Donnelley Financial Solutions, Inc. (NYSE:DFIN) Q4 2016 Earnings Conference Call February 28, 2017 9:00 AM ET
Sanja Burklow – Investor Relations
Dan Leib – Chief Executive Officer and President
Dave Gardella – Chief Financial Officer
Tom Juhase – Chief Operating Officer
Charles Strauzer – CJS Securities
Peter Heckmann – Avondale Partners
Bill Mastoris – Robert Baird & Company
Brian Nolan – J.P. Morgan
Justin Henderson – Eagle Assets
Welcome to the Donnelley Financial Solutions Fourth Quarter 2016 Results Conference Call. My name is Nicole and I will be your operator for today’s call. 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 Sanja Burklow. You may begin.
Thank you, Nicole. Good morning everyone and thank you for joining Donnelley Financial solutions 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 dfsco.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, the information statement dated September 23, 2016 filed as an exhibit to our current report on Form 8-K filed on September 23, 2016 and other filings with the SEC.
Further, we will discuss non-GAAP and pro forma financial information. We believe the presentation of non-GAAP and pro forma results provides 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 footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. We are joined this morning by Dan Leib, Dave Gardella, Tom Juhase and Kami Turner. I will now turn the call over to Dan.
Thank you, Sanja, and good morning everyone. I will cover a few different topics on today’s call including the progress we have made and standing up the company to operate independently. The cost actions we have taken to reduce the amount of net dis-synergies associated with the spin-off from R.R. Donnelley and our priorities for 2017 and beyond. Following my comments, Dave will provide additional detail on our fourth quarter results and then we will open up the lines for Q&A.
I am pleased to report that since our October 1st spin-off from R.R. Donnelley, we have made significant progress on multiple fronts towards setting up the company for long-term success as a standalone entity. From bringing talent into the organization to implementing plans to right size the cost structure and reallocate resources to prioritizing our investment needs and identify new market opportunities, we are taking a thoughtful but aggressive approach in our actions. Though it’s still early days, the steps we have taken and those we will continue to take will further strengthen our position in our core offerings and put us on a path toward bringing a wide array of compliance based solutions to market.
Also in these first few months, I've had the opportunity to meet with many of our employees as well as with some of our clients. From our deep domain expertise and relationships to our proprietary technologies and strong service focus, our clients appreciate the value that Donnelley Financial Solutions brings to them and have also communicated opportunities to further expand our relationships. Given this positive feedback in conjunction with the actions we are taking, there are exciting opportunities ahead of us.
At the same time, I recognize that 2016 was clearly a difficult year. Starting in January and continuing throughout the year, we were operating in a very challenging environment, especially in our core transactional offerings. In particular the number of IPOs price was down nearly 40% from 2015 while M&A transactions were down approximately 20% from the prior year. In addition to the decline in the number of priced IPOs fewer deal terminations and acquisitions of pre-IPO companies also had a negative impact on our 2016 results.
We did however see market activity and deal announcements start to pick-up post-election leading to our own activity increasing in the first two months of 2017 given the normal deal cycle. We are well positioned as capital markets activity continues to recover from the depressed levels we experienced throughout 2016. While the impact of lower transactional activity provided a significant headwind, we did have a number of successes in 2016, especially in areas that are more recurring in nature.
Total revenue from our Venue Data Room offering grew by 20%. Through our development efforts and partnerships we have expanded the use cases for Venue. In December, Venue was recognized with a Virtual Data Room of the Year Award from the Global M&A Network. Our worldwide language solutions business captured over 500 new clients and grew revenue by 9%, continuing a multi-year trend of strong revenue growth. Our language solutions business derives its revenue primarily from the financial, life sciences and legal industries.
In our investment markets offering, we experience continued revenue growth in content management as clients continue to look for efficiencies and content production and workflow solutions to help reduce their costs. Our client retention rate remains very high, consistently above 95% over the last seven years with 2016 being no exception. We are pleased with the progress we're making in these recurring revenue streams. Well a return to a more normalized transactions market will strengthen our results on balance we will target investments that can drive a shift in our revenue mix to one that's more recurring in nature and therefore more predictable over the long run.
We have also made significant progress in our first five months toward operating on a standalone basis and continue to identify opportunities for our improved efficiencies. We've hired key talent across the organization, have begun to improve our internal processes and systems and have developed detailed plans to migrate off the transition services agreements with R.R. Donnelley and LSC Communications. While much of this progress is not visible externally, these changes will drive our overall productivity and help to create long-term value for the company.
We also recognize the importance of aggressively managing our cost structure. As noted in this morning's press release, we develop plans to permanently reduce our cost structure and begin to implement those plans in December. In aggregate, our plans include approximately $20 million of annualized cost savings with the majority being recognized in 2017. We will continue to evaluate our cost structure very closely and take the appropriate actions not only in making further adjustments, but also identifying opportunities where we could be spending more to facilitate profitable growth.
With respect to our operating plan for 2017, I'd like to share with you a few of our key priorities. First, we will continue to build on the momentum that we've created in the areas where we have seen significant growth such as the Venue Data Room, our global language solutions offering and our content management solutions within our investment markets reporting unit. Second, we will continue to make enhancements across each of our technology-based solutions.
From our active disclosure of collaborative workflow tool and Venue Data Room to our FundSuite content management platform and our Language Solutions, the MultiTrans software, we remain focused on delivering product enhancements and improving our clients' experience with these tools. We expect such enhancements to be the result of a combination of organic investment and expansion of our relationships with strategic partners. Third, we will continue to aggressively pursue the transactional activity within the global capital markets.
As I mentioned earlier, 2016 was a challenging year for this part of the business, but our client relationships and reputation in this space position us well to capture this revenue as transactional activity recovers from the levels we experienced throughout 2016. And we will accomplish each of these priorities while taking a disciplined approach to managing our cost structure.
In our first five months as a standalone company, we have also begun to identify potential growth opportunities where we can leverage our core compliance and process management capabilities along with our breath of longstanding client relationships to serve new markets. While still early in the process, I am encouraged by our initial evaluation and the opportunity we have to build new offerings upon the foundation of our core compliance capabilities. The ability to deliver more comprehensive solutions within large evolving markets and leveraging our customer relationships and strong service backbone provides opportunities to drive growth. We’ll talk more about this throughout 2017.
Let me turn it over to Dave before we move to Q&A. Dave?
Thank you, Dan. Donnelley Financial spun-off from R.R. Donnelley on October 1, 2016 and this is our first quarter reporting results on a standalone basis. Before I discuss fourth quarter results, I'd like to discuss a few items that affect year-over-year comparisons between 2016 and 2015 and will also affect comparisons between 2017 and 2016. First prior periods including the first three quarters of 2016 are reported on a carve out basis and include allocations from R.R. Donnelley. Prior to the spin, certain costs for resources of the business were not recorded directly in our operations, but instead were recorded centrally at R.R. Donnelley and allocated to the company in the carve out financial statements.
We estimate that the actual cost of such resources is approximately $14.3 million higher than what was allocated to us in 2015. Of the $14.3 million difference approximately $9.5 million was recognized in 2016 and the remaining $4.8 million is expected to be recognized in 2017, most of this variance is reflected in our U.S. segment and impacts SG&A as well as cost of sales. Second, we expect approximately $15.5 million in incremental annual standalone cost primarily related to IP, finance, legal, HR and executive leadership functions necessary for operating as a separate public company.
We incurred approximately $7 million of these incremental standalone costs in 2016 and we expect to see a further increase of approximately $8.5 million in 2017 as the full annualized impact of these costs are incurred most of this incremental cost impacts SG&A. There's certainly some subjectivity on the breakout between these costs, but the combination of incremental standalone cost and allocate cost in excess of 2015 allocations results in gross incremental cost of approximately $29.8 million of which approximately $16.5 million was recognized in 2016 with an incremental increase of approximately $13.3 million expected in 2017. Of the $16.5 million that impacted 2016, approximately $6.3 million was recognized in the fourth quarter.
Third, going the other way and partially offsetting these incremental costs are actions that we identified following the spin-off to permanently reduce our cost structure, which we began to implement at the end of the fourth quarter. The impact of these actions will continue to ramp up in the first few months of 2017 and we expect these items to have an annualized impact of approximately $20 million. Given the timing of implementation, we expect to recognize the majority of these savings in 2017. On a run rate basis, these three items: higher cost than what was historically allocated, the gross incremental standalone cost and the offsetting co-spin cost structure reductions results in approximately $9.8 million of net dis-synergies slightly below our previous estimated range of $11 million to $16 million. As Dan noted earlier, we will continue to evaluate our cost structure very closely and take the appropriate actions.
Now I will discuss our fourth quarter results. Net sales for the fourth quarter were $221 million, a decline of 7.4% from the fourth quarter of 2015. After adjusting for changes in foreign exchange rates, organic sales decreased 6.5% as an increase in the international segment only partially offset declines in the U.S. segment. Last year's fourth quarter included a large M&A deal and capital markets that is impacting the year-over-year comparability by approximately 370 basis points.
In addition higher mutual funds volume as well as growth in Language Solutions and our Venue Data Room services only partially offset lower transactional and compliance volume. Fourth quarter gross margin was 33.7%, 690 basis points lower than the fourth quarter of 2015, approximately 330 basis points of this decline was driven by a change in the classification of certain IT costs to cost of sales from SG&A compared to the historical classification in the carve out statements, which was based on R.R. Donnelley’s classification. Excluding this reclassification, the decline in gross profit margin was primarily driven by lower transactional volume offset in part by productivity.
Non-GAAP SG&A expense in the quarter was $46.8 million. As a percentage of revenue SG&A was 21.2% or 118 basis points higher than the fourth quarter of 2015. Excluding the favorable 330 basis point impact of the IP reclassification, the increase in SG&A was primarily driven by standalone cost that I described earlier. Our fourth quarter non-GAAP adjusted EBITDA was $27.7 million compared to $49.2 million in the fourth quarter of 2015. Non-GAAP adjusted EBITDA margin in the quarter of 12.5% was [indiscernible] (6 - 0:02:16) basis points lower than the fourth quarter of last year driven by approximately $3.8 million of standalone cost incurred in the quarter as well as lower capital markets transactions and compliance volume.
In addition fourth quarter 2016 actual costs for items previously allocated from R.R. Donnelley were $2.5 million higher than what was allocated to us in the fourth quarter of the 2015 carve out statements. Before I discuss revenue and non-GAAP adjusted EBITDA performance for each of the segments in more detail, I'd like to recap what is included in each segment. Our U.S. segment includes three reporting units: capital markets, investment markets and language solutions and other.
In capital markets, we provide compliance, products and services to companies that are subject to the filing and reporting requirements of the SEC. In addition, we support companies in public and private capital markets transactions with deal management solutions. Included in capital markets is our cloud-based disclosure management system called Active Disclosure, which allows clients to collaboratively create, review and distribute financial communication and regulatory compliance documents on their own systems and then file directly with the SEC.
In addition for both public and private transactions many of our clients use our Venue Data Room offering to manage the transaction process and increase efficiency. Our Venue Data Room product is a cloud based service that allows companies to securely organize, manage, distribute and track corporate governance, financing, legal and other documents in an online workspace accessible to internal resources and outside advisors. In investment markets, we provide products and services to mutual funds, hedge and alternative investment funds and insurance companies with a comprehensive set of products and services including the FundSuiteArc software platform.
FundSuiteArc is a suite of online content management products, which enables clients to store and manage information in a self-service central repository so that compliance and regulatory documents can easily be edited, assemble, accessed, translated, rendered and submitted to regulators. Our Language Solutions and other reporting unit includes traditional commercial printing as well as our Language Solutions offering where we support clients in a variety of industries by helping them adapt their business content into different languages for specific countries, markets and regions through a complete suite of language products and services. Our suite of services includes translation, editing, interpreting, proofreading and multilingual typesetting plus a variety of specialized content services.
Our International segment includes our operations in Asia, Europe, Latin America and Canada and is primarily focused on working with international clients on capital markets offerings and regulatory compliance related activities into or within the United States. In addition, we provide services to international investment market clients to allow them to comply with applicable SEC regulations and we also provide language solutions to international clients.
Our Corporate segment consists of unallocated SG&A expenses including executive, legal, finance, marketing and certain facility costs. In addition, certain costs and earnings of employee benefit plans such as pension and other post-retirement are included in corporate and not allocated to the operating segments.
Now, I will discuss revenue and non-GAAP adjusted EBITDA performance for each of the segments. Revenue in our U.S. segment was $182.8 million in the fourth quarter of 2016, a decrease of 8% from last year's fourth quarter primarily due to the 15.3% decline in our capital markets offering. Last year's fourth quarter included a large M&A deal in capital markets that is impacting the year-over-year comparison in the segment by over 440 basis points, in addition continued strong growth in our venue product offering only partially offset lower volume of IPOs, debt offerings and lower volume of compliance work in the fourth quarter of 2016.
Investment markets reported revenue growth of 2.7% due to higher mutual funds volume. Language solutions and other reported revenue decline of 2.1% as growth in translation services only partially offset declines in commercial print volume. Non-GAAP adjusted EBITDA margin for the segment of 15.6% decreased 495 basis points from the fourth quarter of 2015. In addition to lower capital markets transactional volume, which negatively impacted the margin in the quarter, the U.S. segment EBITDA includes the majority of the higher run rate costs for previously allocated items from R.R. Donnelley.
Revenue in our International segment was $38.2 million in the fourth quarter of 2016, a decrease of 4.5% from the fourth quarter of last year. On an organic basis excluding the unfavorable impact of changes in foreign exchange rates, revenue in the fourth quarter increased 0.5%, driven by higher translation and fund services, partially offset by lower capital markets transactions and compliance volume. Non-GAAP adjusted EBITDA margin for this segment of 10.2% decreased 704 basis points from the fourth quarter of 2015. The decline was driven by lower capital markets volume and reallocation of certain IT expenses, which started being allocated to the International segment in the fourth quarter of 2016 as well as wage and other inflationary increases and higher bad debt.
Our fourth quarter 2016 non-GAAP unallocated corporate expenses were $4.8 million compared to a credit of $1.4 million in the fourth quarter of 2015. The fourth quarter of 2015 included a credit of $2.3 million for certain cost reclassifications from the corporate segment to the U.S. operating segment from the carve out statements. Excluding these reclassifications, which net to zero on a consolidated basis, corporate costs were $3.9 million higher in the fourth quarter of 2016 and $7.3 million higher for the full year 2016 compared to 2015.
Higher cost in both the fourth quarter and full year are primarily driven by standalone costs related to the separation from R.R. Donnelley. Free cash flow in the quarter was $37 million or $14.7 million lower than the fourth quarter of last year, primarily due to lower EBITDA and interest payment in the fourth quarter of 2016 and higher capital expenditures partially offset by lower pension plan contributions in the fourth quarter of 2016. For the year, our free cash flow was $79.8 million; $14 million lower than 2015.
We exited the spin with $336.5 million of debt. And as we mentioned in this morning's earnings release, we have reduced our outstanding debt by $49.5 million since that time ending the year with $587 million of total debt and $36.2 million of cash. As of December 31, 2016, our gross leverage was 3.6 times. We ended the year with $189.9 million of net available liquidity and had nothing drawn on our $300 million revolving credit facility. In addition, we have $68 million cash payment due from R.R. Donnelley on April 1, 2017 that will be used for further debt repayment upon its receipt.
The net under funded amount of our pension and other post retirement plans decreased by $9.6 million during the fourth quarter to end the year with a net obligation of $58.7 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.
Lastly, let me share some additional detail around our full year 2017 guidance that was highlighted in this morning's press release. As evidenced in 2016, the company's performance is highly dependent on global capital markets’ transaction activity and our guidance for 2017 assumes a modest recovery in this area. Our 2017 guidance includes the negative impact of the incremental standalone cost and ongoing cost in excess of historical allocations as well as the planned cost reduction actions that we highlighted earlier.
We expect revenue of approximately $1 billion, representing organic growth in the range of 1% to 2%. We expect non-GAAP adjusted EBITDA in the range of $165 million to $175 million, including corporate costs in the range of $15 million to $20 million. We expect free cash flow in the range of $45 million to $55 million, including an assumption of capital spending in the range of $30 million to $35 million. This free cash flow reflects the significant increase in cash interest payments resulting from the debt issued in connection with a spin-off from R.R. Donnelley as well as cash restructuring associated with our cost reduction actions and certain spin related cash payments.
As Dan mentioned, we are happy with the improved activity levels in the broader market that took place post-election and resulting impact we have seen in the first two months of the year. While we are pleased with this activity, I should note that our normal seasonality within the quarter results in the majority of our first quarter revenue and profit being generated in March. At this March activity also looks to be trending similarly to the strong start of the year, so early indications for 2017 are positive, but much of the quarter’s performance will be driven by what we see in the next 31 days.
And with that, I will turn it back to Dan.
Thank you, Dave. In closing, I would like to thank all of our employees for their continued hard work and focus as we continue to shape our company; we will our reliability, integrity, and quality of product and services at the core of how we engaged with our clients. And now, operator, let’s open it up for questions.
Thank you. We will begin the question-and-answer session. [Operator Instructions] Our first question comes from Charles Strauzer from CJS Securities. Your line is open.
Hi, good morning.
Good morning, Charles.
If we could start up just want to talk a little bit more about the guidance and kind of the assumptions that you’re building in there. There appears to be at least a modest disconnect between the revenue growth and assumptions that you are forecasting versus kind of the current tone in the market in the start of the year and may be talk to a little bit too about the guidance for the implied margins for the EBITDA. And obviously we are assuming some growth there, we’re not really forecasting any material margin improvement and assuming that you do have some top-line growth and given some of the cost reduction actions that you’ve talked about, why wouldn’t there be better margin leverage?
Right. Yes thanks Charlie. So let me kick it off and then Dave will jump into some of the detail as well. So certainly, we saw the pull back around the time of the election in November and have seen post election in the market to pick up. Given the deal cycle our activity levels increased in January, February as Dave mentioned March being the biggest month in the quarter. I would characterize our full-year guidance as prudent calling for modest recovery in the deal market. Given the cycle timeline deals, the forward visibility is not great looking out several quarters.
So we read the same things everyone else reads in terms of prognostication around what the market will look like nine months from now or six months from now. But we have taken a prudent approach towards guidance and aligned with that is building the cost structure for today’s reality and expectation that this would be a modest recovery. And so if the recovery is stronger we would expect some upside.
Yes I think Charlie the only thing to add there is to Dan’s point for – we baked in a modest recovery in capital markets I think, importantly we built the cost structure assuming that modest recovery, to your point and Dan’s point to the extent that it ends up coming back much stronger than we baked out here both from a revenue and margin perspective, I think, that work tends to flow thorough very nicely. So we would see that in our results.
I think part of the point of our guidance here kind of the first quarter out in the box is to just give you a baseline of what that cost structure looks like assuming just a modest recovery in those markets.
May be if we could may be have a little further discussions with you on the cost side, I know there was a lot of puts and takes post spin here, you kind of give a lot of numbers that were a little confusing. May be kind of clarify kind of the differential between the Form-10s versus now what you are assuming in terms of the incremental cost in the implied by your guidance there?
Yes absolutely, so we’ve attempted to disaggregate the pieces really just to establish the cost baseline, did a lot of work on the cost structure in the first few months, post spin, acknowledge that there is a fine line that exists between the historical allocation differences and forward-looking dis-synergies. At the end of the day, the differentiation from our perspective probably doesn’t matter much and we need to manage the overall cost structure, but to do so helpful for us to have the accurate view of the components. So we wanted to share that.
As we discussed in the prepared remarks our cost initiatives will offset these costs. And also enable us to invest in the business and position us well as we ahead into 2017. Dave will run through some of the numbers in detail here.
Yes so Charlie you mentioned the Form-10, so benchmarking off of the 2015 cost structure that included allocations in the Form-10. As Dan said we try to breakout the different components, higher allocations, the aggregate dis-synergies. And when we say aggregate dis-synergies meaning kind of cost that we identified that we’ve added, people that we brought in, third-party vendors, new contracts, et cetera.
So that’s roughly call it $14 million of higher allocations and those costs will remain. $15 million cost that we’ve identified that we’ve added from there you subtract the roughly $20 million of cost that’s coming out of the platform. And so you end up at about net $10 million dis-synergy number which was just below the low end of our $11 million to $16 million estimate that we included in the Form-10.
Okay, that’s helpful. And then may be give out a little bit more breakout on the sales by cycle in terms, specifically in the U.S. market for capital markets things like that.
Yes, all the detail will in the 10-K. For the fourth quarter the U.S. segment was, I mentioned $182.8 million. The breakout of that is capital markets $96.6 million, and that was down from $114 million in the fourth quarter of 2015. Investment markets were $72.4 million compared to $70.5 million in the fourth quarter of 2015. Language Solutions and others was $13.8 million, compared to $14.1 million and again that’s growth in language solutions and a decline in commercial print.
And the International Segment was $38.2 million, compared to $40 million in the fourth quarter of 2015 and again similar situation as I described in the prepared remarks, Language Solutions piece grew and the decline there was really the same that we saw in the U.S. kind of capital markets driven.
Great that’s very helpful. Thank you very much.
And our next question comes from Peter Heckmann, Avondale Partners. Your line is open.
Good morning gentlemen.
Wanted to see if you could give the relative expectations of the sub-segments in your guidance and what ranges might be included in there, so for example, with capital markets what on the transaction nature of the business what – how did you handicap the down versus up and where did that shake out and just how much kind of true visibility do you have on the [Audio Gap] market side is about 120 days, is it 90 days, is it longer. A little bit more commentary there in terms of how much visibility you have into building that guidance number?
Yes sure, I think your characterizations are obviously reveals a bit different. But the 90 days is probably a fair view of forward visibility on that part of the business. Clearly as we talk about what’s going on in our GIM or investor management business or language solutions we have much more visibility, but it just speaks specifics to the transactions part of I think that quarter view is probably a pretty good view. And then clearly within a month we can have things shifted amongst quarters, but that would be the right sort of period of visibility.
Yes in terms of some of the detail I think you know if you look at each of the reporting units and some of the offerings within probably more of the same of what we've seen over the last few years. So I think most of the growth will be driven by the modest recovery in capital markets and then within capital markets we would continue to expect to see growth in the Venue Data Room. If you go to investment markets, again more of the same that recording unit is impacted by lower print volumes and we would expect to see that to continue generally being offset by growth in kind of that management. And that's consistent with what we've seen over the last few years. Language solutions, we would expect to continue to see growth both in the U.S. and International segment.
And then we don't break out the details of International, as I mentioned, most of the fourth quarter decline was driven by capital markets partially offset by language solutions. In 2017 we’re assuming part of that modest recovery impacts international capital markets, as well as continued growth in language solutions.
Yes okay. I'm sorry Peter it's time you just a specificity around cap markets too I think in your question with really IPOs in M&A, the M&A, we're noticing in the last couple of years that because the M&A deals are harder to get closed or harder to get fully approved. So one of the things about the visibility there is you have the work inside the shop but the length of time that it takes for it to come out the other end is sometimes past a year. So you have this work in the shop we call, WIP or Work in Progress and not able to build it. And then you're kind of at the hands of the regulation process in terms of when they'll come out the other end. So that that clouds that visibility as well.
Your numbers go up in terms of how many deals you’re bringing into the shop but then it's a question of how you get them back out the other end.
That makes sense, that makes sense. And then just in terms of the year could you give a little bit of qualitative commentary in terms of any relatively more difficult comparisons on a quarter-to-quarter basis, as well as the flow of margins through the year where we expect relatively more of the margin improvement to occur in the back half?
Yes, so I'll start with some of the comparisons that I mentioned the $13 million of the standalone cost that kind of are carrying over into 2017. If I look quarter-by-quarter, high level numbers we’d expect probably $5 million of that on a year-over-year basis to be in Q1 roughly $3 million in Q2 and $5 million in Q3. And then generally pretty fair comps by the time we get to Q4.
From a from a margin perspective, I think, adjusting for some of these incremental cost numbers, I think if you go back and look at historical margins that’ll probably be the best benchmark in terms of seasonality of the market by quarter.
Great All right that's helpful, thank you.
Our next question comes from Bill Mastoris from Robert Baird & Company.
Thank you. Dan I wonder if you couldn't maybe drill down a little bit on the decline in the compliance volume. I guess most of us believe the compliance is kind of a recurring revenue stream, and so to see that volume decline or at least to have it mentioned in a material sort of way I'm not sure I can play connect the dots there. May be you can kind of go ahead and help us out and give us a little bit of color on exactly what happened there?
Sure, absolutely. So if we look at the compliance side and break it into wins and competitive losses and then noncompetitive, the wins versus the competitive losses were actually up a bit at a client level. The noncompetitive is really what swings and so it's things like mergers and acquisitions, things like companies delisting bankruptcies, et cetera. Clearly a software IPO market impacts the amount of compliance revenue. And then you also have the follow-on, in addition to what all that's wrapped into just the upfront compliance work we obviously have the follow-on printing that is impacted as well.
Okay thank you. Thank you that's very helpful. One for you Dave, and this has to do with kind of the deleveraging of the balance sheet. It looks as though you're kind of on track to get into your target range in about three years with kind of the combination of the art 11 [ph] on these payment, as well as maybe a client free cash flow towards debt reduction. Is there also a mechanism, all right that kind of mandates it? Free cash flow has to be prioritized towards debt reduction. I seem to recall that you have a free cash flow sweep actually contained in your credit agreements. Is that the correct way to think about it?
Yes well let me start off Bill so we ended the year at 3.6 times. I think when you look at the $68 million cash payment coming from the and adjust for that you'd be at 3.2 times. You take the midpoint of $45 million to $55 million in free cash flow. And depending on your assumption whether or not that all goes to debt repayment, I think you start to get relatively close to the top end of our targeted range by year-end and at the midpoint of our EBITDA guidance. So I think we will – assuming no M&A or other types of cash usage you get there quicker than the three years you were talking about.
With respect to the uses of free cash you're correct we do have in addition to the normal amortization on the term loan there is the excess cash flow suite that requires us to pay down the term loan with that cash.
Dan or I should say, I'm sorry Dave if you can remind me that's 50% of excess cash flow is defined is that correct?
Okay, thank you very much. I appreciate it.
Our next question comes from Brian Nolan from J.P. Morgan. Your line is open.
Hey guys can you hear me?
I just one to ask if you could bridge the EBITDA guidance the free cash flow. So as an extension of the last question you guys have the $25 million RP basket that you can use the paydown D 16 unsecured. Is that right? And if so trying to subtract the interest cost from that EBITDA I’m not sure how you end up with the free cash flow guidance that you provide?
Yes, so I’m not sure what you are including in there, but from EBTIDA, so cash taxes, I mentioned higher cash restructuring and some spin related costs. And so, I think, if you look at our historical cash restructuring being in the $5 million to $6 million range we would expect that to be higher this year, probably closer to low to mid teens. Cash interest based on the financing should be just over $40 million. There’s some pension contributions and some other cash payments should get you pretty close to that range. And again I mentioned CapEx in the range of $30 million to $35 million.
Okay, thank you very much.
Our final question comes from Justin Henderson from Eagle Assets. Your line is open.
Hi how many plans are you guys elaborating?
Hi it’s Tom Juhase. We have two facilities in Lancaster, Pennsylvania and one is Secaucus, New Jersey and then we have a production site in Phoenix, Arizona.
And what are they like the pretty S1s and Form-10 something like that? Exactly we have our mutual fund business, perceptiveness for the funds. And then the Secaucus facility is well uses that for annual reports, or proxies. So your basic financial printing business. And then we also have a facility in Temecula that we lease for fulfillment, it’s into [indiscernible] California?
Just from a production standpoint we’re producing roughly half of our work inhouse and then the other portion gets outsourced to third-party providers.
Okay can you talked about your deal cycle earlier in the call on average how long do you work with the client and capital market that’s working on a dealer in IPO?
Yes I mentioned this time again, so I mentioned before that in the visibility question, for an IPO deal transaction it can be short as 120 days and it can be long as six months. When the markets are less volatile, and the window is open they get the deals done. The window to get the deal done closes shorter. Last year and, for example, it was tough year. It’s difficult to progress ability and it’s also difficult to built a busted deal. So we had a lot of that going on last year, but the year window is anywhere from three months to five months as a normality, in a normal market.
Would you say it’s difficult to build a busted deal that’s just written off?
No not at all. It’s now it is you would take some of this from the accounting standpoint, it’s really working with the working group and the companies to the sort through what their plans are going forward whether or not it’s to put on all door is closed.
And from a bad debt perspective to Tom’s point we’re generally able to deal for those that work perform to date in any of those projects and have a pretty good track record in terms of collectability.
How good is pretty good track record? What’s your….
The bad debt number is very low, less than few million dollars.
Okay. Your press release gives you a better job of breaking out the segment. It’s paying a lot of attention to non-GAAP accounting versus GAAP. Comparing the segments would be a little more helpful. Finally, when you guys showed trailing free cash flow numbers in the slide shows before you guys plan out. And then at the Bank of America Conference, I guess the interest cost wasn’t – was there any allocation for RR Donnelley’s interest cost in that number.
Yes that’s right. Those were right out of the Form-10 carve out financials.
Okay. All right, thanks for taking my questions.
Thank you. And thanks for the questions. I think operator that was it for the queue. So appreciate everyone being on the call. And we’ll talk to you in May. Thank you.
Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating, you may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!