for Charlie. I just want to...
Hi. I just wanted to know, if you could expand a little bit, you mentioned direct mail exceeding your expectations for the quarter. If you could just kind of highlight some of the drivers you saw for that this quarter and the outlook for the beginning of 2017?
Sure, Pete. It’s, Mike. And I think, the story for Q4 was very similar to Q3. The trends continue to be more sophistication in the mail stream, more tactile packages, individual clients taking advantage of postal opportunities and I think the biggest piece that matters most is the fact that the response rate are still there. And with all the complexity that’s in these packages I think some of these clients and I can’t speak for them directly, but they are seeing improved rates in effluent responses and it’s such a key component to their overall marketing strategy that they see value on it. And that’s what it comes down to for these customers. It’s all about value and response and we have seen really good performance in the mail stream for the last year and we expect to see similar trends and whole for Q1 and into 2017.
Hey Pet, it’s Bob Burton to add something to that comment, as a former publisher, you mail one direct mail or you mail when you have success and that’s what we’ve had and our customers have had to repeat success and we see nothing there to stop that, because when you can go to the mail and achieve certain kind of returns that makes your numbers that’s what you’ll stay with and we’ve continued to see that.
A very helpful. Thank you.
The next question is from Kevin Cohen at Imperial Capital.
Thanks for taking the questions. I guess, when you kind of think about the assumptions for the envelope area in 2017 year-over-year. Maybe you can give us just a little bit more color in term of your thoughts on price volume or changes in mix to kind of give you a confidence about the underlying guidance just given the, the sort of surprise in the fourth quarter?
Kevin, this is Scott. I’ll start I am sure some folks will add, add in and I think, whenever we talk about our envelope segment, we’ve got three main categories here with the direct mail which we, I think it’s a third, a third, a third as what we’ve traditionally talked about. We’ve got direct mail, growth trends in the mid-single digits performing very well.
As Mike just mentioned, the response rate they are getting are meaningful for them and the color and margin areas are meaningful for us. On the office product side, I think we’ve mentioned that, in terms of what’s going to – what’s we expect there. So we do expect a significant decline over the first half. We do expect some leveling out and over the back half compared to what we saw on 2015, I’m sorry 2016, and then I think on the BRE side of the house the, the regular transaction envelopes, we continue to expect the lower single digit decline as we’ve seen over the years. So, those things along with the profit improvement plan give us some good confidence here. I think, we’ve sized this thing pretty closely over the last 60 days to 90 days as we’ve experienced what we went through on the office product side and hopefully the $8 million that we forecasted for that business is a conservative estimate, and we performed better than that.
And then just as a second question, how do think about the application of free cash flow and specifically potentially for some bolt-on acquisitions in the envelope space, kind of just given more competitive market dynamics as [indiscernible] ( 00:32:07) has called out the market getting a little bit more competitive. How do you kind of think about application of free cash flow, bond repurchases, acquisitions et cetera?
Yeah, I think – and Scott again. We’ve done all the above. We’ve done mergers, we’ve done acquisitions, we’ve done obviously we’ve done bond buybacks over the course of the last couple of years as well. So we sort of look at them and make sure, sort of weigh the math equations. What provides the company, our shareholders the most return. There is steady benefit for M&A, we’ve seen that with our recent transactions in the last couple of years with National Envelope, and the amount of cost needed to come out from this business, capacity is coming out of our industry across the board. So the trend used to continue. So yeah, we will look at everything. We have and we would do so going forward, but at the end of the day, it becomes sort of math equation of what provides our company the best return. So sure.
And I guess, when you say is the potential returns in terms of the application of free cash flow, do the recent competitive dynamics in the envelope space put a little bit more emphasis perhaps around M&A or still kind of agnostic amongst all the different options?
No, I think, outside the office products channel really nothing has changed materially in the envelope industry, I think. Everybody’s pretty much had a very good year, the last two years in terms of the rising tide that lifts all ships here and we’ve seen them in the direct mail business. The wholesale office products business is a different in animal, but it hasn’t gotten materially worse or better at the – in those end markets.
That’s very helpful. Thanks for all the color.
The next question comes from Matt Swope with Robert W. Baird.
Good morning, guys. I’m trying to understand the office products issue a little bit deeper. You’re taking Scott I think about, about two business lines, both office product and the wholesale. Can you help me understand the difference between those two things?
Sure, it’s Mike, Matt. I’ll walk you through the dynamics of the business. Obviously, I think office products itself explanatory. We’re talking about the big box retailers and their ability in their store front. So, it’s the traditional model that, that all of us grew up and then the wholesale business, a little more unique, the product set is very similar, but it serves a different market and it’s a more of a broker model. So, you’re working through distributors in order to satisfy orders.
So, those are the two separate and distinct businesses. I think the office product story, you’ve heard enough about, but obviously retail is going to its own challenges and based upon that and people’s buying habits, that’s resulted in what’s happen to us and what more importantly, it’s happen to the major clients. But wholesale market is far more transactional, it’s got a lot more clients that you’re involved in.
It’s a day-to-day business and there are, there are ups and downs in that business, but we have a good management team and a good and more importantly a great facility structure that we have really been building for the last three years, that put us in a position to service that market at every level and it’s not just one order for these clients. These are multi-part orders, these are complex packages, these are not the most simple, although the envelope maybe more vanilla and less color. The actual, the bundling of the products is really where the value is for us. So we have built systems in and we have built facilities that are best suited to service that marketplace.
So, if you broke down the challenges Mike between office product and wholesale. Is it, is it sort of even between the two or is it, is primarily focused on that failed merger.
Yes. I’ll let Scott to answer, but the majority of it is related to the – to the office product space.
And Matt about 70% of it is – this is already 70-30 type of rationale where that’s really the office product space. The distributors that Mike talked about have been indirectly affected by that, through their other categories, which is then compounded into what they’ve done from an inventory rationalization and certainly a contractual perspective with folks like ourselves.
Got it. Thank you. And then on the – Scott on the revenue decline, just a year-over-year from fourth quarter to fourth quarter, could you give us some big buckets on the roughly $60 million revenue decline, how much of it tied to the one last week in the quarter and how much tied to office products?
Sure. So as I’ve noted in my prepared remarks, the three big items are the one less week, which we’ve gauged it about $25 million or about 5%. The office product and wholesale is just about $20 million for sake of discussion here today. And then the coating operation is about $6 million. So those are your big ticket items that get you in the low-to-mid 50s on the decline that the remaining piece of the decline is on the commercial print side. We did see some follow-up on some select customers but they operate it through the bottom line very well on the fourth quarter. And that was offset by the direct mail trends that we talked about on the other businesses.
Got you. And then just one last one, you gave us a pretty good breakout here, 2017 guidance you mentioned the $180 million EBITDA number 2018, what is that assume about revenue in 2018 as compared to 2017. Are you expecting revenue to turn and be higher in 2018?
Yeah. I think, we’re in an environment certainly, we want to see how the next first six months here shape up. But I think from our perspective it is, we’ll be honest with ourselves that our top line has continue – continued decline, we’re going be rationalizing facility. So inherently some of those sales will go away and I think our expectation is that that gets significantly mitigated particularly on the office product side over the next 18 months to 24 months. So, the model which suggests somewhere between a $1.5 billion and $1.6 billion in 2018 at this point in time, subject to any M&A activity what have you.
Hey, Matt. Bob Burton. Just – and you’re right about the difference in decline but that doesn’t tell you this real story or the fact that we’re looking at new revenues and we’re not, which we’re not going to talk about on this call because competition would listen everything we say. And different scopes and the areas that we’ve been in before and we’re trying to expand and everyone of our senior executives has major new targets and we’re not giving up on that. And looking into 2018 and far, that far ahead, we know, we’re trying and we got the plan laid out, we just don’t have the numbers there.
We’ll win some, we’ll lose some because we’re going to be taken away from other people. But, we understand that the name of the game is make that top line grow and we know that, we have a very good sales organization and we need to do and bring in some of those sales and we’ll be working on those and hopefully, we’ll be able to report to you. But coming off this, non-merger is really an eye opener and I’ve been exposed to it a couple of times in different places. And it just takes a while for us to – to get our footing and make sure we get this cost down right. But we’re looking at sales every day, and looking at opportunities, and hopefully we’ll have the opportunity to report on some of those later on.
Okay, thank you.
The last question comes from Brian Dennis at Cowen.
Hey, good morning, guys. Just a couple of quick ones. On Slide 3, in your deck, you guys state how you expect to continue to office products softness through the six months. Why shouldn’t we expect that to persist throughout the full-year?
Well, I think the softness certainly annualization, what I refer to is the annualization and the runoff of what we saw in the back half year. So that is yet to occur, we had a pretty stable first half of 2015. I think once – ones our customers get through the rationalization, and inventory reduction initiatives, our belief is that those order patterns will return to a normalized level not certainly where they were, pre-2016, but one that’s more manageable for us to continue to operate under as an organization, and we expect that to happen, as we get to the back half of 2017.
Okay, thanks. And just last one on your 2017 revenue guide, what kind of growth rates, or expectations are you assuming specifically within print and labels?
I think the – if you carve out the coating operation on the label side, we’re expecting GDP a little bit slightly more than that particularly from our custom label business in 2017. And on the commercial print side, we have the negative impact of the plant closure, is one – one certain item there. And we continue to see pricing pressures there. We expect those to be offset by some of the initiatives that we’ve talked about on previous call such as Cadena and the opportunities, that we see ahead of us there. So I would say slightly down is the breakeven is kind of the expectation for commercial print. Mike, if you want to add.
Yeah. Brian, I think that the message on the print side in particular have some large opportunities that exists. I mean that will happen throughout 2017 and I don’t have a crystal ball as far as how we’re going to perform on those and what will be awarded but there are clearly opportunities on some fairly large scale of books of business that we’re going after and planning for so. Obviously, we are planning there is an element of what is the historical pattern of this business but there are also some really nice things that are out there that we’re preparing for to win, and we’re not just preparing to compete. We are preparing to win. We are in the race. Yeah.
Great. Thanks, guys.
Okay. Thanks, Brian.
Okay. Ladies and gentlemen, thank you very much. We appreciate your support and have a good day.
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