U.S. Markets close in 2 hrs 55 mins

Edited Transcript of SCOO earnings conference call or presentation 13-Aug-19 1:00pm GMT

Q2 2019 School Specialty Inc Earnings Call

Humble Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of School Specialty Inc earnings conference call or presentation Tuesday, August 13, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kevin L. Baehler

School Specialty, Inc. - Executive VP & CFO

* Michael C. Buenzow

School Specialty, Inc. - Interim CEO & Director

* Ryan M. Bohr

School Specialty, Inc. - Executive VP & COO

================================================================================

Conference Call Participants

================================================================================

* Charles W. Neuhauser

Mainwall Investment Management, LLC - Chief Compliance Officer

* Craig N. Carlozzi

Longfellow Investment Management Co. LLC - Portfolio Manager

* Kevin Tracey

Oberon Asset Management LLC - Analyst

* Patrick Retzer;Retzer Capital Management, LLC

* Jake Candler

FTI Consulting, Inc. - Consultant

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the School Specialty's fiscal second quarter conference call. (Operator Instructions).

And now I'd like to turn the call over to Jake Candler with FTI Consulting. Please go ahead, sir.

--------------------------------------------------------------------------------

Jake Candler, FTI Consulting, Inc. - Consultant [2]

--------------------------------------------------------------------------------

Thank you. Good morning, everyone, and welcome to School Specialty's Fiscal 2019 Second Quarter Conference Call. On our website, under the Investor Relations section, you'll see our press release and the updated investor presentation.

Joining us today are Michael Buenzow, School Specialty's Interim President and Chief Executive Officer; Ryan Bohr, Executive Vice President and Chief Operating Officer; and Kevin Baehler, Executive Vice President and Chief Financial Officer. Following their prepared remarks, they will be available for Q&A.

Additionally, our call today is being webcasted on the website in the Investor Relations section, and we have a replay available for those who are unable to join.

Before I turn the call over to Michael, I'd like to remind everyone that except for historical information contained herein, statements made on today's call and webcast about School Specialty's future financial condition, results of operations, expectations, plans or prospects constitute forward-looking statements. Forward-looking statements also include those preceded or followed by the words anticipate, believes, could, estimates, expects, intends, made, plans, projects, should, target and/or similar expressions. These forward-looking statements are based on School Specialty's current estimates and assumptions and as such, involve uncertainty and risk. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those contemplated by the forward-looking statements because of a number of factors, including those described in the company's Form 10-K. Any forward-looking statements on today's call and webcast speak only as of the date on which it's made. Except to the extent required under federal securities law, School Specialty does not intend to update or review the forward-looking statements.

With these formalities out of the way, I'd like to turn the call over to Mr. Michael Buenzow. Please go ahead, Mike.

--------------------------------------------------------------------------------

Michael C. Buenzow, School Specialty, Inc. - Interim CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Jake. While Ryan and Kevin will cover these points in more detail shortly, I wanted to spend a few moments on key takeaways for the second quarter, which were highlighted in the earnings press release that was posted to our website last night. The first point worth mentioning is that our performance in the second quarter and year-to-date reflects the important operational improvements we've been highly focused on, and our efforts have shown exceptional outcomes. Not only are our fulfillment centers running at the best service levels in many years, but improved price discipline, combined with aggressive SG&A management, are also producing positive results. We remain confident in these key elements of our business strategy, which will have a more pronounced impact in the second half of 2019 and beyond.

Secondly, revenue was lower than expected in the second quarter. Within our Supplies category, we experienced weaker sales from smaller U.S. district and non-U.S. district customers. We are targeting these smaller customers more aggressively with dedicated marketing and inside sales campaigns to improve performance in the back half of 2019.

While our work to improve our coverage of small to medium-sized districts is still ongoing, we remain confident that our inside sales teams, equipped with a more focused direct marketing strategy, will start to gain traction as we move through our important peak sales quarter. Weakness in small district and non-U.S. district is generally confined to the Supplies category, while Furniture sales in this segment are showing growth consistent with the larger districts.

As I mentioned, our Team Sell strategy is taking hold and driving solid results with the larger districts. This is illustrated by the fact that larger U.S. districts, which represent just under 50% of overall Supplies orders year-to-date, are up 2% year-over-year.

With that said, last quarter, I stated we are optimistic that we are making progress on aligning the company to our strategic priorities, and that statement still holds true. I am very pleased with the significant improvement we are beginning to see in a number of key areas, such as our larger school district penetration, the collaboration of our sales teams, the impact of pricing actions, our improved and disciplined approach to formal bids and quotes, operational and fulfillment center performance, which has been exceptional year-to-date, and other cost-control actions. This progress will improve long-term revenue growth, margin expansion, profitability and cash flow generation.

We have lowered our full year 2019 revenue guidance to a range of $640 million to $650 million, representing a 3% to 5% decline year-over-year. Additionally, we now expect our 2019 adjusted EBITDA to come in towards the lower end of our previously disclosed guidance range of $42 million to $46 million, representing a 20% year-over-year increase at the low end of that range.

Despite the reduction to our 2019 revenue outlook, we believe the low end of our previously disclosed adjusted EBITDA guidance range is still achievable due to the expected gross margin expansion, cost-reduction initiatives and strong -- and a stronger performance in our Science Curriculum segment in the second half of the year. Year-over-year, we are currently expecting second half 2019 adjusted EBITDA to rise by approximately $10 million, an increase of approximately 28% over 2018.

Now I'd like to comment on our key operational priorities and business objectives in 2019. First, one of our main goals is to improve penetration and drive organic growth with our existing customers in both large and smaller districts. We continue to drive our Team Sell model to increase the effectiveness of our go-to-market strategies and streamline the flow of information to further advance our product offerings. We remain focused on increasing our customer touch points, building relationships and understanding the priorities of key decision-makers, which we believe will lead to long-term sustainable organic revenue growth.

We continue to position ourselves to capitalize on expected upcoming curriculum changes related to Next Generation Science Standards with increased funding directed towards Early Childhood education, STEM and STEAM initiatives as well as funding of school modernization projects. At the same time, we are focusing resources on increasing market share in our Science Curriculum segment over time.

I am also extremely pleased to announce that School Specialty, through its wholly owned subsidiary, Delta Education, LLC, just recently entered into a new 10-year agreement to continue as the exclusive publisher of the Full Option Science System, FOSS, K-8 Science Curriculum program.

Our second priority is to concentrate on cost containment and operational process excellence. Our efforts to control transportation costs, optimize labor staffing and improve operational efficiency continue to take hold in a positive way as evidenced by the favorable declines in SG&A as a percentage of sales.

Our third priority, which is a function of the first 2, is to continue to build top line momentum, which will result in strong bottom line improvement. As noted, the Supplies category is stable, and we see a path to improving our trajectory in this category. As it relates to science, while adoption decisions have -- in California have been slower than expected, we continue to believe that we are well positioned to capitalize on increasing demand for curriculum programs aligned with the next-gen science standard. We expect momentum to improve both inside and outside California in late 2019 and sustain in future years.

Our Learning Environment pipeline remains robust, and we are well positioned as we head towards 2020. We remain excited about new opportunities to create customized Furniture and Supplies bundles that allow customers to upgrade, outfit and stock complete classrooms, media centers, common areas and other spaces within educational facilities. This positions our company well as major school districts across the country fund modernization efforts and address our nation's aging educational infrastructure.

Our updated 2019 guidance reflects a lower growth outlook for Science Curriculum, continued weakness in both the Agenda and non-U.S. district businesses and a tactical and deliberate decision to exercise greater margin discipline, particularly in the Supplies and Furniture areas.

Fourth, the School Specialty team is focused on generating sustainable free cash flow. More specifically, we anticipate stronger adjusted EBITDA as well as continued normalization of our working capital in the second half of 2019. Our working capital in the back half of the year will be positively impacted by on-time complete shipments and enhanced e-commerce integration to help shorten collection cycles and generate sustainable operating cash flow. This, coupled with efficient capital spending, will lead to a stronger free cash flow profile and provide us with an opportunity to methodically reduce our overall debt leverage.

Now that I've discussed 2019 from a strategic standpoint, I'd like to turn the call over to our COO, Ryan Bohr, to discuss our second quarter financial results. Ryan?

--------------------------------------------------------------------------------

Ryan M. Bohr, School Specialty, Inc. - Executive VP & COO [4]

--------------------------------------------------------------------------------

Thank you, Mike. In 2019, we remain focused on sustainable profitable revenue growth and continued cost optimization to drive consistent free cash flow generation. We took substantial action in the first half of 2019 to further these objectives and are starting to see tangible results due to our actions.

Regarding our financial results, revenue in the second quarter of 2019 decreased by $8.7 million or 5.1% to $160.6 million. This was driven by a 3.6% year-over-year revenue decline in our Distribution segment and a 22.2% year-over-year revenue decline in our Science Curriculum segment. Overall revenues for the Distribution segment were below our internal plans in the second quarter, particularly in the Supplies and Furniture categories. However, with the operational challenges of 2018 fully behind us, booking trends are beginning to strengthen in the peak season, and importantly, the health of our revenue line is improving as evidenced by strengthening gross margin trends that are masked when you simply look at the year-over-year revenues.

Second quarter Supplies revenue of $77 million was down 4.1% year-over-year. Offsetting growth in our large school districts was weakness in both our small district and non-district accounts. Note that many of these customers have transitioned from field-based sellers to coverage by our inside sales organization. We believe this transition, coupled with our poor 2018 peak season service levels, has contributed to weakness we are seeing in the Supplies category for these accounts.

As our inside sales coverage model matures and targeted marketing efforts take hold, we believe our performance in this market segment will improve. In addition, we have seen headwinds in the Canadian market as our business has been impacted by education budget cuts and increased local competition. Furniture revenue was $53.6 million, up 2.3% year-over-year. Demand remains strong in the Furniture category. However, top line growth is lower than expected as we have elected to move away from certain low-margin opportunities, particularly in the project Furniture area. While we have lowered our internal revenue outlook based on recent sales trends, gross margin is expected to expand materially in the second half of the year.

Instruction & Intervention revenue was $14.1 million, down 2% year-over-year. While sales were softer than expected, we are seeing solid demand for S.P.I.R.E. and are enhancing marketing efforts supporting the category, which we will -- which we believe will improve our performance.

Additionally, the launch of Success Coach in the fall, the first major publishing event that we have had in the supplemental curriculum category in several years, is another important step to improving our performance in the category. Success Coach has much broader market appeal as it can be used for supplemental instruction as well as assessment preparation. Feedback from pilots of the program has been very positive. We believe Success Coach is a very strong program that will drive long-term growth within the Instruction & Intervention category.

AV Tech revenue of $4.2 million was up 2.9% as compared to the prior year. Booking trends have improved steadily in 2019, and the AV Tech category is performing slightly above expectations. We believe this is due to better alignment of the category with our efforts to deliver comprehensive Learning Environment solutions, and we expect this trend to gain momentum.

Within the Science Curriculum segment, we had revenue of $10.5 million in the second quarter, down 22% year-over-year. We remain optimistic about the long-term prospects for this segment and expect stronger performance in the second half of 2019 that will carry into 2020. Our long-term outlook for the California adoption remains intact. However, we now expect the majority of purchases to shift into 2020 and 2021. More broadly speaking, we continue to pursue several opportunities outside of California in open-territory states, and we expect this will build as states address the Next Generation Science Standards. To date, 44 states, representing approximately 71% of U.S. students, have adopted education standards influenced by the framework for K-12 science education and/or the Next Generation Science Standards, according to industry reports. However, we believe most states are still in the early stages of purchasing instructional materials to support their science education objectives. We believe this circumstance will drive increasing -- steadily increasing demand for our Science Curriculum program in both the near and long term.

I want to briefly touch on the Agendas category, which had revenue of $2 million in the second quarter, a decline of $2.6 million from the prior year. While overall demand for paper-based planners continues to be under pressure, we have experienced challenges associated with our migration to a new technology platform supporting this portion of our business. These challenges are being addressed but this has impacted sales, and we have lowered our full year outlook for the Agenda category as a result.

Moving on to our gross profit performance and margin in the second quarter. Second quarter gross profit of $52.7 million was down 10.3% as compared to the previous year, representing a gross margin of 32.8%. Gross margin was down 190 basis points compared to the second quarter of 2018.

Turning to gross margin for our segments, Distribution segment gross profit of $46.8 million was down $3.5 million or 7% as compared to the previous year, representing a gross margin of 31.2%, 110 basis points lower than prior year.

In 2018, our gross margin challenges were primarily related to the Supplies and Furniture product categories. Since then, we have implemented multiple pricing actions that have improved our gross margin trajectory, such as changes to our bid and quote process, pricing increases, updated pricing from 2019 contract renewals and changes to our customer-level discounting strategies. On Page 7 of our investor presentation, we have illustrated the impact of these changes within the broad Supplies category. As the chart shows, pricing actions are beginning to drive year-over-year favorability. We expect continued improvement in the second half of the year as our strategic initiatives continue to gain traction and impact the higher-volume selling months. While the analysis we've presented on Page 7 represents only the Supplies category, the story is very similar for Furniture, and the outlook for gross margins in that category is also favorable.

Science Curriculum segment gross profit of $5.9 million was down $2.5 million or 30.2% as compared to the previous year, representing a gross margin of 55.7%, contracting 640 basis points year-over-year. We incurred a higher level of training costs as compared to the prior year, along with other unfavorable cost variances. While these factors weighed on gross profit in the second quarter, it is our expectation that full year gross margin in the Science Curriculum segment will be consistent with prior year.

With respect to SG&A expenses, we saw significant improvement and expect further favorability in the second half of 2019. Second quarter SG&A expense was $50.5 million, decreasing $3.3 million or 6.1% year-over-year, with reductions in personnel costs and transportation costs driving the improvement.

We are pleased with the results of our continued focus on cost management initiatives, especially in the transportation category, where we were able to renegotiate contracts with key freight vendors and more effectively manage our carrier network, all while improving operational efficiency that has minimized order expediting and split shipments. This improvement is just a highlight of the progress our operations team continues to make in maximizing value through our supply chain.

In conclusion, I will speak to our operating income and adjusted EBITDA for the second quarter. Operating income was $1.8 million in the second quarter, representing a decrease of $3 million as compared to the second quarter of 2018. Operating income for the quarter was negatively impacted by $200,000 increase in facility exit costs and restructuring expense along with a $1.8 million increase in restructuring expenses included in SG&A. Second quarter adjusted EBITDA was $10.3 million compared to an adjusted EBITDA of $11.5 million in the second quarter of 2018. The year-over-year decline in adjusted EBITDA was driven by reduced gross profit from lower revenue and lower gross margins. This decline was partially offset by SG&A reductions as discussed.

I will now turn the call over to our CFO, Kevin Baehler, to discuss School Specialty's financial performance in the second quarter and an update on our 2019 outlook.

--------------------------------------------------------------------------------

Kevin L. Baehler, School Specialty, Inc. - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Thank you, Ryan, and good morning. My comments today will focus on free cash flow, working capital, taxes and debt. I'll conclude with some comments regarding our full year 2019 guidance. More detail can be found in the appendix to our investor presentation in addition to the second quarter 10-Q, which was filed yesterday.

Second quarter 2019 free cash flow was negative $21.4 million, an improvement of $13.3 million as compared to second quarter of 2018. As discussed in previous quarters, the year-over-year delta largely reflects working capital improvements realized during the second quarter of fiscal 2019 and a return to normalized end-of-Q2 net working capital levels. The Q2 improvement builds on the improvement we generated in Q1. For the first half of 2019, our free cash flow has improved year-over-year by $22 million. As a reminder, to quickly set the stage for our second quarter working capital management, the first half of our fiscal year is a period in which our net working capital typically builds in anticipation of the upcoming peak shipping season. Our end-of-Q2 net working capital balances are lower than planned even after adjusting for decreased revenues.

As expected, accounts receivable balances continued to normalize in the second quarter and are now proportionately in line with prior years. Accounts receivable was down year-over-year by $3.2 million with a slight increase to days sales outstanding over the same period. Days sales outstanding were up approximately 1 day to 49.5 days. As you may recall, at the end of 2018, our days sales outstanding were up year-over-year by nearly 6 days due primarily to last year's poor operating performance from our fulfillment centers. As a result of the strong operating performance we are having in 2019, we expect end-of-year days sales outstanding to be at or below pre-2018 historic levels.

Moving to inventory. Second quarter 2019 balances were down $9.5 million as compared to the prior period, representing days of inventory on hand of 103 days, down 5.5 days year-over-year. As discussed in previous quarters, increased inventory levels in both Q4 2018 and Q1 2019 were primarily related to strategic early buys, resulting in decreased inventory purchases in Q2 of this year. While the lower revenue forecast is contributing to the year-over-year inventory decline, we continue to focus on effective inventory management and on driving down days of inventory on hand.

For capital expenditures and product development spend, second quarter expenditures were $2.9 million and $1 million, respectively. On a trailing 12-month basis, our capital expenditures were $12 million. We expect our CapEx spend to trend downward over the remainder of 2019 as business application upgrades of sales enablement and analytics tools have largely been completed and the launch of Success Coach is on track for Q3.

We expect cash taxes to be slightly greater than $1 million as we expect to generate a net operating loss in 2019. Looking beyond 2019, cash taxes are expected to be significantly lower than statutory rates as we estimate that we'll have approximately $26 million of net operating losses and $20 million of disallowed interest expense carryovers, both with indefinite carryover periods.

As for debt and interest expense, our net outstanding debt was essentially flat year-over-year as of the end of the second quarter with over $54 million of excess borrowing availability on our ABL. Cash interest expense was up $800,000 in the second quarter of 2019 as compared to 2018 due primarily to a 170 basis point increase in our cash interest rate year-over-year. The increase in the cash interest rate was related to a combination of year-over-year increase in the LIBOR rate for the period and an increase in our applicable margin related to increased senior leverage ratio over the past 12 months.

I'd like to provide a peak season update and touch on full year 2019 guidance. We now expect our full year 2019 revenue to be in the range of $640 million to $650 million. The reduction in outlook stems primarily from slower-than-expected recovery within Science Curriculum, movement away from certain lower-margin Supplies and Furniture opportunities and greater-than-expected decline in Agendas. Despite the lower revenue outlook, it's important to emphasize that our fulfillment centers are having their best peak season operational performance in over 5 years. Lead times are excellent. On-time shipments are just shy of 100%. Back orders are down over 60% and lines per hour are up almost 10%. While these results in and of themselves don't generate revenue immediately, we believe that our customers are certainly taking notice. We believe that this performance, coupled with specific sales and marketing campaigns targeted at the after back-to-school season spend, puts us in a solid position to leverage our strong peak season execution to drive post back-to-school season orders in the fourth quarter and beyond.

Moving down the P&L. We still expect full year 2019 gross margin expansion of approximately 50 basis points, reflecting the impact of pricing actions, a revised bid and quote strategy within Supplies and Furniture and favorable product mix over the second half of 2019. We have realized material gross margin improvement in our booked orders over the past few months, and we expect this year-over-year improvement in booked margins and ultimately shipped margins to continue. As a result, even with lower-than-expected revenues, we expect gross profit dollars in the second half of 2019 to be flat to modestly up as compared to the second half of 2018. We also expect SG&A to provide a boost to our bottom line and be favorable as compared to 2018 driven by lower variable SG&A costs, both -- due both to volume and rate, in addition to lower fixed compensation and benefit costs as we continue to aggressively manage both staffing levels and all other areas of SG&A.

Since some revenue opportunities are slipping into 2020, we are guiding to the lower end of our full year 2019 adjusted EBITDA of $42 million to $46 million. The low end of the range represents growth of 20% year-over-year. This will result in free cash flow of $15 million to $20 million, down from our previous cash flow guidance as a result of the slightly lowered EBITDA expectations and higher-than-anticipated 2019 cash outflows related to restructuring-type expenses and higher-than-anticipated net working capital amounts due primarily to lower incentive compensation accruals.

And before we conclude our prepared remarks, I would like to provide an update on our balance sheet plans for the second half of 2019. We are working with an investment bank to help us in seeking additional capital financing. While our improving financial condition and current outlook support continued deleveraging, our upcoming debt maturities suggest that a refinancing with additional capital will provide the company the flexibility needed to continue to successfully execute its plan. We expect to complete the additional capital refinancing in the early to mid-fourth quarter period, and we'll provide an update during our Q3 conference call.

To wrap up, while there is certainly more work to be done, our sales force remains confident, our customers are happy and our management team is optimistic that we can continue the progress we've already made as we seek to deliver improved financial performance in the quarters ahead.

With that, I'll turn the call back over to Brian, our operator, for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question will come from the line of Craig Carlozzi with Longfellow.

--------------------------------------------------------------------------------

Craig N. Carlozzi, Longfellow Investment Management Co. LLC - Portfolio Manager [2]

--------------------------------------------------------------------------------

I have a few quick ones on my end. First, pertaining to the small district pressure that you're seeing. Just curious what the competitive environment looks like, and specifically, thinking about the buying needs of a small district, is it as simple as they're going to, kind of, staples.com or Amazon and just like buying the supplies ad hoc? Or is there a competitor or are they having different type of budget pressures? Or any more color would be greatly appreciated there.

--------------------------------------------------------------------------------

Ryan M. Bohr, School Specialty, Inc. - Executive VP & COO [3]

--------------------------------------------------------------------------------

Yes. Thanks for the question. This is Ryan. It's not -- there is no -- I wouldn't say that there is a new competitor or new competitive dynamic in play as much as with some of the challenges that we had last year, often the smaller districts have potentially less formalized procurement practices and/or their purchases with us weren't so significant that they were purchasing them through large agreements or contracts. And so they're more susceptible to be able to move their business around, and that can include the Amazons of the world and the Staples, Depot, Max, as you mentioned. However, we haven't seen a significant decline. It's just that they have been softer than the other parts of our business. And we're still seeing a strong relationship with them in Furniture and other areas. And so we've just seen a little bit of weakness, likely moving some of those purchases to the other participants for some of those basic supplies. But we're very confident that we can improve our connection with these customers and, to the extent that the movement has been due to their experience in 2018, really get that business back.

--------------------------------------------------------------------------------

Craig N. Carlozzi, Longfellow Investment Management Co. LLC - Portfolio Manager [4]

--------------------------------------------------------------------------------

Okay. I appreciate that. And the second question is really a 2-part. First is simply clarification. When you're mentioning you're working on your financing or refinancing, do you guys need more debt in aggregate? I know that there's a DPO that you're looking to refinance and roll into whatever the solution is. But in aggregate, are you looking to raise additional debt capital? Or are you looking to raise sufficient debt to refinance your looming maturities?

--------------------------------------------------------------------------------

Michael C. Buenzow, School Specialty, Inc. - Interim CEO & Director [5]

--------------------------------------------------------------------------------

Yes. This is Mike. Thanks for that question. It's not -- we are not anticipating upsizing or increasing our total debt. It's -- as you mentioned, it's to deal with the looming maturity of the deferred vendor notes of approximately $27 million that mature in December.

--------------------------------------------------------------------------------

Craig N. Carlozzi, Longfellow Investment Management Co. LLC - Portfolio Manager [6]

--------------------------------------------------------------------------------

Okay. And I guess the second part dovetails into the overall refinancing picture of the business. I mean, looking forward into 2020, and it sounds as if you've done a great job fixing the distribution side of the business, it's being properly run now, and you anticipate some type of pickup in Science, how do you view the earnings power of the business when compared to 2019? And specifically, what type of 2020 cash flow number do you feel that you need to confidently represent in order to get the capital structure that you need?

--------------------------------------------------------------------------------

Ryan M. Bohr, School Specialty, Inc. - Executive VP & COO [7]

--------------------------------------------------------------------------------

We're not going to provide a specific outlook for 2020. But we look at it like this. I think, number one, we have significant operating leverage in our model. And so as we build the top line, we see a nice opportunity to expand our EBITDA bottom line margins, okay? It's number one. Number two, a few -- as we think about the top line growth, a few of our areas of our business we believe are really recovering from weak points. So as we look at our Science business, for example, it -- recovery has not been as robust as we had expected from a timing standpoint but we still see significant recovery back to levels that we experienced in 2016 and 2017. And when you consider the flow-through impact of that, it's very significant. So continued growth in Supplies and Furniture and then a recovery in the Science business has a pretty significant impact on our bottom line, particularly as we believe we can continue to leverage our overall fixed cost structure. And then I think the final point, as it relates to then free cash flow, is our working capital levels are normalizing. We would expect the statistics around those to be back at historical levels as they're really approximating now. And also, our CapEx, as we've discussed, we don't expect to increase materially. So when you kind of tumble all of that together, that would lead to pretty strong cash flow recovery in 2020 and 2021.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And our next question will come from the line of Kevin Tracey with Oberon Asset Management.

--------------------------------------------------------------------------------

Kevin Tracey, Oberon Asset Management LLC - Analyst [9]

--------------------------------------------------------------------------------

Can you help us bridge to this cut in the free cash flow guidance of $13 million? I understand there could be lower bonus accruals at the end of the year. But on the working capital, I would have thought that would have been a positive for working -- for free cash flow given the lower revenue outlook.

--------------------------------------------------------------------------------

Michael C. Buenzow, School Specialty, Inc. - Interim CEO & Director [10]

--------------------------------------------------------------------------------

Well, the lower cap -- or there will be lower working capital level overall certainly associated with lower revenue. But a couple of things, Kevin, are impacting the cash flow. Number one, we are incurring, and expect to incur, more restructuring costs we have through the first half of the year and expect to incur more in the second half of the year. And that is having a -- certainly an impact on the free cash flow, as we said, from the working capital side. Not only will we have some lower accrual balances, primarily related to incentive compensation, potentially commission accruals due to the lower revenue levels, but also with the Science revenue coming in later in the year, there may be some increase in the AR levels primarily related to the Science business because of the timing of the year in which the spend is coming in. As you know -- as you probably have noted, Science revenues are down through the first half. We expect those to recover to be flat to modestly up on a full year basis. So there will be second half Science recovery. And typically, with our FOSS business, it's a little bit longer recovery -- or excuse me, a longer collection period than for our core Supplies and loose Furniture business. So there is some impact of timing related to receivables as it relates to the -- when that FOSS revenue comes in, in the second half.

--------------------------------------------------------------------------------

Kevin Tracey, Oberon Asset Management LLC - Analyst [11]

--------------------------------------------------------------------------------

Okay. And then on your refinancing, do you think if you hit your low end of your EBITDA guidance that you'll be able to pay off the deferred payment obligations without issuing equity or other junior securities?

--------------------------------------------------------------------------------

Ryan M. Bohr, School Specialty, Inc. - Executive VP & COO [12]

--------------------------------------------------------------------------------

Well, the -- achieving that would allow us to just per the terms of the agreement. I mean, if you look at the amendment that we executed, that really states what we can and can't do based on certain levels of financial performance. We are continuing to pursue discussions around refinancing of our debt regardless of exactly our full year fiscal 2019 adjusted EBITDA outlook. And so the amendment kind of speaks for itself, and we are going to continue to work with our investment banking adviser and ensure that we address the capital structure completely.

--------------------------------------------------------------------------------

Kevin Tracey, Oberon Asset Management LLC - Analyst [13]

--------------------------------------------------------------------------------

Okay. And then what visibility would you say you have today into the full year numbers, I guess, in terms of, for instance, the percentage of orders you've booked relative to your budgeted revenue? And maybe you could talk about how this compares to last year given that we saw EBITDA for last year ended up coming in big ways away from the guidance given on the Q2 call?

--------------------------------------------------------------------------------

Ryan M. Bohr, School Specialty, Inc. - Executive VP & COO [14]

--------------------------------------------------------------------------------

Well, I mean, our year-over-year trends can be very consistent, as you know, but there are things that can move around. Like, for example, when we look at our Science business in the back half of the year, that is based on our best estimate of the pipeline of opportunities that sit in front of us. And as you know as a very astute follower of our story for a number of years, those opportunities can move around, and we have seen that this year and that can happen. So we have a good amount of visibility into the opportunities but things can move around. I'd say for the rest of our business, we are utilizing -- our forecast represents trends that are very consistent with how we are performing. And the seasonality of our business is extremely consistent in the areas of Supplies, Furniture, AV Tech and those other product categories, and our outlook reflects really consistent performance with current trends, generally.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question will come from the line of Charles Neuhauser with Mainwall Investment.

--------------------------------------------------------------------------------

Charles W. Neuhauser, Mainwall Investment Management, LLC - Chief Compliance Officer [16]

--------------------------------------------------------------------------------

Actually, everyone has focused on all the questions I was going to ask. So pretty much all of my questions have been answered.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

And our next question will come from the line of Patrick Retzer with Retzer Capital.

--------------------------------------------------------------------------------

Patrick Retzer;Retzer Capital Management, LLC, [18]

--------------------------------------------------------------------------------

It looks like you've done a credible job of steadying the ship over the last year. So good work on that. Do you have any color on the overall levels of educational spending for the balance of this year and next year by state and local governments, particularly on the larger districts, which are your strongholds?

--------------------------------------------------------------------------------

Ryan M. Bohr, School Specialty, Inc. - Executive VP & COO [19]

--------------------------------------------------------------------------------

Yes. Thanks, Pat. It's a good question. We are seeing very solid school budgets overall. Obviously, there could be some variability region to region. But we're -- budgets are very stable, seeing some growth in funding, particularly in the areas of Early Childhood education. A number of large districts have expanded their pre-K programs, and we're seeing some opportunities related to that. So overall, very stable in the, kind of, general Supplies and Furniture area. And then I think we continue to see a strong outlook supporting the project area of our Furniture business, given the modernization efforts and the amount of funding going into that. So the funding environment has been very stable, and we're seeing some good growth in certain areas.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

And I'm showing no further questions over the phone. So now it is my pleasure to hand the conference back over to Jake Candler with FTI Consulting for any closing comments or remarks.

--------------------------------------------------------------------------------

Jake Candler, FTI Consulting, Inc. - Consultant [21]

--------------------------------------------------------------------------------

Thank you. That concludes today's call. We appreciate you taking the time to join and hope that all of you have a great rest of the week. Thanks so much.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.