Magnera Corp (MAGN) 2017 Q4 法說會逐字稿

Good morning.

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

(Operator Instructions) Thank you.

I would now like to turn the conference over to John Jacunski.

Please go ahead.

Thank you, Shikita.

Good morning, and welcome to Glatfelter's 2017 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 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.

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

Thank you, John.

Good morning, and thank you for joining us today.

Before I provide some comments on our results, I'd like to speak briefly about the announcement contained in this morning's release regarding our Specialty Papers business.

As you know, since the start of the company in Spring Grove, Specialty Papers has been an important part of Glatfelter.

However, over the years, we have shifted more of our focus to developing our engineered materials businesses and have been successful in doing so.

As we focus on continuing that growth and after careful thought, we have decided to explore a range of potential strategic alternatives for Specialty Papers business.

We believe this will make Glatfelter a more focused, growth-oriented company as we strive to accelerate our strategic execution.

I'll have some additional comments on this decision and our broader long-term strategy in my concluding remarks.

Now let's turn to Slide 3 of the presentation.

For the fourth quarter, we reported adjusted earnings per share of $0.34, down $0.06 compared to the prior year quarter.

Overall, EBITDA was flat for the quarter versus last year, and our earnings were helped by an unusually low tax rate.

Our engineered materials businesses performed very well, with strong top line and profit growth.

For Composite Fibers, fourth quarter operating profit was up 22% from the prior year on strong volume growth of 18%.

Demand was strong and shipments for all product segments were up.

The profit improvement was further supported by strong operational performance and successful completion of the cost-optimization initiatives announced a year ago, driving margin expansion by 60 basis points.

This business has clearly turned the corner after a couple of challenging years.

For Advanced Airlaid Materials, fourth quarter operating profit increased 9% from the prior year on the heels of strong shipment of wipes and hygiene products.

This was a record year for this business, both in terms of profit and margins.

Airlaid product demand in North America remains strong as our new capacity in Fort Smith, Arkansas is nearing the completion of customer qualifications and product testing.

At this point, we are on track to start commercial shipments this quarter.

For Specialty Papers, fourth quarter operating profit was down $9.8 million, with shipments lower by 5% from the prior year.

The decline in profitability was led by a lower year-over-year pricing.

However, we did see pricing trends improve during the fourth quarter, and we expect further pricing improvement as we go forward, driven by a significant reduction in industry capacity that is expected to improve operating rates.

This is a very constructive development for Specialty Papers.

At this point, I will turn it over to John, who will provide a more in-depth review of our fourth quarter results, then I'll offer some closing comments on the full year's performance and our broader long-term strategy before taking your questions.

John?

Thank you, Dante.

For the fourth quarter, we reported a net loss of $10.1 million or $0.23 per share.

After excluding noncore and nonrecurring business items, we reported adjusted earnings of $15 million or $0.34 per share, compared with $17.6 million or $0.40 per share in the fourth quarter of 2016.

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

Composite Fibers results increased earnings per share by $0.06, driven by strong volume growth of 18% and favorable operations.

Advanced Airlaid Materials results improved earnings per share by $0.01, also driven by strong shipments.

Specialty Papers results reduced earnings per share by $0.19.

Lower selling prices year-over-year and raw material and energy inflation were the main drivers.

Corporate costs improved earnings per share by $0.06, driven by lower legal expenses from the Fox River matter and lower incentive compensation.

And taxes improved earnings per share by $0.03 from a lower tax rate this quarter of 6.7% compared with 13.6% from the year-ago quarter.

The lower rate was due to the current quarter's tax provision, reflecting the release of a valuation allowance, resulting from updated projected pension expense.

As discussed on prior calls, our tax rate was sensitive to levels of U.S. income and pension expense, and as a result, our actual rate for the fourth quarter came in a lot lower than expected.

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

Total revenue for this business was $144 million, an increase of 14.6% or 7.7% on a constant currency basis when compared to the prior year.

Shipments were up across all product categories with a total increase of 17.7%.

Shipments were particularly strong in wallcover that were up 31%, and tea and coffee that were up 8%.

Selling prices for Composite Fibers stabilized in the quarter compared to the third quarter, however, they continue to be lower on a year-over-year basis.

And as a result, revenues and profit were negatively impacted by $3.7 million.

Entering 2018, we are seeing price stabilization and pockets of price increase as demand for our products looks strong.

Higher wood pulp prices resulted in input cost inflation of $2.6 million when compared to last year.

In the fourth quarter, operations ran very well, with demand driving improved machine utilization and lower downtime.

This led to favorable fixed cost absorption as production efficiently supported shipment growth.

Overall, operations contributed $6.3 million to the earnings improvement.

Operating profit for the quarter increased 22%, with EBITDA margins expanding 60 basis points to a record 16.9%.

The business also successfully achieved its targeted savings of $10 million from the cost-optimization initiative announced in early 2017.

For the first quarter, shipments are expected to be in line with the very strong level of the fourth quarter.

Selling prices [and] raw material and energy prices are expected to be slightly higher than the fourth quarter.

Slide 6 shows a summary of fourth quarter results for the Advanced Airlaid Materials business.

Total revenue for the quarter was $66 million, a 7.9% increase versus the prior year quarter and a 3.1% improvement on a constant currency basis.

Overall, shipments rose 2.4%, driven by strong growth in wipes of 11%, with the hygiene segment up 3%.

The growing demand for our wipes products underscores the market need and the timing of our additional Airlaid capacity in Fort Smith, Arkansas.

Operating cost for this business were up $1.1 million compared to the prior year, reflecting general inflation, primarily in labor costs, and higher depreciation expense.

During the fourth quarter, we went live on new manufacturing and business information systems in our Canadian facility.

The go-live was successful.

And through the efforts of many throughout our organization, there was little disruption to shipments or production.

We plan to roll this out to the business unit's European operation later in 2018.

Operating income of $7.2 million is up 9% from the prior year quarter, demonstrating the strong volume growth and profit profile of this business.

EBITDA margins expanded 80 basis points this quarter to 14.8% compared with the year-ago quarter.

In the fourth quarter, the business successfully initiated customer qualifications and product testing from the new facility in Fort.

Smith.

Commercial shipments are scheduled to begin later this quarter after we complete the product testing process.

We continue to expect overall 2018 shipments to be 10% to 15% higher than 2017, driven by this new capacity.

For the first quarter, we expect shipments to be approximately 5% higher than the fourth quarter as commercial activity begins in Fort Smith.

Selling prices and raw material and energy prices are expected to increase slightly compared to the fourth quarter.

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

Total revenue for the quarter was $191 million or 7% lower than the same period last year.

Shipments were down 5.4%, reflecting the paper machine that was shut down at the end of the fourth quarter.

During the quarter, engineered products segment grew 3.1%, and the cargo segment was down less than 1%.

Selling prices were lower year-over-year with a negative impact of $4 million for the quarter.

Although average selling prices were down year-over-year, they were up slightly from the third quarter as there were a number of announcements in the market from uncoated freesheet manufacturers regarding capacity reductions and conversions, totaling about 10% of the market.

This encouraging market dynamic also facilitated recent price increase announcements for carbonless and many of our engineered products as well as the second increase announcement on a broad range of uncoated free sheet products.

Operating profit for the quarter declined to $3.5 million as the business also faced rising raw material and energy prices of $2.7 million and higher depreciation of $1.3 million from the environmental compliance investments completed in early 2017.

Higher freight costs created a headwind for the quarter of $1.1 million given the current shortage of commercial trucks created by hurricane recovery efforts, record freight volume from the strong holiday season and new federal safety rules that took effect in December.

We expect these higher freight costs to persist at least through the first quarter.

While we achieved meaningful savings from the salary workforce reduction announced in the third quarter, this benefit was overshadowed by transition issues related to the paper machine shutdown, including changes to production patterns and operating personnel.

We have made significant progress on these items, and they were largely resolved by the end of January.

For the first quarter, we expect shipments to be in line with the fourth quarter.

Average selling prices are expected to increase by $20 per ton.

Raw material and energy prices are expected to increase by about $2 million.

In January, we experienced disruption at the pulp production at our Ohio facility due to abnormally cold weather that led to water quality issues and the freezing of certain equipment.

These issues were resolved by the end of January, but as a result, we expect operating performance in the first quarter to be in line with the fourth quarter.

Slide 8 shows corporate costs and other financial items.

During the fourth quarter, we incurred costs related to the startup of our new Airlaid facility in Fort Smith, Arkansas and residual spend on the environmental compliance project in Specialty Papers.

These costs, including charges related to cost optimization actions, were excluded from adjusted earnings.

Corporate costs during the fourth quarter were favorable at $3.1 million compared to last year due to lower Fox River legal cost and a reduction incentive compensation.

We expect corporate cost in the first quarter to be higher than the fourth quarter by approximately $1 million.

Slide 9 shows our free cash flow.

During the fourth quarter, cash flow from operations was $52 million, slightly lower than a year ago.

For the full year, adjusted free cash flow was $31 million or $21 million lower than 2016.

The lower cash flow was driven by higher capital expenditures, increased cash cost related to cost reduction issues and the movement in accruals related to incentive compensation programs.

With the completion of these major programs and initiatives, we expect cash flow in 2018 to improve significantly.

Slide 10 provides additional detail on capital expenditures and related costs.

As you can see, the last couple of years have included heavy capital spending for major programs, with 2017 capital expenditures totaling $132 million.

With the environmental compliance project complete and the conclusion of the Fort Smith investment in the first quarter of 2018, we expect total capital spending to return to more normalized levels in 2018 of approximately $70 million.

I'll now just take a minute to provide some comments regarding a recently enacted U.S. tax legislation and its impact on the fourth quarter as well as 2018 as shown on Slide 11.

In the fourth quarter, we recorded a onetime net charge of $20.9 million, which is reflected in our GAAP EPS.

This includes an estimated charge of $41.8 million related to the deemed repatriation of earnings from foreign subsidiaries.

We have sufficient NOLs to cover this tax so there will be no cash impact to the company.

Partially offsetting this charge was the positive impact from revaluing our net deferred tax liability at the lower tax rate.

Keep in mind, the regulatory guidance for this new tax law continues to be refined, and the fourth quarter charge is based on current estimates.

We will finalize the overall impact during 2018 as further guidance is received.

Based on the new tax legislation, we estimate our effective tax rate for 2018 to be 33%.

This higher rate is driven by a lower tax rate being applied to our expected U.S. laws, resulting in a lower tax benefit.

There are also new tax provisions in the law regarding tax on certain foreign income and limitations on interest deductibility that increases our rate by approximately 6%.

Our estimated rate for 2018 is sensitive to the amount of income or loss in the U.S. since certain of the new tax provisions are driven by the amount of U.S. taxable income.

Slide 12 shows some balance sheet and liquidity metrics.

Our net debt on December 31 totaled $365 million, up $48 million from the end of 2016, primarily driven by the major capital programs.

We finished the year with $116 million of cash on hand and $67 million available under our revolving credit facility, for a total liquidity of $184 million.

Our leverage was 2.3x at year-end based on net debt and adjusted EBITDA.

Liquidity continues to remain strong and our balance sheet is in good shape to support our growth initiatives.

This concludes my comments.

I will turn the call back to Dante.

Thanks, John.

As I've stated before, our engineered materials businesses are the growth engines of Glatfelter, which is underscored by the strong performances delivered by Composite Fibers and Advanced Airlaid Materials in 2017.

You can see more specific details on Slide 13.

For Composite Fibers, revenue grew 5% in 2017 versus the prior year, driven by strong shipment growth of 4% in tea and coffee, 11% in technical specialties and 19% in wallcover.

We expect demand for this business to remain robust in 2018.

Operating profit was up 15%, and adjusted EBITDA margins improved by 80 basis points, coming largely from lean manufacturing execution, continuous improvement in productivity efficiencies.

The cost-optimization initiatives that were launched at the beginning of the year successfully delivered the targeted $10 million of benefits.

For Advanced Airlaid Materials, revenue growth was 4% compared to prior year, with volumes up 3%.

While feminine hygiene demonstrated stable shipment growth of 2%, wipes and adult incontinence were each up by 14% on strong demand.

This business posted not only record profits but also record EBITDA margins that expanded 110 basis points.

With strong demand expected to continue in North America, our 22,000 tons of new capacity in Fort Smith, Arkansas is coming online at an ideal time and consistent with our expectations for the needs of this market.

This new state-of-the-art capacity will help drive our projected shipment growth of 10% to 15% in 2018.

These 2 businesses continue to have a long runway for growth, and we will look to enhance this growth through acquisitions.

As shown on Slide 14, our full year earnings were impacted by the pricing environment for our Specialty Papers business despite the strong operating profit generation in our engineered materials businesses.

The weak pricing environment eventually led uncoated freesheet benchmark prices to reach 11-year lows and reduced specialty paper operating profit by $20 million.

However, we are encouraged by the price increase announcements that have resulted from the recent capacity closures and machine conversions being taken by several companies totaling approximately 10% of industry capacity.

Pricing trends improved in the fourth quarter, and we expect further progress as additional price increases announced late last year and early this year are implemented.

This bodes well for Specialty Papers.

While this plays out, we will continue to focus on factors that are within our control, such as delivering a great customer experience, product innovation, productivity improvements and cost optimization to enhance profitability and cash flows.

We've also made significant progress toward the completion of our major capital programs.

We've finished the environmental compliance projects in Specialty Papers and we're on track to complete the Airlaid expansion.

Going forward, we expect our cash flows to improve significantly with these major programs now behind us.

As we look back on the last several years, Glatfelter has increasingly shifted its focus towards its growing engineered materials businesses.

We are established global leaders in markets like tea, single-serve coffee, wallcover, feminine hygiene and wipes.

And we expect demand for these products to remain robust in 2018.

We're excited about the imminent startup of our new Airlaid facility in Fort Smith and the opportunities we see for future growth in these businesses.

Our engineered materials platforms are global businesses for Glatfelter, and we are committed to remaining the supplier of choice to a wide variety of market-leading customers across a broad range of consumer and industrial product categories.

The key markets we serve are growing at GDP or better, and we're focused on leveraging our leading positions to drive further value creation for our shareholders.

As we focused on these growing markets, our Specialty Papers business has become a less core to Glatfelter and to our vision for the future of the company.

We therefore have decided to explore strategic alternatives for this business, including a possible sale or spin-off of the business unit, which we expect will make Glatfelter a more focused growth-oriented company.

Our board is fully aligned with this long-term strategy and the direction for the company.

We believe this is the best path to build a more profitable and distinctive company and to drive sustainable value creation over time.

I'll now open the call for your questions.

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

The first question is just on the papers business.

Demand was a little worse than I was expecting and the price erosion was worse than I was expecting.

And I think it was below your guidance as well.

Can you just comment on that, if there's anything you want to call out about those 2 items?

Debbie, I think that our volumes were largely in line with our guidance that we guided to volumes down 5% for Q4 versus Q3, and that's pretty much where we landed.

On the pricing side, our average selling price per ton was down about $6 a ton, but that was really just due to some mix movements.

When we look at pricing at the product line level, prices were up a little bit.

I mean, they weren't up a lot, that's for sure.

But it certainly did change the trend that we were seeing as we moved through the last -- certainly, last year or 2 was declining.

So we saw a stabilization in pricing, slight increase.

And I think as we continue to implement the price increases, essentially across almost all of our product lines, we would expect that we would see about $20 a ton increase in our average selling prices in the first quarter.

We expect there will be further realization as we move through the year.

We think it's a little bit difficult to handicap how the second uncoated freesheet announcement will play out, but I think it's reasonable to expect that over the second half of the year, we will see further price improvement, second quarter.

In the third quarter, we'll see further price improvement as those are implemented.

Okay.

And then on the reviewing strategic alternatives, I think you've been asked this question in the past before around the business.

Why now?

How does tax reform play into that?

And just kind of your thoughts on the decision that you made overall.

Sure.

Debbie, we feel very strongly that our Composite Fibers and our Advanced Airlaid Materials businesses, which reflect about half of our revenue and 3/4 of our EBITDA have significant growth potential.

And we want to focus our resources on accelerating this growth.

And by focusing on these businesses over the last several years, as I stated, Specialty Papers has become less core.

And we believe this path provides the greatest opportunities for the company, while also enhancing value to the shareholders.

So we're very excited at the trajectory that we see for AMBU and CFBU and want to focus our energy and resources on maximizing those.

Okay.

And then to the extent that you can, how do you think the Fox River liability plays into this review?

And then what -- also what type of CapEx do you envision spending specifically in this business in 2018?

Yes.

I'll turn it over to John on some of the CapEx, but the Fox River review does not have an impact on the review of strategic alternatives for Specialty Papers.

Okay.

I guess, I mean like if you were to sell the company, does the liability go with the company or does it stay with you?

Stays with us.

And your next question comes from the line of Mark Wilde with BMO Capital Markets.

Just coming back to the strategic review, Dante.

I wonder, first, if you could just kind of walk through what you think some of the options are.

You've mentioned sale, you've mentioned spin.

Just maybe put a little more color around that if it's possible?

Yes.

I said possible outcomes of the review process could include but aren't limited to things like sale of a business unit, a spin-off or other separation alternatives.

It's early in the process and we really haven't established any particular time line.

Although we expect to move this through at a logical pace.

But it's premature for me to speculate on much else past this.

And Dante, would you expect that you do the 2 mills as a bundle?

Or is it possible that it might be -- they might go in different directions?

I've always gathered that the performance between the 2 mills actually varies quite a bit.

Yes.

I think when you decide to explore strategic alternatives, then you have to keep an open mind to any and all value-creating options.

And of course, we want to find solutions that we think are best win for both the Specialty Papers business and for Glatfelter.

So I think we'll stay open-minded and thoughtful.

Okay.

And John, is there any way to kind of get a sense of what the tax basis in the 2 mills is?

Yes.

I mean, the tax basis, with the recent $100 million investment we made for the environmental compliance, certainly, has moved up.

So I would say it's in the $200 million, $250 million range.

Okay.

All right.

That's helpful.

And then just moving over to kind of Fort Smith, is it possible for you guys to just help us think about sort of the cadence of kind of either startup costs or actual contribution from Fort Smith as we move through the year?

Sure.

So Mark, on the startup costs, our guidance is that we have about $3 million after-tax of remaining startup costs.

Those are largely Q1.

There could be a little bit that is in Q2, but I would say largely Q1.

And then we should be done with that.

And that's really the only type of sort of unusual type cost.

We have the other types of cost that we've incurred this year around cost optimization and SPBU environmental compliance, those are completed.

As it relates to the phasing of Fort Smith, our guidance for Q1 is that we'll be up 5% versus Q4 in volume.

If you look back to what we shipped in Q1 of last year, that's says we're going to be up about 8%.

So there's not a real significant level of phasing between in Q1, Q2.

And as we get into that, we expect it to be a pretty gradual sort of 8% up in Q1, and then we would expect slightly better year-over-year comps as we go through the year.

And as we've talked about from a margin perspective, we haven't disclosed specifically what we expect margins to be from this facility.

But what we said is that we would expect stronger EBITDA margins because we don't have to add any significant overhead for this facility compared to what we have today, and logistics-wise, we are in a better position where we are sourcing pulp close to where it's produced and we are shipping the products closer to where they're consumed.

So we would expect some benefit there.

So we expect higher EBITDA margins, but we haven't guided beyond that.

Okay.

And so the facility by the end of, say, 2018 should be EBITDA positive, John?

Certainly.

I mean, we'd expect it to be EBITDA positive very quickly.

Okay.

All right.

That's helpful.

And then Dante...

Ignoring -- Mark, just to ignore -- that's ignoring the $3 million of startup cost.

Yes, yes, yes.

I'm just trying to think about on a fixed cost basis down there.

And then Dante, is it possible to get a little more color on this sort of big bump we saw in volume and kind of Composite Fibers?

Did that come across the whole mill system, or did you get that in specific locations?

I mean, it looks like Dresden must have gotten a lot of incremental volume in the quarter from those wallcovering volumes.

Yes.

So if you go back to the beginning of 2017, we had conveyed our confidence that growth would be restored in CFBU's markets after a couple of challenging years, and that's played itself out.

As John said, in the fourth quarter, we had about 8% lift in food and beverage.

We're up about 20%, composite laminates; technical specialties, up 22%; wallcover, up 31%; metallized, up 3%.

So it was really across the system.

And you asked specifically about wallcover.

Market's much more stable.

We're very pleased with the year-over-year growth.

As I said, 31% in Q4.

You may recall last quarter, it was 30%.

And Q2 was 11%.

So we've had 3 quarters in a row where the volumes are back to pre-crisis levels.

And that we've seen more stability with currencies and the geopolitical backdrop.

And the Scandinavian competitor that exited about a year ago also created some opportunities for the Dresden facility.

Okay.

And then finally, John, just to -- or Dante, to come back to kind of Specialty Papers, I wondered if you could just give us an update on the kind of the core business at Spring Grove, which has usually been the trade book business.

I think 4, 5 years ago, people were really like worried about the printed book going forward.

And it just seems like that business has a much more favorable outlook today than people might have assumed a few years ago.

Sure.

Yes.

Spring Grove's specialty mix has benefited from growth in our engineered products group, so that volume was up about 3% in the fourth quarter.

And as you had mentioned, we've been a leader in the trade book segment for quite a long time.

And the market I think has settled itself in terms of what's going on the E platform, what's going to be on permanent book papers.

And we've seen a little bit of a resurgence.

There is an ebb and flow, as you may recall, to the trade book business based on some of the high profile or best-selling authors and titles that may come to market in any particular year.

But we still have our leading share position and a strong brand recognition and franchise in both the traditional book business, which has stabilized and has demonstrated some growth in certain pockets and our engineered products group.

Yes.

And then book, Dante, has the sort of the pressure you were getting from some of the groundwood grades, has that abated at all, or is that still out there?

It's abated.

And your next question comes from the line of Dan Jacome with Sidoti & Company.

Just trying to get a better -- just 2 quick housekeeping questions.

Just trying to get a better understanding how much of the total 22,000 tons of Airlaid you expect to utilize in year 1?

I know you mentioned 5% quarter-to-quarter.

So if you kind of back into some sort of rate, I just want to hear what internally you're assuming?

Is this something like 30% in year 1?

60% in 2019?

And then after that, potentially fully sold out?

Because I'm kind of getting something between like 15% to 25%.

I could be wrong.

That was my first question.

And then 2, if you had -- I don't know if you can answer this, but if you had -- did not have the Specialty Paper business kind of just a pro forma had you had sold it or spun it off, what would your CapEx be, guidance be for the year?

Okay.

So Dan, with respect to the Advanced Airlaid Materials business in Fort Smith, we are currently producing some wipes products in our facility in Canada, and we will move that product down to Fort Smith.

And then we would expect to grow Fort Smith.

So it's not the -- I kind of look at the capacity utilization based on the entire business and not just specific to Fort Smith because of that movement.

So we will create some open capacity in Canada that we expect that we will also be able to grow into.

So if you look at what we shipped in 2017 and you look at growth of 10% to 15%, beyond that, so 2019 and beyond, we still have 10% to 15% of capacity that we can grow our business with.

And that's across the business unit.

And of course, we have our continuous improvement programs that we look to generate incremental capacity and we evaluate the opportunities for targeted capital investments to also create additional capacity.

So we still have some good growth beyond 2018 of 10% to 15% across the entire business unit, plus that incremental capacity we can create in the future.

Okay.

And then on CapEx?

Yes, as it relates to CapEx, I think broad numbers, our expectation is we'll invest about $70 million for the full year of 2018 on the order of $20 million to $25 million is related to Specialty Papers.

Interesting.

Okay, great.

And then just lastly on the asset potential realignment, if you do a sale or a spin.

Just trying to pick your brain here.

I mean, would you have done this if the 10% of -- because this could help your monetization efforts down the line.

Would you have done this decision -- and I think the answer is yes -- but would you have done this if you had not the pricing tailwind and capacity-shrink tailwind in the industry in the last couple of months?

Would you have opened your thoughts into a potential spin or sale?

Yes, Dan, I think, the decision, I think, is really driven by the growth potential we see in our engineering materials businesses and the fact that we want to shift our resources towards whether it be human or financial resources towards accelerating the growth of those businesses.

Certainly, the improving market conditions are helpful for Specialty Papers.

But the decision drivers are based on our -- what we think we can drive and grow from our engineered materials businesses.

Okay.

Can I ask, when did the board and you guys decide to -- when did this idea first come to the board's front or what have you?

When did it start?

When did you guys start thinking about this?

Would it be like 6 months ago or a year ago as you're trying to match it with the Fox River settlement?

So Dan, I mean, our board focuses on strategy every time we meet, and we are consistently assessing ways to enhance shareholder value.

So these types of decisions are developed over a period of time and require careful thought and consideration.

So to summarize what John said, it's about the long-term strategy and how we think we can best reset the portfolio to be a growth company with a better margin profile and serving markets at a growing GDP, GDP plus and where we want to allocate capital.

Okay.

And then for the Fox River liabilities, I would stay with you.

Assuming there was a full sale, where would I have to look to see why those liabilities cannot be removed?

Is it just kind of a go to the consent decree and it'd be in there?

No.

I think it has more to do with the fact that the Fox River is not attached to our Spring Grove or Chillicothe facilities.

This was from Neenah, Wisconsin, our new Wisconsin facility that we sold in 2006.

Okay.

Yes.

I should have known that.

All right.

Overall, I think this is pretty encouraging news, and we'll see what happens.

I appreciate your time.

And your next question comes from the line of Kurt Yinger with D.A. Davidson.

I was wondering if you guys could just start maybe with an update as to capital allocation priorities as you exit the Fort Smith investment and maybe how that would change if you thought about maybe some proceeds from the Papers business.

So I'll start, and invite John to provide any additional comments he would like.

So as you know, we are exiting a multiyear period of very heavy capital investing.

So we want to focus on restoring our cash flow profile.

And as you know, the balance sheet has capacity and is in decent shape, and we want to maintain a strong balance sheet.

We want to be able to invest in growth and successful execution of the growth strategies that we've articulated to you.

We're also mindful that allocating capital back to shareholders through dividend increases and potential share repurchases.

When the timing is right, it is also important.

And during my tenure as CEO, we've done of those things as a board at different levels and at different points of time.

So I think we want to focus on strengthening the cash flow profile, executing with great precision and accelerating the growth of our engineered materials businesses.

Okay.

And then you guys have mentioned some M&A potential may be within the engineered materials business.

I was wondering if you could maybe benchmark a typical size of something you might look at and maybe what sort of multiples are there?

Yes.

So Kurt, I think we've been very consistent when asked questions about acquisitions and the criteria or filters that we use.

And we want to look at businesses and assets that can enhance and broaden and strengthen our existing engineered materials platforms.

So whether it would be a fit or a tuck-in for the Airlaid business or the Composite Fibers business, or be a close enough adjacency or offer some level of geographic expansion, those are the most likely and logical parts of our business.

We've talked about platforms that we think are better fit, whether they be filtration or personal care and hygiene, electrical.

Those are some examples of types of technology and markets that we think are a better fit and fit our style of business.

In terms of the size of a particular target, it's a reasonably wide range, and they're all situational.

It depends on the investment pieces and how good of a fit it is, what the synergy opportunity may or may not be.

And so it's awful hard to offer some form of conjecture on particular target size or multiple without knowing specifics.

John, do you want to add anything?

No, I think that's correct.

And would it be fair to say that potentially, those will be more international-focused as opposed to maybe U.S.-centric?

No.

I wouldn't say that.

I think, again, you have to cast the net wide and keep an open mind and make decisions based on what you see, what's actionable and what the investment profile looks like.

Okay.

And then just turning back to the quarter.

Obviously, really positive volume growth from the composite fibers business, but more than offset by price.

Are there any notable mixed shifts in there, maybe with wallcovers?

Or how would the pricing differ going forward than maybe what you experienced in those fourth quarters as far as an offset?

Yes.

So on composite fibers, we -- I think we've talked in the past about some new capacity that had come into some of other markets that affected pricing.

And we've talked about the situation with Russia and Ukraine that affected pricing for wallcover products.

And so as we've gone through the last couple of years, we've seen some price declines.

As I mentioned in my comments, our pricing from Q3 to Q4 was stable.

And we're seeing some price lift as we move here to 2018.

So I don't think the -- when we look at it at the product line level, prices were pretty stable.

Q3 to Q4, we saw a bit of a shift in the trend, much like we did in Specialty Papers, and then we are seeing some price lift in Q1.

So it's not really necessarily a mix situation.

It's product by -- product line by product line, we're seeing stability and some price improvement.

Okay.

Two quick housekeeping items.

What was the effective tax rate on adjusted earnings for 2017?

It was -- for the full year, it was 19%.

Okay.

And so that would be expected to move up to 33% in '18?

That's right.

Okay.

And then as far as the transition issue with the paper machine closure, was that the $1 million in operational headwinds in the Papers business?

Or was that maybe partially offset by some benefits?

Right.

So we had the salary workforce reduction that we completed in the third quarter.

And so when you look at our waterfall chart on Slide 7, we show operations and other as a negative $1 million.

So we have a benefit from that workforce reduction and then we have an offset that more than offset that benefit in the transition issues related to the PM24 shutdown.

(Operator Instructions) And we do have a follow-up from the line of Debbie Jones with Deutsche Bank.

You got my CapEx question, but I was wondering, could you comment in Airlaid, where you think you can take EBITDA margins.

Can these approach kind of what you're currently doing in Composite Fibers once you get fully ramped up?

Debbie, as we've said, we haven't provided specific guidance on Fort Smith, and we're not going to provide margin targets for this business given some sensitivities.

Certainly, as we've also said, we expect that over time, we ought to be able to push our margins for both Composite Fibers and our Airlaid business into the high-teens.

We think that, that's sort of where they ought to be given the specialty nature of the businesses.

So we don't -- I'm not going to give a specific target for '18 or for the businesses.

But as we've said, generally speaking, we expect that we should be able to push them into the high-teens over time.

Okay.

And then another one.

You might not be able to answer.

But as it relates to the contracts in your Specialty Papers business, if there were to be a decision by someone to convert, whether you or somebody else, do a different type of production, is there a kind of built-in delay just based on your contract commitments that you have to consider?

Yes.

I think it's premature for us to comment on that at this point, Debbie.

There's still a lot of work that needs to be done around all of these issues.

So it's just premature for me to comment on that.

And we have a follow-up from the line of Mark Wilde with BMO capital markets.

Yes.

I've got 2 follow-ups.

First of all, I wondered, John, if it's possible to get a sense of what you would estimate your tax rate would be going forward without Specialty Papers in the mix?

A little bit difficult at this point, Mark.

I would say that we expect a small loss in U.S., which reflects Specialty Papers' profitability, it reflects our corporate cost, it reflects interest expense.

So I wouldn't expect a significant move just in and of itself from a separation of Specialty Papers.

But certainly, a lot more work will need to be done around that.

So I don't have perfect guidance for you today on that.

Okay, that's fair.

And then the other I wondered about.

Dante, in the Airlaid business, do you benefit in the wipes business from kind of having a cellulose-based wipe rather than a polymer-based wipe?

Certainly, in North America, yes.

That's the form factor of choice for consumers, and there's a lot of strong demand for the Airlaid material.

There are other regions of the world where perhaps the polymer-based material was introduced first and the consumers' tastes and preferences kind of were formed around those.

But clearly, the nature of Airlaid materials offers some compelling value propositions to many customer groups and end users, and this is what compelled us to build a facility in the U.S.

And would you feel like in this business, there'd be room for kind of some more consolidation in the industry?

That's hard to say, and it depends on the specific business and where in the world that may be and what kind of technology they are using to manufacture goods.

Okay.

And you don't have any sense of whether you'd kind of prefer the grow through acquisitions versus maybe greenfielding in some of the developing markets?

Yes, I think the more practical answer, Mark, is it's going to be both.

So clearly, when we saw the opportunity to make the greenfield investment in organic growth and technology we know how to operate with customer support and a supply chain that we have established that made good sense.

And we bought Concert Industries several years ago and have done a very nice job, if I do say so myself, of consistently growing that business over time in a way that rewarded customers for aligning with us and us being patient and thoughtful about how we apply continuous improvement and innovation and finding scale economies and establishing centers of excellence.

So I think it's a combination.

And this does conclude the Q&A portion of the call.

I would now like to turn the conference back over to Dante Parrini for closing comments.

Well, thank you, everyone, for joining our call today, and we look forward to speaking with you again next quarter.

Have a good day.

And this does conclude today's conference.

You may now disconnect.