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Good day, ladies and gentlemen, and welcome to the School Specialty's Fiscal Year 2017 Year-end Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I'd now like to turn the call over to Glenn Wiener of Investor Relations. Sir, you may begin.
Thank you, Jimmy. Good morning, everyone, and welcome to School Specialty's 2017 Year-end Results Conference Call. Our call today is being webcast on our website, www.schoolspecialty.com, and you can access that in the Investor Relations section of the site. You could also visit our website for the press release and updated investor deck. And if anybody needs a copy, just contact my office, and I'll be more than happy to send it out to you. Joining us today, Joe Yorio, School Specialty's President and Chief Executive Officer; Ryan Bohr, Executive Vice President and Chief Operating Officer; and Kevin Baehler, Executive Vice President and Chief Financial Officer. All will have prepared remarks today and will be available during the Q&A portion of the call. Before I turn the call over to Joe, 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 included those preceded or followed by the words anticipates, believes, could, estimates, expects, intends, may, plans, projects, should, targets and/or similar expressions. These forward-looking statements are based on School Specialty's current estimates and assumptions, and as such, involves uncertainty and risk. Forward-looking statements are not used as guarantees of future performance and actual results may 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 the federal securities law, School Specialty does not intend to update or review the forward-looking statements. We have some aggressive plans over the coming months, with respect to Investor Relations and the team will be visiting various cities towards the end of March and into April. Ryan will discuss more of our plans and I'll be more than happy to speak with you following our call to discuss results, our outlook and plans for the future. With that, would love to turn the call over now to Joe Yorio. Joe?
Thank you, Glenn, and good morning, everyone. As you saw from our announcement yesterday, we finished the year with modest top line growth, improving gross margins, lower core overhead when excluding Triumph Learning's expenses, better operating performance and EBITDA. And we did this, while under a lot of pressure, as educational budgets across the country were hard-pressed and many in our industry had down years. The important takeaway is this -- that for the most part, it is behind us. As we move into 2018, we're anticipating more meaningful growth and profitability with more long-term opportunities to drive shareholder value. We've now reported 3 consecutive years of top and bottom line growth, which is as far as we can track is the first time in the company's history. However, finishing 2017 with $658 million in revenue, though a modest increase, was a disappointment from management's perspective. Even with some of the internal and external challenges, it should have been better. And as you see from our 2018 guidance, we're anticipating revenue to come in, even better in 2018, between $680 million and $695 million, representing growth of approximately 3% to 6%. Our strategy all along has been about balanced growth. And in 2016, we were successful in growing 5 of our 7 top categories. This was not the case in 2017 for a combination of reasons: budgetary challenges; and effective pricing in key areas; and to some degree, transition of account coverage challenges. Despite this, Furniture sales were up 4.2% and Instruction & Intervention sales were up 16.6%, the latter driven by the Triumph Learning acquisition. On the other hand, our AV Tech sales declined by 4.6% and Agendas by 16.9%, mostly as expected. Similar to my remarks throughout the year, we've taken steps to improve profitability within the Agenda category. And while there still may be some category erosion in the top line, we have a new leadership team in place over that category, are retooling the operating model and believe the declines will not be as significant in 2018. AV Tech is an area we've identified for investments. And we're also looking at several new product lines and brands that can improve our overall position in that space. While the category was down 4.6%, that total sales decline was about $800,000. We see opportunities for growth in the supply category, with new pricing structure, a strong private label offering and better contributions from our Team Sell model, as well as expansion into the Safety & Security segment. Furniture should continue to be an area of growth for us, as there remains a lot of demand in school construction and refurbishment. And we have experience with this first hand as many of the larger school districts are embracing the 21st Century learning environment and we're well positioned to deliver in that area. Instruction & Intervention holds great promise for us and not just in terms of year-over-year growth, ESSA, or the Every Student Succeeds Act, is gaining more traction and power shifting from the federal government to the states. There is greater emphasis on instructional growth and graduation rates and defined measurement of student progress and outcomes. And this plays right into Triumph Learning's core competency of developing state-specific supplemental learning assessment preparation materials. As ESSA will also focus on nonacademic measures of school quality and student success, it is very much in alignment with our overall 21st Century Safe School value proposition. Science was strong once again in 2017 and our FOSS product continues to build momentum and gain market share, both in the elementary and middle schools across the country. Keep in mind that state science level adoptions were down in 2017, yet we still grew, as we're having a lot of success in open territory states. In 2018, there was limited state adoption activity, which will curtail near-term growth, but over the next 3 years, there are several adoption opportunities on the horizon, with the largest one being in California. And that's expected in 2019. I feel our market position and opportunity in Science is exceptional and will strengthen our position as the market leader in hands-on, inquiry-based science. As I mentioned last quarter, we've been focusing on improving gross margins, both through efficiencies and product innovation. Gross margins were up 30 basis points year-over-year and we expect margins to improve in 2018 up to 70 basis points higher with the full year of Triumph Learning and continued focus on driving the sale of our proprietary brands. Overall, SG&A was up $2.7 million, but when considering incremental cost associated with the Triumph Learning acquisition, our core operating expenses declined by over $4 million year-over-year. And this was while investing in operations, IT and sales-driven initiatives. Overall, we posted a $1.9 million improvement in operating income and $2 million year-over-year improvement in adjusted EBITDA. And while that does represent 4% of growth, we're confident there's strong upside from this current level of profitability. So as while we look ahead, we see a modestly improving market and significant opportunities to drive our business forward. The biggest reason for this optimism stands behind what we're doing to drive growth and differentiation in the market to our 21st Century Safe School value proposition, which I've referenced on prior calls. Last year was really a test mode for us and we took the concept to several schools, school districts, government entities and some communities surrounding certain schools in Colorado, Baltimore and Cleveland, for example. And it hit home with everyone. It's not just about physical security or what to buy or how to prepare, it's about the overall learning environment taking into consideration mental, physical, social and emotional well-being of students and we as their educational partners, what we can do to support schools and create the most productive learning environments that focus on Social and Emotional Learning, or SEL. For a growing number of schools and districts, SEL has become the coordinating framework for educators, families and communities to collaborate, to promote students' social and emotional and academic learning that helps advance student outcomes through personal and academic success. That's the premise of our 21st Century Safe School value proposition.
Safe learning environments, how children are taught and learn, how they interact and how teachers and educators can deal with social and emotional issues in the school. The rise of social media, bullying and several other issues play into effect in the classroom and how it matters inside and outside. Putting our children in the safest environment to succeed is what it's all about. And that's how we're focusing our sales efforts and professional and development resources as we move ahead. We're transitioning from a transactional sales model to consultative, strategic partner-based sales model. That's why the team-selling model was so important as it brings in our domain expertise and third-party experts directly into the sales process to better understand customer needs and how we can support them. We're working on initiatives with Baltimore City Public Schools that builds upon our current collaboration with them and putting on their 21st century school construction and revitalization program. Additionally, we're gearing up as the sole corporate sponsor with Baltimore City Public Schools as the host city for the 2018 Council of Great City Schools fall conference, which brings together the 69 top urban school districts in the United States. This is a big deal as it was an honor to work with the council in Cleveland in 2017 as we truly share the same vision to support students and we see exciting opportunities ahead. I'll now turn the call over to Ryan and then Kevin who will provide a little more color on our financials before we open the call for questions. Ryan?
Thanks, Joe. First, I would like start off by expanding on our comments regarding the transition of our sales coverage model, particularly as it relates to small- to medium-size districts. Within the migration to the Team Sell model, with fewer territory sales managers and substantial changeover in personnel, focus gravitated to the larger districts. The premise being that the expanding inside sales organization would touch a greater number of accounts and provide that complementary coverage. While our overall results could be viewed as consistent with the market, our analysis reveals a correlation between segments of our account base that underwent coverage transition and performance. While this was a negative for 2017, it bodes well for the future and here's why. We have strong evidence that with the right sales coverage and an opportunity to deliver the entirety of our value proposition, we can bring value to our customers and increase penetration. In the investor presentation, we noted that sales in the top 4 tiers of U.S. public school districts, which essentially represents the largest 500 districts in the country, we grew 4.6%. While this is a broad measure of success. We have examples where very targeted focus in partnership with our newly established business development team has had a very meaningful impact. Specifically, we've seen growth rates of between 15% and [ 70% ] in large districts, such as Broward County, Dallas, Chicago and Houston, some of the largest markets within the U.S. Regarding the larger districts, note that they're actually less penetrated, as measured on a per-student basis than the smaller districts. Increasing sales per student from the current level of just over $8 to $23. The average of the top 20% of this group is nearly a $300 million growth opportunity for School Specialty. We are developing the value proposition, deploying the go-to-market strategy and investing in our platform to effectively penetrate this segment of the market, which represents substantial growth. Now we expect to reinvigorate performance in the small- to medium-size districts, with further refinements to the Team Sell model, more stable coverage, enhanced direct marketing activities and overall increased focus. Further, revisions to our pricing strategy are also important and will play a big role in helping us secure more transactional-related sales opportunities. Simply put, our list pricing in catalogs and our discount pricing on the web were simply not competitive on hundreds of highly referenceable commodity items that we sell. These items can be an important gateway to expanding business with a customer, particularly those with which we have a more transactional relationship. Importantly though, we found nearly as many opportunities to improve margins on specialty for noncommodity items. It is not that we do not provide aggressive, competitive pricing where appropriate, it's that our customers generally have to access that pricing through specific purchasing agreements, contracts or request for quotes. This is a key driver of the increasing percentage of our sales that we see flowing through strategic pricing agreements each year. Now this is not a 2017 issue. This has evolved over time and has grown in significance not only as the market has become more competitive, but as price transparency has increased. It has made us increasingly vulnerable to losing everyday transactional and teacher spend and this led to some of the weakness we saw in 2017. Our sales in tiers 5 through 8, which represent over 12,000 active district relationships and nearly 60% of the U.S. student population were down not because we lost district relationships, they simply purchased less. And certainly, part of that is driven by marketing conditions, but we feel that part of it was also driven by our coverage and our pricing. Attacking this pricing structure was long overdue and we feel very good about the changes we've made. Fortunately, we have shown a strong ability to penetrate these accounts in the segment of the market. The top 1,000 districts in tiers 5 through 8 of the market spent an average of $73 a student with us in 2017 compared to an overall average of just over $10. Driving the overall average to just half of the performance we see in the top 10% represents nearly $800 million growth opportunity, and we are better positioning SSI to penetrate it. In 2018, we reset pricing across the board effective January 1. Our focus was on better optimizing pricing. It involved both price increases and decreases and a streamlined and more consistent discounting strategy. We think improved pricing will be a key growth enabler, particularly in the Supply segment of our business. Importantly, over time, we believe it will be essentially margin neutral given that it will facilitate growth of higher-margin product categories and because we are simultaneously driving strategies to increase sales of our proprietary brands, particularly in the office and art portions of the Supplies category. This being said, we do expect some margin pressure in the near term, until sales and marketing efforts behind these changes mature and discount structures are reset with customers, which typically happens around July 1. As you consider our sales guidance for 2018, the low end of the range essentially equates to flat overall sales on the base business and maintaining the full year impact of Triumph's run rate sales. The high end represents about 2.5% growth on the base business and a modest improvement in the Triumph run rate. Recognize that growth in the base business is tempered by limited state adoption activity, as Joe referenced, supporting our Science curriculum and continued expected weakness from the Agenda category. We will continue to take a cautious stance on our revenue guidance until overall growth momentum takes hold. But we feel good about our growth prospects in the years ahead as there are many positive trends over the next few years with respect to specialty supply areas, Science, Instruction & Intervention and Furniture, in particular. As the 2017 results indicate, we've done a decent job neutralizing investments in the business in areas of cost inflation with cost reductions driven by process improvements. Look into 2018, the plan is very consistent with that theme. The full year impact of incremental SG&A relating to the TL acquisition and assuming management and sales incentive plans pay out at target, collectively represent $10 million of incremental expense in the coming year. And while we expect a variable SG&A cost to decrease as a percentage of sales, $29-plus million of incremental revenue through the system would be expected to increase SG&A by a little over $2 million. Beyond these areas, we are seeing some increases in transportation costs and the hourly wage rates in our fulfillment centers. As such, our SG&A outlook assumes that we drive meaningful cost reductions in other areas in 2018. We believe these cost reductions are achievable and we have several process excellence projects in place that are aligned with this objective, and which will result in savings in future years beyond 2018. Considering where we started from nearly 4 years ago, we've come a long way. Over 3 years, our adjusted [ GPM ] EBITDA has increased by approximately $15 million or 39%. During this time, we have not only made significant investments in our platform but also brought on experienced strong team members in all areas of our business. However, we are in the early stages to seeing the impact of changes to our business that are more transformational in nature. We see significant opportunity for growth within our existing customers and believe we have a sound strategy to unlock it. In addition, we are building a scalable platform to absorb growth. The degree of changes we are implementing to our platform and operating model has required a level of reinvestment in our fixed cost structure. However, I believe our fixed SG&A is peaking. As revenue growth takes hold, we believe our EBITDA margins will expand. Our level of capital investment in the business is also peaking, as we overhaul major platforms and implement critical applications that in some cases simply didn't exist. Continued EBITDA growth and declining CapEx will allow our free cash flow to increase considerably post 2018. This being said, we believe neither our market cap nor the level of investor interest in our company reflects the opportunity we have to increase shareholder value. Joe and I intend to spend considerable time over the next several weeks and in the months ahead, discussing our business model and financial outlook with potential investors and others that can increase exposure and bring additional investors into the stock. From our current information, our current number of round lot holders stands at approximately 180. We are confident our efforts over the next few months will allow us to drive that number over 300. Our core objective for 2018 is increasing our shareholder base and uplisting to NASDAQ and we intend to achieve that. With that, I'll turn it over -- turn the call over to our CFO, Kevin Baehler.
Thank you, Ryan, and good morning. Similar to prior quarters, our release and investor presentation provide a significant level of detail into our operating results. Rather than reviewing those, the details in those materials, I will instead focus my comments on our nonoperating results, such as interest expense and taxes, discuss debt, working capital trends and conclude with other financial considerations. Starting with interest expense. Total interest expense for fiscal 2017 decreased by $2.5 million as compared to fiscal 2016 and cash interest expense decreased by $2.8 million due to the combination of lower average outstanding borrowings during the year and lower borrowing cost associated with our Q2 debt refinancing. As we enter into 2018, our net debt level is up approximately $5.7 million as compared to the prior year. This increase is related to the combination of one, $19 million of cash paid in 2017 for the Triumph Learning acquisition; $4 million -- two, $4 million of debt refinancing that was paid in the early in the second quarter of 2017; and three, we had $2.8 million of accretion, or in other words, noncash interest in related to our deferred vendor obligations. These increases to debt were partially offset by the free cash flow of $20 million, which we generated during fiscal 2017. We currently project end of year 2018 net debt to be down approximately $20 million versus 2017. Cash interest, though, is expected to be down a modest amount in 2018 as average borrowings throughout 2018 will remain relatively consistent with 2017. Due to our seasonality, the incremental cash flow associated with our projected revenue growth and EBITDA growth in 2018 will be generated primarily in the fourth quarter. With respect to income taxes, our fiscal 2017 effective tax rate was negative 26.3%, while our cash tax rate was a positive 8.3%. Note that the cash tax rate is lower than our previous estimate, due primarily to incremental timing differences that we identified during the fourth quarter. The negative overall effective tax rate is primarily related to the reversal of a portion of our tax valuation allowances. This reversal is tied directly to our improving financial condition over recent years. The net tax benefit recorded in 2017 associated with the partial valuation of reserve reversal was $1.7 million. But note, we continue to carry a $7.3 million valuation allowance against those deferred tax assets related specifically to foreign taxes and capital losses. A couple of comments related to the impact of the 2017 tax reform. The reduction in federal tax rates from 21% -- or from 35% rather to 21%, lowered the value of our deferred tax assets by approximately $700,000. This impact was recorded in 2017 as additional tax expense. Going forward, the impact of the lower tax rates and other provisions of the act, such as the immediate deduction of certain capital investments will lower our cash tax rate in future years from previous guidance that we had provided. Currently, we are estimating that 2018 cash taxes will be in the low single digits. This reflects the recognition of a portion of our -- of certain of our deferred tax assets, such as our estimated 2017 net operating loss, AMT credits and intangible amortization, as well as the impact of the immediate deduction of certain capital investments. We project cash taxes to increase to between 15% and 19% in 2019 and we will approach the statutory rate for years thereafter. Our statutory rate equaling roughly about 25% or 26%, inclusive of federal and state taxes. The onetime transition tax related to unrepatriated foreign earnings and taxes is still being assessed as we reported in the Form 10-K. We have estimated the impact to be between 0 and $1 million. This range is based on the extent to which we are able to utilize any portion of our foreign tax credits to offset the tax. We will finalize this determination prior to filing our 2017 tax return in this year's second or third quarter. The final tax determined due to this onetime transition can be paid over 8 years as provided in the new tax act. Moving onto the balance sheet. Working capital of $101.4 million is flat as compared to the end of 2016, despite the addition of approximately $5 million of working capital associated with Triumph Learning. Over the past 4 years, working capital has shown steady improvement in terms of both dollars and percent of revenues. Since 2014, overall net working capital is down $18.7 million and down from 19.3% of revenue in 2014 to 15.4% in 2017. On an adjusted basis, for the impact of a full year of Triumph activity, our 2017 working capital as a percent of revenue was less than 15%. We continue to be pleased with the progress in our working capital management and key elements of accounts receivable, inventory and accounts payable are generally in line with our internal plans. Looking forward to 2018, the new revenue recognition standards have received a significant amount of attention as the impact of these new rules will affect the timing of revenue recognition for many companies. The new rev -- new revenue recognition standard became effective for us at the start of 2018, but as disclosed in the Form 10-K, we do not expect this standard to have a significant impact on the timing of School Specialty's revenue recognition. However, related to this standard, we are concluding that catalog costs will be expensed as incurred beginning in 2018 versus currently or 2017 and prior years, we capitalized and amortized catalog costs over the period in which revenue was generated associated from those catalogs. The impact of this change in the accounting for catalogs will be a timing item affecting the comparability of quarters. Beginning with our first quarter of 2018 results, we will call out these timing impacts. Finally, I want to comment on the material weakness in our internal controls that is reported in our Form 10-K. The main contributor to the material weaknesses are deficiencies that have been identified in our general computer controls, primarily related to access and change management among IT personnel, who are tasked with maintaining these systems. These general computer control deficiencies lead to an inability to rely on automated controls most significantly in the applications and systems that track inventory and shipping activities.
It is important to note that we do have daily operating procedures and manual controls in the areas of inventory quantities and shipping accuracy, which do provide us comfort that our day-to-day operations are performing appropriately. However, these manual controls around these daily operating procedures are not designed, executed and documented in a manner that is consistent with the internal control framework. As a result, these manual operational procedures are deemed ineffective. But couple of important points to keep in mind. Number one, we have not identified any unauthorized changes to our system as it relates to the access deficiencies that we had, had as I mentioned earlier. We also did not identify any material financial misstatements in our consolidated financial statements. And remediation efforts have begun and we are confident that these deficiencies will be fully remediated during 2018. In fact, certain remediation steps, such as restricting certain access rights has already been completed. With that, I'll turn the call back over to Joe.
Thank you, Kevin. Glenn, do we want to open it up for questions now?
Yes, sir. Operator, we're ready to take questions now, please.
[Operator Instructions] Our first question comes from Kevin Tracey with Oberon Asset Management.
Congrats on a solid 2017. I had a question about the Science business, obviously, outperformed your expectations coming into the year, significantly. I'm wondering if you have an estimate of your total market share when you kind of look at the K through 5 market? And then can you explain your position on what's going on in the hands-on segment of that market? You mentioned you're a market leader, but I imagine, a number of your competitors are -- are developing new products that align with the Next Generation Science Standards. So can you talk about what's going on in the competitive environment there?
Yes. Kevin, this is Ryan. As far as defining the markets for our Science offering and kind of our position in it. You know that, that our market opportunity is actually evolving. It used to be pretty black-and-white, whether it was opting for a textbook-based program or an inquiry-based program, such as FOSS. And as it relates to that, we feel like we have a very, kind of, dominant market share in that K-5 area and would be the largest player. The interesting thing though is that as our product offering has evolved, we're expanding the reach of that offering into the middle school market, which is an area where the hands-on inquiry-based type programs like a FOSS have been less prevalent. But also, as we look at our opportunity for FOSS, it can serve as both a core curriculum but also can be used in a supplemental manner. And we have plenty of examples with customers where they may have a textbook and they may use elements of our FOSS program to supplement their instruction in key areas or principles. So that -- that trend has also, in some respect, expanded our addressable market and we're seeing the benefit of that. And that is also consistent with some of the trends we see in the -- in the curriculum side of the market overall, where teachers and curriculum developers are kind of developing or curating their own curriculum pulling together resources from a multitude of sources. And so that trend also benefits the potential for FOSS. So it's -- we're a real strong player where we've made some -- our team has made some very smart investments and expansions to the product line. And we think it continues to be a core franchise for us.
Kevin, this is Joe. I think, we also want to touch on, which is a new one for us. As we expanded into Department of Defense schools this year, so that was a new opportunity for us and we will continue to look at opportunities on that line so.
Okay. And so you mentioned there, that you have the dominant position of that inquiry-based market. But has that -- have you seen more kind of competitor activity, you know, challenge in that business, I mean, given, when you look at the Next Generation Science Standards, certainly seems like it promotes that area of the market. Are you seeing competitors come out with new products that are challenging FOSS or...
Yes. There are certainly some increased competitor activity, but we feel that we're kind of out in front of that. So I think it's not -- I mean, there's 2 things. There's obviously products that align with the Next Gen Science Standards, but then there's also products that are very heavily and primarily inquiry based, such as FOSS. So we certainly are seeing some more competitor activity, but we continue to be very successful kind of competing in the market.
All right. And just to clarify your reporting, so this year, you've moved some of your Science supply sales from the Curriculum segment to the Supplies segment. Are those like Science Supplies related to FOSS or do you see that as a separate business?
Generally, those would be separate from those that are attached to the FOSS program.
Okay. All right. And then on the debt. So in the presentation, you noted that leverage ratio is now below 3x and a lot more cash flows to come this year. But you're still paying pretty high rates on your term loan, is there other prospects that, that's going to be refinanced again this year?
Well, there's certainly a cost to refinancing, too, that you have to bear in mind. And in some respects, it can be viewed as high cost of -- higher cost of capital than what might be available. But it was only a year ago, that we went through a very, very thorough process to identify the best debt structure. And we're very comfortable that, that we did a very full market test of what was available to us and what we put in place makes sense. So we're always monitoring that, always trying to understand opportunities. And as we continue to perform, our opportunities will continue to expand. Even when we did this a year ago, our history, while we keep putting it further and further into rearview mirror, still had an impact on the market opportunities available to us, which is [ diminishing. ]
And our next question comes from Ben Terk with Active Owners Fund.
Thanks for all the hard work and the progress disclosure as usual, it's exceptional and just great results. A question around everyone's favorite question, which is prospects for organic growth in 2018. Just trying to, sort of, get the interval of confidence here. Obviously, we all look at the business and see a recurring revenue business. How are you all thinking about the prospects for likelihood of organic growth in terms of how much would you deem is recurring revenue, how much would you say is already in the bag has been sold versus how much you got to go get to that modest organic growth for 2018? And how does the snapshot today in this point in time compare to where you were last year?
Yes. Thanks for the question, Ben. As we look at our business, a very high degree of it is recurring revenue business where are -- these are customers that have transacted with us for many, many years. And as I referenced in my comments, where we see some weakness in certain segments of the market, that, that weakness is not defined as losing customer relationships or losing customer accounts. It's lower purchasing volumes in certain categories, okay, which we need to be continue to be innovative, we need to continue to be close to the customer to understand where their current needs are and how those shift from year to year. So with that said, our account base is very, very stable and the amount of recurring revenue is very high. So when we look at -- now, that the flip side to all of that is driving growth. We have many, many examples of strong growth, but then there's when you deal with such a diverse account base, it takes a little bit to get momentum overall. It's -- I think it's hard to get that momentum to build on the upside, but it's also makes us very stable on the downside. So it's kind of a blessing and a curse in some respect. But we are seeing some very strong wins, I referenced them. And those are wins where, those customers that I referenced, some of the larger districts, they purchase from us for years. But getting closer to them, understanding more of their specific needs and opportunities has allowed us to put forth difference -- different elements of our value proposition, or it could be even service opportunity -- things that they wanted to change with respect to how they purchase products, how they integrate with their supply partners. Sometimes those are the elements of the solution that we drive that can increase purchases. So there's a high degree of comfort in the majority of our business. It's just driving that growth, which is really aligned with all the things that we're doing.
So, Ben, this is Joe. So I'd tell you why that we feel that the organic growth that we want to go after, we feel that we're very well positioned. And I kind of mentioned in my comments, our relationship that we really got last year with the Council of Great City Schools put us in front of the key decision-makers in the top 69 urban school districts in the U.S. So we're meeting, talking to their superintendent or now most of them are their Chief Executive Officer, their chief academic officer, their chief of staff, head of procurement, and as we're in there speaking with them about 21st Century Safe School value proposition, the thing we're not talking about is product. And so, as we're having these conversations, it's normally myself and Ed Carr, our Chief Sales Officer, some of the other key executives, and having one-to-one relationship about where their business is going, how they are being held to a more fiduciary responsibility standard that potentially weren't in the past and how they want to drive student outcome. So I think we're very well positioned. And to give you an example, Ed and I've recently met probably going back to November with a large school district in the United States. In that district, right now, we do about $300,000 in business. But as we've started to meet with their senior executives and they presented their business plan back to us, what we found out is, we actually have an opportunity to probably being north of $3 million in the next 2 or 3 years. We think there's an immediate upside of potentially $1 million in growth. Now you've got to get that growth. But it's opened up for the entire breadth of our product offering and our category experts to meet with the people in that school district to understand their needs and to position us to be their consultative expert as opposed to being a transactional seller. So that's why we feel confident. The value proposition is key. There's no one out there that can do it like we do. And by Ed and myself and other of the senior executives being able to talk at the highest level of the organization, you're truly talking to the decision-maker, who is then figuring out how we become a collaborative partner to execute on his or her value proposition, what they need to do to be more fiscally responsible for their school.
[Operator Instructions] Our next question comes from Patrick Retzer with Retzer Capital.
Good work on 2017 and the fourth quarter, despite the challenges you've listed, you came in at the high-end of the EBITDA guidance. And it sounds like we can look for meaningful revenue growth and a nice jump in EBITDA and free cash flow in 2018. So good work on that.
Thank you, Pat.
So, Ryan had talked about how you've been investing heavily in the business. And it sounds like many of those projects are coming to completion in 2018. So 2019 has the prospect for a substantial increase in your free cash flow margins, is that right?
Yes. I would -- how I characterized, you know, I mentioned, Pat, in my remarks that we kind of see our CapEx levels peaking. You'll notice that our CapEx, portion of our CapEx [ and ] product development expenditures actually coming slightly down in '18, I think about $600,000 is our expectation. Our product development investment is up a little bit, but that's directly related to the fact that we've essentially doubled the size of our supplemental ELA in math instructional material portfolio. I think that we will be completing many of these projects into 2019. And there's a few other kind of more significant projects in the pipeline. But we definitely feel that our current levels are pretty close to the peak and that we'll see reductions in '19 and then even more significantly in 2020. And that we would expect that should we attain our growth objectives and maintain our cost structure like we believe we can, we will see pretty strong expansion of our free cash flow.
Well, that's great. It sounds like the Triumph Learning acquisition is working out well. Can you comment on that? And also on whether we should expect to see 1 or 2 incremental acquisitions in 2018?
Yes. Sure. The acquisition is going well. I mean, I think the integration is going smoothly. And essentially, the entire operation will be fully integrated by the end of this month, including all fulfillment and et cetera. The Triumph product portfolio is very complementary to ours. And they have a very strong sales organization that is also very complementary to ours. So it will take some work on the product line to put -- come up with the right product expansions and really kind of refocusing that business. But we do think it bodes well for growth in the I&I category. And it should be a strong contributor to improved gross margins and as well as our EBITDA margins.
And then Pat, I think also as well as Ryan said, as we look at the 2 teams without a doubt, the Triumph teams' makes our I&I team stronger. They bring products to the mix that our team didn't have access to. We have products that they didn't have access to. I think the overall team is in a much stronger position with a much deeper knowledge base than we had previously. With regards to your question about acquisitions, as we've talked about previously, we got a target list of acquisitions that we continually work on in specific categories where we think there's a deficiency in our current offering or one that we think that we don't have at all, but might mean a strength to our position moving forward. So that absolutely is a key initiative for us as we move into '18 and beyond to continue to look for those potential acquisitions that are quite frankly accretive to our value proposition and where we want to go as a company.
Okay. Good. It sounds like you've gotten a great reception on your initial rollout of the 21st Century Safe School value proposition. Will that be rolled out nationally this year?
It will. We've got a complete marketing campaign behind it. You'll start to see white papers that position us as subject market experts in that category. And you may have seen with the most recent school tragedies as one portion of value proposition, Michael Yorio, who runs our Safety & Security category, he was all over the news as a subject matter expert and contributor to Fox News Cavuto, he was on Telemundo, NBC. And so as we see on that portion of the business, there's absolutely upside for us. And we're also working with government officials not only on the Safety & Security side, but as a whole, to be one of the thought leaders in writing best practices, particularly in that category because one of the things that we know as we're moving forward with that -- with that specific area of Safety & Security, there's a lack of best practices throughout the United States. So we see ourselves as being a thought leader in that category and being a main contributor, hopefully even to writing the best practices. And then, throughout the rest of the offering of the 21st Century Safe School value proposition, it ties right into the Social and Emotional Learning, which is quite frankly, the key buzz word in education today. And so we think we're right in the mix of that as well. So long-winded answer is that, yes, you will see more rolling out. You should start seeing the white papers here. And you will really see a social media blitz with us positioning that value proposition.
Okay. On these horrible school shootings, it seems like public opinion is shifting to the point where something has to be done, money has to be spent in these areas to secure these facilities. Are you getting that same sense that we will see meaningful activity in that area this year?
Absolutely. I mean, literally, Michael and I talk daily, he is talking to state officials, he is talking to federal officials, everyone is trying to look for what the answer is. And unfortunately, there's a lot of people looking for that silver bullet. There isn't one. It's got to be a systemic process and procedure, it's got to be best practice and evidence-based and it's not going to be a quick fix overnight. I mean, there's a bunch of ideas on how could be a quick fix overnight, but there is an easy way to dispute those as well. So it really goes around to the comprehensive fix of training, of products, of services, I mean, it's about awareness, preparedness and preservation. So again, we're at the front end talking to a lot of government officials. I think you're going to immediately see state standards as you've already seen some in Florida and we're walking with all of those, but I think those state standards, you're going to see probably transpire into or transcend into potentially national standards. But again, they don't like to use the word standards [ of ] best practices and we are keenly involved in that right now.
Okay. Great. Last question, the trading activity in the stock seems to have picked up recently. I'm somewhat surprised by the rather modest increase in the number of round lot holders. What day is that as of, do you recall?
That's as of -- I think, Kevin has the report, but it's as of within the last week or 2.
That's correct. As of about the end of the February, Pat.
And our last question in queue is from Brendan Whittington with BulwarkBay Investments.
I had a question around how many individual shareholders does the company have? And how many does it need in order to uplift to NASDAQ?
Sure. As I mentioned in my comments, we have -- our estimate is we have approximately 180 round lot holders and we need to get to at least 300.
And given that you've pretty concentrated shareholder base, how does the company intend on getting these incremental 120 shareholders?
Yes. Well, we have -- there has been as our last person in the call mentioned, there has been increased trading activity, there has been growth in the number of shareholders. We are intending a number of meetings with potential investors and registered investment advisers, those that can bring us access to more of a retail account base. Some of our efforts in that regard in 2017 had a significant impact where 1 or 2 new relationships have led to 30 to 40 additional shareholders. So there's -- it is concentrated, but there is also enough activity that we think that gradually over the next several months we can get there.
Would a share issuance through the -- through an acquisition be a partly contemplated way to increase the shareholder base?
Absolutely. We just -- the key there is having a good use of proceeds and making sure that, that use of proceeds is accretive to the value of the equity. So clearly, that would be an opportunity to stimulate an offering, and an acquisition could potentially stimulate an offering and be a very good use of capital.
Thank you. And I am showing no further questions in the queue at this time. I'd like to turn the call back over to management for any closing remarks.
Yes, thank you. I just want to thank everyone for your continued support as we move into 2018 and beyond, and we'll continue to execute on our value proposition to drive value. So thank you, everyone, and have a great day.
Thank you.
Thank you.
Ladies and gentlemen, this does conclude your program. And you may all disconnect. Everyone, have a great day.