Mativ Holdings Inc (MATV) 2018 Q4 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Welcome to SWM's Fourth Quarter and Year-end 2018 Earnings Conference Call.

  • Hosting the call today from SWM is Dr. Jeff Kramer, Chief Executive Officer.

  • He's joined by Andrew Wamser, Chief Financial Officer; and Mark Chekanow, Director of Investor Relations.

  • Today's call is being recorded and will be available for replay later this afternoon.

  • (Operator Instructions)

  • It is now my pleasure to turn the floor over to Mr. Chekanow.

  • Sir, you may begin.

  • Mark Chekanow - Director of IR

  • Thank you, Victor.

  • Good morning.

  • I'm Mark Chekanow, Director of Investor Relations at SWM.

  • And thank you for joining us to discuss SWM's fourth quarter and year-end 2018 earnings results.

  • Before we begin, I'd like to remind you that the comments included on today's conference call include forward-looking statements.

  • Actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed in more detail in our Securities and Exchange Commission filings, including our quarterly reports on Form 10-Q and our annual report on Form 10-K.

  • Some financial measures discussed during this call are non-GAAP financial measures.

  • Reconciliations of these measures to the closest GAAP measures are included in the Appendix of this presentation and the earnings release.

  • Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations.

  • This presentation and the earnings release are available on the Investor Relations section of our website, www.swmintl.com.

  • I'll now turn the call over to Jeff.

  • Jeffrey Kramer - CEO & Director

  • Thank you, Mark, and good morning, everyone.

  • Yesterday, we reported fourth quarter and full year 2018 results with a full year adjusted EPS of $3.48, exceeding the guided range we provided last February.

  • We'll cover the details shortly.

  • But simply put, while 2018 presented substantial cost headwinds, a variety of actions drove solid earnings and free cash flow of nearly $110 million.

  • We finished the year strong, with fourth quarter adjusted EPS of $0.90, benefiting from good performance within both businesses as well as a lower tax rate than we had anticipated.

  • The business fundamentals are healthy exiting the year.

  • Within AMS, we delivered accelerated organic sales growth in 2018 and completed several key strategic growth and optimization projects.

  • And within EP, we have improved our sales mix and continued to drive efficiencies.

  • Now shifting to our operating segments.

  • AMS achieved 9% organic sales growth in the fourth quarter.

  • Transportation films, driven by robust demand for paint protection products, delivered rapid growth, while filtration momentum continued, led by nearly 20% growth in our RO water business.

  • AMS segment adjusted operating margin expanded during the fourth quarter, reversing the margin pressure trend we had experienced throughout the year.

  • While higher sales were part of that equation, we also completed our Austin site closure project during the fourth quarter, reducing our fixed costs.

  • Of note, some of these savings were temporarily offset by expected inefficiencies as the final volumes from that plant were transitioned to other sites.

  • We also saw less pressure from higher polypropylene resin costs in the fourth quarter compared to the prior year.

  • Though we caveat, it is still early in the year, resin pricing appears to be moderating and could be favorable versus 2018 average levels if recent polypropylene pricing holds.

  • Taking our fourth quarter results in the context of the full year, we were pleased with 6% organic growth in AMS with solid gains across several of our end markets.

  • And we believe we are set up for improved results in 2019 after a choppy year for margins.

  • Importantly, the return of the replenishment cycle for our water filtration products was a positive theme throughout 2018.

  • And we see continued healthy long-term demand supported by the need for better-quality drinking water across the world.

  • We also see continued strong growth for transportation films as consumer awareness is increasing, particularly in Asia, where we have been successful in tapping into expanded distribution channels.

  • We also made good progress on several strategic initiatives during the year.

  • In addition to the Austin site closure, which was a major undertaking for optimizing our operations, we also expanded into a new greenfield facility in China, which will serve as our backbone for growth in Asia.

  • This expanded and enhanced state-of-the-art facility was designed to accommodate growth across our key product lines and end markets.

  • Furthermore, we completed our first international film line in Europe, leveraging the unique capabilities of an existing site to provide additional capacity for our rapidly expanding transportation films business.

  • And lastly, we completed initial customer qualifications for our new specialty filtration paper, an exciting opportunity that leverages our paper engineering capabilities within EP and our deep AMS commercial relationships in the filtration end market.

  • Moving to Engineered Paper, fourth quarter sales increased 3%.

  • Another quarter of positive price/mix performance provided an 8% lift, more than offsetting a 4% volume decline.

  • Our sales mix was strong during the quarter, with several factors driving our performance.

  • First, LIP volume was up, as was most of our cigarette papers portfolio.

  • And battery separator paper was another strong performer.

  • Second, we continue to de-emphasize certain high-volume but low-margin nontobacco products such as printing and writing papers, replacing a portion of those lower-margin products with more attractive papers, including tipping papers and nontobacco products such as greaseproof papers for food service packaging.

  • EP segment adjusted operating margins though remained pressured during the fourth quarter due to higher cost for wood pulp, which was up more than 25%, and other input costs such as energy as our wood pulp price escalators were not yet effective.

  • For the full year, we delivered 4% segment sales growth, with the key takeaway being positive price/mix performance more than offsetting lower volume.

  • We continue to focus on our mix, gaining share in attractive categories and de-emphasizing lower-margin volumes.

  • As referenced, raw materials were a significant headwind for margins with relief expected in 2019 through price escalators.

  • At this time, though, there is limited visibility on wood pulp prices heading materially lower in the coming year.

  • Regarding our 2018 strategic priorities, we believe we have gained some share in LIP and other cigarette papers.

  • And while inflationary pressure masks some of the cost improvements we have made within our operations, we continued our focus on efficiency as a way to help offset tobacco industry pressures.

  • Lastly, our heat-not-burn volumes increased versus 2017 as we continue to partner with several firms.

  • However, as we have said, the rollout of new products by our customers will remain lumpy.

  • Recently, consumer adoption rates have moderated, while our customers introduce next-generation products.

  • We continue to provide valuable support in this innovative product category and consider ourselves well positioned when sales growth accelerates again.

  • I will now turn the call over to Andy.

  • R. Andrew Wamser - Executive VP of Finance & CFO

  • Thank you, Jeff.

  • I'll now review our financial results.

  • In the fourth quarter, AMS net sales increased 9% to $108 million with no acquisition benefit as our transportation and filtration businesses posted solid gains.

  • Adjusted operating profit grew 16% as margin expanded 90 basis points.

  • Sales growth more than offset moderating pressures from the Austin closure project and higher resin costs.

  • Market prices for resin were up more than 5% during the quarter compared to last year, though that marks a notable easing of the year-over-year pressure we saw earlier in 2018.

  • For the year, AMS sales grew 8% or 6% when excluding the benefit of the Conwed acquisition.

  • Our diversified revenue base in AMS continued to provide strong organic growth.

  • Filtration and transportation were the key drivers, with our medical business also delivering solid full year results.

  • Infrastructure, construction and industrial sales were generally flat for the year.

  • Segment adjusted operating profit declined 5% as margin contracted 220 basis points for the full year, again, reflecting the anticipated Austin closure expenses and higher polypropylene costs, which were up more than 20% compared to 2017.

  • We expect operating profit in AMS to experience strong growth in 2019, and Jeff will expand more on our outlook shortly.

  • For EP, fourth quarter sales grew 3% with price/mix providing an 8% benefit, which more than offset a 4% decline in volume.

  • As Jeff detailed, the positive mix shift was due to a combination of factors, including good LIP volumes and a more profitable mix of nontobacco papers.

  • Unfortunately, the contractual lag on price increases overshadowed other positive aspects of our EP performance, as adjusted operating profit was down 12% in the fourth quarter with margin contracting 330 basis points.

  • Wood pulp costs were up more than 25% on average during the fourth quarter and accounted for 190 basis points of margin contraction.

  • For the full year, EP sales increased 4% with similar trends of a 5% positive impact from price and mix, offsetting a 3% decline in volume.

  • Currency provided a 3% benefit to the full year top line results as well.

  • Adjusted operating profit was down 2% with margin contraction of 150 basis points as wood pulp prices were the primary source of pressure.

  • We note wood pulp price indices were up more than 30% compared to full year 2017.

  • Unallocated expenses declined 24% in the fourth quarter, essentially driving the 9% full year decrease.

  • One particular item that skewed this year-over-year result was stock market volatility.

  • As a result, our fourth quarter stock market declined, which pressured many other companies in our sector and also SWM's share price.

  • Our deferred compensation expense was reduced.

  • This was not business related.

  • And absent further volatility, we'd expect this benefit to reverse in 2019.

  • This singular item accounted for a benefit of approximately $2 million in the fourth quarter.

  • From a consolidated view, sales were up approximately 6% for the quarter and for the full year as well.

  • Adjusted operating profit was up 6% in the fourth quarter with flat margins and for the full year, was down 2% with 130 basis points of margin contraction.

  • Adjusted EBITDA was $42 million in the fourth quarter, up 3%, and was $197 million for the full year, essentially flat with 2017.

  • All told, given the significant headwinds on raw materials, which were approximately $20 million in wood pulp and resin alone, we were pleased with our EBITDA performance.

  • Shifting to consolidated earnings.

  • Fourth quarter 2018 GAAP EPS was $0.23 compared to an $0.89 per share loss in the fourth quarter of 2017.

  • In the fourth quarter of 2018, we recorded a $0.50 per share noncash impairment to 1 of our Chinese joint ventures.

  • This recon-based business in China, a 50-50 partnership with the governing body of the Chinese tobacco industry, delivered a modest profit in 2018.

  • However, its multiyear results have lagged the original business case due to unique characteristics of the closed Chinese market.

  • The staged investment was made between 2011 and 2014 and has been impacted by increasing overcapacity of RTL as multiple regional players have built excess production capabilities for internal Chinese demand.

  • We have shared our concerns about the long-term market dynamics in the Chinese Recon market periodically on our earnings call.

  • And while we expect the venture to contribute modestly to earnings, the tempered outlook now warrants the accounting impairment.

  • Please note, this Chinese joint venture is unrelated to our more global recon business within the EP segment.

  • Regarding the fourth quarter 2017 GAAP loss, recall we incurred a noncash charge of $1.29 per share, primarily related to the changes in the U.S. tax laws enacted in late 2017.

  • For the full year 2018, GAAP EPS was $3.07, up from $1.12 in 2017.

  • In addition to the joint venture impairment, 2018 GAAP results were affected by 2 positive items: a $0.25 gain from a contingent liability revaluation and a $0.43 gain related to tax adjustments driven mainly by tax law changes in the U.S. Full year 2017 GAAP EPS reflected the large fourth quarter tax charge as well as a $0.21 of restructuring expenses.

  • While we want to be clear regarding our GAAP results and the items they reflect, when adjusting for these onetime items as well as our typical purchase accounting adjustments, adjusted EPS may provide a more meaning -- a more helpful view of our year-over-year earnings comparisons.

  • We encourage you to review our non-GAAP reconciliations to see the detailed review of our non-GAAP adjustments.

  • For the fourth quarter of 2018, adjusted EPS was $0.90, up from $0.64 in the fourth quarter of 2017.

  • And full year adjusted EPS of $3.48 was up 9% versus 2017.

  • We are pleased by the strong closing performance which [was] a result of a number of items.

  • First, our tax rate finished 2018 lower than we had originally expected.

  • Recall, we originally projected a several hundred basis point decline from the 30% normalized rate in 2017.

  • When adjusting for unusual items, the full year 2018 tax rate finished at approximately 21% after tracking at approximately 24% through the first 3 quarters of the year.

  • In addition, despite the previous discussion, our Chinese joint ventures delivered higher fourth quarter profits versus the prior year period, though that performance did not alter our impairment test.

  • Outside of the tax rate benefit and strong joint venture finish, 2 other factors drove strong EPS performance: first, the fourth quarter and full year benefit by approximately $0.05 each from the lower deferred compensation expense, which I referenced earlier; second, an adjustment to the tax treatment of our purchase accounting expense add-backs when calculating adjusted EPS benefited the fourth quarter and the full year adjusted EPS by approximately $0.05 each.

  • These factors combined for a $0.10 benefit to our fourth quarter and full year results that were not directly business related.

  • All told, excluding these 2 nonbusiness items, our fourth quarter adjusted EPS would have been $0.80 and our full year would have been $3.38, in the middle of our originally guided range of $3.30 to $3.45.

  • 2018 free cash flow was $109 million, up from $90 million in 2017 due in part to lower capital spending.

  • CapEx was approximately $30 million for the year, down about $11 million due mainly to timing of capital projects, with some spending pushed into 2019.

  • From a leverage perspective for the terms of our credit facility, we were at 2.5x net debt-to-adjusted EBITDA at the end of the fourth quarter, down from 3.0x at year-end 2017.

  • And we would expect that leverage will trend lower in 2019 as a function of free cash flow generation.

  • Now back to Jeff.

  • Jeffrey Kramer - CEO & Director

  • Moving on to our 2019 outlook.

  • We are guiding to an adjusted EPS range of $3.40 to $3.60.

  • We anticipate sales, adjusted operating profit and EBITDA to all increase slightly higher than adjusted EPS due to higher projected interest rate expense from our bond financing and a slightly higher tax rate than the 21% normalized from 2018.

  • We also expect free cash flow to again exceed $100 million, with CapEx expected to be between $35 million and $40 million.

  • For modeling purposes, we would suggest using approximately 5% as an average interest rate on our total debt.

  • Our range reflects strong profit growth in AMS, modest pressure in EP and several million dollars of increased IT spending in support of our ongoing growth expectations, which we know will be classified primarily within our unallocated expense bucket.

  • Generally speaking, inflationary pressures continue.

  • And while we see some early signs of relief in polypropylene, wood pulp remains elevated as do freight costs.

  • More specifically, in AMS, we expect continued sales momentum and improved margins as a result of pricing actions, potentially moderating resin costs and benefits from the Austin closure.

  • We plan to reinvest in the business as well, deploying some of those savings into additional marketing, commercial development and product innovation initiatives.

  • We will also be strategically adding global capacity to support our growing transportation and filtration businesses and pushing to ramp up sales of our new filtration paper product.

  • Within EP, we expect to combat industry attrition through a variety of means, including further positive shifts in our sales mix with potential share gains in LIP and other attractive product categories.

  • Of course, we will continue our company-wide focus on innovation and operational excellence to drive value and support long-term top and bottom line performance.

  • In closing, I just want to reiterate some key themes regarding our business fundamentals.

  • 2018 overall results were encouraging, with good performance from EP, organic growth in AMS, investments in new capacity innovation projects around the world, solid free cash flow and stable EBITDA despite inflationary pressures exceeding $25 million.

  • Our diversified portfolio in AMS has healthy underlying demand.

  • And with the potentially less volatile cost environment in terms of raw materials and with our Austin project behind us, we believe we are set up for solid 2019 growth.

  • EP continues to perform admirably against a challenging industry backdrop as evidenced by only modest decrease in adjusted operating profit despite a $13 million headwind from wood pulp prices.

  • From a longer-term perspective, we've made great strides in transforming the business, with AMS having enough scale to balance out the inherent industry pressures of the EP segment.

  • As we push to further grow the company through both organic initiatives and potential M&A, we have ample liquidity to pursue our growth ambitions and further rebalance our portfolio towards growth businesses.

  • We appreciate your continued interest and support.

  • That concludes our remarks.

  • And Victor, please open the lines for questions.

  • Operator

  • (Operator Instructions) Our first question comes from the line of Dan Jacome from Sidoti.

  • Daniel Andres Jacome - Equity Research Analyst

  • I'll start with the EP segment first.

  • I think you noted some share gains in LIP.

  • Can you elaborate a little bit on that?

  • How much, if possible, was an exiting player?

  • And how much was just an industry mix change from one producer to another?

  • Jeffrey Kramer - CEO & Director

  • I think it's a combination of factors.

  • I think, Dan, as we always talk about, we believe we're the leading supplier of LIP.

  • And because of that, I think our customers really value our participation in their supply chains.

  • And so I think we gained some share just because of performance and our capacity capabilities.

  • I think also, there was an exit of a smaller player that has been participating in the marketplace.

  • And I believe we achieved some share gain from that as well.

  • But it's really a combination of both.

  • It's not a single item.

  • Daniel Andres Jacome - Equity Research Analyst

  • Okay, great.

  • That's helpful.

  • And then to AMS, it looks like the water filtration side is getting a little bit more robust, finally.

  • Can you elaborate on that?

  • I mean, what do you expect in the next year or 2?

  • Should we expect a more smoother, linear up-cycle or realistically, maybe some fits and starts here and there, but other than that, it's more bullish?

  • Jeffrey Kramer - CEO & Director

  • Yes, Dan, this is always that question.

  • I would love to have a nice linear play in all of my marketplaces, if I could.

  • And if you could indicate how I could get to that, I'd appreciate it.

  • But yes, we are seeing very positive trends in reverse osmosis.

  • We told you earlier that there's 2 main drivers.

  • One is a little bit lumpier when they bring on a brand-new plant, a new capacity; and one is the replenishment cycle.

  • Some new capacity has certainly been coming on, but a lot of this benefit has been that delayed replenishment cycle that we've been seeing over many years.

  • When we talk to our customers, it had been something that they've been able to extend with low energy prices.

  • But after a period of time, that just needs to come back to roost.

  • And so we think that trend should continue relatively smoothly over the coming year and hopefully, for several years to come.

  • Daniel Andres Jacome - Equity Research Analyst

  • Okay, terrific.

  • And then last question, kind of 2 questions buried into one.

  • So the Europe, the new film capacity, how much of that is going to cost, generally speaking?

  • And then I think on Asia, you may have said on the consumer film side expansion of your distribution channels any color, if possible, on either of those or both would be fantastic.

  • Jeffrey Kramer - CEO & Director

  • Yes.

  • Sure.

  • So we don't usually announce how much it costs us to install a line, but this capacity was reasonable for us for 2 reasons.

  • One, we're able to take advantage of a site that already had capable individuals and capacity on.

  • So we were able to slot a line right into that, and so it was a very reasonable investment for us, and we've already gotten qualifications for it, so we're excited about it.

  • Again, each one of our lines, while still significant investments, are not like $50 million investments that you need to put into a greenfield site.

  • I mean, we could easily move lines into sites for a very reasonable capital investment.

  • Moving to distribution channels, so 2 things that are happening.

  • So we continue to focus on Asia for all our product lines.

  • We indicated we built that new plant in Suzhou.

  • We built that with capabilities for expansion and -- for multiple product lines.

  • And so that's great.

  • But as we've expanded our manufacturing presence, we've also become -- and raised our profile in Asia with our customers, and there are a number of customers throughout Asia, both in China but also Korea and Japan, et cetera, that are really starting to look to us as a quality film supplier for surface protection films.

  • And so we're hoping that, that trend continues as the marketplace becomes more aware of transportation films.

  • And I think we've mentioned before, we think it's a megatrend as a rising middle class investing in automobiles and port infrastructure, they're looking for ways to protect it, and this kind of film works really well.

  • And so we're very positive in that.

  • Operator

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

  • Kurt Willem Yinger - Research Associate

  • I was wondering if you guys could start off with maybe talking about your medium- to long-term margin expectations for the AMS business.

  • And I know you guys don't guide to specific segments or anything on an annual basis.

  • But at high level, what might be the puts and takes versus that expectation and your own internal plans for 2019?

  • R. Andrew Wamser - Executive VP of Finance & CFO

  • Sure.

  • So right, we look at -- for 2019, we would expect the AMS business to have some margin expansion.

  • I think you could pencil in anywhere the order of magnitude of at least 50 to 100 basis points.

  • When you look at the contributing factors for that, it's really a couple-fold.

  • One is, we are seeing some of the benefits of resin prices today, and that's just if it holds where spot prices are today, but we don't predict forward curves.

  • The second impact would be the closure of the Austin facility, which we talked about all of last year.

  • The one thing that I will mention, though, at least as it relates to Austin is, if you recall, we moved -- from Austin, we moved several lines to 4 different facilities.

  • And for those facilities, they are familiar with the products in each of the locations, but it will take them some time to get the learning curve to be as efficient as it was for that team in Austin to run those lines.

  • So between those 2 factors, we would expect about anywhere between that 50 to 100 basis points of margin expansion within AMS.

  • Kurt Willem Yinger - Research Associate

  • Got it, Andy.

  • And in the release, you touched on some trade uncertainty and the potential risk of slowing growth in Asia, yet it seems like transportation films was again a big growth driver.

  • And in the past, I think China has been a pretty big part of that.

  • So could you maybe talk about which products you may already be seeing pressures on or what you think might be at risk going forward?

  • Jeffrey Kramer - CEO & Director

  • Yes.

  • This -- Kurt, this is -- that's more of a general commentary.

  • I think it would be wise for every company to be saying we are not seeing a slowdown in growth in any of those regions now.

  • But the -- just the sheer number of trade topics that are in development from Brexit to the trade tariffs, et cetera, we always feel it's just prudent to talk about it because it could have an impact.

  • We're not seeing it.

  • We're hopeful that the governments will be able to resolve all the issues.

  • But I think one of the key things that's also important is that we have capacity throughout the world.

  • And so we have global capacity in Asia.

  • We have it in Europe, and we have it in the U.S., and so I think that'll insulate us from a lot of the activities as well.

  • So there's nothing specific we were pointing to other than, we tend to be cautious about the global macro trends overall.

  • Kurt Willem Yinger - Research Associate

  • Okay, okay.

  • That's good to hear.

  • And switching over to EP.

  • With some of your price escalators on the cigarette paper side tied to pulp, is there any way you could sort of quantify what kind of revenue tailwind that might be for 2019?

  • R. Andrew Wamser - Executive VP of Finance & CFO

  • What I'd say to that is we're projecting the EP business to be largely flat, maybe some declining -- marginal declining pressure there.

  • When we look at the impact of pulp and the impact of the escalators, what we'd say is the first half of the year is certainly going to be a little bit more challenging, I think, than the second half as you saw some of that rise throughout all of last year.

  • There certainly will be an impact in elevated pulp costs, again, for like that first half year-over-year, but the pricing escalators that we have, we expect to be caught up.

  • But as a net benefit even by taking some additional share, we'd expect it to be largely flat, maybe slight -- maybe a modest, modest decline.

  • Kurt Willem Yinger - Research Associate

  • Okay.

  • And then I know Dan touched on this a bit, but looking at the 8% price/mix benefit, I understand that some LIP share gains probably benefited that figure.

  • But were there any pure price increases that flowed in from either the U.S. or Europe?

  • And is -- are those share gains that you benefited from something that can be sustained going forward?

  • R. Andrew Wamser - Executive VP of Finance & CFO

  • Sure.

  • So what I'd say is on some of the nontobacco papers, we were able to increase price immediately.

  • And so then the other benefit we had in the fourth quarter to the back half of the year is that we saw less of sort of, I would say, lower-margin fill-up paper that we would have, and then we were able to replace it with some of the more higher-margin cigarette paper.

  • So that was really what helped to offset what Jeff talked about, we did have $30 million of headwinds in raw material inputs, and that -- those are the key reasons why we were able to overcome that.

  • Jeffrey Kramer - CEO & Director

  • Yes.

  • Kurt, it really -- again, we do have good products in our nontobacco paper segment as well, and we had some good mix effects from there.

  • So it's a combination of multiple factors, a little bit of price, a little bit of share gain in LIP, a little bit of good performance in our battery separator business, which was what we talked about, and then a mix effect as we've been able to replace lower-margin products with higher-margin products.

  • So it was actually just a good, solid quarter across a number of subsegments within our EP business.

  • Kurt Willem Yinger - Research Associate

  • Okay, makes sense.

  • And then could you expand a bit on the specific applications for the filtration paper you qualified?

  • And any information you could provide maybe on market size or a near-term opportunity set would also be really helpful.

  • Jeffrey Kramer - CEO & Director

  • Yes.

  • We're still a little cautious in how we're talking about it because it's a brand-new product from a competitive reason.

  • It is in the filtration paper marketplace, and we hope to be able to give you more color as the year progresses.

  • We just want to share about it because it is something that we talked about in the past.

  • We made a major investment to -- in capacity to be able to manufacture this in our EP side, and we've reached some good qualifications, initial qualifications in new customers.

  • So I think that's something you'll hear more about in the future, but I'm a little reticent at this particular phase.

  • Kurt Willem Yinger - Research Associate

  • All right.

  • Fair enough.

  • And lastly, in your view, what are kind of the biggest needle-moving items when we look at the 2019 guide that can maybe drive us towards the lower end versus the upper end?

  • And what sort of things should we be monitoring on that front?

  • Jeffrey Kramer - CEO & Director

  • Yes.

  • I think we all have to watch inflationary cost pressures, right?

  • So we talk about resin.

  • We talk about pulp.

  • We also have energy costs.

  • We also have transportation costs, particularly in the U.S. as trucking is becoming cost.

  • So I think the inflationary cost question is always going to be important.

  • I think we have a good outlook on it, but those things can move at any time.

  • So I think those would be the biggest issues on the downside if they move very rapidly in the direction we haven't predicted.

  • I think the upsides are really around the mix effects that we have in both EP as well as in AMS.

  • And really, that core organic growth that we've been promising on AMS at the higher margins, if we can deliver on that, I think that can give us some of the upsides that we have.

  • I think we've given you some good guidance around where we think we'll be, and we'll be able to keep reporting every quarter around some of those key strategic initiatives to show you how we're progressing.

  • Operator

  • And our next question comes from the line of Dan Jacome from Sidoti.

  • Daniel Andres Jacome - Equity Research Analyst

  • Just one more of a housekeeping question.

  • So you gave us a guidance on the CapEx, which it looks, if I'm not mistaken, a step-up from this year to the tune of $11 million.

  • So assuming you were targeting a free cash flow number for 2019 that was in line with what you reported in 2018, you would need about an $11 million swing in free -- in operating cash flow, excuse me.

  • Just trying to get a better sense of how you're looking at the working capital line in the next couple of quarters.

  • R. Andrew Wamser - Executive VP of Finance & CFO

  • Yes.

  • So on the CapEx side, we ended the year at $30 million, and some of that has -- was a little bit lower than what we'd expected, and some of those projects we've pushed into this year.

  • Our guidance for 2019 is between $35 million and $40 million.

  • So we ended the year at $109 million in free cash flow for 2018.

  • I think the degree in terms of what we would exceed or beat around that level will be dependent obviously on what the final CapEx number is, obviously, and then what happens on a working capital side.

  • On the working capital, it really -- largely will depend on where this -- where unanticipated or higher sales or lower sales come from.

  • To the degree that some of these sales are going into markets like Asia, the terms are a little bit longer, and so it could be a little bit more of a drain on working capital.

  • To the extent that it's not, it could be a benefit.

  • So as kind of to be able -- we think and around what we did last year is a good ballpark for what we think '19 would -- what would happen for this year, but I think, plus or minus, it will depend on absolute CapEx spend.

  • Jeffrey Kramer - CEO & Director

  • And we're also -- as we indicated, we're expecting strong growth in our AMS segment with higher operating cash flows from that as margins increase, and we have organic growth.

  • And so some of that will help offset some of that capital spend as well.

  • Operator

  • And I'm seeing no further questions in the queue.

  • I'd like to turn the call over to Dr. Kramer for closing remarks.

  • Jeffrey Kramer - CEO & Director

  • Well, thank you, everyone, for staying with us during this call.

  • I think as we indicated, we were pleased with how we ended the fourth quarter.

  • It was a little bit bumpy as raw material costs throughout the year gave us some headwinds, but I think the business performed admirably.

  • And I think that's a good indication as we move our strategic transformation of the company of our forward momentum.

  • And we're hopeful that we'll have a nice positive year to talk about at the end of the year of 2019 as well.

  • So thank you again for all your support.

  • Operator

  • Ladies and gentlemen, thank you for participating in today's conference.

  • This does conclude the program, and you may all disconnect.

  • Everyone, have a great day.