Nov 4, 2014
Executives
John Jacunski - Executive Vice President, Chief Financial Officer Dante Parrini - Chairman, Chief Executive Officer
Analysts
Steve Chercover - D.A. Davidson James Armstrong - Vertical Research Partners George Livadas - BMO Capital Markets Debbie Jones - Deutsche Bank
Operator
Good morning. My name is Shaun and I will be your conference operator today.
At this time, I would like to welcome everyone to the Glatfelter’s Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you.
Mr. John Jacunski you may begin your conference.
John Jacunski
Thank you, good morning and welcome to Glatfelter’s 2014 third quarter earnings conference call. This is John Jacunski, I am 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 2013 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 those 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.
Dante Parrini
Thank you, John. Good morning and thank you for joining us to discuss our third quarter results.
Earlier today we reported third quarter adjusted net income of nearly $31 million and a quarterly record of $0.70 per share compared to $0.55 in 2013. I’m very pleased with our strong performance this quarter.
We continue to benefit from our market leading positions in each of our businesses. We’ve handled well the operating and market challenges we’ve encountered.
And we have strong operating performance including record quarterly pulp production in our specialty papers business. These factors led to the record adjusted earnings per share for the quarter at 27% increase over the third quarter of last year.
And our Advanced Airlaid Materials business revenue grew 7% during the quarter driven by strong demand for adult hygiene products. This led to a 91% increase in operating profit during the quarter and when adjusting for the cost related to fires in our facilities in 2013 earnings were up 34%.
Our production teams in Europe and North America performed well and work together to support a new product launch for adult incontinence by a major customer helping to drive our volume growth. We continue to operate at capacity in this business and we’re supplementing our North American capacity with production from our facility in Germany.
Due to the strong demand we’re evaluating options to continue to serve the growth of our customers in this particular market. Composite Fibers continues to face the challenging economic and market environment.
However operations ran very well in the quarter which generally offset the impact of the challenging business environment. Operating profit for this business was $18 million, down slightly compared to last year.
Specialty Papers had a very strong quarter, with shipments up 2% again outperforming the broader uncoated free sheet market that was down 8% which reflects both the long term demand decline and increased imports. Selling prices for this business were up nearly 4% compared to the year ago period reflecting price increases announced late last year and early this year.
We’ve discussed the issues this business had with pulp production late last year and early this year we took steps in the first quarter as well as during our annual maintenance outages in the second quarter to address these issues and the operations teams have taken further improvement steps which resulted in record pulp production for the quarter in both mills. This when combined with the top line growth resulted in Specialty Papers generating $28 million in operating profit up 54% compared to last year and a quarterly record.
Again, I’m pleased that how Glatfelter people have responded to market opportunities, operational challenges as well as economic and geopolitical obstacles to post record quarterly results in the third quarter. John will now provide a more in-depth review of our third quarter and then I’ll close with some additional perspectives on our business.
John.
John Jacunski
Thank you, Dante. For the third quarter we reported net income of $30.4 million or $0.69 per share.
After excluding non-core business items, reported net income of $30.8 million or $0.70 per share an increase of 27% compared to the $0.55 in 2013. Net sales during the quarter increased 1.8% and totaled $465 million.
Slide 4 shows a bridge of adjusted earnings per share from the third quarter of last year to this year. Composite Fibers results reduced earnings per share by $0.01, Advanced Airlaid Materials added $0.06 to earnings per share and Specialty Papers results added $0.16 to earnings per share.
Corporate cost reduced earnings per share by $0.04, which was partially offset by lower pension cost of $0.03. And a higher tax rate for the third quarter of this year reduced earnings per share by $0.06.
The tax rate for the third quarter of this year was more normal 25%. The tax rate last year was 16% and included the impact of releasing reserves due to the lapse of the statutes of limitations on audit periods.
And finally, a lower diluted share count increased earnings per share by $0.01. Slide 5 summarizes results for the Composite Fibers business.
This business generated revenue of $155 million, down 4% over the last year. Shipping volume was down less than 1% compared to the third quarter of last year in a very difficult market environment.
Selling prices declined during the quarter primarily from non-woven wall cover and metalized products with the total impact operating profit of 4.9. Shipments of tea and single-serve coffee products declined 3% during the quarter.
Shipments of non-woven wall cover products increased 5%. The combination of renewed competition and political instability in Russia and Ukraine has created a challenging commercial environment.
Despite these challenges our products continued to be favored by customers and we have successfully defended our positions. Our operations and product innovation teams have generated efficiency improvements and cost reductions that have allowed us to maintain our strong margins in this product segment.
We continue to be pleased with the progress of this business as the Dresden acquisition continues to meet expectations with EBITDA and margins tracking at or above 2013 levels. Shipments of technical specialty products were flat year-over-year and as expected, composite laminate shipments were down 11% reflecting our planned shift away from the lower end of the segment following the upgrade of a machine in 2013 at our facility in Gernsbach, Germany.
And finally, shipments of metalized products were down 5% compared to last year. Demand for wet glue labeled products remains weak in this segment and competition is increased.
Shipments in the self-adhesive label and inner liner markets partially offset the decline in the wet glue label market. We had a good operating quarter in Composite Fibers with improved productivity and waste levels compared to the third quarter of last year.
We took some down time in the quarter to manage inventory levels which negatively impact the results by $1.1 million but when combined with good operations and cost control, overall operations added $3.2 million to operating income. For the quarter Composite Fiber’s operating profit was $18.1 million down 4% compared to the year ago quarter with EBITDA margins expanding by 40 basis points to 16.5%.
Given the economic and market challenges this was a solid result. For the fourth quarter 2014 when compared to the third quarter we expect shipping volumes to be approximately 5% lower, reflecting normal seasonality.
There continues to be limited visibility on Russia and Ukraine which creates some uncertainty. We also plan to take machine downtime to reduce inventory levels impacting results between $1 million and $2 million more than the impact of Q3.
In additional as we previously announced we close the acquisition of a producer of Electrical Papers on October 1st. So we will have a full quarter results from this business in the fourth quarter.
Advanced selling materials results are summarized on Slide 6. This business generated another strong quarter with top line growth of 7% and net sales of $74.4 million and then operating profit increase of 91% to $7.5 million when compared to the same quarter in 2013.
Shipments were up 6% led by increases in adult incontinence, feminine hygiene core products, and specialty wipes. Our leadership positions in these key markets continue to provide growth opportunities for the future.
Operating performance in this business also improved and when combined with the impact of the top line growth and adjusting for the two fires last year, Advanced Airlaid Materials operating profit grew 34%. Our facility in Canada continues to operate capacity and cannot meet all customer demand for this region.
As a result we will continue supplementing the Canadian facility with production from our facility in Germany. This has created some freight cost penalties in the near term for the business.
For the fourth quarter 2014, we expect shipping volumes to be approximately 5% lower than the third quarter reflecting normal seasonality. We also expect to incur approximately $1 million of cost in the fourth quarter related to lost production time from temporarily taking down the line in Germany to increase production capacity.
Slide 7 provides the summary of the strong results for Specialty Papers. Net sales for the quarter were up 5% with selling prices increasing nearly 4% or $8.3 million compared to the year ago quarter, following the industry price increase announcement late last and early this year.
Shipping volumes were up 2.4% which is much better than the broader uncut efficient market that was down 8%. We continue to grow in key product lines to offset the impact of the broader market decline with shipments of non-carbonless forms products up 18%, engineered products increasing 9% and shipments of envelope products up 2%.
We experienced decline in the shipment of book publishing products at 5% and carbonless products were up 13%. During the quarter specialty papers had a very strong operating performance.
Both pulp mills had record quarterly production, paper machine throughput improved and waste levels were reduced. This more than offset normal cost inflation and higher expense for incentive compensation.
Operating profit for the quarter was $27.8 million up 54% compared to the year ago period and a quarterly record. For this business in the fourth quarter we expect shipping volumes to decrease approximately 5% compared to the third quarter with slightly lower average selling prices both due to normal seasonal fluctuations.
We also expect maintenance spending to be approximately $2 million higher than the third quarter reflecting the normal variation in work. Slide 8 shows corporate cost in those financial items for the quarter.
Corporate cost were up $2.3 million compared to last year. This increase represents investments in strategic initiatives and slightly higher cost for incentive compensation.
Also in Slide 8, you can see we had gains from the sale of 1,095 acres of timberlands and an impairment charge for a long life asset associated with the value of Dresden trade name. As recorded by the accounting standards we annually test our non-amortizable intangibles for impairment which includes goodwill and the Dresden trade name.
Due to the current political instability in Russia and Ukraine, the discount rate is used to value the Dresden trade name has increased substantially and as previously discussed our near term pricing has been negatively impacted. As a result we recorded a $3.3 million pretax impairment charge on the $10 million value established at the acquisition day.
This is a non-cash charged earnings and as we discussed earlier in this call, our non-woven wall cover business continues to meet expectations with EBITDA and margins tracking at or above 2013 levels. Sales of our pension plan are shown on Slide 9.
Our qualified plan remains well funded, we’ve not have to make cash contributions to our qualified plan for quite some time and we do not expect to for the foreseeable future. With respect to pension expense, considering the impact of higher discount rates and the improved funded status, we expect full year 2014 expense of approximately $6.7 million compared to $14.2 million for 2013.
Slide 10 shows our free cash flow. During the third quarter we generated cash from operations of $42.7 million compared to $47.5 million in the third quarter of 2013.
The decline in cash flow from operations was driven by higher use of cash this year for working capital, offset somewhat by higher EBITDA. Capital expenditures for the third quarter declined compared to last year due to the completion of a Composite Fibers capacity expansion project.
For the full year we expect capital expenditures of $75 million to $80 million. As it’s typical for our business we expect strong cash flow in the fourth quarter.
Slide 11 provides forward look for capital expenditures as well as the impact of the annual maintenance outages for our Specialty Papers business. In order to meet new Boiler emissions regulations, we’ll be converting or replacing four coal fired boilers to natural gas and upgrading site infrastructure to accommodate the new boilers including connecting to gas pipelines.
The total cost of this project is estimated at $85 million to $90 million with most of the spend in 2015 and 2016. We also expect to expand our Festooning capacity in our Airlaid Business to serve the growing demand for their products.
These two investments will result in more elevated levels of capital expenditures over the next few years. With respect to annual maintenance outages for Specialty Papers business that are completed in the second quarter of this year we expect an elevated cost in 2015 to complete the replacement of Superheaters on our recovery boiler in Spring Grove.
This equipment is 22 years old and our inspection show that they are at the end of their useful lives. With extended downtime for the pulp mill to complete the replacement we expect the total cost impact of the outages next year of $34 million.
We expect the outage cost to return to more normalized levels in 2016. Slide 12 shows some balance sheet and liquidity metrics.
Our net debt totaled $357 million at September 30, up 37 million from the year end due to higher levels of working capital and cash tax payments. And the use of $12.2 million in 2014 for the repurchase of 464,190 shares of company stock.
We finish the quarter with $54 million of cash and $218 million available under our revolving credit facility. So our balance sheet remains in good shape with leverage on a net debt basis of 2 times at September 30.
We believe this provides sufficient liquidity to continue to execute our growth strategies and we expect substantial cash flow during the fourth quarter which is typical for our business. Finally, I want to provide an update on the Fox River environmental matter.
As you recall the Glatfelter has been involved in litigation regarding responsibility for the remediation of Fox River due to presence of PCBs in the sediment as a result of the production and recycling of NCR branded carbonless paper. A Federal district court in Wisconsin rule that NCR was responsible for 100% of the cost associated with remediation and natural resource damages of the portions of the river below the area of the river where Glatfelter discharged its waste water.
The district court’s decision was based on NCR’s knowledge versus that of recyclers and view that the producer of the product containing the PCB is more responsible than the recyclers. This decision was appealed and the appeals court issue that’s ruling in late September.
The appeals court noted that the district court may have considered all appropriate equitable factors in reaching that conclusion, but it wasn’t clear from the district court’s opinion. The appeals court therefore vacates the decision and remanded to the district court for further consideration.
On remand the district court could restore its original allocation of responsibility or to determine a different allocation. We continue to believe that district court’s decision was appropriate.
As a result we’ve not altered our reserves for this matter. However, remediation of the river will go on for several more years and the source of funding of this remediation over that period is uncertain while the district court reconsiders the final allocation of responsibility.
Our 10-Q will be filed with the SEC by the end of today with the full disclosure regarding these recent developments. This concludes my comments I’ll now turn the call back to Dante.
Dante Parrini
Thank you, John. Glatfelter continues to focus on its few key drivers that have produced the track record of success and position our business well for continued growth.
Those being fortifying and growing our leading positions in a wide variety of specialty growth markets, developing new and innovative products to strengthen our competitive advantage and provide additional growth opportunities and focusing on manufacturing excellence and continues improvement to drive greater efficiency gains and build a lower cost structure. Our Composite Fibers business has faced market challenges from geo-political issues, weak economic conditions and more intense competition.
However, the underlying long-term growth potential remains compelling. We continue to be the world leader filtration papers for tea bags and single-serve coffee applications as well as non-woven wall cover and all of these markets have attractive growth profiles.
In October we also expanded our product line of electric products through the acquisition of SPO. This business based in Germany has annual revenue of approximately $32 million a third of which in China, Asia Pacific and provides us with access to additional customers as well as broader product lines to serve this growing market.
We expect this acquisition to add $0.03 to $0.05 earnings per share in 2015. Our Advanced Airlaid Materials business has strong demand for adult hygiene products.
We continue to bring innovations to these markets which supported a new product launch for adult incontinence by a major customer. This market, as well as the feminine hygiene and specialty wipes markets holds much promise for future growth.
With this business operating at capacity we continue to evaluate opportunities to create incremental capacity through targeted investments as well as a more substantial capacity addition. And in Specialty Papers, we expect to be able to continue leveraging our broad product line, new business development capabilities and focus on customer service to outperform the broader uncoated free sheet market and to continue running our assets full.
These market opportunities are underpinned by our drive for manufacturing excellence and continuous improvement. We have a long track record of success with creating earnings growth through this programs and it will remain a key area of focus for all of our businesses.
2014 has been a challenging year but we have responded well and I expect Glatfelter people will deliver another year of record earnings. We continue to have attractive growth opportunities both organically and through acquisition and our focus on operational excellence provides an opportunity to expand margins.
As a result Glatfelter is well positioned to continue our track record and solid earnings growth as we move toward 2015. At this time I’d like to open the call for your questions.
Operator
(Operator Instructions) Your first question comes from the line of Steve Chercover from Davidson. Your line is open.
Steve Chercover - D.A. Davidson
Thank you. Good morning everyone.
I might have missed it, but I don’t think you mentioned MLP conversions for your virgin pulp assets in North America. So just wondering whether you are investigating the potential?
John Jacunski
Yes Steve certainly, we are in the early stages of investigating the structure and whether it’s appropriate for our business. We’re certainly also committed to exploring any opportunity that can create shareholder value.
So we will continue that process and after we get a little deeper into it we will report back if we think it’s an appropriate stuff for the company intake.
Steve Chercover - D.A. Davidson
But to-date you have not submitted request for private letter ruling?
John Jacunski
We’ve not.
Steve Chercover - D.A. Davidson
Got it. I am also wondering whether you will get any productivity improvements out of the mandatory CapEx for Boiler MACT.
John Jacunski
There are some, but there are also some cost penalties, so the investments we’re making essentially, our expectations is that they will be large cost of neutral to our P&L overtime other than the fact that we’ll have higher depreciation expense going forward from the depreciation front of the investment. But from an operating cost perspective, when we look at all the puts and takes the gas is more expensive fuel than coal and but we’ve also have some offset through improved efficiency from new boilers and then lower cost for handling coal and things that’s we were, but net expect it to be essentially cost of neutral.
Steve Chercover - D.A. Davidson
Okay. And, then, what is the delta in the outages or the impact of the outages in 2015?
You said it was going to be 34 million, but what was the base this year?
John Jacunski
In 2014 it was 28 million. So it’s up -- it will be -- our expectations, it will be up 6 million versus last year.
Steve Chercover - D.A. Davidson
Great. I appreciate that I’ll get back in the queue.
Operator
The next question comes from the line of James Armstrong from Vertical Research Partners. Your line is open.
James Armstrong - Vertical Research Partners
Good morning. First question is on the specialty papers side.
At least by my calculations, the cost per ton dropped significantly. Do you think that level is sustainable into the fourth quarter, or will we see the normal seasonal reversal?
And, on that topic, you mentioned pricing weakness in the fourth -- a seasonal pricing weakness in the fourth quarter versus the third quarter. Could you let us know what sub-segment -- why we would see that pricing weakness?
John Jacunski
Sure James. On the cost side the one thing we mentioned in our guidance was that we expect maintenance cost to be little bit higher in the fourth quarter versus the third quarter.
We had record pulp production, certainly what’s striving to continue to achieve that level of production and perhaps increase it further. But those are based on the guidance we provide we would expect cost might be slightly higher just because of the maintenance, but not a substantial increase and then with respect to pricing it’s not unusual given the seasonal demand decline in the fourth quarter for pricing to drift a little bit lower and generally speaking it’s more of the white papers type products versus our carbonless or engineered products but we’re not talking about significant declines but there can be a little bit of a drift down due to the seasonal weakness in demand.
James Armstrong - Vertical Research Partners
Okay, that helps a lot and then coming back to the maintenance and the little bit on the pulp side. As you do you boiler replacements, do you see any capacity gains as you do so will there be any chance for debottlenecking?
John Jacunski
No, I don’t think so. I mean it’s -- we're essentially installing more efficient boilers but it’s not going to change the overall level of steam demand and production of steam that we have.
James Armstrong - Vertical Research Partners
Okay, and then lastly switching gears to the Airlaid segment, as you do your capacity expansions on the extra Festooning, will that be like a Greenfield or will that be done on current locations, most likely in Canada it sounds like?
Dante Parrini
Hi James, it’s Dante. So the addition of Festooning capacity will happen at existing GLT facilities.
So we’re still going through the internal analytics of where and how, but it will either be at [Gatzino at Falken, Hogen] or some combination of both over time.
James Armstrong - Vertical Research Partners
Okay, that helps a lot. Thank you very much.
Operator
Your next question comes from the line of [Audio Gap] your line is open.
Unidentified Analyst
Thanks for taking the question. Nice job on the paper side, unless I’m mistaken looks like the best shipment number in maybe six quarters and I was just looking at the last call I guess the implied guidance was for down just under 2% you came in 4 points better, can you just give us a little bit more flavor on sort of dynamics that were in play in the quarter and then I guess what were you thinking when you gave that guidance back in late July?
John Jacunski
Sure, I mean the demand was just a little bit strong than what we expected, I wouldn’t say there is any particular factor, we had good growth in our engineered product segment and good growth in our carbonless form segment, the others performed about where we expected so some of this can just be sort of customer timing but I wouldn’t say any particular factor in it being a little bit stronger. It’s in line with what our expectations over the long term, we’re outperforming the broader uncoated free sheet market for 10 years now, our shipments generally have been increasing 1% to 2% per year so this might have been slightly stronger quarter than normal but there was no sort of single or unusual factor.
Unidentified Analyst
Okay, that makes sense. I guess it’s a good problem to have.
And then lastly, I guess you have a new board member since your last earnings release so that -- obviously -- might be look like a pretty nice win for you guys. Any idea how you might be able to leverage Bruce’s background in technology?
John Jacunski
Sure, so we’re pleased to have Bruce Brown joining our board and this is part of a managed internal board succession project as almost tenured director will approach his mandatory retirement age in early 2015. We felt that Bruce’s background and global business development innovation, the thought capital that he brings to our board and his 3 plus decades of experience and knowledge of some of our technologies and materials was a great addition and just like we look to fully leverage all of our board members skills and capabilities and business experience we look to do the same at Bruce.
So we’re very pleased to have him on board and optimistic about the future.
Unidentified Analyst
Okay, great that’s it for me. Good luck for the rest of the quarter.
Operator
Your next question comes from the line of George Livadas from BMO Capital Markets, your line is open.
George Livadas - BMO Capital Markets
Good morning guys, thanks for taking my questions. I guess first question could you comment that I guess bit more on the coffee and tea markets and what you’re seeing there?
John Jacunski
Sure. So, the global growth profile for our food and beverage businesses is 3% to 4% we see -- you can see some period-to-period variation that is not systemic in any way, single serve coffee is growing faster than tea.
As you might know from our shipments over the last few years we will encounter from time-to-time a quarter or two of shipments that are either substantially above or somewhat below the broader trend line of growth and this is more -- has to deal with inventory management and timing as oppose to the fundamental mechanics of how that market is developing and how the growth is progressing over time. So, we continue to be very optimistic on both tea and coffee as John stated we expect our Q4 coffee filter paper shipments to be back at normalized levels and we’re very pleased to have leading market position in both categories and are working hard to maintain our customer’s confidence and trust.
George Livadas - BMO Capital Markets
Thank you. That’s very helpful.
And I guess looking ahead, how do you think about the impact from FX on I guess your pricing guidance? Is that something you factor in when you give guidance on pricing, or how do you think about it?
John Jacunski
From an FX perspective our largest non-U.S. dollar denominated currency is the euro.
We are about €140 million long. And so certainly as FX rates fluctuate it can have an impact on us.
If we were to look at our Q3 results with the current spot rate of about $1.25 results would have been on the order of $0.04 lower for the quarter. We do hedge the euro somewhat, we have about 30% hedge over the next 12 months and that hedge rate tends to be around 133 or so.
So that will somewhat reduce that. So there could be some impact if FX rates were to stay where they currently are at about $1.25 but we will or I guess that we have the hedges that will take out some of the down side over the next 12 months.
George Livadas - BMO Capital Markets
Okay. Thank you.
And I guess just one kind of cleanup question, I noticed the tax rate for the quarter was a little bit lower than, at least, than I had expected, is 28% still sort of your guidance for the year?
John Jacunski
Our normal tax rate would be around 28% and then we had couple of small things this quarter that reduce it to 25% so it’s not too far out of the ordinary. Things that can affect our rate would be things like audit resolutions, where we end up releasing reserves that have previously been accrued and in particular in Q4 if the restriction development credit is extended, it expired at the beginning of this year, if its extended before year end that can lower our tax rate a bit.
But on a going forward basis, about 28% is pretty standard rate for us.
Operator
(Operator Instructions) Your next question comes from the line of Debbie Jones - Deutsche Bank. Your line is open.
Debbie Jones - Deutsche Bank
I was hoping you cound comment just a little bit more on the Airlaid capacity expansions. I realize you don’t know quite which facility yet.
But is there kind of like a timeframe you could comment on, and then is this on the back of industry growth, or do you have any specific customers supporting this decision?
Dante Parrini
Debbie, it is Dante. I am happy to comment.
As we think about the capacity situation in our Airlaid business, we’re thinking about this in parallel path as John made reference we’re taking some down time in Q4 to install a calendar on one of our lines in Germany, within Boster and this is going to help improve our ability to schedule and have better flexibility and create longer production runs and then that will create 2,000 to 3,000 metric tons of additional capacity. At the same time we’re accessing the broader development of the market which is growing and we continue to project about a 5% global growth rate for the adult hygiene categories as well as our specialty wipes.
And we’re also participating in the growing retail section of the adult incontinence markets. It’s hard to project with any level of accuracy how big the market could grow and at what rates.
Other than that we’re positively dispose towards the demographic profile and the direction of this particular categories is heading and we think our technology is a great fit for adult incontinence applications. And you know that we have leading share positions in these [some] high and strong growing position in the adult incontinence.
So it’s important for us to be able to support the growth of our customers and we’ve identified our Airlaid business as a growth platform for Glatfelter. So we’re very actively engaged in completing the analytics around the bigger picture capacity expansion.
The ultimate resolution is to be determined whether we would build a line at a facility or look at a Greenfield facility, those are all under consideration and we’ll provide you update as our point of view becomes clear.
Debbie Jones - Deutsche Bank
Okay. Thanks.
That’s helpful. And I just wanted to touch on -- well, first of all, thank you for the information on the environmental regulation spend, that’s helpful.
As I look at that increase for you next year and then as you have to continue to kind of evaluate the writing litigation. Now how does that impact your M&A thoughts in terms of size or capital deployment in terms of share repurchases, going forward?
Dante Parrini
Sure. I think John did a nice job of summarizing the recent ruling from the courts in our point of view.
Clearly when we think about managing our balance sheet and the role of M&A, we step back and say well first of all, we feel very good that we’ve created a business that has two of its three business units that are organically growing across the product categories anywhere from 2% to 3% up to 10%. And so we do have organic growth opportunities and we like the profile of investing in organic growth.
At the same time we project what we think the cash flow profile is going to look like and then what are the uses we’re going to have for applying our cash flows. And we operate with a high level of financial discipline and we want to be -- have a conservative bias to make sure that we protect the balance sheet and never put the company at risk while at the same time very thoughtfully and methodically investing in the ongoing growth and development of Glatfelter.
So, I believe that there is an opportunity for well-priced, good fit acquisitions within our portfolio over time and we continue to assess those options as we do every year. At the same time we want to be thoughtful and mindful about how much capacity we maintain in the balance sheet so that we’re prepared for any of the outcomes.
Debbie Jones - Deutsche Bank
Okay, great, thank you, that’s helpful.
Operator
There are no further questions at this time. Dante, I turn the call back to you.
Dante Parrini
Okay, well thank you very much for joining our call today and we look forward to speaking with you next quarter. Have a great day.
Operator
This concludes today’s conference call. You may now disconnect.