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Veritiv Corp  (NYSE:VRTV)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to Veritiv Corporation's Fourth Quarter and Full Year 2018 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 Tom Morabito, Director of Investor Relations. Mr. Morabito, you may begin.

Tom Morabito -- Director of Investor Relations

Thank you, Tiffany; and good morning, everyone. Thank you all for joining us. Today you'll hear prepared remarks from Mary Laschinger, our Chairman and Chief Executive Officer; and Steve Smith, our Chief Financial Officer; afterwards, we'll 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 2018 Annual Report on Form 10-K and in the news release issued this morning, which is posted in the Investor Relations section at veritivcorp.com.

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

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

Mary A. Laschinger -- Chairman and Chief Executive Officer

Thank you, Tom. Good morning, everyone, and thank you for joining us today as we review our fourth quarter and full year 2018 financial results. We will also provide some thoughts on the important drivers of our expected full year 2019 performance, share our guidance for the year and give an update on our optimization efforts.

Overall, we are pleased with our 2018 accomplishments. We achieved positive revenue growth led by our Packaging business and delivered on our adjusted EBITDA guidance. We fell short of our initial free cash flow guidance for the Company, primarily due to the complexity of the integration and the pressures it put on our processes.

The integration is now substantially complete and we are focused on the optimization efforts of our long-term strategy. Our optimization effort will emphasize improving our commercial, supply chain and back office business processes, which should improve our earnings and free cash flow profile. I will speak more about the optimization efforts shortly.

Reported net sales for the year were $8.7 billion, up 4% compared to the prior year period. The revenue improvement was largely driven by increases in Packaging and Publishing, while Facility Solutions was flat and Print experienced a decline. Adjusted EBITDA for 2018 was $185 million, up 5% year-over-year. The incremental earnings were driven by a revenue growth and lower headcount related expenses, partially offset by margin compression and higher expenses for both bad debt and storage.

During the fourth quarter, we saw a modest improvement in revenues driven by top line growth in Packaging and Publishing segments. Our Facility Solutions and Print segments both experienced revenue declines. Reported net sales for the fourth quarter were $2.2 billion, up slightly compared to the prior year period. Adjusted EBITDA for the fourth quarter was $58 million, down 4% year-over-year. The decline in earnings was largely driven by margin compression and increases in storage costs and bad debt, partially offset by lower headcount related expenses.

Now, I'd like to shift to our segment results. In the fourth quarter, Packaging core revenues were up 3% year-over-year, driven mostly by price and to a lesser extent volume. For the year, Packaging's core revenues were up 12%. Packaging's adjusted EBITDA decreased over 9% in the fourth quarter, but was up nearly 4% for the year. The fourth quarter's earnings decrease was principally due to increased storage costs and margin pressure.

For 2019, we expect Packaging revenue growth to continue at a rate higher than GDP, but not as robust as 2018, as we expect to see less of a benefit from supplier price increases, more modest growth in certain large customers and we lap the incremental revenue benefit from the All American Containers acquisition. In 2019, we also expect adjusted EBITDA to improve by a rate greater than our rate of revenue growth due to improved margin management from both our commercial optimization efforts and cost efficiencies.

Our Facility Solutions segment saw a decline in fourth quarter core revenues of 1.6% year-over-year and had flat core revenues for 2018. As we shared on our third quarter earnings call, for the fourth quarter, we were expecting a slowdown in revenue growth and a decline in earnings similar to the third quarter year-over-year decline. However, adjusted EBITDA for the fourth quarter was better than expected. The quarterly decline in adjusted EBITDA is due to both the increasingly competitive nature of the market for this segment and the fact that we continue to make customer choices that align with our product and service capabilities.

We are repositioning this segment to where we can be most successful based on both our strength, as well as market and channel dynamics. For example, we have been slowly exiting retail markets, because of the industry dynamics. While these choices have had and may continue to have an adverse effect on our revenues and adjusted EBITDA in the near-term, long-term, our business may be smaller, but should be more focused and more profitable.

For 2019, we expect Facility Solution revenue trends to be below GDP due to the conditions and choices just mentioned. We do, however, expect to see a slight improvement in year-over-year adjusted EBITDA driven by operational efficiencies and further focus on core product offerings including private label.

Switching to our Print segment. Unfavorable industry pressures continue to affect our revenues. Print core revenues declined 4% in the fourth quarter and 4.6% for the year, driven by the continuing secular declines in market volumes, partially offset by increased prices. The Print segment's adjusted EBITDA was up over 2% in the quarter and up over 5% for the year, as increases in bad debt were more than offset by the benefit of lower selling expenses. As we mentioned on previous calls, we are making choices to manage risk in our Print segment, which has and may continue to result in lower volumes, but should help improve the quality of our customer portfolio to achieve long-term sustained profitability.

For Print, in 2019, we expect secular industry trends will continue to negatively impact the segment's revenue. We could also see worsened market volume declines as we continue to make adjustments to our customer base and product offerings. The industry remains challenged as suppliers continue to rationalize capacity leading to increased pricing which could drive higher margins; however, it may also lead to reduced demand and higher bad debt risk. We expect the Print business model changes that we implemented in 2018 will contribute to earnings in 2019. Taking all these factors into account, we expect Print adjusted EBITDA in 2019 to be relatively flat.

The Publishing segment's core revenues increased 9% in the fourth quarter and nearly 6% in 2018. For both the quarter and the year, although industry volumes continue to decline, we benefited from an increase in prices and a favorable mix shift within certain customers. Earnings in this segment were down year-over-year for both the quarter and full-year due to a rapid increase in cost of products sold, which were difficult to immediately pass along, as well as a shift in customer mix.

For 2019, we are expecting a more stable environment for Publishing with our volume declines consistent with the industry declines and prices moderating. We expect earnings to be at roughly the same level in 2018 -- as in 2018. As we have noted in the past, this business can be impacted by changes in customer order patterns.

Turning now to our consolidated 2019 guidance. On our third quarter earnings call we indicated that we expected 2019 adjusted EBITDA to improve over 2018. This improvement will be driven by a combination of better than market growth in Packaging and improving margins. Our improving margins would come from a modest price increase on higher cost to serve portions of our business and reduced operating costs due to our optimization efforts.

These earnings improvements will likely be partially offset by the earnings impact of declines in our segments other than Packaging, charges for bad debt and the negative impact of certain financing leases being replaced by operating leases. Considering all these factors and others, we are expecting our 2019 adjusted EBITDA to be in the range of $190 million to $200 million. As previously indicated, we expect to see an inflection point in our free cash flow performance in 2019 as the integration is now largely behind us and we can focus on improving the business processes, especially with accounts receivable and inventory. For 2019, we expect free cash flow to be at least $55 million.

As a reminder, there is seasonality in our business for adjusted EBITDA. This year, 2019, there are three factors that could adversely affect our first quarter results that would change the seasonal pattern. First, customer pre-buys, which occurred in December after announced price increases. Second, poor weather which caused lower demand from offices, schools, restaurants, and other public venues. And third, the effect of the government shutdown. The impact of these factors to our results and the seasonality pattern is unknown at this time.

Now, I'll turn it over to Steve who can take you through the details of our fourth quarter and full-year financial performance. I will then come back and spend a few minutes on our integration and optimization efforts before moving to questions-and-answers.

Stephen J. Smith -- Senior Vice President and Chief Financial Officer

Thank you, Mary; and good morning, everyone. First, we will review the overall results for both the fourth quarter and year ended December 2018. As we review these results, I would note that 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.

As it relates to day count, we had the same amount of shipping days in the fourth quarter of 2018, as we did in the fourth quarter of 2017. For the full year of 2018, we had one more shipping day versus full year 2017. For 2019, we'll have one less shipping day in the first quarter and one additional shipping day in the third quarter with the other two quarters having a same number of days as 2018. As a result, we will have the same number of shipping days during 2019 as we had in 2018, but the difference in day count will shift our already seasonal earnings slightly more into the second-half.

For the fourth quarter of 2018, we had net sales of $2.2 billion, up marginally at 0.3% from the prior year period, while core net sales were nearly flat at an increase of 0.6%. Our cost of products sold for the quarter was approximately $1.8 billion. Net sales less cost of products sold was $399 million. Net sales less cost of products sold as a percentage of net sales was 17.9%, down about 30 basis points from the prior year period.

Adjusted EBITDA for the fourth quarter was $57.6 million, down 4% versus the prior year period. Adjusted EBITDA as a percentage of net sales for the fourth quarter was 2.6%, down 10 basis points versus the prior year period. The decrease in adjusted EBITDA margin was driven by three major factors: margin pressure from changes in customer mix, incremental bad debt expense, and a negative impact of certain financing leases, being replaced by operating leases. These pressures on earnings were partially offset by both lower headcount related expenses and operating efficiencies in the supply chain.

For the year ended December 31st of 2018, we had net sales of $8.7 billion, up 4% from the prior year. Our net sales per shipping day, as well as our core sales growth both increased 3.6% year-over-year. For the year, our cost of products sold was approximately $7.2 billion. Net sales less cost of products sold was approximately $1.5 billion. Net sales less cost of products sold as a percentage of net sales was 17.7%, down about 40 basis points from the prior year period.

Adjusted EBITDA for the year was $185 million, an increase of 5.1% from the prior year. Adjusted EBITDA as a percentage of net sales was 2.1%, which is consistent with the prior year. Our increased earnings for the full year were driven by revenue growth, lower headcount related expenses and the impact of one more business day. The earnings improvement was somewhat dampened by margin pressure due to changes in customer mix, incremental bad debt expense and a negative impact of certain financing leases becoming replaced by operating leases.

Let's now move into the segment results for both the fourth quarter and year ended December 31st of 2018. For the fourth quarter, the Packaging segment grew its net sales 2.7%, core revenues increased 3% year-over-year, increased volumes and pricing both helped to drive the improvement. For the year, the Packaging segment's net sales were up 12.3% and core revenues were up 11.9%.

For the fourth quarter and full year, Packaging contributed $64.7 million and $246.7 million in adjusted EBITDA, down about 9% and up nearly 4% respectively. For the quarter, adjusted EBITDA as a percentage of net sales was 7.1%, down 90 basis points from the prior year period, as earnings from the increased revenue were offset primarily by higher storage costs, principally due to certain financing leases being replaced by operating leases. For the year, adjusted EBITDA as a percentage of net sales was 7%, down 50 basis points from the prior year period. Adjusted EBITDA margins for the year were impacted by higher storage costs and compressed margins due in part to the increasing sales to larger lower margin accounts.

In the fourth quarter, Facility Solutions net sales decreased 2.3%, while core revenues decreased 1.6%. As Mary mentioned, we are experiencing slowing revenue growth in this increasingly competitive segment and we continue to make customer choices that align our product and service capabilities. For the year, at the Facility Solutions group reported flat net and core sales.

For the fourth quarter and full year, Facility Solutions contributed $9.2 million and $29 million in adjusted EBITDA, down approximately 12% and 18% respectively. Adjusted EBITDA as a percentage of net sales decreased 30 basis points in the quarter and 50 basis points for the year. The adjusted EBITDA margin decline was primarily driven by lower margins due to a shift in customer mix, partially offset by reductions in operating costs.

In the fourth quarter, the Print segment had 4.3% decline in net sales and core revenues were down 4%. The revenue decrease was driven by secular declines in market volumes, partially offset by increases in market pricing. In the quarter, Print's volumes declined approximately 12% year-over-year, while pricing increased roughly 8%. For the year, the Print segment had a 4.2% decline in net sales and core revenues were down 4.6%.

For the quarter and full year, Print contributed $16.4 million and $64 million in adjusted EBITDA, up over 2% and 5% respectively. The earnings impact of the sales decline was more than offset by a reduction in selling and administrative expenses, largely due to the Print business model change earlier in 2018. We are pleased with the Print segment's ability to reduce its cost structure to enable increasing adjusted EBITDA, despite the decline in revenues.

In the fourth quarter, the Publishing segment had an 8.8% increase in both net sales and core revenues. This revenue growth was primarily driven by increase in prices. For the year, the Publishing segment had 6.4% increase in net sales, while core performance was up 5.9%. For the fourth quarter and full year, Publishing contributed $7.4 million and $24.6 million in adjusted EBITDA, down about 16% and 7% respectively. The decline in earnings can be attributed to lower margins from a shift in customer and product mix, and an increase in bad debt expense.

For the entire Company, we experienced nearly $9 million of bad debt expense in the fourth quarter, double that of the prior year's fourth quarter. For the year, bad debt totaled about $27 million, up $11 million from 2017. Of that $27 million, most was driven by our Print segment, where we increased reserves for both higher-risk accounts and where we experienced customer bankruptcies.

Shifting now to our balance sheet and cash flow. At the end of December, we had drawn approximately $932 million against the asset-based lending facility and had available borrowing capacity of approximately $279 million. As a reminder, the ABL facility is backed by the inventory and receivables of the business. At the end of December, our net debt to adjusted EBITDA leverage ratio was 4.7 times. Our long-term strategic goal continues to be a net leverage ratio of around 3 times.

For the year ended December 31st, 2018, our cash flow from operations was approximately $15 million. Subtracting capital expenditures of about $45 million from cash flow from operations, we generated negative free cash flow of approximately $30 million. If we add back the roughly $88 million of cash items due to acquisition, integration and restructuring activities, adjusted free cash flow for 2018 would have been approximately $58 million. For the year ended 2018, while our cash conversion cycle remained flat year-over-year at 51 days, our free cash flow was impacted by a higher-than-anticipated growth in our Packaging segment and by integration-related challenges and our accounts receivable and accounts payable processes.

We missed our revised free cash flow guidance of nearly zero, as we significantly reduced our inventory during the fourth quarter and that had the unintentional and temporary effect of lowering our accounts payable, as we had less payments to be made. With our integration-related conversions substantially completed, we expect to see improvements in our cash conversion cycle in 2019, which is largely why we currently anticipate the inflection in our free cash flow. As Mary mentioned, we anticipate at least $55 million of free cash flow for 2019, defined as cash flow from operations less our capital expenditures. For 2019, our total capital expenditures are expected to be approximately $45 million.

Now, I will turn the call back over to Mary.

Mary A. Laschinger -- Chairman and Chief Executive Officer

Thanks, Steve. We achieved a significant milestone in building the future of Veritiv by substantially completing our multi-year integration in 2018. During integration, we focused on building a stronger foundation to be able to accelerate our growth and profitability.

As you know, these past couple of years have been very complex due to three major programs. First, our systems conversions resulted in the transition of $4 billion of revenue over 50,000 customers and more than 200,000 product SKUs to a single operating system. Second, our warehouse consolidations led to a net reduction of our original US distribution center network by 30%. Third, warehouse management system conversions and installations were implemented in the majority of our network.

As a reminder, these major programs put short-term pressures on our processes, our costs and our cash flow. But our integration has enabled, standardized and simplified processes, reduced the complexity of operations and facilitated better systems and tools. These enhanced foundational capabilities will support our optimization efforts by driving greater efficiencies and better measurement and monitoring of key performance metrics.

In 2017, I shared with you our long-term strategy to shift our portfolio mix to higher growth, higher margin businesses by investing in Packaging and services, protecting our leading market positions in Facility Solutions, Print and Publishing, and optimizing our business processes across commercial, supply chain and back office operations. All these initiatives were designed to grow adjusted EBITDA and cash flow and lead to a higher return on invested capital.

Now, I'd like to take a moment and explain how we expect to create value across these three levers of our business model. First, more efficient commercial operations with better processes and controls will improve margins through better price management, greater emphasis on higher margin products and categories including private label and narrowing our focus into end use markets that have greater growth and profitability. Through these initiatives, we would also expect to lower our selling expense. We began these efforts during 2018 with the Print business model changes.

Second, in our supply chain, we have done a tremendous job consolidating our warehouse network and now the focus is to achieve inventory and cost reduction through optimal placement of inventory into fewer locations and more efficient management of our fleet by reducing the number of miles traveled.

And third is in our back office and other functional support processes. With more standardization and greater efficiencies, we will drive a significant improvement in these primary business processes. For example, improving our customer order entry to cash collection process will drive a reduction in working capital and improved cash flow.

Turning now to our financial expectations associated with optimization. Today, we are updating and providing further clarification of the optimization benefits and costs. In 2017, we indicated that from 2019 through 2021, the expected benefits would be $100 million and we were expecting to generate $20 million per year in increased cash flow driven by a reduction in our inventory. At that time, we also thought our cost to achieve the optimization objectives would be between $125 million and $175 million.

Our updated expectations are for $100 million in optimization benefits. And just like our integration, not all the benefits will flow to reported earnings. We anticipate that between $30 million and $50 million of optimization benefits will flow to earnings. Any amounts not flowing through earnings would likely be due to inflation in all of our businesses and lost gross margin dollars from our declining businesses. This flow-through is dependent on the performance of the Print and Publishing businesses.

During integration, we achieved significant synergies, but the structural decline of our Print business offset many of these benefits. Today, however, our growth businesses are offsetting most of that earnings decline from Print, and therefore, a greater value of optimization benefits should drop to the bottom line.

In 2017, we shared that we were targeting an increase of $60 million in free cash flow from working capital by 2021. Today instead of providing guidance to an increase in free cash flow over the optimization period, we are providing guidance on total cash flow over that same period. We expect to generate between $150 million and $200 million of cumulative free cash flow over the three-year period with at least $55 million generated during 2019. Above-planned growth in Packaging would dampen the expected cash flow, as we would need to fund above-planned working capital.

Finally, we are lowering the expected amount of cash used to achieve the optimization from our initial guidance of $125 million to $175 million to a range of $80 million to $120 million. This reduction is due to the revised estimate of certain costs. In summary, our improved cash flow profile will be driven by enhanced earnings and the cash benefit from lower days sales outstanding in our accounts receivable and inventory.

That concludes our prepared remarks. Operator, we'll now open it up to take any questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of John Dunigan with Barclays. Your line is open.

John Dunigan -- Barclays -- Analyst

Hi. Good morning, Mary, Steve. How are you doing?

Mary A. Laschinger -- Chairman and Chief Executive Officer

Good.

Stephen J. Smith -- Senior Vice President and Chief Financial Officer

Good morning, John.

John Dunigan -- Barclays -- Analyst

I guess, I first wanted to touch on the inventory and accounts receivable. It seems like some of that was coming through in the Packaging segment that caused a little bit of the weakness during the quarter. But maybe you can give us a little bit more details on what drove some of that accounts receivable and inventory headwinds, and obviously, the unintended consequence of lower accounts payable, not really helping working capital?

Mary A. Laschinger -- Chairman and Chief Executive Officer

Right. Great, John. Sure. So the bigger issue was really with accounts receivable less with inventory and it is geared more toward our Packaging business. We had a congruence of, what I would almost characterize as a perfect storm. As we went through integration, we were also incurring significant COGS changes from suppliers at a time when we were managing and moving tremendous amounts of data. And so there was a lot of change going on in the business and we were trying to manage all of it at the same time. And had we not had this inflationary environment, I suspect our outcome would be different today. So it was due to the complexity of the integration along with a lot of data and information moving to get the Company fully integrated with our system, along with a time period when we were receiving excessive cost and trying to manage price changes all at the same time.

Additionally, due to the nature, the historic nature of the Company, there were a lot of very specialized services provided in invoicing and billing activities that frankly, some of even our customers didn't realize was being done, and so we had some issues with things such as EDI transfer of accounts. So the good news is that they're all fixable and we actually didn't get worse throughout the year. We just didn't improve to the degree that we had hoped. And the reason that's important is because, we were doing major system conversions right up until the very end of the year. So we already started getting a handle on it in the first part of the year, but we had -- and it wasn't getting worse, it just wasn't getting better. So, that's a little bit on the AR side with Packaging.

On the accounts payable, slight surprise we had is, actually what happened was, we actually just didn't end up buying as much as we anticipated and that brought our AP levels down, which is a good news thing, because we saw some of the market softening a little bit in particular in Print, and so we pulled back on inventory levels and that had a negative impact on accounts payable.

John Dunigan -- Barclays -- Analyst

Okay. I appreciate all the details. You had also mentioned one of the factors for the first quarter being pre-buy ahead of some of the price increases. Was that because contracts are resetting in January due to higher inflation? If so, what some of the inflation that got passed through, or if it's just pushing prices a little bit more organically you like maybe with some of the drivers are there?

Mary A. Laschinger -- Chairman and Chief Executive Officer

Yes. So let me speak to what price increase is first of all. There have been several supplier price increases announced that were to go into effect in the first part of the year, as well as we announced, I would characterize it as an inflationary price increase on two parts of our business where we have higher cost to serve. As a result of that, some customers decided to pre-buy and so the pipelines are quite full in particular in the Print business and some -- we saw some of that in Packaging as well, but it was very specific in the Print business.

John Dunigan -- Barclays -- Analyst

Okay. And then, with regard to the cost reduction efforts that you said would allow Veritiv to reduce some of the pricing on products, is that mostly for Print and Publishing or is that kind of across the portfolio? And do you see yourselves getting priced out of some business that you could see volumes picking up a bit more as pricing comes down?

Mary A. Laschinger -- Chairman and Chief Executive Officer

Yeah. So, let's clarify, John. I do not believe I said that the cost reduction would lead to lower end prices to our customers. That is not the plan at all. In fact, we believe that we've got opportunities for margin improvement in the business over the course of time due to both inflationary factors that are impacting the business and our ability to better manage price just by having a consolidated set of systems. One point of truth, I guess, is one way to look at instead of two or three. So, we are not speaking to lowering prices in the marketplace at all. The cost reduction initiatives are broad-based just because of the enablement that the integration has given us. That come from process improvement, which leads to lower operating cost, lower headcount costs that should be part of the benefits of going through the integration.

John Dunigan -- Barclays -- Analyst

Okay. Thank you for clarifying that. And then, just my last one was and I apologize if I missed this, the total bad debt expense in 2018 versus 2017, was that year-over-year and do you expect that to get better or worse looking ahead to 2019?

Mary A. Laschinger -- Chairman and Chief Executive Officer

I'll let Steve answer that question.

Stephen J. Smith -- Senior Vice President and Chief Financial Officer

Sure, John. So the total bad debt in 2018 was $27 million. The total bad debt in 2017 was $16 million. And it's hard to predict precisely where these accounts will end up during 2019. But, we're anticipating roughly the same level of activity in this category in 2019 is an 2018.

John Dunigan -- Barclays -- Analyst

Okay. Thank you. I'll turn it over.

Operator

(Operator Instructions) Your next question comes from the line of Keith Hughes with SunTrust. Your line is open.

Judy Merrick -- SunTrust Robinson Humphrey -- Analyst

This is Judy Merrick for Keith Hughes. Thanks for taking my question.

Mary A. Laschinger -- Chairman and Chief Executive Officer

Good morning, Judy.

Judy Merrick -- SunTrust Robinson Humphrey -- Analyst

Good morning. On the Print segment, the margin improvement that you had in the fourth quarter was some on the restructuring and some on price. Can you kind of tell us little bit more about that and for your flat margin outlook kind of impact of each on that?

Mary A. Laschinger -- Chairman and Chief Executive Officer

So, the margin improvement in Print was a direct result of the restructuring of the business that we initiated in 2018. Judy, this was a significant effort as part of reducing selling expenses in general, because the business is in structural decline. And so, that's the key driver of the margin improvement in 2018. In terms of, I think we said flattish in 2019, we do have some benefits coming from the restructuring carryover benefits. They're not as great and we anticipate that there's going to be an offset in both volume on that margin improvement, as well as -- well it's mostly volume impact in the Print segment to keep our margins relatively flat. It would be volume and bad debt.

Judy Merrick -- SunTrust Robinson Humphrey -- Analyst

Okay. Got you. And also in the lower volume outlook you have for 2018 in Print, aside from the industry volume declines, are you still adjusting some of your client base going forward as well?

Mary A. Laschinger -- Chairman and Chief Executive Officer

Yeah, we are doing two things, Judy. We're adjusting the client base for high-risk accounts, primarily around debt. It doesn't do anything good to sell to them if they don't pay us, simplistically, and so we're more aggressively managing that. And for a number of reasons, we think the industry is not getting healthier and with price increases from manufacturers coming more and more into play, there could be even greater risk. So we're trying to be proactive to address that. So that could have impact on revenues.

The other thing that we are also adjusting is, we're making some choices on the product portfolio as well. For example, we are in the wide format space, print wide format print. And in the last couple of weeks, we announced that we were exiting the plastic portion or the non-paper portion of wide format and that will put some pressure on the top line as well. Now, the reason we're doing that is because we don't believe that we have the right to win in that space, whereas in the paper space for wide format, we do believe we do. And so, it's a strategic choice that we made. So it's a choice around both optimizing the product portfolio to get it to a sweet spot, as well as making customer choices to derisk the business.

Judy Merrick -- SunTrust Robinson Humphrey -- Analyst

Okay. That's helpful. And then just one more on the Facility Solutions. You talked last quarter and this quarter about it becoming more competitive. Is that an area mostly retail or are there other -- any other areas that you see that same competitive outlook in 2019 where you -- and other areas you might be exiting other than retail?

Mary A. Laschinger -- Chairman and Chief Executive Officer

Yeah. I would say what we're faced with is a lot of its retail and what we would characterize is smaller order type business. We generally don't want to be in the small order type business, that's where some of our other competitors play, but we did have some historical business in those spaces. And so, we've been identifying those markets and segments where we do have the greatest value proposition offer both in terms of our service capabilities, order metrics and our value-added consultative sell, and as well as markets where there is better growth dynamics and profitability dynamics. And retail is certainly illustrative of that in the US specifically and as well as there's bad debt risk in that space as well. And so we've just as we've looked at the trajectory on this market, we're making choices of where we really want to compete in terms of where we can get paid for the value that we bring that matches to our service metrics, which are also more in line with the same kind of service metrics we offer in our Packaging business, Packaging and Print business.

Judy Merrick -- SunTrust Robinson Humphrey -- Analyst

Okay. Thank you. And if I could, one more on the longer term optimization plan that you outlined, of the three areas, is there one that kind of stands out that has most improvement or -- and one area that you're seeing sort of earlier one that's kind of later (inaudible)?

Mary A. Laschinger -- Chairman and Chief Executive Officer

Yeah, I would say the commercial and the back office have the greatest levers for us with the most immediate impact.

Judy Merrick -- SunTrust Robinson Humphrey -- Analyst

Okay. Great. Thank you.

Operator

Your next question comes from Dan Jacome with Sidoti & Company. Your line is open.

Daniel Jacome -- Sidoti & Company -- Analyst

Hi, good morning. Can you give us some extra flavor on why you are confident the Packaging segment will be able to outgrow GDP in 2019? The only reason I'm asking is you tough compare versus last year's cycling the AAC acquisition and in this first quarter for that you're up basically at GDP levels. That was my first question.

Mary A. Laschinger -- Chairman and Chief Executive Officer

Sure. So our value proposition in Packaging is different than what the manufacturer's value proposition is. And I believe we add more value in general, because we're providing both -- we're substrate agnostic, we provide a total solution and we can -- and that gives us the ability then to target higher growth market segments as well. And so it's a combination of targeting higher growth segments within the Packaging space along with higher specialty products, and we do anticipate that there is going to be some uplift in pricing not to the degree that we had last year, as well as we've been continuing to make investments in this space, recognizing that the growth there has to offset the structural decline in our Print and Publishing business. So it's a combination of investments, it's a combination of our value proposition, the expectation that there will be some price benefit due to both cost of goods sold, as well as our own pricing initiatives and those factors in our minds add up to slightly better than GDP type growth.

Daniel Jacome -- Sidoti & Company -- Analyst

Okay. That's helpful. And then on the FS segment, I think, you said you're getting out of wide format, what's the tail on that, when would that be completed, what's your best estimation on that?

Mary A. Laschinger -- Chairman and Chief Executive Officer

So the wide format is geared in our Print business. And so those are wide format where you have huge, how do I describe, a sheet essentially of either resin-based products or paper-based products that printers have to support on big signs that you see outdoor signage, as well as some of these big things you see -- markings you see on the airport floors, for example, just to give you an idea of what it is, it's all in the Print space, we were supporting that business both from a paper-based and a non-paper-based and we're exiting the non-paper-based element of that. And we expect to have that exits complete here in the first half of the year. And there will be some implications to that in terms of inventory as well as revenue.

Daniel Jacome -- Sidoti & Company -- Analyst

Okay. And then just to be clear, payables in 2019 is an expected tailwind after being a headwind in the fourth quarter of this year -- of last year?

Mary A. Laschinger -- Chairman and Chief Executive Officer

Steve is shaking his head and said, yes.

Daniel Jacome -- Sidoti & Company -- Analyst

That's a yes, OK. I think, last one, not to give -- expected tailwind you said?

Stephen J. Smith -- Senior Vice President and Chief Financial Officer

It is.

Daniel Jacome -- Sidoti & Company -- Analyst

Okay. And then, not to give you a hard time, but I noticed -- did you mention weather as a potential adverse event in the early part of the first quarter? Did I hear that clearly?

Mary A. Laschinger -- Chairman and Chief Executive Officer

Yes. Yeah, that's correct.

Daniel Jacome -- Sidoti & Company -- Analyst

Can you tease that out a little bit? I haven't covered you too long, but I did go over the transcripts since the IPO and I don't think I've ever seen the word weather in there, so please.

Mary A. Laschinger -- Chairman and Chief Executive Officer

Okay. Yeah, we have mentioned it in prior earnings releases. But this year, the severity of what we saw impacting operations from the Northwest to the East-West on almost a rolling basis for both the month of January and February shutdown operations. I mean, we saw things, for example, in the State of Minnesota where the school systems were shutdown for an entire week, consumers just weren't going out and it impacts in particular our FS business, as well as our Print business. And so, it's all driven by how active is the consumer outside their home, as well as the government shutdown, as you can imagine, a lot of paper goes into the government and people that supports the government. And so, those two factors we believe will have an impact on the business here in the first quarter. We don't know yet to what degree, but it does happen when you shutdown a facility for a day or two, we're just not shipping anything. And therefore -- and then a lot of times, it's transactional business that doesn't come back.

Daniel Jacome -- Sidoti & Company -- Analyst

No, that's very helpful. I appreciate it. I should have thought of that. My blunder. Thank you.

Mary A. Laschinger -- Chairman and Chief Executive Officer

No problem. All right. So I think that's the end of our questions. So first of all, thank you, thank you for your questions. We're really pleased that the integration is now substantially complete and we are under way with the optimization efforts to really support our long-term strategy. In 2018, despite the complicated set of initiatives we completed, as well as the significant increases in bad debt we experienced, we did deliver on the adjusted EBITDA guidance provided at the beginning of the year. For 2019 and driven by our efficiencies, gained by the integration and now optimization, we expect to see an improvement in adjusted EBITDA and a significant improvement in our free cash flow profile. So again, thank you for joining us today and we look forward to speaking with you in May as we share our first quarter 2019 results. Have a great day.

Operator

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

Duration: 48 minutes

Call participants:

Tom Morabito -- Director of Investor Relations

Mary A. Laschinger -- Chairman and Chief Executive Officer

Stephen J. Smith -- Senior Vice President and Chief Financial Officer

John Dunigan -- Barclays -- Analyst

Judy Merrick -- SunTrust Robinson Humphrey -- Analyst

Daniel Jacome -- Sidoti & Company -- Analyst

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