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Edited Transcript of GLT earnings conference call or presentation 5-Feb-19 4:00pm GMT

Q4 2018 P H Glatfelter Co Earnings Call

YORK Feb 9, 2019 (Thomson StreetEvents) -- Edited Transcript of P H Glatfelter Co earnings conference call or presentation Tuesday, February 5, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dante C. Parrini

P. H. Glatfelter Company - Chairman, CEO & President

* John P. Jacunski

P. H. Glatfelter Company - Executive VP & CFO

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Conference Call Participants

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* Anojja Aditi Shah

BMO Capital Markets Equity Research - Senior Associate

* Deborah Anne Jones

Deutsche Bank AG, Research Division - Director

* Kurt Willem Yinger

D.A. Davidson & Co., Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning. My name is Tamiya, and I will be your conference operator today. At this time, I would like to welcome everyone to the Glatfelter's fourth quarter conference call. (Operator Instructions) Thank you. Mr. John Jacunski, you may begin your conference.

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [2]

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Thank you, Tamiya. Good morning, and welcome to Glatfelter's 2018 Fourth Quarter Earnings Conference Call. This is John Jacunski. I'm the company's CFO.

Before we begin our presentation, I have a few standard reminders.

During our call this morning, we will use the term adjusted earnings as well as other non-GAAP financial measures. A reconciliation of these financial measures to our GAAP-based results is included in today's earnings release and in the investor slides.

We will also make forward-looking statements today that are subject to risks and uncertainties. Our 2017 Form 10-K filed with the SEC and today's release, both of which are available on our website, disclose factors that could cause our actual results to differ materially from these forward-looking statements. These statements speak only as of today, and we undertake no obligation to update them.

I will now turn the call over to Dante Parrini, Glatfelter's Chairman and Chief Executive Officer.

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [3]

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Thank you, John.

Good morning, and thank you for joining us today.

The fourth quarter concluded a pivotal year in the transformation of Glatfelter into a leading global supplier of engineered materials. We accomplished this through several significant strategic actions.

Early in the year, the first commercial product was shipped from our new state-of-the-art facility in Fort Smith, Arkansas. This marked the successful conclusion of a multiyear greenfield project that enhanced our capabilities and expanded Glatfelter's Airlaid production capacity by 20,000 metric tons. We are now well-positioned to capitalize on the market growth in North America and better serve our customers.

To further strengthen our market-leading Airlaid business, we acquired Georgia-Pacific's European nonwovens business in Steinfurt, Germany, on October 1. Steinfurt's people, products and technologies are very complementary to our current Airlaid business, and the acquisition broadens our product lines and provides attractive synergy opportunities.

On October 31, we exited the paper business by completing the sale of Specialty Papers for $360 million, to focus Glatfelter's portfolio on higher margin and stronger growth businesses.

And finally, after 10 years of litigation, we entered into an agreement with the U.S. government to resolve the Fox River matter, with no change to our reserve.

As it relates to our quarterly results, we reported total revenues of $230 million, adjusted earnings per share of $0.03, and adjusted EBITDA of $20 million, all of which were in line or slightly better than expectations.

From a business unit perspective, Advanced Airlaid Materials delivered a very strong performance, and Steinfurt got off to a great start. Legacy Airlaid shipments were up 10%, and net sales increased 16% on a constant currency basis compared to last year. The successful progress of new customer qualifications is now contributing to our favorable results. When including the Steinfurt acquisition, net sales increased 50% and operating profit grew by 34%.

In Composite Fibers, however, we continue to operate in a very challenging and competitive market environment with elevated input costs. During the fourth quarter, the business took significant machine downtime to reduce inventory levels and adjust production to weak demand. Shipments were down 11%, with revenues lower by 6% on a constant currency basis, while operating profit was cut in half when compared to the same period last year. I'll speak to the steps we are taking to address these issues during my closing remarks.

At this point, I'll turn the call over to John to provide a more in-depth review of our fourth quarter results. And I'll offer some closing comments before we open it up for questions. John?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [4]

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Thank you, Dante.

Slide 4 shows the fourth quarter's consolidated income statement on a GAAP basis, with a comparison against the same period last year. As a reminder, Specialty Papers results were classified as discontinued operations for all periods presented in the earnings release and the accompanying investor presentation as of the third quarter of 2018. In addition, the Steinfurt acquisition is included in our results for the fourth quarter.

Results from continuing operations represent Glatfelter's engineered materials businesses and corporate shared services and overhead. As you may recall from last quarter, costs related to corporate shared services that were historically allocated to Specialty Papers remains in continuing operations, as required by the accounting standards.

For the fourth quarter, revenues were up 12% in constant currency compared to last year, driven by strong organic growth in Airlaid, the impact of the Steinfurt acquisition and reflecting weak demand in Composite Fibers. Operating profit was down in the fourth quarter versus last year, primarily driven by a challenging demand and input cost environment in Composite Fibers and the transaction costs incurred related to the Steinfurt acquisition. After excluding noncore and nonrecurring business items, we reported adjusted income of $1.4 million or $0.03 per share in the fourth quarter compared to adjusted earnings of $8.6 million or $0.20 per share in the fourth quarter of 2017.

Slide 5 shows a bridge of adjusted earnings per share from the fourth quarter of last year to this year. Composite Fibers results reduced earnings per share by $0.18, driven primarily by machine downtime, lower shipping volumes and elevated raw material prices. Advanced Airlaid Materials results increased earnings per share by $0.05, driven by the Steinfurt acquisition. And taxes reduced earnings per share by $0.04, driven by a higher effective tax rate, as expected.

Slide 6 shows a summary of fourth quarter results for the Composite Fibers business. Total revenues were 6% lower compared to last year on a constant currency basis due to the weak demand across all product segments during the quarter. Shipments were particularly weak in December, and this weaker demand level continued in January, but we expect it to improve for the balance of Q1.

For the fourth quarter, the food and beverage segment was down overall by 5%. But for the full year, coffee shipments increased 4% versus 2017, and we expect stronger growth in this segment as well as in tea in 2019.

Wallcover shipments were down 14% as demand was impacted by the overall weak economic environment in Russia as well as the unfavorable euro-ruble exchange rate. And similar to last quarter, metallized product shipments were down 16% as a result of industry overcapacity and product substitution.

Overall, selling prices improved, driven by increases earlier in 2018. We expect to realize $7 million to $9 million in 2019 from the price increase we announced late last year, largely beginning in the second quarter.

Operating income for the quarter declined $8.6 million compared to last year, primarily due to higher input costs, lower shipments and the related lower fixed cost absorption from machine downtime. While wood pulp prices moderated somewhat in late 2018, they were significantly higher than the year-ago quarter, and selling price increases have not been able to keep pace to offset this impact.

Our fiber costs also continue to be negatively impacted by the sourcing disruption at one of our key suppliers from a fire at their site that was discussed last quarter. The impact in the fourth quarter from this situation was $400,000. The supplier has begun to bring production back online, and we have developed some alternative sources to bridge the gap while their full production capacity gradually gets back to normal levels in the coming months. We expect the impact from this supply disruption in the first quarter to be slightly higher than the fourth quarter.

As a countermeasure to the challenging results during the quarter, we achieved a $2 million benefit from cost reduction and spending curtailment initiatives. Currency translation negatively impacted results by $1.2 million, with a comparatively weaker euro.

For the first quarter, shipments are expected to be up slightly compared to the fourth quarter. We anticipate a gradual pick-up in demand during the quarter following the weak demand in December and customer holiday shutdowns. For the full year, we expect volume growth to be in line with the market of approximately 3%. Selling prices are expected to be flat compared to the fourth quarter. And raw material prices are expected to come down slightly, but largely be offset by energy price increases. Higher production levels are expected to improve operating profit by $1 million from better fixed cost absorption compared to the fourth quarter.

Slide 7 shows a summary of the fourth quarter results for the Advanced Airlaid Materials business. Steinfurt's results are included for the entire quarter as the acquisition closed on October 1.

Total revenue for the quarter was $98.3 million, with legacy volumes increasing 10% compared to the prior year and net sales up 16% on a constant currency basis. With new customers getting qualified and the available capacity from our Fort Smith facility, the business had a strong growth in wipes, with volume up 38%, and tabletop shipments almost tripling.

Raw material and energy inflation negatively impacted operating profit by $2.1 million, but was largely offset by contractual pass-throughs to customers via higher selling prices. Operating income for the quarter increased $2.5 million, driven by Steinfurt getting off to a great start and contributing $2.4 million in operating profit. The legacy operations had a slight increase in operating profit with EBITDA increasing 11%, driven by the strong shipment growth.

For the first quarter, we anticipate total shipments to increase slightly compared to the fourth quarter. Selling prices and raw material prices are expected to be relatively flat, and energy prices are expected to increase slightly.

As we look to the -- ahead to the full year, we are reaffirming our legacy shipment growth expectation of 8% to 10%. As the fourth quarter showed, we have made significant progress with new customers and successful product qualifications that will continue to drive growth in 2019. We also expect Steinfurt's annual volume to be approximately 28,000 metric tons, with operating profit in the $7 million to $9 million range.

Slide 8 shows corporate costs and other financial items. As I stated earlier, following the divestiture of Specialty Papers and its results being recognized as discontinued operations in our consolidated financials, corporate costs have been adjusted accordingly for all periods shown to include corporate shared services costs that were previously allocated to Specialty Papers. We made progress during the fourth quarter with the rightsizing of our corporate costs and shared services to align with the smaller business footprint through the elimination of some spending as well as approximately 20 positions. And this helped us to reduce costs for the fourth quarter by $1 million compared to last year. We continue to expect to reduce corporate costs by $14 million to $16 million by the end of this year. This will result in estimated corporate costs of $35 million to $37 million in 2019 and $28 million to $30 million in 2020 compared with 2018 corporate costs of about $43 million.

Slide 9 shows our free cash flow. During the fourth quarter, cash flow from continuing operations was $22 million lower as a result of lower earnings, expenses related to acquisition activities and the timing of compensation-related accruals. We expect a significant improvement in free cash flow in 2019, driven by earnings growth, lower capital expenditures and better use of working capital.

Slide 10 provides details on capital expenditures. With all our major capital programs now behind us, capital expenditure levels are expected to decline significantly going forward. We expect total capital expenditures to be in the range of $23 million to $28 million for 2019.

Slide 11 shows some balance sheet and liquidity metrics. Our net debt on December 31 was $269 million, reflecting the combined impact of the Steinfurt acquisition and the Specialty Papers divestiture. Our leverage at year-end was 3x, and we had available liquidity of about $153 million. We expect our liquidity and leverage to improve by the end of 2019 as earnings and cash flows increase.

As was mentioned earlier, in January, we reached an agreement with the U.S. government to resolve our liability related to the Fox River. We are making no adjustment to our reserve as a result of this agreement. In January, we paid $20.5 million as required under the consent decree, which remains subject to court approval. The $25 million remaining reserve will be paid over the next 30 years for government oversight costs and monitoring and maintenance of the river.

And on January 25, we initiated a process to redeem our $250 million 5 3/8% notes currently outstanding. These notes will be fully repaid on February 28 through the use of our bank facility and will significantly reduce our interest expense going forward.

Slide 12 provides a summary of our projected tax rate. While the tax rate on adjusted earnings for the fourth quarter was 53%, we expect this to decline to 40% in 2019 as our U.S. earnings profile improves. And with the continued utilization and eventual exit from the use of NOLs, the effective tax rate will gradually step down, ultimately getting to 30% by 2020.

This concludes my comments. I will turn the call back to Dante.

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [5]

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Thanks, John.

2018 was a year of transformational change at Glatfelter as we reshaped our business portfolio, creating a more focused engineered materials company. The actions we have taken give us a renewed source of optimism as we focus on delivering improved profitability and cash flows in pursuit of our growth ambitions. Our profitability growth in 2019 will be driven from 4 main areas.

For Airlaid, our focus will be on driving growth in North America from the new capacity. We made significant strides on this growth in the fourth quarter with new products and customers, and we believe we are well-positioned to sustain this momentum. We also expect to realize growth from the Steinfurt acquisition, including delivering the expected synergies. Finally, we remain committed to improving operational excellence and achieving increased productivity across the business.

For Composite Fibers, we expect to grow in key markets, including single-serve coffee, tea and wipes, while managing risk in the wallcover and metallized markets. We're having some success with the price increase announced late last year, which will help to partially offset the significant rise in raw material costs, although it will not be enough to fully absorb these higher costs. Therefore, we are redoubling our efforts to reduce costs and improve efficiencies.

To that end, we're executing a program to reduce staffing levels by 50 people in the first half of the year to generate an annualized cost savings of $4 million. This initiative is focused on improving the efficiency of our metallizing business and other mill operations, as well as back-office functions. We expect these actions to lead to meaningful improvement in profitability for this business.

At the corporate office, we're focused on meeting the cost takeout targets for the rightsizing initiative as we adjust to the current scale of the business. As previously communicated, we intend to reduce corporate costs by $14 million to $16 million by the end of 2019.

We also expect interest expense to be substantially lower in 2019 from the payoff of our $250 million notes. We expect the refinancing of our debt will reduce our interest expense by about $6 million compared to 2018.

The significant strategic steps taken in 2018 have put us in a position to now drive growth from our engineered materials platform and improve profitability and cash flows as we build upon our strong customer relationships and leading market positions in categories like single-serve coffee, tea, wipes, feminine hygiene, adult incontinence, tabletop and electrical to deliver more consistent growth and new innovations; drive greater efficiencies as we rightsize our corporate costs and operate a more synergistic and agile engineered materials platform; and deploy continuous improvement and operational excellence aggressively throughout the organization to address headwinds and strengthen margins and cash flows over the longer term.

I'll now open the call for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Debbie Jones from Deutsche Bank.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [2]

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I wanted to start and say, first, congratulations on the strong performance at Airlaid. I have a couple of questions there. First, if I run rate your performance with the acquisition, it points to something higher than what you're guiding to for 2019. And so I'm just curious if there's any type of seasonality I need to be considering or projects or maintenance. Otherwise, what would actually get me to the low end of your guidance range?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [3]

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So Debbie, the guidance for Airlaid is up 8% to 10% volume on the legacy part of the business. For Steinfurt, we expect 28,000 tonnes of shipments. In the fourth quarter, Steinfurt shipped about 7,000 tonnes. So I think that -- when we look at our guidance, I think we -- I'm not sure how you're getting to a lower run rate. I think Q4...

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [4]

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No. I was [anticipating] higher. Like, you did $2.4 million in the quarter related to the acquisition, correct?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [5]

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Yes.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [6]

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So I'm just saying that, that actually would imply you did something north of $9 million on a run-rate basis for the acquisition.

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [7]

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I understand. Yes, I understand. So for the Steinfurt acquisition, we definitely had better performance in Q4 than what we had guided to. Shipments were a little bit stronger than what we had initially expected, and we achieved better on the cost side. There is a customer that we expected was going to be transitioning away to another substrate. That's happening faster. So we did lower our guidance expectations on shipments for Steinfurt by 1,000 tonnes next year, but we did not adjust our operating profit target. That remains $7 million to $9 million. So while we're expecting lower shipments, we are maintaining, and it's reflective somewhat of that better performance in Q4 and what we expect to achieve next year.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [8]

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Okay, that's helpful. And then I think you touched on it, but are you fully done with the qualification process in your North American mills that you were intending to do?

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [9]

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More or less, yes.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [10]

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Okay. And then on Composite Fibers, I wanted to understand your volume outlook for 2019 because -- we can take this offline if I'm wrong, but your sequential guidance, to me, for volumes implies that you're actually down year-over-year in Q1, which I'm assuming maybe there was still some wallcover weakness. But that would put kind of greater pressure on that 3% number to achieve that. It would put greater pressure on volume growth in the back half of the year in the second quarter. So I was wondering if you can walk me through that.

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [11]

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Sure. So I would say that your summary is largely accurate. And we know that the wallcover market got very soft in Q4, especially in December, and it continued into January. And Russia is impacted by things like currency and their economic situation, also trade tensions with the Ukraine. In December, the Russian Federation placed a ban on imported goods from Ukraine. That included a variety of things, including wallpaper. So that is driving some risk in 2019 for wallcover. Big picture, as John said, coffee grew 4% in 2018. We have a line of sight to expect a much stronger growth in 2019. Tea was off a couple of percent in 2018. We've had some customer wins. And as you may recall, we had abnormally hot and extended summer weather in Europe, which affected some of our tea sales. So the combination of customer wins and an expectation for more normalized weather throughout 2019 gives us reason to expect growth in tea. Our technical specialties were up about 3% in 2018. We also expect stronger growth in some of the electrical product lines as well as some of our consumer product lines. And we recently landed a rather large piece of metallized business that will start to ramp up in the second quarter. So when we look at all this, we say that Q1 is off to a modest start. And then we expect to see a pick-up in growth in quarter 2 through quarter 4. And on a blended average for the year, we expect to grow for the business unit around market levels of 3%.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [12]

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Okay, that's helpful. And then last question for me. Can you just -- sorry if you've said this, but can you remind me why some of the pricing benefits you're accepting -- expecting don't roll through until Q2, I think you called out? And then do you think there will be other opportunities for you in any of your businesses in Composite Fibers to move on price again throughout the year if you continue to see this raw material inflation?

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [13]

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So as you might recall, the price increase announcement for Composite Fibers occurred kind of rather late in Q4. And so it was announced toward the end of November. And so there were negotiations taking place. And as we transitioned out of one fiscal year and into the next fiscal year, just the nature of the implementation and ramp rate lends itself more to seeing a pick-up in uptake in Q2. We don't expect the uptake to take all that long. And we're expecting $7 million to $9 million of price realization. In terms of what may or may not present itself through the course of 2019, as you can appreciate, that will depend on a lot of different variables that I just can't really offer any conjecture on at this point in time. I believe we see opportunities for growth in our volumes. We're getting aggressive on managing our costs. We're going to continue to apply our continuous improvement. And the combination of these efforts, while we leverage our leading positions and strong customer relationships, it will lead us to believe that there's upside for the business as we make our way through 2019.

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Operator [14]

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Your next question comes from the line of Anojja Shah from BMO Capital.

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Anojja Aditi Shah, BMO Capital Markets Equity Research - Senior Associate [15]

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I just wanted to ask a question on the Airlaid margins in the fourth quarter. They seem to have declined a little bit. Can you just go into what -- do you still have startup costs at Fort Smith? Or is there something else going on?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [16]

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No, the -- so the -- the startup -- we do have some startup costs, but those were excluded from adjusted earnings. We do have higher depreciation with the Fort Smith facility coming online in 2018. So I think that's likely what is impacting the margins. We saw very good growth in the legacy part of the business. EBITDA went up 11%, so I think that is contributing to it. And then of course, on the -- some of the new products, we are still on a ramp-up curve on gaining efficiencies. So we've been hitting our productivity improvement targets with the new facility, but of course, we are not at the sort of the nameplate run rate just yet. We would expect that, that will continue in 2019 as we bring new products on and improve the manufacturing efficiency for those products. So I think those are the things that are contributing to the margins. But as we go through 2019 and we improve volumes by 8% to 10% for the legacy business, and as I said, improve the manufacturing efficiency, we would expect margins to be improving.

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Anojja Aditi Shah, BMO Capital Markets Equity Research - Senior Associate [17]

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Okay. And then is freights -- I know you called out freight in the release. Is freight recoverable in any way for you? Like through an inflation index or something like that?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [18]

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No. There's no contractual. It would have to be negotiated through a price increase.

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Anojja Aditi Shah, BMO Capital Markets Equity Research - Senior Associate [19]

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Right. Okay. And then can you just give me some color on how you're thinking about capital allocation right now? Are you open to more M&A right now? Or do you have to get to a target leverage level before you do any more deals?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [20]

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Our leverage is at 3x. Our covenant currently is 4.5x. So we definitely have space for growth. And so we are certainly open. It's part of our strategy going forward. We're certainly open to that, and we'll evaluate the impact to leverage and what the opportunity is on a case-by-case basis. But certainly, our balance sheet has the wherewithal to do acquisitions in the near term. But as we go through 2019, we would expect that with growth of EBITDA and some cash flows, we'll improve that leverage position. So it's still something that's very much part of our strategy.

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Anojja Aditi Shah, BMO Capital Markets Equity Research - Senior Associate [21]

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And can you just remind us what your target areas would be?

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [22]

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Well, I mean, historically, Anojja, we said somewhere around 2.5x, and -- or lower for acquisitions.

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Anojja Aditi Shah, BMO Capital Markets Equity Research - Senior Associate [23]

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Sorry, I meant targets for...

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [24]

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We've got over 4x. So..

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [25]

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I think it's the acquisition markets.

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [26]

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Oh. Were you asking the targets for acquisition markets as opposed to the leverage?

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Anojja Aditi Shah, BMO Capital Markets Equity Research - Senior Associate [27]

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Exactly. No, target for...

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [28]

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Well, you got some extra insight that should be consistent with what you heard previously. So certainly, the targets that would broaden our existing Airlaid business and Composite Fibers. Something in the engineered materials space, areas like hygiene, personal care, convenience, filtration, electrical, are examples. And clearly, from a geography point of view, some U.S.-based assets are preferred. Because if you look at the portfolio today, now that we've divested Specialty Papers, we've got a disproportionate amount of our assets coming from outside the -- located outside the United States. So that should give you a feel for how we might think about growing through acquisition.

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Operator [29]

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(Operator Instructions) Your next question comes from the line of Kurt Yinger from D.A. Davidson.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [30]

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Starting off, could you maybe just update us on your overall pulp consumption with Steinfurt added? And then maybe provide a bit of color on the mix between fluff and then hardwood or softwood?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [31]

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Sure. So for the Airlaid business, we consume around 85,000 tonnes of fluff pulp a year. For our Composite Fibers business, we're using primarily softwood pulps. We use about just under 90,000 tonnes, about 22,000 tonnes a quarter, so 88,000 tonnes annually of softwood pulp. We don't consume a whole lot of hardwood pulp these days with the divestiture of Specialty Papers.

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [32]

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And for CFB, we use a back -- other specialty synthetic and tree-free fibers.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [33]

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Okay, great. Helpful. And then on the redemption of the 5 3/8% notes, are you just going to utilize your revolver to a much greater extent? Or how are you guys thinking about that from a liquidity perspective?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [34]

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Yes. So we're -- our current revolving credit facility is -- matures in just over a year. So we're looking at replacing that facility to extend the maturities. But we will use our revolving credit facility and/or term loans as we refinance that debt.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [35]

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Okay. And on the $7 million to $9 million pricing benefit in 2019 you called out in Composite Fibers, does that assume full acceptance of what you've kind of put into the market? Or is there some level -- I guess, maybe conservative -- conservatism isn't the right way to put it, but should you not necessarily really get 100% of what you're looking for?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [36]

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Yes, that -- I mean, the $7 million to $9 million is what our expected realization is. So it's based on our discussions with customers. In many cases, we have agreements complete. In other cases, they're not quite complete. But that's our expectation for the impact to 2019 from that price increase.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [37]

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Got it. And lastly, just piggybacking on a previous question. In Airlaid, you exited the year at about a 15% EBITDA margin. My impression is that Steinfurt maybe is a bit better than what your business did in 2018. If you look at the volume growth and better utilization at Fort Smith, could you maybe talk about how you're thinking about margin improvement in 2019, or any longer-term targets you have for that business?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [38]

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Yes. So we certainly would expect that EBITDA margins will improve as we grow the volume. So this 8% to 10% volume we growth expect for the legacy part of the business should allow us to improve EBITDA margins. We essentially have the fixed costs that -- from the new Fort Smith facility that are largely in our results today. And so growing the volume should allow us to generate improved margins from where we were in Q4. This kind of a business, we would expect to be a high-teens EBITDA margin business over time. And then we think we're on track to be able to achieve that as we go over the next couple of years.

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Operator [39]

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Your next question comes from the line of Debbie Jones from Deutsche Bank.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [40]

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Just 2 follow-ups. I wanted to understand better the uptick in the CapEx range. I don't know if that's related to some of the new volume you called out in Composite Fibers. And then just my second question on cash flow, I'll wait until you're done.

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [41]

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Sure. I think that's largely related to the Steinfurt acquisition. But John, you can give her the details.

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [42]

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Sure. So there were some in-process projects for Steinfurt to improve their efficiency in finishing. And so as -- we acquired the business effective October 1. As we've now completely evaluated the project, we expect to continue on with that. And so we upped our guidance there. We expect we'll get some financial benefits from that, largely starting in 2020. So that's really the only driver of that change in CapEx.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [43]

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Okay. And then I just wanted to ask a little bit more about the timing of the payroll employee benefit impact you had in the quarter. Does that -- I'm kind of confused with the wording of that. Does that mean it unwinds in some way in 2019? Or you just expect a lower overall other impact from what you -- that bucket that you put together on Slide 9? And then also what -- could you just give us a little bit more color on your working cap for 2019? Is it potentially flat, or maybe a benefit?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [44]

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Sure. So what happened on the compensation items in Q4, what happened was we had accruals that declined during the quarter. And they declined by about $11 million in the fourth quarter. And for the full year, they were down $18 million. And that's what you're seeing on that other line on Slide 9. And so what happened there is we had extended downtime in Composite Fibers, and people used vacation to cover that. So we saw vacation accruals decline. We had differences in just the timing of when payrolls were paid around year-end this year versus last year. And then on the incentive side, our short-term incentive, we had very low accruals in 2018 based on the performance criteria. And so we saw those accruals decline. So it's the decline in those accruals that comes through on that line, amongst other things. But on the compensation side, we would not expect that to recur next year. We would expect to have a more normalized level of operations and incentive accruals. And so this is something that impacted 2018, but we would not expect it to impact 2019 in a negative way.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [45]

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Okay. And then working cap?

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John P. Jacunski, P. H. Glatfelter Company - Executive VP & CFO [46]

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Working capital, we would expect it to be slightly negative from the growth that we expect in the Airlaid business. Inventory-wise, we expect we will likely be flat or improve somewhat. But with the 8% to 10% growth on the legacy side for the Airlaid business and about 3% volume growth for Composite Fibers, we would expect a small use of working capital during the year, but nothing of any significant magnitude.

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Operator [47]

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There are no further questions at this time. I'll turn the call over to Dante for any closing remarks.

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Dante C. Parrini, P. H. Glatfelter Company - Chairman, CEO & President [48]

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Okay. Well, thanks, everybody for joining our call today. We look forward to speaking with you again next quarter. Have a good day.

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Operator [49]

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This concludes today's conference. Thank you for your participation. You may now disconnect.