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Edited Transcript of LKSD.N earnings conference call or presentation 23-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 LSC Communications Inc Earnings Call

Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of LSC Communications Inc earnings conference call or presentation Thursday, February 23, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Janet Halpin

LSC Communications Inc. - IR

* Tom Quinlan

LSC Communications Inc. - Chairman & CEO

* Drew Coxhead

LSC Communications Inc. - CFO

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Conference Call Participants

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* Charlie Strauzer

CJS Securities - Analyst

* Stephen Weiss

Bank of America - Analyst

* Jamie Clement

Macquarie Group - Analyst

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Presentation

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Operator [1]

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Welcome to the LSC Communications fourth-quarter 2016 earnings conference call. My name is Cynthia and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Janet Halpin.

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Janet Halpin, LSC Communications Inc. - IR [2]

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

During this call, we will refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statement included in our earnings release and further detailed in our information statement dated September 23, 2016, filed as an exhibit to our current report on form 8-K, filed on September 23, 2016, 10-Q for the period ended September 30, 2016, filed with the SEC and other filings with the SEC.

Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP results provide you with useful supplementary information concerning the Company's ongoing operations and is an appropriate way for you to evaluate the Company's performance.

They are however provided for informational purposes only. Please refer to the press release and related schedules for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our website in the investor section a description as well as reconciliations of non-GAAP measures to which we will refer on this call. We are joined this morning by Tom Quinlan, Drew Coxhead and Kent Hansen. I will now call the turn the call over to Tom.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [3]

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Thank you Janet. Good morning everyone and thank you for attending this call.

While a difficult comparison to last year's fourth quarter, we were pleased that the results were in line with our previous guidance despite challenging market conditions. We've made great strides in our key initiatives since last we spoke as we have continued to address the specific industry challenges that our clients face. Our heightened attention to providing supply chain solutions is helping increase our clients' operating efficiencies and allowing them to manage and deliver their physical and digital content more effectively.

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

Another area where we are helping publishers address challenges is in streamlining their asset management workflow. Our ability to house and manage all of our publishing clients' assets for both print and digital distribution creates a single workflow designed to increase speed to market and improve efficiencies across the distribution process for publishers. As part of our ongoing commitment to providing our clients with state-of-the-art production capabilities, we are investing in HP digital production technology.

This investment expands and upgrades our industry-leading digital inkjet book production platform and will further enable our custom supply chain solution book publishers that increase their speed to market, produce high-quality products and decreased their total cost of ownership. Our continued investment in these types of technologies highlights the position LSC holds as an integral partner in supporting the present and future for our clients. And the momentum is continuing to build towards additional supply-chain deals.

With the ongoing transformation that's taking place in the magazine and retail industries, LSC has been taking the necessary steps to diversify our offerings. Similar to our focus on technological advancements in our book publishing platform, we've added new technologies and solutions to a portfolio that enable our magazine, catalog and retail clients to deliver more value to their audiences.

In addition to our web and mobile-based publications and catalogues, we have developed a new [market] for our clients. The end-to-end fulfillment of subscription boxes. Through our deep understanding of our clients' needs, combined with our manufacturing warehouse and fulfillment knowledge, we are able to offer a scalable end-to-end solution in this fragmented, fresh and fast-growing market.

This opens new revenue streams for both LSC and our clients. To support this offering, we have aligned ourselves with strategic allies who have extensive experience and the industry standards to manage consumer products.

Along with LSC capitalizing on this fast-growing market, we are continuing to expand our best-in-class co-distribution services that leverage shared buy-ins to increase postal discounts and manage costs for our clients. Additionally, we are leveraging our Continuum acquisition to increase the purchasing power of our clients' procurement and marketing teams.

Our office products segment continues to remain focused on driving growth through multiple initiatives. Through product design and materials optimization, we have enhanced our position as low-cost domestic provider of private label products for customers. We are also capturing market share with our premium-branded products across all channels with particularly strong growth from online retailers.

And we are continuing to explore multiple opportunities within the industry for synergistic consolidation. In addition to the accomplishments I have just described, we remain committed to further enhancing our solution portfolio with strategic acquisition opportunities that we expect to benefit all of our stakeholders in 2017 and future years.

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

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Drew Coxhead, LSC Communications Inc. - CFO [4]

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

Net sales for the fourth quarter were $919 million, a decline of 8.5% from the fourth quarter of 2015. Adjusting for the December 2, 2016, acquisition Continuum and the unfavorable impacts of changes in foreign-exchange rates and pass-through paper sales, our organic sales decline was 6.3%.

This organic decline in net sales was driven by volume declines and price pressure across the print segment particularly in catalogs, magazines and retail inserts and in Europe. Fourth-quarter GAAP net income was $9 million compared to $38 million in the fourth quarter of 2015. The fourth quarter of 2016 includes interest expense of $18 million related to the debt issued in connection with the October 1 separation from RR Donnelley, while no interest expense was allocated to LSC in the fourth quarter of 2015.

Fourth quarter non-GAAP adjusted EBITDA was $80 million compared to $111 million in the fourth quarter of 2015. Non-GAAP adjusted EBITDA margin in the quarter of 8.7% was 240 basis points lower than the fourth quarter of last year. I want to highlight four significant factors unique to the fourth quarter that drove a large portion of the EBITDA decline versus last year's fourth quarter.

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

Second, normal seasonal ordering patterns results in the mix of education books in the fourth quarter being heavily weighted to college books needed for the second semester. K-12 book shipments are relatively light in Q4.

As a result, both sales and non-GAAP EBITDA margin in the fourth quarter were negatively impacted by declines in college book demand driven by digital substitution, textbook rental programs and piracy. While we anticipate that these challenges will continue to affect college book demand, there's an outsized impact on us in the fourth quarter.

Third, we had a LIFO inventory reserve release of $7 million that reduced cost of sales and increased non-GAAP EBITDA in the fourth quarter of 2015. In 2016, we had only a minimal change in our LIFO inventory reserve. So this is a $7 million unfavorable comparison year over year.

Finally, our expense for healthcare benefits was $7 million higher in the fourth quarter of 2016 compared to the fourth quarter of 2015. The increase in healthcare costs was driven in part by a few unusually large claims that impacted the quarter. Also, our healthcare expense in 2015 was an allocation of the total healthcare expense for RRD.

So the comparison to our now standalone healthcare benefit expense isn't perfect. Healthcare expense is also heavily weighted to the fourth quarter as employees used up their deductibles and is therefore more volatile in Q4 compared to the rest of the year. The impacts of these four items add up to nearly the entire change in non-GAAP EBITDA that we saw in the quarter.

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

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

In CMR, the overall organic decline was 7.7% driven by volume declines and price erosion. However we continue to see growth both in Mexico and in our mail services offerings. In book, we had an organic decrease of 1.2% in the quarter as continued growth in our supply change management services mostly offset the tough quarter-over-quarter comparison in adult coloring books and the decreases in higher education book volume that I mentioned earlier.

Our Europe reporting unit experienced 20.5% of organic decline largely related to the closure of our UK facility. In addition, some customer contracts previously managed by LSC's European operations were assigned to RRD entities as of the spinoff date, resulting in a $5 million unfavorable impact on net sales in the quarter with minimal impact on earnings.

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

Net sales in the office products segment were $130 million, a decrease of 0.8% from the fourth quarter of last year. After adjusting for the negative impact of foreign exchange rates, organic sales were flat year over year. Sale to the major office products retailers were down year over year as these customs continue to focus on store consolidation and inventory reductions.

These decreases were more significant than we had expected in the quarter, but they were entirely offset by growth with independent distributors and online retailers. We expect these sales trends to continue into 2017 and believe we are well positioned to succeed as sales continue to move online. Office products segment income from operations was $16 million compared to $10 million in the fourth quarter of 2015.

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

Free cash flow for the fourth quarter was $82 million. The fourth quarter is historically the strongest cash flow quarter driven by the seasonality of our working capital requirements. We also had minimal cash tax payments in the quarter, since it was our first as a standalone company.

Free cash flow in the quarter did reflect interest payments of $7 million and we no longer benefit from the allocated pension income that was presented as a cash inflow pre-spin. As of December 31, 2016, our gross leverage was 2.1 times. Within our targeted gross leverage range of 1.7 times to 2.25 times.

Given our expectations for continued strong free cash flow, our mix of prepayable term loans and notes maturing in October 2023, provides us flexibility to continue operating within our targeted leverage range. We ended the quarter with $95 million of cash on hand, $483 million of net available liquidity and nothing drawn on our $400 million revolving credit facility.

On February 2, 2017, we used cash on hand to pay in advance the full $50 million of term loan B required amortization payments for 2017. Our underfunded pension obligations decreased $78 million during the fourth quarter to end the year with a net obligation of $280 million.

This decrease was largely due to an increase in the discount rate used to value the obligations. Substantially all of the pension obligation relates to our US plans which are frozen with no further benefits being earned.

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

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

In office products, we are expecting a decline in net sales in 2017 as the major retailers continue to consolidate stores and trim inventories. We expect our non-GAAP adjusted EBITDA margin to be between 9.75% and 10.25% for the year. Price declines in the print segment are expected to continue to be within a typical 1% to 2% range in 2017 and we are also seeing increased pressure on wages and benefits from tightening labor markets.

In addition, employee incentive compensation expense was well below targeted levels in 2016 despite the overall solid performance for the year. We continue to focus on productivity and cost reduction as well as growth in new service offerings and expect these efforts to largely offset the negative pressure on margins. Depreciation and amortization is expected to be range of $155 million to $165 million.

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

And we expect free cash flow of between $125 million and $155 million. This range reflects the significant increase in cash interest payments resulting from the debt issued in connection with the spinoff from RR Donnelley and elimination of the $28 million of operating cash flow [tied] from pension income allocations in 2016. I would also note that we expect the first quarter of 2017 to be the toughest comparison to 2016.

In 2016's first quarter, non-GAAP adjusted EBITDA increased $22 million compared to Q1 2015, driven in part by strong adult coloring book sales and an earlier than normal ramp-up in demand for K-12 educational books. Based on progress so far in Q1, we expect sales from both of these products to be at more levels in Q1 2017. Standalone company costs comparisons are also expected to be slightly negative in Q1 before turning slightly positive in Q2 and Q3.

And with that, I'll return the call to Tom for some closing comments.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [5]

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

Cynthia, we will now open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Charlie Strauzer with CJS Securities.

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Charlie Strauzer, CJS Securities - Analyst [2]

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

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [3]

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We can Charlie. Thank you for joining.

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Charlie Strauzer, CJS Securities - Analyst [4]

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No worries, no worries. Thanks for having me. Just picking up on the office products side, I know that you're factoring into guidance the continued work down of inventory at Staples and Depot. Just the tone of how that's going and are you starting to see some light at the end of the tunnel there?

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [5]

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I would tell you Charlie that Jim Ellward and Steve Thomas the two gentlemen that run that business for us are doing a heck of a job; and I think as we look at it, the inroads that we made in e-commerce are really helping out from a branded standpoint. So we think there's more consolidation to be done from a brick-and-mortar standpoint, but I think when you look at the mass distributors, the food stores, where we've gotten, where they've been able to get us involved into bigger areas has helped out a lot. The exciting thing when you think about it, that business that we have, as you can see in the great job that the team did in laying out for everybody for the presentation. There's a comp out there, another publicly traded company that trades north of eight times based on, basically it's the same products and services.

So we're excited about what we believe we've embarked on with the office products business. And again, when you think about it, it's, right now it's 14% of our top line at the end of 2016. But we think we're positioned really well for not only, what I'll call, a private-label standpoint, but also from a branding standpoint as well. I know one of the things that we've see people come across is just, if what happens if the current administration takes any actions in Mexico because we do have operations there.

We feel confident that whatever takes place down there we are in a good position to continue to serve customers. NAFTA has been around for probably 60 years almost, so we don't think that's going to go away overnight. Anything that's going to take place is going to take a while. Quite frankly, where we're really excited about, if this does take place, the overseas imports, they have as much or more impact on the office products business coming out of Asia than anything out of Mexico. A level playing field for all of us in that respect, would be really, really nice for the industry.

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Charlie Strauzer, CJS Securities - Analyst [6]

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What are you seeing in terms of maybe a pickup in potential M&A activity on some of those smaller players? You've mentioned in the past that you have an appetite for that in both the print and the office products segment.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [7]

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Sure. I think look, in our past lives, we looked at things that would move the needle from a large standpoint. As we sit here today with the size that we have, there is many opportunities for us in all the products and service lines that we have as you go down the marketplace there. I think one of the areas where we're really, really excited about is what we've been able to do when I talked about subscription boxes. The magazine media model continues to evolve and we're developing new technologies and solutions that is going to enable our clients to deliver more value to their clients, advertisers and audiences.

Look, we're going through, I talked about the web mobile-based publications. We're doing event-marketing materials now. Without a doubt, we're the best in class from a codistribution service standpoint. These subscription boxes what they are, it's a package or a retail product sent directly to a customer on a recurring basis. Subscription boxes, they're a marketing strategy and a method of product distribution that we do better, than what we believe, anybody else.

The benefits for our magazine clients is it extends their brands. Manufacturers and retailers, they'll partner and pay to reach the audiences that the publishers have. An engaged consumer, as we all know, leads to higher retention rates. The margins in the subscription boxes versus the other models are better. If you think about the areas that they're focused on right now it's beauty, travel, technology and cooking; and those things, from our standpoint, involve customers that we have great relationships from a retail standpoint, from a magazine standpoint and it involves e-commerce, design, content creation, packaging, logistics, I mean the list goes on and on. So you think about where we could look at things there, there's opportunities for us there.

As you think about again, staying on this subject, if you think about what we do with catalogs, again, our whole key there is managing the distribution. We produce great quality. A lot of us in the industry have great equipment, but the key here is to make sure, for catalog to be successful, is you've got to go ahead and reduce their distribution costs. And I think, as we think about things, we think we optimize the efficiency better than anybody else, as I said. We are able to combine versions and titles from multiple customers into a single mail shoot. And if you just think about the postal rates, the three digit rate's the most expensive in breaking it down into my simple Quinlan-ese terms, we can actually cut that in half by what we can go from the carrier route-rate saturation standpoint.

And again, we're creating a catalog that resonates with the customer, with the customer's end customer; the catalog, they're looking to grab retention and market share for the business. It drives action; it drives results. There's been people that have gotten away from the catalog. One in particular going back a number of years, Ron Johnson at JCPenney; and you saw the impact, even though brick-and-mortar, as most of us think, are less than what it used to be, that catalog still causes an action. You may not go into the brick-and-mortar store, but you're going to take some action on some device to go ahead. So we think what we're doing by extending the catalog from the mailbox to the inbox is helping there. All of this is going to be done so that we don't scare everybody; it's going to be done within what Drew and I have been publicly talking about, the range for leverage will be between 1.75 to 2.25 as we go ahead and move to get this all accomplished.

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Charlie Strauzer, CJS Securities - Analyst [8]

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That's very helpful. Thanks very much Tom.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [9]

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Thank you

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Operator [10]

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Our next question comes from Steven Weiss with Bank of America.

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Stephen Weiss, Bank of America - Analyst [11]

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Hi, good morning.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [12]

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Good morning, Stephen.

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Stephen Weiss, Bank of America - Analyst [13]

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So I was hoping or I wanted to see if you could flush out some of your Q1 commentary a bit more in terms of what it might mean for the trajectory of revenues and EBITDA and then if you could remind us if there is any residual comparison issues that occur after the first quarter?

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Drew Coxhead, LSC Communications Inc. - CFO [14]

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Yes, sure. I think, as I commented, the first-quarter comparisons are pretty tough. A lot of it is driven by the really strong first quarter that we had in a couple of areas last year. But I think as you look at the last couple quarters of comparisons that we had in 2016, a lot of those same kind of factors are continuing into Q1. We think as you can see from our guidance, we think a lot of that moderates as you get into the latter part of the year. But Q1 does have those tough comparisons, particularly in a couple of the big areas in the book business that I mentioned on the publishing side with the coloring books, and what we are seeing in terms of timing. Which leaves the college in the first quarter, a little bit exposed to the college market.

In terms of standalone company costs, the numbers are getting pretty small at this point. But there's a little bit of negative just of the synergy costs that we had in Q4. A little bit negative and, when I say a little bit, you're talking about a $1 million or $2 million; you actually, because of some of the changes in allocations after Q1, we'll see things kind of in the same ballpark, but turn slightly positive. By the time we get to Q4 of 2017, things are pretty much all comparable.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [15]

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Stephen, this phenomenon with the coloring books. Look we've got other opportunities with Dover publishing which we came along with the Courier property that we acquired and they are working hard to replicate that. The thing that we've gone back to them and said, hey, it's great to have a grand slam, but you need to continue to do that. Believe or not, painting on rocks, stone painting as it's called. Am I hoping to sit her next year and be talking to you about how great that is? Yes, but it's something that's new for this management team to have such an outlier and great performance. And then, what's the next trick that we're going to come up with? They're working hard to go ahead and get that out there so that we have something every year that's out there that is performing as well as that did.

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Stephen Weiss, Bank of America - Analyst [16]

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

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [17]

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Yes, sure. Any such great clients Pearson and anybody else that we have as close as we are, we are involved with them. The good thing for us is, and I think it's for the rest of the industry that you'll see, the supply chain is completely changing and as you think about the publication marketplace. Again, the evolution went from just printing to just being printing now and distribution. Now you've heard talk a lot about buying paper. That's just one part of it. We've got many different aspects of the supply chain that we're taking over. We want our customers just to worry about content, You worry about creating great content; we will take care of everything else for you.

And as that starts to take hold, people look to become more efficient as people look to have more costs taken out of their operations. That's where we go ahead and have the benefits take place. And again, from a book standpoint, we can give you, and again this carries over to other products, the savings on paper and book procurement costs we provide. The cash-flow improvements that you're going to get. Quicker fulfillment rates to customers because of the warehousing that we have.

We've got increased titles that are going to be available for sales. There will be fewer out of stock products. Less inventory obsolescence and obviously, as you think about rebadging of employees or how you take out fixed costs, which again at this team here, we've taken the model that we've done here, of taking fixed costs and making them variable. We're able to use that with our customers. So unfortunately, what I would say is we would like to see all of our customers doing great, but when they don't, we're there to help out and hopefully give our capabilities and services that are going to enable them to buy them some time until they get back and regroup.

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Stephen Weiss, Bank of America - Analyst [18]

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

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Drew Coxhead, LSC Communications Inc. - CFO [19]

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

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [20]

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From a book standpoint, again we highlight that; we've highlighted it quite a bit. Even sales for books were up over 3% in 2016 over 2015. You saw what our growth was; that's the third straight year that books are doing well. Amazon is opening up a bookstore in Manhattan. A brick and mortar, so the book is probably the most consistent, stable product that we have. And we're about five times larger in this area than our next-largest competitor. So again, we feel pretty good as far as what that product can do and there hasn't been any real, what the industry calls, runner or any breakout science fiction content that's been out there.

All signs are good there. The piracy that we continue to talk about, we are hoping to create something that could be the industry standard for all of our customers and that's going to help their P&Ls out. A lot of opportunities there. They, Rick Lane, and team have a big flashlight on them and we know that they're going to respond favorably to what we're looking to get done.

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Stephen Weiss, Bank of America - Analyst [21]

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On the office products, I know you mentioned the ongoing challenges with the consolidation trend that's occurring in the industry, but I was taken a bit by your margin improvement this quarter despite some of the headwinds in the segment. Just wondering how sustainable we should think of those trends as we head into this year.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [22]

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One of the, what I hope is many positives coming from the spin is, is that we are focused on this business unlike we were when we were nearly an $11 billion entity. Again, for -- as I thought I mentioned, Jim Ellward runs the business for us and Steve Thomas, his financial guy, the get the fact that they need to go ahead and match costs to revenues. They've been around long enough; they understand it. And did a heck of a job at getting ahead of it as we're going through things.

And, like any other business, we think we can continue to keep that as we go forward. We've got to find new avenues for us in the e-commerce distribution. We'll look to have acquisitions that make sense. We've had pretty good success where we've been able to acquire things at a higher multiple and take out a number of turns out of them. So again, as you think about all the things we offer to our clients, it comes down to how can we save you money and make you more efficient. We think our office products business fits that DNA really well.

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Drew Coxhead, LSC Communications Inc. - CFO [23]

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

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [24]

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

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Stephen Weiss, Bank of America - Analyst [25]

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All right. Great. Why don't I leave it there.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [26]

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Thank you.

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Operator [27]

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And our next question comes from Jamie Clement, Macquarie Group.

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Jamie Clement, Macquarie Group - Analyst [28]

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Hi guys. Thanks a lot for taking my questions ahead of time.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [29]

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Hey Jamie, how are you?

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Jamie Clement, Macquarie Group - Analyst [30]

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Find thanks. Tom, what is your rough mix breakdown within educational books texts between el high and higher Ed? K through, excuse me, K through 12 and higher ed, my bad.

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Drew Coxhead, LSC Communications Inc. - CFO [31]

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James, this is Drew. So within the educational books, we're much bigger in K to 12 if you look across the, on an annualized basis compared to a higher Ed space. But the K through 12 business is a lot more seasonal. So Q4 that's not necessarily the case, it's a little more shifted towards college as I mentioned in my comments.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [32]

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And as you think about the products within religious, we are one of the main religious players in the book market and we're starting to do more and more there from a warehousing fulfillment standpoint, so again, good opportunities there. We've got to continue to develop custom supply-chain solutions for the book publisher. So again, they can increase their market, speed to market, will decrease their overall costs. But that more meaningful relationship that they could have with their customer is where we've got to help the industry get towards the end of the day.

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Jamie Clement, Macquarie Group - Analyst [33]

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

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [34]

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It's very full. It's probably the way to put it. I challenged the team to come back to me and tell me that we've run out of warehouse space which would be a real, real good problem for us. So we're, again we're excited about what those things are out there. It is a service that's needed when you look at how everyone, how content is being handled today. When you, again, go back to the supply chain solutions, we coined the phrase, supply chain as a service.

We really think that we're onto something in a major way with books. And going to continue to get into catalogs, magazines and retail inserts as we go through.

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Jamie Clement, Macquarie Group - Analyst [35]

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

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Drew Coxhead, LSC Communications Inc. - CFO [36]

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So we're not anticipating anything too different at this point, Jamie, in terms of

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Jamie Clement, Macquarie Group - Analyst [37]

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Okay.

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Drew Coxhead, LSC Communications Inc. - CFO [38]

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If you're looking at our 2017 guidance and the bridge from EBITDA to free cash flow, we will have our normal seasonality that we would expect to see, so you'll see probably stronger performance in Q4 than the rest of the year. But not anticipating anything particularly unusual driven by the supply chain management.

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Jamie Clement, Macquarie Group - Analyst [39]

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

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Drew Coxhead, LSC Communications Inc. - CFO [40]

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In line with what we've seen the last few years. If you look at, over the last few years you've seen $20 million to $30 million. We have an ongoing focus on driving costs out to offset all the pressures that we've got on margins and you will continue to see something in line with history is what we would expect. Okay, thank you all very much for your time.

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Tom Quinlan, LSC Communications Inc. - Chairman & CEO [41]

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Thank you. Cynthia we'll wrap it up. We appreciate hopefully, as you heard and can see, our approach is consistent and our ability to deliver solutions and cost savings for our clients is going to continue. We're excited about the opportunities that each of us see for LSC Communications in 2017. Look, I'm confident that we are going to be able to deliver a value for all of our stakeholders in 2017. So with that, thanks for spending time with us today and hope everybody has a great day. Thank you.

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Operator [42]

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