Feb 6, 2018
Executives
John Jacunski - Executive Vice President & Chief Financial Officer Dante Parrini - Chairman and Chief Executive Officer
Analysts
Debbie Jones - Deutsche Mark Wilde - BMO Capital Markets Dan Jacome - Sidoti and Company Kurt Yinger - D.A. Davidson
Operator
Good morning, at this time I would like to welcome everyone to the Glatfelter’s Fourth Quarter Earnings 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.
I would now like to turn the conference over to John Jacunski. Please go ahead.
John Jacunski
Thank you, Shakira. 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.
Dante Parrini
Thank you, John. Good morning and thank you for joining us today.
Before I provide some comments on our results I would 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 focused on continuing that growth and after careful side 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 have some additional comments on this decision and our broader long-term strategy in my concluding remarks.
Now I’ll start 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 will help by an unusually low tax rate. Our engineered materials businesses perform very well with strong top-line and profit growth.
For Composite Fibers fourth quarter operating profit was up 22% from the prior year and strong volume growth of 18%. Demand is strong and shipments for all product segments were up.
The profit improvement was further supported by strong operational performance and successful completion of the costs optimization initiatives announced a year ago driving margin expansion by 60 basis points. This business has clearly turned the corner applicable challenging years.
For Advanced Airlaid Materials, fourth quarter operating profit increased 9% from the prior year on the heels of strong shipments of wipes and hygiene products. This was a record year for this business both in terms of profit and margins.
Airlaid product development in North America remains strong as our new capacity in Fort Smith is nearing to completion of customer qualifications product testing. At this point, we’re 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 and profitability was led by lower year-over-year pricing.
We did see pricing trends improve during the fourth quarter and we expect further pricing improvement as we go forward driven by significant reduction and industry capacity that is expected to improve operating earnings. This is a very constructive development for Specialty Papers.
At this point, I’ll turn it over to John, who will provide a more in-depth review of our fourth quarter results, and then I’ll offer some closing comments on the full year’s performance and our broader long-term strategy before taking your questions. John?
John Jacunski
Thank you, Dante. For the fourth quarter, we reported net loss of $10.1 million or $0.23 per share.
After excluding non-core and non-recurring 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 reduced earnings per share by $0.19, lower selling prices year-over-year and raw material income energy inflation with the main drivers. Corporate costs improved earnings per share by $0.06 driven by lower legal expenses for the Fox River matter and lower incentive compensation.
And taxes improved earnings per share by $0.03 from lower tax rate this quarter of 6.7% compared with 13.6% in 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 and well covered that were up 31% and tea and coffee that were up 8%.
Selling prices for Composite Fiber stabilized in the quarter compared to 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. Our 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 target 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 a very strong level of the fourth quarter.
Selling prices and raw material and energy prices are expected to be slightly higher in 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 the 3.1% improvement on a constant currency basis. Overall, shipments rose 2.4% driven by strong growth in wipes of 11% with a hygiene segment of 3%.
The growing demand for our wipes products on the scores that market need and the timing of our additional Airlaid capacity enforcing with our concern. Operating cost for this business were up 1.1 million compared to the prior year reflecting general inflation primarily in labor cost 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 planned to roll this out the business units European operations later in 2018. Operating income was 7.2 million was 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 successful initiated customer qualifications and product testing form 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 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 we shut down at the end of the third 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 that were up slightly from the third quarter as there were a number of announcements in the market from uncalled officially manufactures regarding capacity reductions and conversions totaling about 10% in the market.
This encouraging market dynamic also facilitated recent in price increase announcements for carbonless and many of our engineered products as well as a second increase announcing on a broad range of efficient products. Operating profit for the quarter declined of $3.5 million as business also face rising raw material and engine 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 from 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 over shaded by transition issues related to paper machine shutdown including changes to production payers and operating personnel. We have made significant progress on these items and they were largely result 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 to full production in our higher facility due to have normally called 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 start-up of our new Airlaid facility in Fort Smith, Arkansas and residual spend on the environmental compliance projects 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 like $3.1 million compared to last year due to lower approximately for the legal costs and reduction incentive compensation. We expect corporate costs 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 and slightly lower than a year ago.
For the full year adjusted free cash flow was $31 million were $21 million lower than 2016. The lower cash flow was driven by higher capital expenditures increased cash costs related to cost reduction issues and a momentum and of course 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 expenditures to return to more normalized levels in 2018 of approximately $70 million.
I’ll now take a minute to provide some comments regarding and recently in active U.S. tax legislation and its impact on the fourth quarter as well as 2018 have 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 and allows 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 lower tax -- by a lower tax rate being applied to our expected U.S.
laws resulting in a lower tax benefit. There are some 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 on 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 total liquidity of $184 million.
Our leverage was at 2.3 times at year end based on net debt and adjusted EBITDA. Liquidity continue 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.
Dante Parrini
Thanks John. As I have 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 and 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 volume up 3%, While feminine and 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. A strong demand expected to continue in North America our 22,000 tons of new capacity and 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 to drive our projected shipment growth of 10% to 15% in 2018. These two 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 are impacting 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 free sheet benchmark prices to reach 11-year low and reduce Specialty Papers 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 implemented. This bodes well for Specialty Papers.
Well, this place out, we will continue to focus on factors that are within controls such as delivering our 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 finished the environmental compliance projects and 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 focused towards its growing engineered materials businesses.
We are established global leaders in markets like tea, single serve coffee, wallcover, hygiene and wipes. And we expect demand for these products to remain robust in 2018.
We are excited about the imminent start-up 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 remain in the supply of choice to a wide verity of market leading customers across the broad range of consumer and industrial product categories.
A key market we serve or growing our GEP 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 less for the Glatfelter into 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 we’ll may Glatfelter and 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 the more profitable and distinct of company and to drive sustainable value creation overtime. I’ll now open the call for your questions.
Operator
[Operator Instructions]. And your first question come from the line of Debbie Jones with Deutsche.
Debbie Jones
First question just on the papers business. Demand with a little worse than I was expecting and the price erosion which worse than I was expecting and I think it was below your guidance as well.
Can you just comment on that if there is anything you want to call it about these two items?
Dante Parrini
Debbie, I think that our volumes were largely in line, we’re 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 the pricing at the product line level, prices were up a little bit I mean weren’t up a lot that’s for sure.
But it certainly did change the trend in there we were seeing as we move through the last -- certainly last year or two with declining. So, we saw a stabilization of pricing slight increased.
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 we there will be further realization as we move through the year we think it's -- a little bit difficult to handicap all the second uncoated free sheet announcement will play out but it is reasonable to expect that over the second half of the year we will see further price improvement -- second quarter in the third quarter we will see further price improvement as well as are implemented.
Debbie Jones
And then on the reviewing strategic alternatives, I know you have been asked this question in the past before around the business why now how does tax reform planned to that I'm just coming your thoughts on the decision that you have made around?
John Jacunski
Sure, Debbie we feel very strongly that our Composite Fibers and Advanced Airlaid Materials businesses which reflect about half of our revenue and three quarters of our EBITDA has 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 trajectory that we see for our AMBU and CFBU and want to focus our energy and resources on maximizing those.
Debbie Jones
To the extent that you can -- how do you think the factor reliability plays into this review? And then also what type of CapEx to you vision spending specifically in this business in 2018?
Dante Parrini
I'll turn it over to John, on some of the CapEx but the partial review does not have an impact on the review of strategic alternatives for specialty papers.
Debbie Jones
I guess it means like you were to sell the company there is a liability go with the company or does it stay with you?
Dante Parrini
Stays with us.
Operator
And your next question comes from the line of Mark Wilde with BMO Capital Markets.
Mark Wilde
Just coming back to the strategic review, Dante, I wondered first if you could just walk through what you think some of the options are, you have mentioned sale you have mentioned spend, just maybe put a little more color around that if it's possible.
Dante Parrini
Yes, as I said possible outcomes of the review process could include but are limited to things like sale of the business unit, the spin off or other separation alternatives. Its early in the process and we really haven't established any particular timeline although we expect to move this through at a logical pace, but it's premature for me to speculate on much else past this.
Mark Wilde
Dante would you expect that you do the two mills as a bundle or is it possible what it might be that might go in different directions. I have always gathered that the performance between the two mills actually varies quite a bit.
Dante Parrini
Yes, I think when you decide to explore strategic alternatives then you have to keep in 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, we’ll say open minded and thoughtful.
Mark Wilde
And John is there any way that kind of give it sense of what the tax basis in the two mills is?
John Jacunski
Yes. I mean the tax base is with the recent $100 million investment we made for the environmental compliant certainly has moved up.
So, I would say it’s in the $220 million, $250 million range.
Mark Wilde
If I 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 start-up costs or actual contribution from Fort Smith as we move through the year?
John Jacunski
So, Mark on the start-up costs, our guidance is that we allot $3 million after-tax, it remains start-up costs, those are largely Q1, there could be a little bit that is in Q2, but I’d say largely Q1. And then we should be done with that.
And that’s really the only type of sort of unusual type cost, the other types of costs that we’ve incurred this year around cost optimization and in the SPBU environmental compliance those are completed. As relates to the phase in of Fort Smith, our guidance for Q1 is that will be up 5% versus Q4 and volume.
If you look back to what we shift in Q1 last year that’s were going to up about 8%. So, there is not a real significant level of facing between Q1 and Q2 and as we get into the, we expect to be a pretty gradual sort of 8% up in Q1 and then we would expect slightly better year-over-year comps as we’re going for the year.
And as we’ve talk about from a margin perspective. We haven’t disclosed specifically what we expect margins to be from this facility.
But we’ve always said is that we expect stronger EBITDA margins, because we don’t have to add any significant overhead for this facility compared to where we have today and logistics wise, we are in a better position where we are sourcing help close to where it’s produce and we are shipping in products closer to where they’re consuming. So, we would expect some benefit there.
So, we expect higher EBITDA margins, but we have guided beyond that.
Mark Wilde
Okay. So, the facility by the end of 2018 should be EBITDA positive John?
John Jacunski
Certainly, I mean we expected to be EBITDA positive very quickly.
Mark Wilde
And then that…
John Jacunski
Mark just to ignore, that’s ignoring the $3 million of start-up costs.
Mark Wilde
Yes. I’m just trying to think about on the fixed costs basis down there.
And then Dante is it possible to get a little bit more color on this sort of the big bump we saw in volume and kind of Composite Fibers. Does that come across the mill system or did you get that in specific allocations?
I mean looked like Dresden must have gotten a lot of incremental volume in the quarter from those wallcovering volumes?
Dante Parrini
Yes. So, if you go back to the beginning of 2017, we had conveyed our confidence that growth will be resorted in CFBU markets after a couple of challenging years and that’s played itself out.
As John said in the fourth quarter, we had about 8% left in food and beverage, we’re up about 20% composite laminates, technical specialties up 22%, wallcover up 31%, metalized up 3% some is really across the system. And you asked specifically about wallcover, market is much more stable we are 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 have had three quarters in a row where the volumes are back to pre-crisis levels. And you know that we have 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.
Mark Wilde
And then finally John or Dante to come back to kind of specialty papers I wondered if you could just give us an update on the core business with spring grow which is the usually been the trade book business I think four or five years ago people were really 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.
Dante Parrini
Spring rose specialty mix has benefited from growth in our engineered products group so that volume was up about 3% in the fourth quarter. And you had mentioned we have 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 have seen a little bit of resurgence. There is an evident 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 at 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.
Mark Wilde
And then book Dante has the pressure you are getting from some of the ground wood grades is that abated at all or is that still out there?
Dante Parrini
Its abated.
Operator
And your next question comes from the line of Dan Jacome with Sidoti and Company.
Dan Jacome
Just trying to get a better -- just two quick housekeeping questions. Just trying to get a better understanding of how much of the total 22,000 tons of Airlaid you expect to utilize in year one?
I know you mentioned 5% quarter-over-quarter it's like back into some sort of rate I just want to hear what internally you are assuming, is this something like 30% in year one 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 two, if you had -- I don’t know if you can answer this but if you did not have the specialty paper business kind of just a pro forma [indiscernible] spun it off, what will your CapEx be, guidance be for the year?
John Jacunski
So, Dan with respect to the Advanced Airlaid Materials business and 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 -- kind of look at the capacity utilization based on the entire business and that’s just specific to Fort Smith because of that movement.
So, we will create some open capacity in Canada that we expect that we also will be able to grow into. So, if you look at what we shift in 2017 and you look at growth of 10% to 15% beyond that so 2019 and beyond we still have 10% to 15% of our 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 target capital investments to also create additional capacity.
So yes, 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.
Dan Jacome
And then on CapEx?
John Jacunski
Yes, as it relates to CapEx, I think broad numbers, our expectation is we will invest about $70 million for the full year of 2018 on your 20 million to 25 million is related to specialty papers.
Dan Jacome
And then just lastly on the asset potential realignment of you do a sell or spin. Just trying to pick your brain here.
I mean, what you have done this, if the 10%, 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 potentially spin or sell?
John Jacunski
Yes, Dan, I think the decision, I think is really driven by the growth potential we see in our engineer materials businesses. And the fact that we want to shift resources towards whether it be human or financial resources towards accelerating the growth of those businesses.
Certainly, the improving marketing conditions are helpful for specialty papers. But the decision drivers are based on our -- what we, I think we can driving growth from our engineered materials businesses.
Dan Jacome
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 you guys start thinking about this?
Would it be like 6 months ago or a year ago. I am just trying to match it with the Fox River settlement?
Dante Parrini
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 servicing markets that are growing GDP, GDP plus and where we want allocate capital.
Dan Jacome
And then for the Fox River liability that would stay with you assuming there was for 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?
Dante Parrini
No. I think it has more to do with the fact that the Fox River is not attach to our Spring Grove comp facilities.
This was from Wisconsin, our new Wisconsin facility that we sold in 2006.
Dan Jacome
Actually, I know that. All right.
Overall, I think this is pretty encouraging news. And we’ll see what happen.
I appreciate that.
Operator
And your next question comes from the line of Kurt Yinger with D.A. Davidson.
Kurt Yinger
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.
Dante Parrini
Yes, I'll start and then let John provide any additional comments he would like. So, as you know we are exiting a multiyear period of very heavy capital investment.
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 strategy that we were reticulated to you we will also mindful that allocating capital back to shareholders through dividend increases and potential share repurchases when the timing is right is also important. And during my tenure as a CEO we have done all 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 energy and materials businesses.
Kurt Yinger
And then you guys have mentioned some M&A potential maybe within the engineered materials business. I was wondering if you could maybe benchmark a typical size or something you might look at and maybe what sort of multiples are there?
Dante Parrini
So, Kurt I think we have been very consistent when asked questions about acquisitions and the criteria of 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 tuck in for the early business or the composite fiber business or be close enough adjacency or offer some level of geographic expansion, those are the most likely and logical parts of our business.
We have talked about platforms that we think are a better fit whether they be filtration or personal care and hygiene electrical those are some examples types of technology in markets that we think are a better fit and fit our style of business. In terms of the size of the particular target, it’s a reasonably wide range and they are all situational, it depends on the investment thesis and how good of a fit it is, what the synergy opportunity may or may not be and so its awful hard to offer some form of conjecture on particular target size or multiple without knowing specifics.
John do you want to add anything?
John Jacunski
No, I think that’s correct.
Kurt Yinger
Would it be fair to say that potentially those would be more international focused as opposed to maybe U.S. centric?
Dante Parrini
No, I wouldn’t say that. I think, again if you cast a net line and keep in open mind and make decisions based on what you see with actionable and what the investment profile looks like.
Kurt Yinger
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 mix shifts in there, maybe with wallcovers?
Or how would the pricing differ going forward as and what you are experiencing in this fourth quarters always going to offset?
John Jacunski
On composite fibers I think we have talked in the past about some new capacity that come in to some of their markets that affected pricing and we have 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, when we look at the product line level, prices were pretty stable Q3 to Q4. We saw bit of a shift and the trend, much specialty papers and then we are seen some price left in Q1.
So, it’s not really necessarily a mixed situation. It’s product by product line by product line were same stability and some price improvements.
Kurt Yinger
Two quick housekeeping items. What was the effective tax rate on adjusted earnings for 2017?
John Jacunski
For the full year was 19%.
Kurt Yinger
Okay. And so that would be expected to move up to 33% in ’18?
John Jacunski
That’s right.
Kurt Yinger
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?
John Jacunski
Right. So, we have 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 another is 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
[Operator Instructions]. And we do have a follow-up from the line of Debbie Jones for Deutsche Bank.
Debbie Jones
You got my CapEx question, but I was wondering could you comment in Airlaid? Where do you think, you can take EBITDA margins?
Can this approach kind of what you’re currently doing in Composite Fibers once you get fully ramped up?
John Jacunski
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, ought to be able to push our margins for both Composite Fibers and our Airlaid business into a high-teens.
We think 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 said John speaking, we expect that we should be able to for some into the high-teens overtime.
Debbie Jones
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 build and delay just based on your contrast commitments that you would have to consider?
John Jacunski
Yes. I think just premature for us to comment on that at this point Debbie, there is still a lot of work that needs to be done around all of these issues.
So just premature for me to comment on that.
Operator
And we have a follow-up from the line of Mark Wilde from BMO Capital Markets.
Mark Wilde
Yes. I got two 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?
John Jacunski
A little bit difficult at this point Mark, I would say that we expect a small loss in the 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 itself from a separation with specialty papers but certainly a lot more work we need to be around there. So, I don’t have perfect guidance for you today on that.
Mark Wilde
And then the other one I wondered about Dante, in the Airlaid business do you benefit in the wipes business from to having a cellulose-based wipe rather than a polymer-based wipe?
Dante Parrini
Certainly, in North America yes, that’s the form factor of choice for consumers and there is a lot of strong demand for the Airlaid material. There are other regions in the world where perhaps the polymer-based material was introduced first and the consumer's taste 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.
Mark Wilde
And would you feel like in this business there will be room for some more consolidation in the industry?
Dante Parrini
That’s hard to say, and it depends on the specific business and where in the world it may be and what kind of technology they are using to manufacture goods.
Mark Wilde
And you don’t have any sense or whether you kind of prefer to grow through acquisitions versus maybe green fielding in some of the developing markets?
Dante Parrini
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 they 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 that’s being patient thoughtful about how we apply continuous improvement and an innovation and finance scale economies and establishing centers of excellence. So, I think it’s a combination.
Operator
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.
Dante Parrini
Well, thank you everyone for joining our call today. We look forward to speaking with you again next quarter.
Have a good day.
Operator
And this does conclude today conference. You may now disconnect.