Magnera Corp (MAGN) 2017 Q1 法說會逐字稿

Good morning.

My name is Lisa, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Glatfelter's First Quarter Conference Call.

(Operator Instructions)

It is now my pleasure to turn the call over to John Jacunski.

Sir, you may begin.

Thank you, Lisa.

Good morning, and welcome to Glatfelter's 2017 First 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 2016 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 forward-looking statements speak only as of today, and we undertake no obligation to update them.

And finally, we have made available a slide presentation to accompany our comments on this morning's call.

You may access the slides on our website or through this morning's webcast provider.

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

Thanks, John.

The year has gotten off to a solid start, and we believe we can continue to build on the momentum in our engineered materials businesses coming out of a challenging 2016 environment.

Our Composite Fibers business is a core growth platform for Glatfelter and remains instrumental in building market leadership positions in attractive global consumer product categories with healthy, long-term prospects.

We're cautiously optimistic on the outlook for the wallcover segment, and we expect demand for food and beverage products to remain firm, with shipment growth expected to continue.

When coupled with our cost-optimization initiatives, the outlook is promising for profit improvement and margin expansion as the year unfolds.

So let me get back to Slide 3, which also has our earnings for the quarter, where we generated adjusted earnings per share of $0.39, which is an increase of 5% over the prior year quarter.

Both Composite Fibers and Advanced Airlaid Materials delivered strong results with shipments up in all Composite Fibers segments and continued growth in wipes and hygiene products in Advanced Airlaid Materials.

While challenging market conditions prevailed for Specialty Papers, its operating performance and cost reduction efforts offset the majority of the volume and price decline impacts.

Overall volume, our revenue for the quarter was $391 million, down 1.2% on a constant currency basis compared to same quarter last year, while shipments were down 2.4%.

As I said, Composite Fibers had a strong start to 2017 with shipments up 5%, and operating income grew 29%.

Following a challenging 2016, demand improved across the board, including key market segments like tea, single-serve coffee and wallcover.

The Russia and Ukraine wallcover markets are showing signs of stability, and we're pursuing new customer opportunities in Western Europe and Asia.

At the same time, cost optimization actions announced earlier in the year for this business are gaining traction and contributed to overall EBITDA margin expansion of 220 basis points.

In Advanced Airlaid Materials, we had another solid quarter, with continued growth in hygiene products and a 7% increase in wipes.

Continuous improvement in operating performance at both facilities contributed to an 8% increase in operating income and widened EBITDA margins by 110 basis points.

We're also on track with our capacity expansion plans in Fort Smith, Arkansas, which we expect to come online during Q4, with commercial shipments beginning in Q1 of 2018.

With North American Airlaid demand remaining strong and supply dynamics tight, our strategic decision to bring state-of-the-art capacity to the market through organic investment remains timely.

For Specialty Papers, this was a challenging quarter, with overall shipments down approximately 4%, in line with the market, and operating income lower by 12%.

The Industry supply-demand imbalance has resulted in relatively lower operating rates and is continuing to put pressure on selling prices.

Improved operations and cost-saving measures partly offset selling price impact and higher input costs.

As we communicated during last quarter's earnings call, we successfully completed the boiler environmental compliance projects in Specialty Papers in January.

With this project now behind us, we expect lower capital expenditures for the business unit as we go forward.

At an enterprise level, our cash flow generation remains healthy, and we expect to return to normalized capital expenditure levels in 2018 upon successful completion of the Airlaid capacity expansion project.

And our balance sheet remains in good shape.

This concludes my opening remarks.

John will now provide a more in-depth review of our first quarter results.

Then I'll offer some closing comments before taking your questions.

John?

Thank you, Dante.

For the first quarter, we reported net income of $11.6 million or $0.26 per share.

After excluding noncore business items, we reported adjusted earnings of $17.2 million or $0.39 per share compared to $0.37 in 2016.

Slide 4 shows a bridge of adjusted earnings per share from the first quarter of last year to this year.

Composite Fibers results increased earnings per share by $0.06, driven by higher shipping volume and strong operational performance.

Advanced Airlaid Materials results improved earnings per share by $0.01.

Specialty Papers results reduced earnings per share by $0.03, as lower selling prices and higher input costs outpaced improved operations and spending controls.

Corporate costs, pension and interest expense were all in line with last year.

And the effective tax rate on adjusted earnings was 28.1% compared to 23.9% a year ago, reducing earnings per share by $0.02.

This higher tax rate is driven by net operating losses being incurred in the United States, primarily from the Fox River matter and accelerated depreciation on the Specialty Papers environmental compliance project.

While we ultimately expect to be able to realize the tax benefit of these NOLs, under the accounting rules, we are required to set up a valuation allowance against the value of the NOLs.

As a result, we expect our effective tax rate to be approximately 28% for 2017.

The estimated rate is sensitive to the level of income from Specialty Papers business unit, among other items, and as a result, there could be some volatility in the rate.

Slide 5 shows a summary of first quarter results for the Composite Fibers business.

Total revenue for this business was $125 million, up 1.3% when compared to the prior year and up 5.9% on a constant currency basis.

Lower selling prices, primarily driven by customer mix and the competitive situation in select markets, were fully offset by a 5% increase in total shipments.

Shipments of our tea and single-serve coffee products were up 6% compared to the year ago quarter.

Demand for these products was affected in 2016 via customer inventory management programs.

We returned to growth in the first quarter as expected.

These markets have solid demand characteristics, and we expect shipment growth to continue as we move through 2017.

Shipments of wallcover products increased 5% in the first quarter of this year compared to last year.

This market has stabilized with some signs of improvement, and we are producing trials for new customer opportunities in Western Europe and Asia.

Near-term trends continue to be challenging to predict, given the geopolitical and economic uncertainties in our primary markets for these products, but we are cautiously optimistic.

We also saw strong growth in our other product lines during the first quarter, with shipments of composite laminates up 11% and technical specialties up 6%.

Raw material and energy prices were relatively stable in the quarter, with the exception of abaca fibers.

Tightness in the availability of high-quality abaca fiber continues and is putting pressure on prices.

The Composite Fibers business is operating very well, and its largest facility in Gernsbach, Germany delivered record production to meet customer demand in the first quarter.

We also made good progress with our cost optimization program we announced earlier this year, generating a $1.9 million benefit during the quarter.

We continue to expect to generate $10 million for the full year.

When combining the impact of improved operational efficiency, and the cost optimization program, operations added $4.1 million to earnings during the quarter.

Overall, operating profit increased 29% to $14.4 million, with EBITDA margins expanding 220 basis points.

For the second quarter, when compared to the first quarter, we expect shipping volumes to increase approximately 5%.

We expect selling prices to be in line with the first quarter, while raw material and energy prices are expected to increase slightly.

Advanced Airlaid Materials results are summarized on Slide 6. Total revenue for this business was $60 million, down slightly when compared to the prior year and stable on a constant currency basis.

Shipments of wipes continue to grow, up 7% year-over-year, while shipments of hygiene products were up 1.4%.

The lower selling prices were driven by customer contract provisions that require the pass-through of raw material price changes.

As you may recall, about 90% of the revenue from this business has this cost pass-through arrangement.

Operations for the Airlaid business continue to perform very well, which is key to growth in 2017, as we bridge our customers to greater capacity in 2018 with the opening of Fort Smith.

This business unit is off to a great start in 2017, with operating profit up 8% to $7.1 million and 110 basis point increase in EBITDA margins.

For the second quarter, we expect shipping volumes to be slightly higher compared to the first quarter, and we expect average selling prices and raw material and energy prices to be in line with the first quarter.

Slide 7 provides a summary of the results for Specialty Papers.

Revenue for Specialty Papers was $205.8 million or 5.6% lower than prior year quarter.

Shipments decreased 4.2%, which was in line with the broader uncoated free sheet market.

Shipments of engineered products were up 6%, driven by increased shipments of inkjet and other specialized products, while shipments declined in each of our market segments, reflecting the broader market decline.

Selling prices in the first quarter were below the year-ago levels in all product categories, reflecting continued pricing pressure as a result of the excess capacity and lower industry operating rates.

We did announce a 6% price increase for products during the quarter that we expect will offset some of the price weakness on other products.

Raw material prices are relatively stable, although there has been an uptick in pulp prices in the broader market, and natural gas prices were higher in the first quarter of this year compared to last year.

Operating performance at our facilities was strong, with pulp mill -- with good pulp mill and paper machine performance, and spending was tightly controlled.

Overall, operating income declined $1.7 million to $13.2 million when compared to the year-ago quarter.

For the second quarter, we expect shipping volumes to be slightly lower than the first quarter with selling prices declining slightly.

Raw material and energy prices are expected to be slightly higher.

We anticipate taking machine downtime to align production rates with demand and manage inventory levels, impacting operating income by approximately $3 million during the quarter.

We will also complete our annual maintenance outages during the second quarter, with an expected impact to operating profit of approximately $22 million to $24 million compared to $26.3 million last year.

Slide 8 shows corporate costs and other financial items.

During the first quarter, we incurred costs related to the Specialty Papers' environmental compliance project, the Airlaid capacity expansion and the Composite Fibers' cost optimization program that were excluded from adjusted earnings.

Corporate costs during the first quarter were $5.3 million and were in line with prior year.

We expect corporate costs in the second quarter to be on a similar level.

Slide 9 shows our free cash flow.

During the first quarter, cash flow from operations was $7.6 million, slightly lower than last year.

The first quarter includes normal seasonal working capital use.

Total capital expenditures were lower this year, reflecting lower spending on our major capital programs.

Slide 10 provides estimates for capital expenditures and related costs.

The boiler environmental compliance project was completed in the first quarter.

The Airlaid capacity expansion project and the onetime implementation costs remain on target, with commercial shipments beginning in the first quarter of 2018.

Consistent with our prior guidance, for the full year 2017, we expect capital expenditures to fall between $125 million and $140 million.

Slide 11 shows some balance sheet and liquidity metrics.

Our net debt on March 31 totaled $353 million, up $35 million from the end of 2016.

We finished the quarter with $57 million of cash and $151 million available under our revolving credit facility.

Our balance sheet remains in good shape, with leverage based on adjusted EBITDA and on a net debt basis of 2.2x.

This concludes my comments.

I will turn the call back to Dante.

Thank you, John.

Our Q1 results really reflect a positive start to the year and we're in line with our expectations going into the quarter.

As we turn our focus to quarter 2 and the rest of 2017, our Advanced Airlaid Materials business continues to build on its leading market positions in hygiene and specialty wipes.

We expect these segments to continue their 3% to 4% growth rates, and the capacity expansion project for the North American market will be a catalyst to meaningfully improve the growth trajectory and margin profile of this business.

As stated earlier, our Composite Fibers returned to growth after a year of inventory adjustments and a slightly more challenging market environment.

It gives us optimism as we think about this important growth platform for the company.

And the combination of the expected growth across our market segments and the benefits of our cost optimization initiatives all look very good as we think about Q2 and the remainder of 2017.

And in Specialty Papers, in light of the challenging market conditions, we'll focus our efforts on new business and new product development by leveraging our engineered products platform while aggressively managing costs to preserve the cash flow profile of this business.

With the environmental compliance project now fully complete, capital spending will return to normalized levels.

Before I open the call for questions, I'm pleased to acknowledge that Glatfelter was the recipient of 2 distinguished awards last month, one in the area of product innovation and the other in recognition of overall supplier excellence.

The innovation award was announced at INDEX 2017, the world's leading nonwovens exhibition held in Geneva, Switzerland, for our Dreamweaver Gold product line, which is a new generation engineered material designed for applications in separators for lithium ion batteries and capacitors.

Dreamweaver Gold is a product developed by technology company Dreamweaver International in cooperation with Glatfelter.

And the supplier recognition award was from one of our largest customers, Keurig Green Mountain, who named Glatfelter, Supplier of the Year.

This is the highest honor among Keurig's 16 annual Supplier Recognition Awards, which were announced during its Top 100 Supplier Conference in Burlington, Massachusetts last month.

These awards demonstrate our ongoing commitment to customer service excellence, innovation and technology leadership and high-value engineered materials.

I'd like to recognize the hard work and dedication of our Composite Fibers team members who helped us earn these prestigious distinctions.

These are just a couple of examples of Glatfelter's tireless efforts to be supplier of choice of engineered materials to customers around the world.

I'll now open the call for your questions.

(Operator Instructions) And your first question comes from Mark Wilde with BMO Capital Management.

I wondered, Dante, just to start off on the Specialty Paper business, is it possible for you to kind of quantify the amount of downtime or the downtime costs in both the first quarter and then what you're expecting in the second quarter?

Sure.

I think John has that data available.

Sure, Mark.

In the first quarter, we took actually very little downtime, just a few machine days at the start of the year after the Christmas and New Year holiday.

In the second quarter, we expect to take around 12,000 tons of market-related downtime, and we expect the impact of that to be about $3 million, generally just the fixed cost impact of idling the machine.

Of course, that can be sensitive to the demand in the market.

We do have some elevated inventories after exiting Q1.

So this is, in part, to help work down some of those inventories and then also match production with incoming demand.

Okay.

And then is it possible, John, in the guidance, you kind of -- you point to kind of 3 things that are all drags of some order, kind of prices being down a little bit, costs being up a little bit, volume being a little bit weaker sequentially.

I'm just trying to figure how all of that nets against the sort of $3 million, $3.5 million drop year-on-year in maintenance expense.

Yes.

I think -- Mark, I don't really want to quantify it too much.

I mean, I think we've -- the drops are slight.

Prices in the first quarter were generally flat to Q4, which is down slightly.

So I think the -- so the descriptions I gave hopefully can get you in the right ballpark.

We don't expect real significant movements in any of the input costs or selling prices.

Okay, all right.

That's helpful.

And then just if the market remains weak, would you look at some kind of a long -- longer-term kind of supply cuts rather than just market downtime?

Sure, Mark.

I mean, as always, we monitor and match our demand with internal capacity.

And as John just summarized for you, we take downtime or reduce shifts when necessary.

We do have a bit of a diverse mix, which helps us keep our assets full more frequently through the course of an entire business cycle.

We do our analytics, and we're going to make the decisions that are necessary to preserve the cash flow profile of the business and have a competitive cost structure and match up our assumptions about the future for this particular business unit.

We did close a small machine in December of 2016 in Spring Grove.

It wasn't large, but it was just under 10,000 tons a year of capacity.

So it's something that we actively monitor and have a plan in place depending on how we see the industry demand and supply reconcile itself over time.

Yes.

I just didn't know, Dante, in either of the mills, whether it's possible to take out any more capacity without really kind of distorting the economics for either of those mills?

Well, it depends on the circumstance, right?

So it depends on where we see market pricing and utilization and how the mix is shaping up.

So I think it's very situational.

I think that's the best answer I can provide you at this point.

Okay.

I think that's fair.

Can we turn now to Composite Fibers?

And I wondered if you could talk a little bit about, first, what you're seeing in the wallcovering area and then maybe give us a little more color on some of these new business initiatives, you said in Western Europe and Asia, that try to build a little broader geographic base for the wallcovering business?

Sure.

So as I stated, we see the market as more stable than it has been in recent quarters.

We're encouraged by the first quarter growth of about 5% year-over-year.

I think if you look at some of the contextual data, it's also constructive, especially for the Russia, Ukraine region, where, in Russia, there's an expectation that we see GDP growth of about 1.3% this year coming off a couple of years of recessionary environment.

If you look at the ruble, it strengthened against the euro about 25%, Q1 '17 versus Q1 '16.

A Scandinavian competitor exited the market in 2016, which is creating some opportunity to replace them as a supplier across certain wallcover grades.

And then I'd say the broader opportunities that we see, whether that's in Europe or Asia, we've been working over several months and quarters on business development to try to round out then expand the portfolio of customers we have for this particular product line.

And so I'd say the combined effects of those have us cautiously optimistic.

The ongoing caveat is that when you have geopolitical profile of a region like Russia-Ukraine, it does make forecasting a bit more challenging and can lend itself to a little bit more uncertainty.

So...

Yes, okay, that's for sure.

And what do you expect, Dante, this year in terms of just food and beverage growth?

Yes, I would say that we expect to grow with the market at least.

And that would be 3% to 5%?

3% to 4%?

Yes, I'd say 3% to 4% is a good estimation of market growth for those product categories.

Okay.

And the last one I had.

Just turning to Airlaid.

You called out the impact of the Fort Smith startup, not only on your volume trajectory, but you mentioned margins.

And margins in this business are actually quite good relative to what they were when you bought the business about sort of 6 or 7 years ago.

How much further can a Fort Smith help you expand those margins?

So good question, and we're very enthusiastic about the contributions that Fort Smith will have for Glatfelter in the Airlaid business more specifically.

It's going to add additional scale to the business.

It will help us further diversify our technology and product offering.

We don't have to add a lot of fixed costs to support Fort Smith coming online.

So the incremental EBITDA that comes from Fort Smith will be at a margin profile that's attractive and should buoy the entire business unit.

Given the nature of the asset, the types of products and customers that we're serving, I'd rather not get into very specific details about the profit profile of the products that are going to be produced at Fort Smith, but I will say that, I think, it's stacking up to be a compelling investment and will help us take the Airlaid business to that next level of performance.

And Dante, if, for some reason, at some point, you added a second line or even a third line at Fort Smith, that would be incrementally even more positive to the margins in that business?

Yes.

We have the footprint in Fort Smith to be able to add and grow over time.

And again, it will depend on the circumstances, but generally speaking, I would envision that we would not have to add much along the lines of overhead to support another line of production asset in Fort Smith.

And what would you think that your trend of growth would be in Airlaid over the next 3 to 5 years, just from a volume perspective?

Well, if you look at our track record since we bought the business, we've grown our volume at a CAGR of around 5% per year.

If you look at the -- a lot of the different nonwoven categories, they're growing in the 3% to 6% per year range.

So I guess, it would depend on how the mix unfolds, but we expect, as leaders in this space, to be able to grow at least with market.

And your next question comes from Dan Jacome with Sidoti.

So let's just stay please with the Advanced Airlaid.

With the capacity that's coming online, just curious how you're thinking about just the mix and how -- where you want to skew it and there's personal hygiene and -- versus the wipes.

Looks like the wipes still, pretty solid growth here at, I think, 7%.

That was my first question.

Sure.

So Fort Smith capacity will be directed toward the specialty wipes market as a primary market.

And so that's where we expect the majority of the volume and growth to come from in Fort Smith.

And again, those markets are growing, if you want to round about 4% to 5% per year.

Okay, great.

And then just turning over to Composite Fiber, just the fiber for the abaca pulp.

I know what the answer is, I just want to hear your version kind of why is it tight?

Is it the same thing that was driving that tightness?

I think, a year ago, you had the same callout and maybe it's part of the trends, just in the beverage industry, some of those abaca pulps or whatever are pretty sustainable -- are kind of known for their sustainability.

Is that what it is?

Why is the market tight?

Sure.

So there are a few different factors that can influence the abaca market.

Those fibers are predominantly grown in the Philippines and parts of Latin America.

And so in the Philippines, weather can have an effect.

These are not large industrial plantations, but they're much smaller farmers and smaller tracts of land across all parts of the Philippines.

So as typhoon season comes through, that will have an impact.

I do believe that there's a leaning toward more sustainable natural fibers in general.

But in terms of Glatfelter, we're the largest buyer of raw fiber in the region.

And so due to that purview, we have made improvements in our sourcing strategies and have opened new channels for abaca.

We continue to optimize our recipes to either streamline and reduce the amount of abaca content without compromising product performance at all.

We're using other natural fibers.

And we also have, from a contingency point of view, non-abaca recipes developed for many of our grades.

So we have a variety of business continuity plans in place so that we can give our customers in the market supreme confidence that they can rely on Glatfelter regardless of these weather cycles and what else may be going on in the region.

And then finally, we do help manage risk through investments in raw materials with finished goods.

This is at our facility in the Philippines as well as finished goods on ocean liners and on the ground at our Europe-based mills.

Okay, great.

That's really a lot of color there.

I appreciate it.

And then I just had a question, I think you mentioned a competitor exited the market.

Where was it?

You say wallcover?

Yes, so there was a Scandinavian French player that decided to shut a machine down that was producing a combination of wallcover products, both nonwovens and paper-based wallcover, and decided to rebuild the machine to support growth in their core markets.

And so that creates an opportunity for us to engage their customers and see if we can bring on some new business, especially as a leader in that space and the largest player in Europe.

Okay.

That wasn't my question.

Why were they exiting, but it's not really a cause of concern.

It's just the wallcover wasn't their core competency, and so for you guys, it's a benefit, I guess?

Correct.

It was a very small part of their business.

Your next question comes from Debbie Jones with Deutsche Bank.

My first question, just on Advanced Airlaid, just kind of a point of clarification.

You called out wipes and hygiene products being up 7% and 1.4%, respectively.

Total volume's up just 1.2%.

Is there a product mix shift?

Or is there a category there that's kind of in decline for you?

And how should we think about that going forward?

I wouldn't describe any of the categories as in decline.

Clearly, wipes is a growing segment, and that we are investing in our capacity in Fort Smith.

And so we have a lot of effort underway to help bridge our customers through 2017, to get them to 2018 when the additional capacity will be available.

The overall hygiene category did grow, and the different subcategories of hygiene had different levels of growth rates.

I would say that Europe does remain a bit sluggish, and so that has pulled down the more historical growth levels that we've seen in some high and it's having a bit of a weighted average impact on the overall growth for that hygiene category.

But we had a very strong quarter for adult incontinence.

Seasonally, our baby swim diaper business is up substantially on a year-over-year basis, albeit on smaller volume, but nonetheless, that's encouraging.

So that's the way I would address your question.

Okay.

And then a question on Composite Fibers.

You provided a lot of color there, but just, if I look at your guidance, the sequential move for shipments would imply that you're flat year-over-year.

Can you correct me if I'm wrong there?

And then just how to think about that?

Because I think it was pretty encouraging to see that you had kind of shifted to growth in Q1.

So can you comment on the outlook there on a year-over-year basis?

And then second question, how should I think about the seasonality for this business in general?

Just because if I look historically, I'm not sure that, that's the best representative answer there.

Yes.

So Debbie, I think, certainly, we would expect some volume growth in Q2 year-over-year.

Our guidance was up approximately 5%.

So we do expect a little bit of volume growth.

Given some of the uncertainties continuing to surround the wallcover business, as we said, we're cautiously optimistic, but we have not embedded a significant amount of growth in our overall estimate.

So we expect to have some shipment growth in Q2.

Okay.

That's how...

Yes, we also have a sequential quarter basis, it will be up 5% and modestly over Q2.

And some of the caveats that John said, we want to still be a bit conservative in terms of how we forecast the wallcover business for CF view.

Yes.

So that's what I'm trying to understand, the seasonality there.

I mean, for example, Q1 to Q2 last year, I think you had like a 10% sequential move.

So it's just a little confusing to me because I don't think last year was really representative of the true seasonality.

So I just want to kind of get your sense on that going forward.

Yes, that's right.

I mean, Q1 last year was a particularly weak period, and we had talked about some of the inventory management programs that some of our customers had.

So definitely, Q1 of last year was a little bit on the weaker side.

So 10%, a little bit too big of an expectation, I think, as normal seasonal change.

Okay.

My takeaway here is that you might see a little bit better in Q2, but that you're just trying to remain conservative.

That's a fair summary.

And I'd say the Composite Fibers business has a little bit less seasonality through the course of the year, generally speaking, than our North American Specialty Papers business.

Okay, all right.

That's helpful.

And then I wanted -- can we just go back and kind of review what specifically you're doing to kind of cut costs in the specialty fibers business and how much more room there is to go?

You're referring to Composite Fibers?

Well, I think that you also had a decent amount of savings in papers as well.

But correct me if I'm wrong, if that was, I guess, something different.

Yes.

So you're correct.

So the cost improvement program that we announced for Composite Fibers is the one that has $10 million economic benefit projected for 2017.

And as we exit '17 and into '18, we estimate about a $13 million run rate.

And we're off to a good start in the first quarter so out of the gates quickly, which is good.

And not changing any of the guidance on the expectations for the cost savings in Composite Fibers this year.

In Specialty Papers, given the nature of that business, we have an ongoing and very active and aggressive series of continuous improvement and cost-reduction initiatives.

It's necessary, given some of the secular headwinds that we face and especially with the backdrop of weaker operating rates and its effect on price and volume.

So we are accelerating and intensifying our efforts in that regard and working very diligently to try to stave off the headwinds that we covered and that we expect to continue to see until industry operating rates and supply and demand balance themselves a little bit better.

Okay, great.

And then just 2 quick ones here.

I just noticed in your deck that you took out the major product costs for 2017 just from $6 million to $11 million.

Could you comment that, one?

And then two, final question, just kind of on the M&A pipeline for Glatfelter.

Sure.

So on the major project costs, the realignment, Slide 10, really, the difference between what we have previously disclosed in this relates to the tax situation I described at the start of the call, where we have previously been applying a tax rate against that, given the situation we're in with needing evaluation allowance against U.S.-based NOLs, we have reduced the tax rate to 0. So the gross spending on these items, pretax spending on these items has not really changed.

It's driven by a change in the tax rate that's being applied.

Okay.

And then the M&A pipeline?

Sure.

So acquisitions remain an important part of our strategy as we think about further accelerating Glatfelter's growth and continuing to build on our engineered materials platform.

As you know, we're exiting a couple of year period of heavy capital spending, whether it was the boiler conversions for environmental compliance at our U.S. mills and the building of a Greenfield facility in Arkansas for the Airlaid business.

Those -- the capital project for environmental compliance is complete, and we will bring up Fort Smith in Q4 this year.

So those heavy spending programs will run their course and wind down at the end of this year.

Fort Smith could have a little bit of cash spillover into Q1 next year, but it won't be anywhere near as material as the last couple of years have been.

At the same time, we were being mindful, although confident, on our position with the Fox River.

We also had to be thoughtful about getting clarity on what our cost expectations would be as we think about going forward in the completion of the remediation of the Fox River.

So as we gain more clarity around these points and as we wind down these major capital programs and expect a substantial lift in the cash flow profile of the business, and at the same time, we've been managing the balance sheet aggressively.

So our leverage is 2.2x or so.

We have capacity, and we have an interest in building on to our engineered materials platform.

So it's an active part, an ongoing part of our strategy, and we'll apprise you of progress and details when it's the right time.

(Operator Instructions) And your next question comes from Steve Chercover with D.A. Davidson.

It's kind of late in the Q&A, but I did have a couple of questions.

First of all, on Airlaid, I guess, the modeling.

Can you tell us how much EBITDA and depreciation you expect in 2018?

I don't know if you ever disclosed that.

Steve, we don't provide those types of estimates.

Well, how about maybe the payback period on that investment?

We -- what we said is we think the payback will be well above our cost of equity.

We expect that the ramp-up period will -- for the full utilization of the capacity, will be 2 to 3 years.

And as Dante had described earlier, we expect that the margins, the incremental margins from this facility will be well above our current average EBITDA margins because we don't have to add a lot of overhead when we bring this facility up.

Okay.

So it becomes commercial in Q1 of '18.

Should we foresee any significant startup expenses that should be incorporated into the Q4 projection?

So we've -- we're just referring in the last question or 2 questions ago around Slide 10 in our investor deck.

So we've outlined what we expect the onetime cost to be.

And we have been -- we've started to incur those as we've been hiring people and training people and implementing systems and that kind of thing.

So we've been carving those out of our normal earnings as a onetime project cost.

So they're excluded from adjusted earnings.

But we do have the guidance, again, on Slide 10 of our quarterly investor deck, and I'm happy to follow up and get into more details with you, if you like.

All right.

And then the downtime in paper, maybe just a senior's moment on my part, but I don't really recall you guys having much in the way of economic downtime until recently.

So is that the case, first of all?

We've had -- over the years, we've had downtime depending on market conditions.

I would say that more often than not though, we were certainly running at capacity.

We had some downtime in Q4 of last year.

And as we've described, the market is not particularly strong right now, and capacity utilization rates are on the lower side.

So that just makes for a much more competitive market.

And our volumes in Q1 were down in line, with the broader market.

So that's -- it's just reflecting that situation in the market.

Yes, I mean, I believe you've typically outperformed the broader markets.

So are there any grades that you could point to within the specialties that are kind of tailing off?

Well, in the tailing-off part, I think there's no new news on the part of the portfolio where you have exposure to U.S. printing and writing grades.

The areas that we have been leveraging, like our engineered products portfolio, high-speed inkjet, that was up 10% year-over-year in Q1.

We make a number of customized products that are a little bit on the one-off side that had double-digit growth year-over-year.

And so it's more a factor of the market conditions that John made reference to.

We've also invested a lot of energy and effort in our operational excellence and continuous improvement.

And the operating metrics of the pulp mills in the paper machines have also improved over this time.

So we're generating incremental capacity by virtue of better uptime efficiency, better overall manufacturing productivity, better scheduling and sequencing of grades.

And so I think, that's also a factor that we take into consideration when matching up our production capacity with the projected demand.

You have a follow-up from Mark Wilde.

Yes, just a few kind of small ones.

Dante, in the Composite Fibers business, I think, in the slide deck, you show a little over $4 million of operational improvement in Composite Fibers.

And I think the portion of that, that's tied to your kind of cost optimization program is only about $1.9 million.

So what are the other sort of pieces in there?

And are they going to be reoccurring, to any extent, through the course of this year?

Yes, so Mark, we've talked in the past about our continuous improvement initiatives that we have in our methodology that's aimed at improving productivity and lowering waste levels.

I think I mentioned in my comments that we had record production out of our Gernsbach, Germany facility.

We also, I believe, had a record production out of our facility in France.

So the initiatives that we have been undertaking to improve productivity has allowed us to lower our overall cost structure.

We definitely believe that, that's sustainable.

The $10 million cost-reduction program that we've also talked about, we believe that's sustainable.

So they've -- I think this business has done a very good job, over time, of continuing to improve the efficiency and cost structure of the business.

It certainly helps when you have a little bit of additional volume to be able to obtain the benefit of improved productivity.

And so we saw a little bit of that in the first quarter as well.

But we certainly believe it's sustainable.

Okay, all right.

And then also in Composite Fibers, for the second quarter, you mentioned increased volume but also increased raw material costs.

So can you help us think about how those 2 things kind of play against each other?

I think the raw material costs, we expect to be up slightly, really driven by pulp prices.

So these business purchases, most -- the only -- it makes the tobacco pulp primarily, but it purchases all these other pulps, and the market prices there have gone up a little bit.

And so we expect -- as we look at the overall raw material and energy, we just expect a slight increase.

But then that's driven by wood pulp.

Certainly, the 5% improvement in volume, you can see the impact from, what, Q1, where we had a similar increase year-over-year.

So the volume impacts should be more favorable, certainly, than the increase in the raw material cost.

Okay.

That's helpful.

And then John, can you just -- finally, can you just help us sort of on a quarter-to-quarter basis, kind of cadence the CapEx?

Because basically, in the first quarter, you're running at kind of what it looks like is kind of a normal kind of full year number for this year.

You ran a little over 30.

I think you're saying the number for the year is $125 million to $140 million.

When do we start to see that number really come down on just a quarter-by-quarter basis?

We did see it come down a little bit in Q1 as we finished the Specialty Papers.

I apologize, I do not have the quarterly breakdown in front of me, but I'm happy to follow up with you and give you a better sense for how the normal CapEx will flow for the last 3 quarters as well as the Airlaid expansion.

Okay.

And is it fair to say in '18 and '19, if we pencil in something in the range of $70 million to $80 million, sort of a good kind of first swing estimated CapEx in the 2 out years?

Yes, that's the guidance.

We expect to get back to our normal CapEx range in '18.

And it appears we have no more questions in the queue at this time.

Dante, do you have any closing remarks?

Sure, Lisa.

I just want to thank everyone for joining our call today, and we look forward to speaking with you next quarter.

Have a good day.

Ladies and gentlemen, this does conclude today's conference call.

Thank you for your participation.

You may now disconnect.