Veritiv's (VRTV) CEO Mary Laschinger on Q4 2017 Results - Earnings Call Transcript

Veritiv (NYSE:VRTV) Q4 2017 Earnings Conference Call March 1, 2018 10:00 AM ET

Executives

Thomas Morabito - Director, IR

Mary Laschinger - Chairman & CEO

Stephen Smith - SVP & CFO

Analysts

Jason Freuchtel - SunTrust Robinson Humphrey

Ryan Merkel - William Blair

Scott Gaffner - Barclays Capital

John Dunigan - Barclays

Chris Manuel - Wells Fargo Securities

Operator

Good morning, and welcome to Veritiv Corporation's Fourth Quarter and Full Year 2017 Financial Results Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions.

At this time, I would like to turn the call over to Tim Morabito, Director of Investor Relations. Mr. Morabito, you may begin.

Thomas Morabito

Thank you, Tiffany, and good morning, everyone. Thank you all for joining us. Today, you'll hear prepared remarks from Mary Laschinger, our Chairman and Chief Executive Officer; and Steve Smith, our Chief Financial Officer. Afterwards, we will take your questions.

Before we begin, please note that some of the statements made in today's presentation regarding the intentions, beliefs, expectations and/or predictions of the future by the company and/or management are forward-looking. Actual results could differ in a material manner. Additional information that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors to be contained in our 2016 annual report on Form 10-K and in the news release issued this morning, which is posted in the Investors section at veritivcorp.com.

Non-GAAP financial measures are included in our comments today and in the presentation slides. The reconciliation of these non-GAAP measures to the applicable GAAP measures are included at the end of the presentation slides and can also be found in the Investors section of our website.

At this time, I'd like to turn the call over to Mary.

Mary Laschinger

Thanks, Tom. Good morning, everyone, and thank you for joining us today as we review our fourth quarter and full year financial results. We will also provide some thoughts on important drivers of our expected full year 2018 performance and share our guidance for the year.

Over the past two years, we've been pleased with our improved revenue trajectory which has been driven by strong top-line growth in our packaging segment and improved performance from Facility Solutions. For the fourth quarter of 2017, reported net sales were $2.2 billion up 5% when compared to the prior year period.

For the full year 2017, net sales were $8.4 billion up 50 basis points compared to the prior year. Since the beginning of 2017, our year-over-year quarterly core net sales have been improving due to our investments in selling resources resulting in significant growth in packaging and a reversal in the transfer Facility Solutions revenues.

The fourth quarter is the second consecutive quarter in which our consolidated core net sales were positive year-over-year. In addition, as of December, we have experienced six consecutive months where each had year-over-year growth. For the year, the incremental earning from this improved revenue performance were offset by several factors. These include the continued industry pressures in the Print and Publishing segments, a significant increase in bad debt charges especially in France, investments in our growth segments and slightly higher distribution expenses.

As a result, we reported a consolidated adjusted EBITDA of approximately $176 million for the year which was below prior year period but above our revised guidance of $170 million to $175 million. For the fourth quarter of 2017, we reported a consolidated adjusted EBITDA of approximately $60 million which was up nearly 20% year-over-year driven by both strength in our packaging business and one extra shipping day.

For the year, we reported a net sales increase of 50 basis points and excluding the positive effect of foreign currency exchange rates and a negative effect of one less shipping day our core net sales increased 70 basis points from the prior year. On both the reported and core basis, this is the first positive full year revenue comparison that we have experienced since going public.

As mentioned, our 2017 revenue performance was driven by growth in packaging and Facility Solutions partially offset by the continued secular decline in our Print and Publishing segment. The full year trends were also evident in our fourth quarter where we reported a net sales increase of 5% excluding the effect of both foreign currency exchange rates and one more shipping day, our core net sales increased 2.7% over the prior year's fourth quarter.

Now, I'd like to provide some additional details on the fourth quarter mention some key drivers for 2018 and provide our guidance for the year. The packaging segment performed very well in the fourth quarter. Core revenues increased 16.7% quarter-over-quarter. 7.5% of which was due to the All American Containers acquisition. Without the benefit of the AAC incremental revenue, our core packaging segment growth was about 9% quarter-over-quarter that was driven by strength across most of our product categories particularly in corrugated and film. Approximately 6% of the growth came from volume and about 3% from price. For 2018, for our packaging business, we expect to see solid revenue performance and a modest improvement in adjusted EBITDA margin when compared to 2017.

Overall, we continue to view packaging as having growth rates higher than GDP, however, we would not expect to see similar revenue growth in 2018 as we experienced in 2017. We're expecting to see fewer price increases in 2018 compared to 2017, also a slower growth rate in our international packaging business and more modest growth in a certain large customer account.

Our facilities solution segment grew its core revenues 1.8% quarter-over-quarter. Over the past year, we've been pleased with the improving revenue trends for this segment. Although the growth slowed somewhat in the fourth quarter due to challenges in the retail space. For 2018, we view Facility Solutions at a GDP growth business, but we do plan to selectively prune some higher risk accounts mostly in retail.

Industry pressures continued to impact the Print and publishing segment. Print core revenues declined 8.5% in the fourth quarter driven by secular declines in both market volumes and market price. The Print segment's earnings were also negatively impacted by charges for bad debt. Publishing core revenues declined 5.1% which was driven by secular declines in both market volumes and market price.

For 2018, we expect the secular industry trends continue to negatively impact both segments. We recognize the challenges in this industry but these segments continue to generate free cash flow which help support our growth businesses. The industry is changing quickly and we will continue to adjust our business model as market dynamics evolve in order to remain competitive and to generate positive free cash flow for the company.

Shifting now to our operating system conversion; our multi-state conversion of the southeast was successfully completed and during 2018 we have additional large scale conversions planned. Overall, our operating system conversion and warehouse consolidation will be substantially complete by the end of 2018.

Now I'd like to turn to our expectations for 2018. This year will be a key inflection point for Veritiv with the integration substantially complete by the end of 2018 and our mix of business improving to higher growth, higher margin segments. During the year, we will transition to the optimization element of our strategy and that natural extension of our efficiency efforts is expected to yield an additional $100 million in benefits due 2021.

In our third quarter earnings call November, we indicated that we expected adjusted EBITDA through 2018 to improve over 2017. That guidance as well as our guidance today is driven by continued growth in our packaging and Facility Solutions partially offset by the continued decline in Print and Publishing and the negative impact of financing leases becoming operating leases. Taking all these factors into account along with a full year of All American Containers, we are expecting our 2018 adjusted EBITDA to be in the range of $180 million to $190 million.

In November, we also indicated that we expected free cash flow in 2018 to improve over 2017 as we focus on improvements in working capital in part enabled by the operating system integration and warehouse consolidation. For 2018, we expect free cash flow to be at least $30 million.

Now, I'll turn it over to Steve so he can take you through the details of our fourth quarter and full year financial performance.

Stephen Smith

Thank you, Mary, and good morning, everyone.

Let us first look at the overall results for both the quarter and the year ended December 2017. As Mary walked you through earlier, when we speak to core net sales, we were referencing the reported net sales performance excluding the impact of foreign exchange and adjusting for any day count differences. We had one more shipping day in the fourth quarter of 2017 compared to the fourth quarter of 2016.

For the full year 2017, we had one less shipping day versus the full year 2016. I would quickly note that in 2018, we'll have one additional shipping day in the third quarter while the other three quarters having the same number of days as 2017 resulting in one more shipping day for the full year 2018 relative to 2017.

For the fourth quarter of 2017, we had net sales of $2.2 billion up 5% from the prior year period while core net sales increased 2.7%. As Mary mentioned, our sequential quarterly pattern in core net sales has been steadily improving over the past two years and we were pleased to see a second quarter in a row of positive core net sales. This trend line improvement is in part driven by the investments we are making in our growth segment and is occurring despite a tough revenue environment for our Print and Publishing segment.

Our cost of products sold for the quarter was approximately $1.8 billion. Net sales less cost of products sold was $404 million. Net sales less cost of products sold as a percentage of net sales was 18.2% up 30 basis points from the prior year period. Adjusted EBITDA for the fourth quarter was $60 million a 19.8% increase over the prior year period.

Adjusted EBITDA as a percentage of net sales for the fourth quarter was 2.7% up 30 basis points versus the prior year period. An increasing percentage of our consolidated revenue for the higher margin packaging segment contributed to the improved margins. For the year ended December 31 of 2017, we had net sales of $8.4 billion up 50 basis points from the prior year period.

Our growth in net sales per shipping day increased 90 basis points year-over-year and our core net sales growth increased 70 basis points for the year. For the year, our cost of products sold was approximately $6.9 billion. Net sales less cost of products sold was approximately $1.5 billion. Net sales less the cost of products sold as a percentage of net sales was 18.1% up about 10 basis points from the prior year period. Adjusted EBITDA for the year was $176.4 million a decrease of 8.2% from the prior year period. Adjusted EBITDA as a percentage of net sales was 2.1% percent down 20 basis points from the prior year period.

Our decreased earnings for the full year were due to four primary factors; the structural decline in Print, investments in selling personnel in our growth segment, increased bad debt charges and increased deliver and handling costs which were primarily related to higher fuel prices and the All American Containers acquisition.

Let us now move into the segment results for both the quarter and year-ended December 31, 2017. In the fourth quarter, the packaging segment grew its net sales 19.3%. Core revenues increased 16.7% quarter-over-quarter, which is much better than the market performance. For the year, the packaging segments net sales were up 10.6% and core revenues were up 11% for the year. Without AAC in 2017, our organic revenue growth year-over-year was more than 8%. Approximately 6% of the organic growth came from volume and about 2% from price.

For the fourth quarter and full year, packaging contributed $71.3 million and $238 million in adjusted EBITDA up about 28% and 8% respectively. For the quarter, adjusted EBITDA as a percentage of net sales was up 8% up 50 basis points from the prior year period. Adjusted EBITDA margins for packaging were positively impacted by volume rebates in the fourth quarter.

For the year, adjusted EBITDA as a percentage of net sales was 7.5% down 20 basis points from the prior year period. Adjusted EBITDA margins were negatively impacted by changes in customer mix and higher resin prices for the year. In the fourth quarter, Facility Solutions net sales increased 4.4% while core revenues increased 1.8% percent. The higher growth categories this quarter were talent issue, food service products, and safety supplies.

We also saw strength in Canada this quarter, which was driven by growth with some large select corporate account. For the year, Facility Solutions net sales increased 3% and core revenues were also up 3%. For the fourth quarter and full year, Facility Solutions contributed $10.4 million and $35.5 million it adjusted EBITDA down about 18% and 25% respectively.

Adjusted EBITDA as a percentage of net sales decreased 90 basis points in the quarter and 100 basis points for the year. The adjusted EBITDA decline was primarily driven by higher supply chain cost, a shift in customer mix towards larger national accounts, and additional expense for our bad debt reserve.

In the fourth quarter, the Print segment had a 6.7% decline in net sales and core revenues were up 8.5%. Secular declines in both market pricing and volumes continued to impact the segments sales shortfall with volume declines driving 5% of the 8.5% decline quarter-over-quarter and pricing accounting for most of the rest of the economy.

For the year, the Print segment had an 8.3% decline in net sales and core revenues were up 8.1%. For the fourth quarter and full year, Print contributed $16 million and $60.8 million in adjusted EBITDA down approximately 24% and 21% respectively. The earnings impact the sales decline was partially offset by reduction in operating expenses.

In the fourth quarter, the Publishing segment had a 3.3% decline in net sales and a 5.1% decrease in core revenues. This reduction in revenue was driven by a roughly 3% decrease in both volume and price. The volume decreases were most pronounced in the magazine and educational book verticals.

For the year, the publishing segment had a 7.3% decline in net sales while core performance was up 7%. For the fourth quarter and full year, publishing contributed $8.8 million and $26.4 million in adjusted EBITDA up about 22% and 12% respectively. The increase in earnings can be attributed to the mix of business and a reduction in operating expenses.

Next, I would like to update you on the impact of the recent US tax reform legislation. Veritiv recognized the tax effects of the tax reform legislation in the year ended December 31, 2017 and recorded a $30.2 million provisional tax expense.

In addition, in December, as of December 31, the tax receivable agreement Veritiv has with UWWH was revalued for the Tax Act changes which reduced the value of the liability by $13.5 million. On the income statement, this item effects our other income and expense line.

Pending further evaluation of the Tax Act, over time and with increasing pre-tax income, we estimate that our effective tax-rate will trend toward approximately 26%, down from our previous expectations of around 40%. At this time, the cash tax impact of the Tax Act reform is not expected to be material in 2018. For additional information on the effects of the Tax Act, I would refer you to our 2017 10-K, which we filed later today.

Today we're providing 2018 guidance for the -- and adjusted EBITDA range for capital expenditures and for free cash flow. As Mary mentioned, we expect adjusted EBITDA for 2018 to be in the range of $180 million to $190 million which reflects an expectation of continued strength in our growth segments of packaging and facilities solutions as well as the full year of All American Containers, partially offset by continued declines in Print and Publishing and the negative impact of financing leases becoming operating leases.

Shifting now to our balance sheet and cash flow; at the end of December, we had drawn approximately $898 million against the asset-based lending facility and had available borrowing capacity of approximately $317 million. As a reminder, the ABL facility is backed by the inventory and receivables of the business.

At the end of December, our net debt to adjusted EBITDA leverage ratio was 4.6 times including borrowings for the August 2017 AAC acquisition. Our net leverage ratio had been 5.4 times at the end of the third quarter of 2017 right after the AAC acquisition. Our strategic goal is a net leverage ratio of about three times.

For the year ended December 31, 2017 our cash flow from operations was $37 million subtracting capital expenditures of $33 million from cash flow from operations for the year, our free cash flow was only $4 million in 2017.

If we add back $78 million of cash items from the acquisition, the integration, and restructuring adjusted free cash flow for 2017 would have been approximately $82 million. Free cash flow was impacted by our increased investment and accounts receivable and inventory to support sales growth and our packaging segment. Our net working capital increased year-over-year mainly due to increases in accounts receivable driven in part by our growth segments partially offset by our contracting segments during 2017. As a reminder, our working capital pattern can be seasonal.

As Mary mentioned, we anticipate at least $30 million of free cash flow for 2018 to find cash flow from operations less capital expenditures. We have two types of integration costs there are those costs that run through the income statement directly and those that are within capital expenditures.

One-time integration and restructuring costs expected to run through the income statement for 2018 will be between $40 million and $50 million. We expect capital expenditures related to integration and restructuring projects to be in the range of $10 million to $20 million which will help enable efficiencies in 2018 and beyond. Similar to prior years, this incremental capital spending is principally for information systems integration.

For 2018, our ordinary course capital expenditures are expected to be approximately $20 million to $30 million. For comparison purposes, in 2018 capital expenditures totaled $33 million for the year. Of that spending, there was about $16 million related to integration projects.

Finally, I would like to provide an update on our synergy capture since the merger and the transition to the optimization element of our strategy in 2018. As a reminder, our synergy percentages are calculated using the cumulative effect of synergy benefits already achieved in the 2014 through 2017 period.

We ended 2017 having captured 90% of the high-end of our ultimate goal of $225 million. We surpassed the low-end of our range of $150 million in synergies during 2016, well ahead of our multi-year plan. The initial synergy capture is now effectively complete; we consider it to be a success because it reduced the cost structure in the core business and helped offset the structural decline in the Print segment.

As Mary mentioned, we will now transition to the optimization element of our strategy which is expected to generate an additional $100 million in benefits through 2021 as a result of greater efficiencies. We expect to see a greater flow through of the benefits from the optimization to our future your earnings that we experience with the integration.

This will be driven by the ongoing shift in the segment mix of our business to our higher growth higher margin businesses. So that concludes our prepared remarks.

Tiffany, we are now ready to take questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Jason Freuchtel with SunTrust. Your line is open.

Jason Freuchtel

Hi, good morning.

Mary Laschinger

Good morning, Jason.

Jason Freuchtel

In the Print and Publishing segments, both experienced the lowest year-over-year revenue decline during the year. Was there any specific actions Veritiv was taking that slowed the growth or slowed the deceleration or did you see any change in the industry during the fourth quarter relative to the rest of the year?

Mary Laschinger

I would say there wasn't any material change. I think if you look at quarter-over-quarter comparisons throughout the year. In 2016, it was probably a greater benefit from election spend and in the first three quarters of 2016. So, when we were into 2017, the year-over-year declines appeared greater because of that anomaly in 2016. But we did not see a material improvement or change in the industry.

Jason Freuchtel

Okay, thanks. And it did look like you had a nice top-line growth in the Packing segment in the fourth quarter what was the main driver of the growth? And I may have missed this but how much benefit did you experience from the All American Container acquisition?

Mary Laschinger

So, to answer your first question. The benefit, all in we had about almost 17% growth in the quarter for our packaging segment. About 7.5% of that came from All American Containers acquisition. So, we had about 9% core growth in the business, 6% of that was volume 3% was price. The growth in the business was broad-based across a number of sectors and across a number of product categories.

We had our greatest strength in the corrugated category followed by films and other miscellaneous product. So, it was broad-based also from a customer standpoint, also smaller mid-sized customers as we experienced growth in our field sales operations which was quite substantial followed by the corrugated growth and then by our national account.

Jason Freuchtel

Okay. And then in the packaging segment in 2018 I believe you commented you're expecting fewer price increases and less growth in Europe and at a certain customer. Is the fewer price increases purely based on your expectation for raw material pricing during the year and can you expand on what is contributing to your lower growth expectations in Europe and at the certain customer you referenced?

Mary Laschinger

Okay. So first of all, the last item. I didn't reference a specific customer, what I said was is that we're expecting less aggressive growth in large national account. Because as you can imagine that when you're bringing on large accounts they can be lumpy, so we anticipate growth in that part of our business but not to the same degree and pace that we saw in 17. So, it wasn't a specific customer.

My comments on international, I didn't reference Europe. Most of our international businesses comes out of our support for US customers operating in Asia, a lot of those are very specially designed projects that we do and we had some real strength in our international business in Asia this past year and we see that again tapering off slightly just not as robust but we will still have continued growth.

Again, we look at that as those are projects that come and go over the course of time and we're constantly working on new ones but there's some lumpiness in that part of our business. In terms of price, we do -- we experienced several price increases in particular in corrugated throughout the year in 2017 and prices started to tip up as well as in resins at the end of 2017.

Our expectations in corrugated in particular in 2018 is that there won't be, it won't be as aggressive as well as we have a layering in effect of those price increases that went into effect already in 2017. So, it reduces the percent growth.

So, anticipating fewer price increases in corrugated at this point in time we can't predict that precisely and on the resin's front again we started experiencing price increases in the fourth quarter already. We're anticipating that there will be some more of that just not the same rate. As anticipated ongoing capacity improvements in that space.

Jason Freuchtel

Okay, great. Thanks. And I think you also referenced an issue collecting receivables from small print publishing customers last quarter. Have you resolved those issues or is there still some uncertainty in terms of what you're expecting from collecting receivables from those customers in 2018?

Mary Laschinger

I would characterize that that situation has not gotten worse and we're starting to see some modest improvement and believe we'll continue to make progress. And certainly, there is risk in that space, just because of the market dynamics. But I believe that it will moderate more as we go into 2018.

Jason Freuchtel

Okay, great. Thank you for your time.

Operator

Your next question comes from the line of Ryan Merkel with William Blair. Your line is open.

Ryan Merkel

Hi, thanks. Good morning everyone.

Mary Laschinger

Good morning, Ryan.

Ryan Merkel

So, first of all in 2018 is there any risk of cost overruns as you continue to integrate the systems and the DC's or do you think you have that largely behind you now?

Mary Laschinger

First of all, it's not largely behind us. In terms of cost overruns, we have planned for I would say less productivity improvement as a result of the integration. I would say if there is risk, it's going to lie more on our need for third party freight, which is something that we can't control as much.

So, I think it's going to be similar to what we saw in 2017 in general. But again, I want to clarify, we are not through our warehouse consolidations yet. But we think we've got a pretty good handle on it. Obviously, there are some things we can't control around fuel and some third-party freight which we do need every once in a while, but those would be the big drivers of that.

Ryan Merkel

Got it. Okay. And then for Facility solutions in 18, you said GDP growth but then you're also going to prune some high-risk accounts and you mentioned retail. So, what sort of growth rate would you expect then I guess to sort of quantify the retail risk there in the pruning?

Mary Laschinger

We would expect low single-digit growth in that space. As we look at some of the risk profile of some customers in particular around credit.

Ryan Merkel

Okay. So even with some pruning you still expect positive growth?

Mary Laschinger

That is correct.

Ryan Merkel

Okay. And then just lastly, you sort of walk through this, Steve walked through this but can you just explain or put a fine point on why in 2017 EBITDA margin is up in Publishing but is down in Print. The core revenue declines were fairly similar just what sort of the difference?

Mary Laschinger

Yes, the difference is that the publishing business is a brokerage business model and so they have more than 70% of their total cost structure is completely variable and so it flexes with the trends in the business a greater plus. As we've gone through integration of systems and other capabilities in that business, we've been able to get at selling expense as well.

So, it's a combination of a high variable cost structure, very high variable cost structure. Product do not flow through the warehouses as well as great management of selling expense. Whereas when you look at the Print business, I would characterize almost everything in our business is variable, not everything but most things and it takes longer to adjust to lower demand in that space just because of the nature of it flowing through the warehouses.

Ryan Merkel

Makes sense. Thanks for that.

Mary Laschinger

And the pricing pressures were a little bit worse in the print space. More competition than what we experienced in Publishing. Okay, perfect. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Scott Gaffner with Barclays. Your line is open.

Scott Gaffner

Thanks. Good morning.

Mary Laschinger

Good morning, Scott.

Scott Gaffner

Mary when you mentioned fewer or lower price increases in the corrugated segment in corrugated industry in 2018. Are you assuming that the March 1 price increase is effective or because if that's the case I would have thought I would be very similar 2018 versus 2017. What are you seeing in there?

Mary Laschinger

Yes. So, there were two price increases last year and right now there is another one announced for here in the first quarter which will probably go into effect probably in the second quarter. So there, and it's hard to predict what might be on that that recognizes a lot of other capacity coming online. So, we're just not sure at this time. So, it's actually double the amount of price increases in 2017 versus what's currently expected in 2018.

Plus, we've got the year-over-year comparisons when those price increases in 2017 came into play sometime in the second quarter.

Scott Gaffner

Okay. So, you are assuming now that the March 1 price increase is effective and you have accounted that?

Mary Laschinger

We believe that it will yes.

Scott Gaffner

Okay. All right fair enough. Steve when I look at the $30 million of free cash flow, I just want to clarify if that's free cash flow or adjusted free cash flow which metric are we using there?

Stephen Smith

The former; the free cash flow. So, cash flow from operations less CapEx.

Scott Gaffner

Okay. All right and then if you look at Mary the business over time, we've obviously got a little bit inflationary environment going on here. You mentioned some of the resin side. But the business definitely relies heavily on trucking and I don't know how much of your fleet is company owned versus how much is outsourced can you can you walk us through that and that sort of underlying impact on the business and how much of that cost you can pass through to the end customer.

Mary Laschinger

Yes. So, on inflation of raw materials, we generally will be able to pass that through. Sometimes we have lag and there may be dynamics periodically where some markets may be more competitive I'm especially when we are trying to renew large corporate contracts and those kinds of things but generally speaking, we try to stay up with price increases that we're receiving from manufacturers due to inflation, it's not going to be perfect. There's oftentimes lags and so on.

As it relates to inflation, in particular in the trucking industry, the majority of what we do haul is our own internal fleet. We have roughly about 1000 power units and 1500 trailers. And so, where we experience inflation as I mentioned with third-party freight is when we cannot use our fleet.

For example, as we're doing warehouse consolidation or sometimes we do have some customer demands that call on us for third-party freight. So that's the area that we have less influence on to the extent that we have fuel increases that would impact this all.

Scott Gaffner

Okay. And then just lastly on working capital. Steve, I think what's the exact assumption for working capital source versus use in 2018?

Stephen Smith

We're assuming a slightly positive source of cash from changes in working capital Scott in 2018, which would be a reversal of trend. There is no doubt you figured out in 2017.

Scott Gaffner

Okay. Alright, thank you.

Operator

Your next question comes from the line of John Dunigan with Barclays. Your line is open.

John Dunigan

Good morning, Mary. Good morning, Steve.

Stephen Smith

Good morning.

Mary Laschinger

Good morning, John.

John Dunigan

I just wanted to follow-up on Scott's point about the free cash flow. If I can maybe just get a bridge. If you're increasing the EBITDA at the mid 10 million, but I might have missed, sorry. But I thought you said there wasn't much an increase or benefit year-over-year from cash taxes. Working capital is as you just said supposed to be slightly positive maybe $5 million.

And I think CapEx, at the mid is supposed to be up slightly. So how do you get to the $30 million of free cash flow. What am my missing here?

Stephen Smith

So, you are really close let me just add a few more points the 180 to 190 of adjusted EBITDA range, we take the mid-point. You'll see that that would generate roughly breakeven net income plus or minus a small amount. So, let's assume it's zero to start. DNA the last few years have been running right around mid-fifty. So, let's call it $55 million as an add back. Then we have other non-cash items, let's use the 2017 figure as representative of 2018 plus $10 million. And then the midpoint of the CapEx is about $40 million. We've got a 30 to 50 of the two different types.

So, before we get to the working capital you'd have total cash flow of about $25 million. And as we just spoke with Scott, we think there's potential for slight positive in networking capital in 2018, so that would take us to the $30 million or greater figure.

John Dunigan

Okay. And going back to the comment that the synergies from the integration are now largely complete. Are they expecting no material benefits from the operating system conversion either now that that's mostly in place any derive benefits from that or further warehouse consolidation, nothing we necessarily see as a particular improvement in 2018 over 2017?

Mary Laschinger

So, we're still finishing all of that work and it carries us through into the fourth quarter of 2018. We would characterize that the synergy capture is complete in terms of this first round and as we stabilize our network, stabilize our information systems that then takes us into the optimization phase of the company where we can begin to drive process improvement and operational excellence.

So, there will be some benefit from all the work that's been done, but we don't characterize it is synergies. That wasn't part of our original plan when we launched this initial effort.

John Dunigan

Okay. So, I guess just thinking about 2018 you'd have further costs from the system conversion and warehouse consolidation this year and then looking ahead into 2019 as you get more into the optimization program you'll start seeing the benefits pretty much starting in 2019.

Mary Laschinger

That's a fair characterization, yes.

John Dunigan

Okay. I'm jumping around a little bit here. But the facility solution you talked earlier about the growth profile on the revenue side. But with the pruning of some of the I guess lower margin customers or high-risk customers, what's the expected growth in the margin profile for 2018 and beyond?

You have a particular target or goal that you think that segment could get you?

Mary Laschinger

For 2018, I would characterize it that it's going to be relatively flat. Primarily driven by the fact that we're still finishing integration. We would expect over the course of time in all of our segments as we get through this that we would see a trend toward better margins across the entire system as a result of completing the integration and moving the company into optimization but stable for the year.

John Dunigan

Okay. And then just one last one and I'll turn it over. You have previously called out breaking out into new segment, the services offering that you already have is that's still expected to happen this year and I guess where have you seen the progress in 2017?

Do you see it adding a considerable amount of growth looking ahead?

Mary Laschinger

Yes. So, we still feel very strongly about the value creation that will come with services. We have begun the work of separating the existing services in the company into its own unit. We won't start reporting on that until 2019 and do see some value there.

We have not given any estimates on growth. I will say that currently those segments of our business are growing, but they're embedded currently in the core business. And it's not, and because of the size of what it is today, it's not having material impact on the core.

And so, we're learning more and more every day about putting the strategies in place and the capabilities in place to accelerate that growth. But we still feel confident that there is significant opportunity there, but we haven't characterized that specifically.

John Dunigan

Okay. Thank you very much.

Operator

Your next question comes from the line of Chris Manuel with Wells Fargo. Your line is open.

Chris Manuel

Good morning, guys. And congratulations on a strong finish to the year. I want to dig in if I could at just a couple components there within the free cash flow. Steve when you said working capital modest help, I mean should I think it's something that's in the 0 to $10 million range is that kind of what you're implying?

Stephen Smith

Yes, correct.

Chris Manuel

Okay. That's helpful. And then, I wanted to ask about kind of some of the debt costs or assumptions or thoughts there. Do you have, I think last year your interest costs were about $31 million. I know that we've had interest rates move up a chunk, you're mostly variable on the ABL.

Is there and pardon me for not going all the way through, I'm sure you filed some of the debt agreement in components through time. But did you have any LIBOR floors [ph] or things or should we assume, how should we think about interest cost for 2018?

Stephen Smith

Interest costs will be slightly up from 2017 due to the acquisition of AAC in August. So, our absolute level of borrowings would be up all things being equal by the $145 million net purchase price. With rates rising in 2018 at least as expected by most of the market, there will be some use of cash for that incremental interest expense but would be measured in order magnitude of $5 million not $15 million.

Chris Manuel

Okay. So, all right that's helpful. So, you are, I don't know if you had any LIBOR floors or things in there that you were insulated from the first 50 basis points of a move or something like that?

Stephen Smith

We do not. LIBOR strips can be stretched out for temporary fixing of rates, but we do not have any floors or ceilings that would protect us from great movement. We have a cap that is currently at 3% out of the money, but we're at distance from hitting that at this time.

Chris Manuel

Okay. That's helpful, the last question. I did notice in the cash flow segment, you had an adjustment here for acquisition and integration expenses it was like $41 million bucks for the year. You did just mention you paid $145 million, that seems like a really big number almost a third of purchase price for integration cost.

Could you maybe give us a little color there as to what was happening or what's behind that?

Stephen Smith

So, are you referring to $40.5 million a year?

Chris Manuel

Yes, $40.6 right here. Cash payments for acquisition and integration.

Stephen Smith

Okay. So, the cash payments for integration acquisitions is a combination of factors. If I'm looking at the same figure you're looking at. I mean just in relation to it being, $145 million is a purchase price. It seemed like a really really big number, and maybe it's related to something else.

Mary Laschinger

Yes. Chris, let me clarify. The $41 million is not integration cost for AAC. We've not really integrated AAC. If that's what your question is.

Chris Manuel

Okay. So, this is something that's totally different. That's what I was trying to understand, it was not related to the acquisition.

Mary Laschinger

No, no. There are more items in there. So, we have not spent any real money on integrating AAC at this point. So that is not the cost of integration.

Chris Manuel

Okay, that's helpful. And last question is thoughts for 18 as you think about M&A markets things of that nature. I mean do you have any, I guess would be maybe challenging to want to add a bunch and given where you're sitting today with leverage but do you have opportunities for any swap?

Say, add some small pieces anything you would think about the leading within the portfolio to kind of fund that. Thoughts there?

Mary Laschinger

Well, Chris as you can imagine as the owners of the business in terms of what we're trying to do with that we're constantly evaluating the strategy for the company to continue to accelerate its growth. To your point, our debt to EBITDA came down considerably from when we closed the transaction in the third quarter to today. But right now, I would characterize that we're going to try and focus on paying down that debt. Opportunities do remain, we'll have to see how they play out over time. But there's nothing specific to comment at this time.

Chris Manuel

Okay. That's helpful. Good luck guys.

Mary Laschinger

Thank you.

Stephen Smith

Thank you, Chris.

Operator

Your next question comes from the line of Jason Freuchtel with SunTrust. Your line is open.

Jason Freuchtel

Hi, thank you for taking a couple of follow-ups. Did you reference in your commentary that your bad-debt reserves increased for a particular segment or was that across the board in 4Q 17 and with that has your methodology for assessing bad debt changed over the course of 2017 and if so can you explain how?

Stephen Smith

Sure. So, we did not reference specific figures on bad debt by segment, but we're glad to give a bit more detail today and then we can talk the methodology change that occurred during 2017 but had a small impact on the bad debt expense.

So first of all, during 2017, the incremental bad debt expense year-over-year was about $14 million from around $2 million in 2016 to around $16 million in 2017 all of that variance of $14 million. The vast majority, more than half was related to our Print segment; and then it was evenly split, the incremental effort or cost between the other segment. As always, the methodology, we did take a look at different stratus of exposure on bad debt meaning different time experiences 0 to 30, 60 to 90 above 180 and we did put in place some different rate reserves given length of exposure in our Print segment.

We did put aside a little bit different dollar figure as a result of that methodology change but was small relative to the overall $14 million increase year-over-year.

Mary Laschinger

Jason, I'll also add to clarify Steve commented that year-over-year from 16 to 17 it was an incremental 14. But the 16 was a relatively low number. And so, on average you wouldn't see that kind of a delta. 16 was just a historically low number for bad debt.

Jason Freuchtel

Okay. So, $16 million is probably close to what your average has been over time. Is that fair?

Mary Laschinger

No. I would say about half that.

Jason Freuchtel

Okay, great. And then I think also you indicated the cash impact from the Tax Act will be immaterial in 2018. Given expectation of what it will or if it will materially contribute to your cash flow in 2019?

Stephen Smith

We don't yet have that perspective, we're working through it Jason in maybe the future quarter and call we could share that with you.

Jason Freuchtel

Okay. And then lastly, we've heard from some other distribution businesses that there's been a shortage of drivers in the back half of 2017. Have you experienced any issues attracting the appropriate amount of drivers or an increasing costs associated with the drivers over the last six months?

Mary Laschinger

So, we for the last year or more we've been challenged like other companies with a shortage of drivers and so that continues to be a challenge for all companies that are shipping freight frankly. And so, we've been dealing with that over the course of the last couple of years actually. We do have the added benefit with our drivers that they get to go home every night and so our dynamics can be a little bit different, but that doesn't suggest that we don't have challenges but it's been out there for quite some time Jason.

Jason Freuchtel

Understood. Okay, great. Thank you.

Stephen Smith

Thank you.

Mary Laschinger

Go ahead.

Operator

There are no further questions in queue at this time.

Mary Laschinger

Well, thank you everyone for your questions. While I think about 2017, it was a challenging year for Veritiv but I believe and I'm absolutely committed that we've got a bright future for Veritiv. Our growth segments in Packaging and Facility solutions continue to perform well and the growth of these segments is now offsetting the secular declines in Print and Publishing.

Over time the higher growth higher margin packaging and Facility solution businesses will make up a larger percentage of the overall business and over the past few quarters, we've already seen this long-term strategy play out. While the investments in our growth segments impacted our 2017 earnings, I believe they are vital to our long-term success of the company.

In terms of our integration, we made significant progress in 2017 and we are pleased that we're getting closer to its completion. The entire Veritiv team should be proud of all we've accomplished in nearly four years since a very big merger. A great deal of work remains in 2018, but as we move through this year we'll be well positioned to transition to the optimization element of our strategy.

So, thank you again for joining us today and we look forward to talking to you in May when we share our first quarter 2018 results. Have a great day.

Operator

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