Veritiv Corp (VRTV) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Veritiv Corporation's Second Quarter 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 Mr. Tom Morabito, Director of Investor Relations. Mr. Morabito, you may begin.

Thank you, Amy, 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 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.

Thanks, Tom. Good morning, everyone. Thank you for joining us today as we review our second quarter financial results and provide an update on some of the important drivers of our full year outlook.

Overall, our second quarter results were mixed. Our revenue trend continued to show improvement versus historical levels as reported net sales in the second quarter were $2 billion, down only 1.5% when compared to the prior year period.

We reported a consolidated adjusted EBITDA of $42.5 million for the quarter, which was below the prior year period. This decrease was primarily due to the combination of continuing industry pressures in the Print and Publishing segment, investments in our growth segment, slightly higher operating expenses due in part to the complexity of our integration and an increase in fuel prices. As we previously shared, we knew this would be a challenging year due to the complexity and scale of the integration. However, the environment in Print and Publishing has been more difficult than anticipated.

We reported a net sales decline of 1.5% in the quarter. Excluding the negative effect of foreign currency, our core net sales declined 1.2% from the prior year quarter. Our second quarter revenue performance was driven by growth in Packaging and Facility Solutions, offset by the continued secular decline in the print and paper industry. Over the past 1.5 years, our quarter-over-quarter core net sales comparisons have been improving due to the growth in Packaging and Facility Solutions as a result of our investments in these businesses.

Now I would like to review some key elements of the second quarter and provide an update on our expectations for the remainder of 2017.

First, the Packaging business performed well in the second quarter. Core revenues increased 6.1% year-over-year, largely driven by our strength in corrugated, film and bag categories. The majority of this growth was due to increased volumes, with modest improvements in market price. As we have mentioned on previous calls, we continue to invest in our sales and marketing efforts for Packaging to drive organic growth as well as evaluate inorganic opportunities. For the remainder of 2017, we expect to see continued solid revenue performance and modest improvements in margins and costs from this segment.

Second, Facility Solutions continued its improving trend line for sales growth. In the second quarter, Facility Solutions grew its core revenues 3.1% year-over-year. We have been pleased with the improving revenue trends for this segment. However, we did see pressure on margins, which Steve will speak to later. For the remainder of 2017, we expect continued improvement in revenue and margins and cost trend lines to improve as well from this segment.

Third, industry pressures continue to impact the Print and Publishing segments. Print and Publishing core revenues declined 7.3% and 11.3%, respectively in the second quarter, driven by secular declines in both market pricing and volume. For the remainder of 2017, we expect the secular industry declines to continue to impact revenues in both segments.

Shifting now to our integration work and synergy capture. We remain on track with our multi-year plan. In the second quarter, with the reduction of multiple locations, we made significant progress in our warehouse consolidations, bringing our current footprint to about 160 warehouses. These complex multi-location moves remain a key component of our strategy and over time, will allow us to lower our long-term cost.

In the second quarter, we also successfully completed a multi-location systems conversion without any issues. The next major milestone will be a multistate conversion of the entire Southeast, which should be completed near the end of the third quarter.

As previously stated, this is a challenging year for our integration, but these activities are critical to support our future optimization efforts.

In terms of our 2017 outlook, while we are not satisfied with our year-to-date results, taking into account the business momentum that we have and the various initiatives that are underway, we continue to expect our 2017 adjusted EBITDA to be in the range of $190 million to $200 million and our cash flow commitment -- and meeting our cash flow commitment of at least $60 million. A risk to achieving this range would be additional pressure in our Print and Publishing segments.

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

Thank you, Mary. Good morning, everyone. Let's first look at the overall results for the second quarter ended June 2017. As Mary walked you through earlier, when we speak to core net sales, we are referencing the reported net sales performance, excluding the impact of foreign exchange and adjusting for any day count differences. There were no day count differences this quarter as we had the same number of shipping days in the second quarter of 2017 as the second quarter of 2016. However, for modeling purposes, it is important to note that we will have 2 fewer days in the third quarter of 2017 and 1 additional day in the fourth quarter. As a result, for the year, we have 1 less shipping day. This day count pattern will shift a meaningful amount of second half earnings, all things being equal, from the third quarter to the fourth quarter.

For the second quarter of 2017, net sales of $2.0 billion were down 1.5% from the prior year period. Removing the impact of foreign currency changes, core net sales declined 1.2%. As Mary mentioned, our sequential quarterly pattern in core net sales has been steadily improving over the past 1.5 years. This trend line improvement in our core net sales 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 segments.

Our cost of products sold for the quarter was approximately $1.7 billion. Net sales less cost of products sold was $368 million. Net sales less cost of products sold as a percentage of net sales was 18.2%, up 10 basis points from the prior year period.

Adjusted EBITDA for the second quarter was $42.5 million, a decrease of 15.2% from the prior year period. Adjusted EBITDA as a percentage of net sales for the second quarter was 2.1%, down 30 basis points from the prior year period. Due to the decline in core net sales, specifically -- specific supply chain costs for warehouse consolidations and investments in selling personnel in our growth segments, our adjusted EBITDA margins at the consolidated level were reduced quarter-over-quarter.

Let's now move into the segment results for the quarter ended June 30 of 2017. The Packaging segment grew its net sales 5.6% and core net sales were up 6.1%, which we believe is better than the market performance. This growth in net sales was largely driven by increases in our corrugated, films and bag categories, mostly due to higher volume and to a lesser extent, market price.

Packaging contributed $54.1 million in adjusted EBITDA, down 8.6% year-over-year. Adjusted EBITDA as a percentage of net sales was 7.3%, down 110 basis points from the prior year period. Adjusted EBITDA margins for Packaging were impacted by higher resin prices, the competitive nature of our standard product categories, higher supply chain costs and the investments being made in the business.

Facility Solutions net sales increased 2.2%, while core sales increased 3.1%, which we believe is slightly above the market performance. We believe we are outperforming the market in some categories and underperforming it in others. For instance, we have seen sales growth in the categories of safety supplies, chemicals and food service items.

Facility Solutions contributed $9.8 million in adjusted EBITDA, down 29.5% year-over-year. Adjusted EBITDA as a percentage of net sales decreased 130 basis points from the prior year period. This adjusted EBITDA decline was due to higher operating expenses from increased headcount to support the company's growth strategy, higher supply chain cost and customer mix.

The Print segment had a 7.6% decline in net sales, while core sales were off 7.3%. Secular declines in both market pricing and volumes continued to impact this segment's sales shortfall, with price and volume contributing equally to this quarter's decline.

Print contributed $17.6 million in adjusted EBITDA, down 10.7% year-over-year. Adjusted EBITDA as a percentage of net sales was relatively flat versus the prior period. A reduction in supply chain cost mostly offset the adjusted EBITDA margin impact of the net sales decline.

The Publishing segment had an 11.3% decline in both net sales and core sales. This soft revenue performance was affected by secular declines in both market prices and market volumes. The volume reductions were particularly pronounced in magazine, educational book and specialty paper verticals, as customers adjusted their promotional mix and spend.

Publishing contributed $6 million in adjusted EBITDA, up 1.7% year-over-year. Adjusted EBITDA as a percentage of net sales increased 40 basis points from the prior period. The increase in earnings can be attributed to the mix of business within the segment.

Switching from our segment analysis, let's take a look at our synergy timeline, balance sheet, cash flow and expectations for the allocation of capital. As a reminder, our synergy percentages are calculated using the cumulative effect of synergy benefits already achieved in 2014 through 2017. Said differently, we are quoting the cumulative effect, not the incremental effect, and comparing our performance to the high end of the multiyear synergy range. We have already surpassed the low end of the original synergy targets, largely due to strong execution of our sourcing strategies.

As mentioned on previous calls, we do not anticipate this accelerated pace of synergy capture to continue during 2017. As we move forward with the next phase of our integration, our focus is on process enhancement and information systems, which require significant investment and time, as well as the continuing consolidation of our warehouse footprint. By making these investments and completing these major work streams, we expect to capture further efficiencies in future years.

Our current expectation for net synergy capture for 2017 remains in the range of approximately 80% to 90% of the ultimate goal of $225 million over the 5 years post-merger.

Shifting now to our balance sheet and cash flow. At the end of June, we had drawn approximately $790 million of the asset-based loan facility and had available borrowing capacity of approximately $376 million. As a reminder, the ABL facility is backed by the inventory and receivables of the business.

At the end of June, our net debt to adjusted EBITDA leverage ratio was 4.1x. At the time of the merger, our net leverage ratio was 5.5x and our strategic goal is a net leverage ratio of about 3x.

For the quarter ended June 30 of 2017, our cash flow from operations was $37 million. Subtracting capital expenditures from cash flow from operations for the second quarter, we generated positive free cash flow of approximately $27 million. Adding back the $18 million cash impact of restructuring, integration and other related adjustment items, adjusted free cash flow for the second quarter of 2017 would have been approximately $45 million.

Free cash flow was impacted by our increased investment in accounts receivable and inventory to support sales growth in our Packaging and Facility Solutions segment. This impact was partially offset by reduced inventory levels, primarily in our Print and Publishing segment.

As a reminder, our working capital pattern can be seasonal. For 2017, as Mary stated, we still anticipate at least $60 million of free cash flow, once again defined as cash flow from operations less capital expenditures.

The positive cumulative free cash flow since the merger in 2014 has allowed us to accomplish 2 objectives. First, we've invested in the company. That investment has had 2 elements: onetime integration costs and capital expenditures. We've also had 2 types of integration and restructuring costs. There are those costs that run through the income statement directly, and those that are within the capital expenditures. Onetime integration and restructuring costs expected to run through the income statement in 2017 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 synergy capture in 2018 and beyond.

Similar to prior years, this incremental capital spending is principally for information systems integration. For 2017, our ordinary course capital expenditures are expected to be approximately $20 million to $30 million. For comparison purposes, capital expenditures totaled $10 million for the second quarter. Of that spending, there was about $4 million related to integration projects.

And as a reminder, our second major use of excess cash has been to pay down debt. Overall, we've been pleased with our deleveraging initiatives since the merger.

That concludes our prepared remarks. Amy, we are now ready to take questions.

(Operator Instructions) Your first question today comes from the line of Scott Gaffner of Barclays.

Hi, this is actually John Dunigan sitting in for Scott. So I was hoping you could, I guess, discuss a little bit of the makeup of the $30 million of the integration and restructuring cost in this quarter. And then, just looking forward, you had mentioned the rolling out of the system conversion to multistates across the Southeast in 3Q, and I guess I just wanted to get an idea if that's going to be incrementally higher than the costs that were associated with the system conversion across multi-locations in this past quarter.

Okay. Why don't I take that second question, first, John, and then I'll hand it over to Steve to talk about the integration cost. So the -- we completed one multi-location conversion in the second quarter. The higher operating cost that we saw was not a result of that, actually. The higher operating cost was a result of closing multiple facilities and consolidating into fewer. And so the startup, the ramp-up of moving into a new facility -- for example, we moved 3 facilities into 1. That ramp-up of that new facility is what drove some slightly higher operating costs for the quarter. So it wasn't the conversion, the systems conversion that we spoke about or that we're anticipating in the third quarter.

So to put all that into context, the larger warehouse consolidations are behind us in the first half of the year. We do have a few the second half of the year, but they're not as complicated and so we don't -- so we anticipate our cost structure being better. And the systems conversion that we're planning for in the third quarter, we feel very good about, and we do not anticipate driving our cost up relative to historical levels.

And just related to maintaining your EBITDA and free cash flow targets, what gives you comfort with that, given your adjusted EBITDA has been down year-over-year for the first half as well as the CapEx running, I guess, a little bit higher year-over-year? Just interested in what you're seeing kind of through the back half of the year.

Yes, and then I'll turn it back over to Steve to talk about your first question. There are several dynamics in the business that we feel very good about. First of all, in terms of the guidance and the commitment to guidance, the reaffirm in guidance, we see positive revenue trajectory in the business and the pattern's getting better. Along with that, slightly improved margins for a number of reasons. Some of that is seasonality as well. As well as better -- I shouldn't say better, but cost management, not only better, but different from the first half just because of the initiatives that were underway between the first half and the second half.

So there are many factors that we look at the business in terms of feeling confident that we can still deliver on our commitment. From a cash flow standpoint, obviously, the EBITDA drives that as well, as well as we've been spending more time focusing on our working capital initiatives and feel confident that we'll be able to execute on that as well. And Steve, maybe you have anything else you want to add to that, and then go back to the integration question?

Sure. So let me just add to the operational effects, Mary, that you mentioned, just some of the seasonality effects that we also note in our business as it relates to EBITDA, and then I'll move to the same effect as it relates to cash flow. So as it relates to EBITDA, John, the best way to think about the possibility of being in the range at the end of the year is to look back at 2015, and there you'd see that in the first half of the year versus the full year, you'd find that we produced 38% of the full year's adjusted EBITDA in the first half and 62% in the second. If you apply that same seasonality pattern to '17, you'd see we end up in the range of $190 million to $200 million.

Having said that, we would also tell you that due to the day count factor that I mentioned earlier in the prepared remarks, that the patterning in the second half, so it was within the second half of '17, will be slightly different than in '15, with more weighting for the fourth quarter than the third quarter, again due, specifically, to day count. So in summary, all the operational reasons Mary mentioned, plus seasonality and that seasonality weighting toward the end of the year, particularly the fourth quarter, in significant part due to day count.

Going to cash flow, the -- Mary mentioned already the fact that the stronger earnings in the second half will help us relative to the commitments. Also I would tell you that in the second half of '16, we had a meaningful use of working capital in both our accounts receivable as well as our inventory, which we don't expect to repeat in the second half of '17. And so you're seeing some of that already in the second quarter performance, and we expect you to see more of it in the third and fourth quarters of this year.

Maybe you can address the first question around integration costs in the second quarter.

Sure, you bet. So in the second quarter, we had $30 million of onetime costs in the period, and the reason for the increase from the prior year's period has to do with the multi-employer pension plans charges we took in the second quarter of just around $13 million. You'll see in our Q filed later today that we had a couple of charges into 2Q, and that's the bulk of the change over the prior period. And in addition, you're seeing some headcount related costs in the period of about $4 million related to severance and relocation. So those are the primary drivers of that category.

Your next question comes of the line of John Babcock of Bank of America Merrill Lynch.

I just wanted to actually follow-up from the response to one of John's questions here, just on cost management and just want to get a sense for what sort of levers you can pull there, and if you could quantify that, the benefit to the second half, that would be helpful.

So John, on the cost management side, we've -- I'd like to think of it more as not having some recurring costs that we had in the first quarter, specifically due to the multiple moves of warehouses and consolidations that we had. And so as -- I look at it as more not only continued cost management and productivity improvements, but also not having recurring cost due to more challenging warehouse moves. And that could be in the range of anywhere from $3 million to $5 million of incremental or first half, second half benefit, okay?

And how many warehouses did you consolidate during the quarter?

We consolidated 6, and 10 in the first half of the year, which has put quite a significant pressure on the business in the first half of the year. There were fewer of those and less complicated ones in the second half.

Great. And then, with the systems integration continuing, when do you expect that to be done? And then also, if you could talk about the pace of synergy capture over the balance of 2017 and into 2018, that would be helpful.

So on the systems conversion, we have a very large conversion that's going to start here in September. We've completed 2 already, which have gone very, very well and have not been disruptive to operations at all. And so this conversion that will occur is the -- most of the Southeast of the United States, from North Carolina cutting through down to Texas. Then we would anticipate another large one very early in 2018 and be complete with this in the first half of 2018. And by the end of 2017, it's important to note that 70% of the total business will be converted into -- onto a single set of systems. So we would have 30% left in 2018.

And then John, as it relates to our synergy capture pattern both this year and next, I'll just reflect for a moment on the pattern of the last couple of years to set up my answer, and that is, in '15 we had synergy captures of about $95 million, and then in '16, of about $37 million, which brought us to just about 77% of the high end of the range we had guided to of $225 million. For this year, we've guided to 80% to 90% of that $225 million, and our current forecast shows us being right in that range for this year as a forecast. Again, we typically don't like guide quarterly on this item. And then for '18, we anticipate being in the next range of 90% to 100%. So we're going to move up from 80% to 90%, probably next year, to 90% to 100% as we continue to find synergies. Again, some of these, the pace of which is slowing by design because we had pulled forward so much work into the early part of the integration.

And then John, let me also add, as you recall back in March, we announced really the go-forward strategy for the organization and committed that post-integration, which comes in 2018, that we're moving the company into an optimization phase where we committed to another $100 million of cost reductions and/or margin improvements, along with $100 million of free cash flow improvement, spread out over the years of the tail end of '18, '19 and '20. And that's above and beyond what Steve has already referenced.

Okay, thanks. And then with regard to some of the other items that you mentioned impacting earnings during the second quarter, industry pressures, investment in growth, increase in fuel prices, I was wondering if you could put some numbers around that.

Yes. I'll speak to the increased investment in selling -- selling and sales support to drive growth. For the first half of the year, it was in the range of almost $10 million. And as I shared back in -- when we announced our guidance for the full year that those investments could accumulate in the range of $10 million to $15 million on an annualized basis. So we've already seen 2/3 of that hit the P&L, at least 2/3 of it hit the P&L in the first half of the year. Steve, maybe you want to reference the balance of...

Sure. So one of your other questions was with regard to fuel, and the impact of fuel on the first and second quarters of this year. In both quarters of this year, it was a drag versus the prior year of about $1 million. So year-to-date, $2 million drag due to increased diesel fuel costs.

And then industry pressures, and was there anything else that was there? I guess, you also had the supply chain.

Yes. And the supply chain costs were, again, a few million higher than anticipated.

Okay, thanks. And then last question before I turn it over, just if you could talk about trends in working capital and how should we should think about that next quarter. I think you talked about how it's going to reverse a little bit from last year, but want to know how we should think about it from 3Q to 4Q.

Yes. I'll let Steve address that. Thank you.

Sure. So I would actually look at the whole half if we could, rather than quarter-to-quarter. And so the expectation for our working capital in the second half of the year is that it does create some inflow of cash versus the prior year period. But as a whole year, 2017 versus 2016, which might be a fairer comparison, we see that the total amount of working capital contribution is roughly equivalent, within a few million dollars, between '17 and '16. So what's happening in short form then is that some of the working capital benefits we expected in '17 are coming later in the year. We didn't get them in the first quarter, candidly and, but we're planning for them to come in the second half, and that would be equivalent to the -- roughly the $27 million of benefit from working capital we achieved in 2016.

Your next question comes from the line of Chris Manuel of Wells Fargo Securities.

Just a couple of questions I'd like to center on first. It looks like you had some reasonable revenue gains in both the 2 segments that you had targeted, in the Packaging and Facility Solutions. We just didn't see much of a flow through. In fact, it was modest degradation. So I'm trying to get a sense of how much of the change kind of goes away through the back half of the year, so as you continue to see revenue improvement there and how monetization goes. I appreciate you talked about a lot of consolidation cost and movement cost, whether it was warehouses earlier and some systems and stuff coming but, how do you feel that the contribution from those businesses will change as the back half progresses?

Well, as I commented earlier, we would expect -- let me first speak about Packaging, that our revenue trajectory continues and it's been strong over the course of the last 3 quarters, actually. We would expect some modest improvement in our margins as a result of a range of things, and again, I'm talking to the second half of the year, as a result of continued movement on prices in the marketplace, as well as the investments that we are making in the business year-over-year will be less of a change year-over-year, which will also support the margins, as well as lower costs across that business.

So we would expect that we have a greater flow-through of that improvement over the course of the balance of the year. That also naturally changes the overall enterprise margin flow-through, just because of the mix shift in the business. So there's several factors that we are expecting to drive improvement in the Packaging business. And then on the Facility Solutions business, again, we did see a material change in that business in terms of earnings. About 50% of that reduction in earnings was due to supply chain costs, which we anticipate improving. Our sales investment cost was about 25% of it, which we see leveling out, as well as we continue to see margin improvement due to just process improvements and efficiencies in managing that business.

Okay. So it sounds like then, we will see those businesses, if I'm pulling this all together right, the profits from those businesses on a year-over-year basis, improve in the back half of the year.

We are expecting that, yes.

Okay. Then, maybe Steve, Mary, one with respect to kind of your big-picture guidance, the $190 million to $200 million. If I make sure that I understand this right, that suggests that, again, and I know you addressed this a little bit earlier, that the back half of the year, you need to have at least somewhere between I guess, $118 million and $128 million of EBITDA, which suggests that you're going to be up, let's call it, $10 million to $20 million over -- year-over-year with respect to your numbers. When does that inflection occur? I mean it sounds like that -- I heard as well you're going to continue to have some systems integration cost and things in 3Q. So I guess, I'll be very direct, I mean is 3Q EBITDA, your first 2 quarters have been down this year. You're anticipating them to flip up for the year. Does that begin to occur in 3Q? Or do we need to wait for a pretty hockey stick in 4Q? So I guess the direct question is, is EBITDA in 3Q, is it up, flat, down? How do you think about that?

Steve.

So I would say it's a fair question in that the -- it's more back-end loaded. Well, let's explain why that is. First, '15 is a better comp than '16 in that it's $113 million of EBITDA in the second half. So you'll see that then the stretch is less to get to the second half of '17. One other factor that's worthy of note is that because of the growth in Packaging and Facility Solutions, our supplier terms, our commercial terms, including rebate, tend to be more back-end loaded. And as we grow, they get realized from an accrual perspective in the fourth quarter. And so a big driver of fourth quarter performance over '15 and '16 are some of those terms and when they're realized from a P&L perspective.

Okay. So if I'm trying to piece this together...

Chris, let's just wrap up one more item on that. Steve, maybe you can you talk about the third quarter, fourth quarter day difference, which drives a change between the third and the fourth quarter.

Sure. So in short form, the fourth quarter of this year has one more day than the third quarter. And that is important to our earnings, all things being equal, that incremental day's worth in the neighborhood of $5 million, as a rule of thumb. And so that factor alone causes more of the "hockey stick" that you're referring to. But in addition, we have the operational performance of the businesses, particularly Packaging and FS, that are on a trajectory of growth, which helps us from our commercial terms perspective.

Okay. So again, just piecing this together, it sounds like then, given day issues, given kind of systems and some rebate things, 3Q is probably again, a down quarter, and then we see a pretty substantial hockey stick, 4 and beyond. Am I summarizing that correctly?

You are. And to be straight with you, as it relates to '16 versus '17, it could be the case that adjusted EBITDA is flat to slightly down, with still an expectation of hitting our range, our commitment range for all of 2017.

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

So the first question from me, you mentioned, Mary, earlier that your goal is $100 million of cost takeout in 2018. So I have two questions. One, what are the pieces there? And then second, is there a cost to get that $100 million of cost savings?

Yes. Ryan, that's not quite what I said, so let's be clear. If you recall, so Steve was first speaking about the synergy capture from the merger of the 2 companies and the tail of that going into 2018. And in 2018, we'd be complete with the bulk of our integration, which then sets us up to begin the optimization phase of the company. And we announced that optimization benefit, what we would get for that benefit back in March, and we said that we would be working to achieve $100 million of cost improvement, margin improvement over the course of the next 3 years. So it doesn't all -- it starts in '18, but it carries into '19 and '20 as well. So you've got two dynamics going on here. One is the completion of the integration and the benefit and synergy capture from that. And then once we're fully integrated, launching the optimization phase of the company.

Okay. And what are the pieces of the optimization over 3 years? And then what's the cost?

Yes. The pieces of the optimization are, first and foremost, SG&A, because -- and that's about 50% of it is SG&A. About 25% is also -- is in the area of, again, procurement and pricing. And then the balance of 25% is more in fixed costs due to asset -- reduction of assets. And the cost to achieve was -- we announced back then, in the range of $100 million and $150 million, max.

Got it, okay. And then (inaudible)

And then, Ryan, we also committed with that, the $100 million of improved working capital as well, over the course of 3 years.

Okay. Perfect. And then secondly, the Packaging sales growth rate was pretty good. Can you tell us, was there any price, either positive or negative, in that growth rate for the quarter?

Yes. So yes, our Packaging sales growth reported is about 6%. Of that 6%, only 1% of that was due to price. The rest was all due to volume.

Got it, okay. And then, Facility Solutions EBITDA margin was a little disappointing. I know you've got some investments there. But I just had a higher level question. Just longer term, what level of EBITDA margin is reasonable for that business? What are you targeting?

I don't know that we've shared that perspective. And so I don't -- Ryan, I don't want to answer that question off the cuff. We'd have to come back to you with that answer.

Okay. Fair enough.

We do have some models associated with that, but I don't want to just -- I don't have those in front of me, so we'll have to come back to that question. What I would like to give some context, though, is where we are with that business. As you recall, going back to more than a year ago, I said we were in fix-it mode with Facility Solutions, and we had 3 things that we had to do. We had to fine-tune the customers and targets that we would go after, and that was about making marketing customer choices, which we have done. And then lining up the product choices and launching the private label, which we're well on our way of doing. And then lastly, improving the supply chain. So as you think about those 3 things that we said we needed to do, we're well on the path of addressing the first two, and you can see that in the top line, and now we have more work to do on the supply chain side of that business.

(Operator Instructions) Your next question comes from the line of Jason Freuchtel of SunTrust.

First, I just wanted to clarify what is included in your reiteration of guidance for 2017 EBITDA. I think you had indicated that additional pressure from Print and Publishing could negatively impact your guidance, but I think you also indicated earlier that you expect secular declines in Print and Publishing to continue? Can you reconcile those 2 statements and describe what you're expecting to experience in Print and Publishing?

Yes. So I think one of the wildcards in our first half earnings was that the Print and Publishing dynamics were worse than anticipated. I mean, we had a plan -- I think we've done an outstanding job trying to manage the margins in that business, but under any scenario, they were worse, mostly because of pricing. And so that's something that is very hard for us to predict, which could put some downward pressure on the business. However, we have seen, and are expecting at this point in our model, some leveling off of pricing. There's been some announcements of price increases in the coated space. And to the extent that those go through, and they are getting some legs with those announcements, we would anticipate to be on stronger footing in the second half of the year. But again, Jason, it's unpredictable because the market has just got so much overcapacity.

Okay. And I believe your long-term financial obligations increased sequentially by about $14 million in the quarter, which is, I think where you include your -- or where you report your capitalized lease obligations. Are there other obligations that are impacting that line item? Or did your capitalized lease obligations increase in the quarter?

So what happened in the quarter, Jason, was that we were under construction in the Canadian facility. And upon the completion of that facility in the second quarter, we recognized that asset liability on the balance sheet and the liability ran through the line item you're referring to. So that's what you're seeing. You'll see a bit more detail in our Q this quarter on it, when it's filed later this afternoon, and it's in footnote #3 on debt and other liabilities. And so we'd be glad to explain it further once you get a chance to see it, but it's just -- it's one asset that came out of the balance sheet in the quarter.

Okay, and then, I guess in terms of the other warehouses that you're planning to close, are those classified as capitalized leases? Or are those operating leases?

It's a combination of both. And we haven't disclosed publicly what the mix of those will be. But maybe we'll give that some thought. But we -- at this time, we haven't disclosed the mix between capital and operating. As you know though, lease accounting standards will change in the not-too-distant future and we'll collapse those in any case.

Okay. And can you remind us how your margins typically behave in an environment where raw material prices are declining, maybe over a short period as well as a long period?

Yes. When raw material prices are declining, we generally see at least a near-term expansion of margins. And -- but generally, what we try to do is manage those margins fairly level, but we see some delay, both going up and down.

Okay. And then lastly, I was just curious, what was driving the delay in realizing the benefits in working capital earlier this year?

Go ahead, Steve.

Yes, there were a series of factors. Primarily, we were focused on the income statement rather than the balance sheet in the first quarter, and we've redirected resources and energy toward those resource -- towards those activities of managing the AR and inventory in the second quarter and the second half. And so it's a function of resources and focus.

And I will also add, Jason, we were in the process of fine-tuning our inventory replenishment system, getting it onto one common system. And so that created a blip in our inventories as well. Any other questions?

And there are no further questions at this time. Sorry, we do have another question from the line of John Babcock.

With regards to days, how should we think about that? Are those usually weekdays? Basically total days during kind of a 3-month period? How can we kind of calculate that on a go-forward basis?

Well first of all, we can give you, at any time you'd like for future year, the shipping days in the year, but what we think of are shipping days that are available for our operations. And to the extent there are holidays that fall differently, for example, the Fourth of July, during a given quarter, it does impact quarter-over-quarter comparisons for shipping days. And therefore, for revenue and therefore, for earnings.

Okay, so it's not -- is it primarily -- like, so when we think about shipping days, is it going to be pretty consistent to the shipping days that are reported by the box producers, essentially? So it's very similar to their schedule?

I don't know. I'd have to check on that, John.

It could -- it might be similar, but I can't say specifically that it's exact, but we can give you total number of shipping days in any given quarter, John.

Okay, so it's just a (inaudible)...

And comparisons. And the comparisons.

So the 3 days lower in 3Q, is that versus 2Q? Or is that versus 2Q '16 -- or 3Q '16?

So it's 2 days lower, just to be clear, 62 days of shipping in the third quarter of 2017, and that's 2 days less than the prior year comparable third quarter of '16, which had 64 shipping days in it.

Okay. And then 4Q is 1 day more than 3Q, or 1 day more than 4Q '16?

It's one day more than the prior year. So we have 62 days in the fourth quarter of 2017 and only 61 days in the fourth quarter of 2016.

And there are no further questions at this time. I'll turn the call back over to Ms. Laschinger.

And well, thank you, everyone, for your questions. You know, overall, our Packaging and Facility Solutions organic growth trends continue to be encouraging to us and are nearly offsetting the Print and Publishing structural declines that we've been experiencing over the course of the last several many months and quarters. While our adjusted EBITDA was also affected by investments in our growth businesses and slightly higher operating expenses due to the complexity of our integration, we believe we are making the best decisions for the long-term success of Veritiv.

Despite these near-term pressures, we expect to deliver on our full year 2017 commitment. Again, we thank you for joining us today, and we look forward to talking to you again in October as -- when we share our third quarter 2017 results. Thank you, and have a great day.

And this concludes today's conference call. You may now disconnect.