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Glatfelter  (NYSE:GLT)
Q4 2018 Earnings Conference Call
Feb. 05, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning. My name is Timiya and I will be your conference operator today. At this time, I would like to welcome everyone to the Glatfelter's fourth quarter 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 P. Jacunski -- Executive Vice President and Chief Financial Officer

Thank you, Timiya. Good morning and welcome to Glatfelter's 2018 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 the 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 2017 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 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 C. Parrini -- Chairman and Chief Executive Officer

Thank you, John. Good morning and thank you for joining us today. The fourth quarter concluded a pivotal year in the transformation of Glatfelter into a leading global supplier of engineered materials. We accomplished this through several significant strategic actions.

Early in the year, the first commercial product was shipped from our new state-of-the-art facility in Fort Smith, Arkansas. This marked the successful conclusion of a multi-year greenfield project that enhanced our capabilities and expanded Glatfelter's airlaid production capacity by 20,000 metric tons. We are now well positioned to capitalize on the market growth in North America and better serve our customers.

To further strengthen our market leading airlaid business, we acquired Georgia-Pacific's European nonwovens business in Steinfurt, Germany on October 1st. Steinfurt's people, products and technologies are very complementary to our current airlaid business and the acquisition broadens our product lines and provides attractive synergy opportunities. On October 31st, we exited the paper business by completing the sale of Specialty Papers for $360 million to focus Glatfelter's portfolio on higher margin and stronger growth businesses. And finally, after 10 years of litigation, we entered into an agreement with the US government to resolve the Fox River matter with no change to our reserve.

As it relates to our quarterly results, we reported total revenues of $230 million, adjusted earnings per share of $0.03 and adjusted EBITDA of $20 million, all of which were in line or slightly better than expectations.

From a business unit perspective, Advanced Airlaid Materials delivered a very strong performance and Steinfurt got off to a great start. Legacy Airlaid shipments were up 10% and net sales increased 16% on a constant currency basis compared to last year. The successful progress of new customer qualifications is now contributing to our favorable results. When including the Steinfurt acquisition, net sales increased 50% and operating profit grew by 34%.

In Composite Fibers, however, we continued to operate in a very challenging and competitive market environment with elevated input costs. During the fourth quarter, the business took significant machine downtime to reduce inventory levels and adjust production to weak demand. Shipments were down 11% with revenues lower by 6% on a constant currency basis, while operating profit was cut in half when compared to the same period last year. I'll speak to the steps we are taking to address these issues during my closing remarks.

At this point, I will turn the call over to John to provide a more in-depth review of our fourth quarter results, then I'll offer some closing comments before we open it up for questions. John?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Thank you, Dante. Slide four shows the fourth quarter's consolidated income statement on a GAAP basis, with a comparison against the same period last year. As a reminder, Specialty Papers results were classified as discontinued operations for all periods presented in the earnings release and the accompanying investor presentation, as of the third quarter of 2018. In addition, the Steinfurt acquisition is included in our results for the fourth quarter.

Results from continuing operations represent Glatfelter's engineered materials businesses and corporate shared services and overhead. As you may recall from last quarter, costs related to corporate shared services that were historically allocated to Specialty Papers remains in continuing operations as required by the accounting standards.

For the fourth quarter, revenues were up 12% in constant currency compared to last year, driven by strong organic growth in Airlaid, the impact of the Steinfurt acquisition and reflecting weak demand in Composite Fibers. Operating profit was down in the fourth quarter versus last year, primarily driven by a challenging demand and input cost environment to Composite Fibers and the transaction costs incurred related to the Steinfurt acquisition. After excluding, non-core and non-recurring business items, we reported adjusted income of $1.4 million, or $0.03 per share in the fourth quarter compared to adjusted earnings of $8.6 million, or $0.20 per share in the fourth quarter of 2017.

Slide five shows a bridge of adjusted earnings per share from the fourth quarter of last year to this year. Composite Fibers results reduced earnings per share by $0.18 driven primarily by machine downtime, lower shipping volumes and elevated raw material prices. Advanced Airlaid Materials results increased earnings per share by $0.05 driven by the Steinfurt acquisition and taxes reduced earnings per share by $0.04 driven by a higher effective tax rate as expected.

Slide six shows a summary of fourth quarter results for the Composite Fibers business. Total revenues were 6% lower compared to last year on a constant currency basis due to the midweek demand across all product segments during the quarter. Shipments were particularly weak in December and this weaker demand level continued in January, but we expect it to improve for the balance of Q1. For the fourth quarter, the food and beverage segment was down overall by 5%. But for the full year, coffee shipments increased 4% versus 2017 and we expect stronger growth in this segment as well as in tea (ph) in 2019.

Wallcover shipments were down 14% as demand was impacted by the overall weak economic environment in Russia, as well as the unfavorable euro-ruble exchange rate. And similar to last quarter, metallized products shipments were down 16%, as a result of industry overcapacity and product substitution. Overall selling prices improved driven by increases earlier in 2018. We expect to realize $7 million to $9 million in 2019 from the price increase we announced late last year, largely beginning in the second quarter.

Operating income for the quarter declined $8.6 million compared to last year, primarily due to higher input costs, lower shipments and the related lower fixed cost absorption for machine downtime. While, wood pulp prices moderated somewhat in late 2018, they were significantly higher than the year-ago quarter and selling price increases have not been able to keep pace to offset this impact. Our fiber costs also continued to be negatively impacted by the sourcing disruption at one of our key suppliers from a fire at their site that was discussed last quarter. The impact in the fourth quarter from this situation was $400,000. The supplier has begun to bring production back on line and we have developed some alternative sources to bridge the gap while their full production capacity gradually gets back to normal levels in the coming months. We expect the impact from this supply disruption in the first quarter to be slightly higher than the fourth quarter. As a countermeasure to the challenging results during the quarter, we achieved a $2 million benefit from cost reduction and spending curtailment initiatives. Currency translation negatively impacted results by $1.2 million with comparatively weaker euro.

For the first quarter, shipments are expected to be up slightly compared to the fourth quarter. We anticipate a gradual pickup in demand during the quarter, following the weak demand in December and customer holiday shutdowns. For the full year, we expect volume growth to be in line with the market of approximately 3%. Selling prices are expected to be flat compared to the fourth quarter and raw material prices are expected to come down slightly, but largely be offset by energy price increases. Higher production levels are expected to improve operating profit by $1 million from better fixed cost absorption compared to the fourth quarter.

Slide seven shows a summary of the fourth quarter results for the Advanced Airlaid Materials business. Stanford's results are included for the entire quarter, as the acquisition closed on October 1. Total revenue for the quarter was $98.3 million, with legacy volumes increasing 10% compared to the prior year and net sales up 16% on a constant currency basis. With new customers getting qualified and the available capacity from our Fort Smith facility, the business had a strong growth in wipes, with volume up 38% and table top shipments almost tripling.

Raw material and energy inflation negatively impacted operating profit by $2.1 million, but was largely the offset by contractual pass-throughs to customers via higher selling prices. Operating income for the quarter increased $2.5 million, driven by Steinfurt getting off to a great start and contributing $2.4 million in operating profit. The legacy operations had a slight increase in operating profit with EBITDA increasing 11% driven by the strong shipment growth.

For the first quarter, we anticipate total shipments to increase slightly compared to the fourth quarter. Selling prices and raw material prices are expected to be relatively flat and energy prices are expected to increase slightly. As we look to the -- ahead to the full year, we are reaffirming our legacy shipment growth expectation of 8% to 10%. As the fourth quarter showed, we've made significant progress with new customers and successful product qualifications that will continue to drive growth in 2019. We also expect Steinfurt's annual volume to be approximately 28,000 metric tons with operating profit in the $7 million to $9 million range.

Slide eight shows corporate costs and other financial items. As I stated earlier, following the divestiture of Specialty Papers and its results being recognized as discontinued operations in our consolidated financials, corporate costs have been adjusted accordingly for all periods shown to include corporate shared services costs that were previously allocated to Specialty Papers.

We made progress during the fourth quarter with the right sizing of our corporate costs and shared services to align with the smaller business footprint through the elimination of some spending as well as approximately 20 positions and this helped us to reduce cost for the fourth quarter by $1 million compared to last year. We continue to expect to reduce corporate costs by $14 million to $16 million by the end of this year. This will result in estimated corporate costs of $35 million to $37 million in 2019 and $28 million to $30 million in 2020 compared with 2018 corporate costs of about $43 million.

Slide nine shows our free cash flow. During the fourth quarter, cash flow from continuing operations was $22 million lower as a result of lower earnings, expenses related to acquisition activities and the timing of compensation related accruals. We expect a significant improvement in free cash flow in 2019 driven by earnings growth, lower capital expenditures and better use of working capital.

Slide 10 provides details on capital expenditures. With all our major capital programs now behind us, capital expenditure levels are expected to decline significantly going forward. We expect total capital expenditures to be in the range of $23 million to $28 million for 2019.

Slide 11 shows some balance sheet and liquidity metrics. Our net debt on December 31st was $269 million reflecting the combined impact of the Steinfurt acquisition and the Specialty Papers divestiture. Our leverage at year end was 3 times and we had available liquidity of about $153 million. We expect our liquidity and leverage to improve by the end of 2019 as earnings and cash flows increase. As was mentioned earlier, in January, we reached agreement with the US government to resolve our liability related to the Fox River. We are making no adjustment to our reserve as a result of this agreement.

In January, we paid $20.5 million as required under the consent decree, which remains subject to court approval. The $25 million remaining reserve will be paid over the next 30 years for government oversight costs and monitoring and maintenance of the river. And on January 25th, we initiated the process to redeem our $250 million, 5.375% notes currently outstanding. These notes will be fully repaid on February 28th, through the use of our bank facility and will significantly reduce our interest expense going forward.

Slide 12 provides a summary of our projected tax rate. While the tax rate on adjusted earnings for the fourth quarter was 53%, we expect this to decline to 40% in 2019 as our US earnings profile improves. And with the continued utilization and eventual exit from the use of NOLs, the effective tax rate will gradually step down ultimately getting to 30% by 2020.

This concludes my comments. I will turn the call back to Dante.

Dante C. Parrini -- Chairman and Chief Executive Officer

Thanks, John. 2018 was a year of transformational change at Glatfelter as we reshaped our business portfolio, creating a more focused engineered materials company. The actions we have taken give us a renewed source of optimism as we focus on delivering improved profitability and cash flows in pursuit of our growth ambitions.

Our profitability growth in 2019 will be driven from four main areas. For Airlaid, our focus will be on driving growth in North America from the new capacity. We made significant strides on this growth in the fourth quarter with new products and customers and we believe, we are well positioned to sustain this momentum. We also expect to realize growth from the Steinfurt acquisition including delivering the expected synergies. Finally, we remain committed to improving operational excellence and achieving increased productivity across the business.

For Composite Fibers, we expect to grow in key markets including single serve coffee, tea and wipes, while managing risk in the wallcover and metallized markets. We're having some success with the price increase announced late last year, which will help to partially offset the significant rise in raw material costs, although will not be enough to fully absorb these higher costs. Therefore, we are redoubling our efforts to reduce costs and improve efficiencies.

To that end, we are executing a program to reduce staffing levels by 50 people in the first half of the year to generate an annualized cost savings of $4 million. This initiative is focused on improving the efficiency of our metallizing business and other mill operations as well as back-office functions. We expect these actions to lead to meaningful improvement in profitability for this business. At the corporate office, we're focused on meeting the cost takeout targets for the right-sizing initiative as we adjust to the current scale of the business.

As previously communicated, we intend to reduce corporate cost by $14 million to $16 million by the end of 2019. We also expect interest expense to be substantially lower in 2019 from the payoff of our $250 million notes. We expect the refinancing of our debt will reduce our interest expense by about $6 million compared to 2018. The significant strategic steps taken in 2018 have put us in a position to now drive growth from our engineered materials platform and improve profitability and cash flows as we build upon our strong customer relationships and leading market positions in categories like single serve coffee, tea, wipes, feminine hygiene, adult incontinence, tabletop and electrical to deliver more consistent growth and new innovations, drive greater efficiencies as we right-size our corporate costs and operate a more synergistic and agile engineered materials platform and deploy continuous improvement and operational excellence aggressively throughout the organization to address headwinds and strengthen margins and cash flows over the longer term.

I'll now open the call for your questions.

Questions and Answers:

Operator

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

Debbie Jones -- Deutsche Bank -- Analyst

Hi, good morning. I wanted to just start and say first congratulations on the strong performance in Airlaid. I have a couple of questions there. First, if I run rate your performance with the acquisition it points to something higher than what you're guiding to for 2019. And so I'm just curious if there's any type of seasonality I need to be considering or projects or maintenance, otherwise what would actually get me to the low end of your guidance range?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

So, Debbie, the guidance for Airlaid is up 8% to 10% volume on the legacy part of the business. For Steinfurt, we expect 28,000 tons of shipments. In the fourth quarter, Steinfurt shipped about 7,000 tons. So I think that when we look at our guidance, I think we -- I'm not sure how you're getting to a lower run rate. I think Q4...

Debbie Jones -- Deutsche Bank -- Analyst

(inaudible) you did $2.4 million (ph) in the quarter related to the acquisition, correct?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Yeah.

Debbie Jones -- Deutsche Bank -- Analyst

So I'm just saying that that actually would imply you do something north of $9 million on a run rate basis...

Dante C. Parrini -- Chairman and Chief Executive Officer

Understand.

Debbie Jones -- Deutsche Bank -- Analyst

(inaudible)

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Yeah, I understand. So for the Steinfurt acquisition, we definitely had better performance in Q4 than what we had guided to. Shipments were a little bit stronger than what we had initially expected and we achieved better on the cost side. There is a customer that we expect who was going to be transitioning away to another substrate, that's happening faster. So, we did lower our guidance expectations on shipments for Steinfurt by a 1,000 tons next year, but we did not adjust our operating profit target. That remains $7 million to $9 million. So while we're expecting more shipments, we are maintaining and it's reflective somewhat of that better performance in Q4 and what we expect to achieve next year.

Debbie Jones -- Deutsche Bank -- Analyst

Okay, that's helpful. And then, I think you touched on it. But are you fully done with the qualification process in North American mills that you are intending to do?

Dante C. Parrini -- Chairman and Chief Executive Officer

More or less, yes.

Debbie Jones -- Deutsche Bank -- Analyst

Okay. And then on Composite Fibers, I wanted to understand your volume outlook for 2019 because we can take this offline if I'm wrong, but your sequential guidance to me for volumes implies that you are actually down year-over-year in Q1 which, I am assuming, maybe there is still some wallcover weakness. But that would put kind of greater pressure on that 3% number to achieve that, it would put greater pressure on volume growth in the back half of the year in the second quarter. So I was wondering if you could walk me through that.

Dante C. Parrini -- Chairman and Chief Executive Officer

Sure. So I would say that your summary is largely accurate and we know that the wallcover market got very soft in Q4 especially in December and it continued into January and Russia is impacted by things like currency and their economic situation, also trade tensions with the Ukraine, in December the Russian Federation placed a ban on imported goods from Ukraine, that included a variety of things including wallpaper. So that is driving some risk in 2019 for wallcover.

Big picture, as John said, coffee grew 4% in 2018. We have a line of sight to expect a much stronger growth in 2019. Tea was off 2% in 2018. We've had some customer wins and as you may recall, we had abnormally high and extended summer weather in Europe, which affected some of our tea sales. So the combination of customer wins and a expectation for more normalized weather throughout 2019 gives us reason to expect growth in tea.

Our technical specialties were up about 3% in 2018. We also expect stronger growth in some of the electrical product lines as well as some of our consumer product lines and we recently landed a rather large piece of metallized business that will start to ramp up in the second quarter. So when we look at all this, we say that Q1 is off to a modest start and then we expect to see a pickup in growth in quarter two through quarter four. And on a blended average for the year, we expect to grow for the business unit around market levels of 3%.

Debbie Jones -- Deutsche Bank -- Analyst

Okay, that's helpful. And then last question for me. Can you just -- sorry if you said this, but can you remind me why some of the pricing benefits you're accepting -- expecting don't roll through in to Q2, I think you called out? And then do you think there will be other opportunities for you in any of your businesses in Composite Fibers to move on price again throughout the year if you continue to see this raw material inflation?

Dante C. Parrini -- Chairman and Chief Executive Officer

So as you might recall, the price increase announcement for Composite Fibers occurred kind of rather late in Q4. So it was announced toward the end of November and so there were negotiations taking place. And as we transition out of one fiscal year and into the next fiscal year, adjusting for the nature of the implementation and ramp rate lends itself more to seeing a pickup and uptick in Q2. We don't expect the uptick to take all that long and we're expecting $7 million to $9 million of price realization. In terms of what may or may not present itself through the course of 2019, as you can appreciate that would depend on a lot of different variables that I just can't really offer any conjecture on at this point in time.

I believe, we see opportunities for growth in our volumes. We're getting aggressive on managing our costs. We're going to continue to apply our continuous improvement. And the combination of these efforts, while we leverage our leading positions and strong customer relationships, lead us to believe that there's upside for the business as we make our way through 2019.

Debbie Jones -- Deutsche Bank -- Analyst

Okay, thanks. That's helpful. And I'll turn it over.

Operator

Your next question comes from the line of Anojja Shah from BMO Capital.

Anojja Shah -- BMO Capital Markets -- Analyst

Hi, good morning.

Dante C. Parrini -- Chairman and Chief Executive Officer

Good morning.

Anojja Shah -- BMO Capital Markets -- Analyst

Good morning. I just wanted to ask a question on the Airlaid margins in the fourth quarter. They seem to have declined a little bit. Can you just go into what -- do you still have start-up costs at Fort Smith or is there something else going on?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

No, the -- so for the start-up, we did have some start-up costs, but those were excluded from adjusted earnings. We do have higher depreciation with the Fort Smith facility coming online in 2018. So, I think that's likely what is impacting the margins. We saw very good growth in the legacy part of the business. EBITDA went up 11%. So I think that that is contributing to it. And then of course on the -- some of the new products, we are still in a ramp-up curve on gaining efficiencies. So we've been hitting our productivity improvement targets with the new facility, but of course we are not at the sort of the nameplate run rate just yet.

We would expect that that will continue in 2019 as we bring new products on and improve the manufacturing efficiency for those products. So, I think those are the things that are contributing to the margins. But as we go through 2019 and we improve volumes by 8% to 10% for the legacy business, and as I said, improve the manufacturing efficiency, we would expect margins to be improving.

Anojja Shah -- BMO Capital Markets -- Analyst

Okay, thanks. And then is freight -- I know you call that freight in the release, is freight recoverable in any way for you like through an inflation index or something like that?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

No, there is no contractual, it would have to be negotiated through a price increase.

Anojja Shah -- BMO Capital Markets -- Analyst

Right. Okay. And then can you just give me some color on how you're thinking about capital allocation right now? Are you open to more M&A right now or do you have to get to the target leverage level before you do any more deals?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Our leverage three times our covenant currently is 4.5. So we definitely have space for growth. And so we are certainly open, it's part of our strategy going forward. We're certainly open to that and will evaluate the impact to leverage and what the opportunity is on a case-by-case basis. But certainly our balance sheet has the wherewithal to do acquisitions in the near term. But as we go through 2019, we would expect that with growth of EBITDA and some cash flows will improve that leverage position. So it's still something that's very much part of our strategy.

Anojja Shah -- BMO Capital Markets -- Analyst

And can you just remind us what your target areas would be?

Dante C. Parrini -- Chairman and Chief Executive Officer

Well, I mean historically Anojja, we've said somewhere around 2.5 times. We're lower.

Anojja Shah -- BMO Capital Markets -- Analyst

I am sorry, I meant target for...

Dante C. Parrini -- Chairman and Chief Executive Officer

For acquisitions, we've got over 4 times. So --

John P. Jacunski -- Executive Vice President and Chief Financial Officer

The acquisition markets.

Dante C. Parrini -- Chairman and Chief Executive Officer

Were you asking the targets for acquisition market?

Anojja Shah -- BMO Capital Markets -- Analyst

Exactly. No, target for...

Dante C. Parrini -- Chairman and Chief Executive Officer

An extra insight that should be very consistent with what you heard previously. So, certainly the targets that would broaden our existing Airlaid business and Composite Fibers, something in the engineered materials space, areas like hygiene, personal care, convenience, filtration, electrical are examples. And clearly from a geography point of view, some US based assets are preferred, because if you look at the portfolio today now that we've divested Specialty Papers, we've got a disproportionate amount of our assets coming from outside the -- located outside the United States. So that should give you a feel for how we might think about growing through acquisition.

Anojja Shah -- BMO Capital Markets -- Analyst

Yeah, that's great. Thank you very much.

Dante C. Parrini -- Chairman and Chief Executive Officer

Yeah.

Operator

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

Kurt Yinger -- D.A. Davidson -- Analyst

Yeah, thanks and good morning Dante and John.

Dante C. Parrini -- Chairman and Chief Executive Officer

Good morning, Kurt.

Kurt Yinger -- D.A. Davidson -- Analyst

Starting off, could you maybe just update us on your overall pulp consumption with Steinfurt added? And then maybe provide a bit of color on the mix between fluff and then hardwood or softwood?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Sure. So for the Airlaid business, we consume around 85,000 tons of fluff pulp a year. For our Composite Fibers business, we're using primarily softwood pulps. We use about just under 80 -- just under 90,000 tons, about 22,000 tons a quarter, so 88,000 tons annually of softwood pulps. We don't consume a whole of lot hardwood pulp these days with the divestiture of Specialty Papers.

Dante C. Parrini -- Chairman and Chief Executive Officer

Then for safety, we use a backup.

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Yeah.

Dante C. Parrini -- Chairman and Chief Executive Officer

Other specialty, synthetic and tree-free fibers

Kurt Yinger -- D.A. Davidson -- Analyst

Okay, great, helpful. And then on the redemption of the 5.375% notes, are you just going to utilize your revolver to much greater extent or how are you guys thinking about that from a liquidity perspective?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Yeah, so we're -- our current revolving credit facility is -- matures in just over a year. So we're looking at replacing that facility to extend the maturities. But we will use our revolving credit facility and/or term loans as we refinance that debt.

Kurt Yinger -- D.A. Davidson -- Analyst

Okay. Thanks, John. And on the $7 million to $9 million pricing benefit in 2019 you called out in Composite Fibers, does that assume folic substance (ph) of what you've kind of put into the market or is there some level, I guess, maybe conservative -- conservatism isn't the right way to put it, but should you not necessarily get 100% of what you're looking for?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Yeah, I mean $7 million to $9 million is what our expected realization is. So it's based on our discussions with customers. In many cases, we have agreements complete. In other cases they're not quite complete, but that's our expectation for the impact to 2019 from that price increase.

Kurt Yinger -- D.A. Davidson -- Analyst

Got it. And lastly, just piggybacking on a previous question. On Airlaid, you exited the year at about a 15% EBITDA margin. My impression is that Steinfurt maybe is a bit better than what your business did in 2018. If you look at the volume growth and better utilization at Fort Smith, could you maybe talk about how you're thinking about margin improvement in 2019 or any longer term targets you have for that business?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Yeah, so we certainly would expect that EBITDA margins will improve as we grow the volumes. So this 8% to 10% volume growth we expect for the legacy part of the business should allow us to improve EBITDA margins. We've essentially had the fixed costs that from the new Fort Smith facility that are largely in our results today. And so, growing the volume should allow us to generate improved margins from where we were in Q4. This kind of a business, we would expect to be high teens EBITDA margin business over time. And we think we're on track to be able to achieve that as we go over the next several years.

Kurt Yinger -- D.A. Davidson -- Analyst

Awesome. Thanks, John. And thanks Dante and good luck in the quarter.

Dante C. Parrini -- Chairman and Chief Executive Officer

Right. Thank you.

Operator

Your next question comes from the line of Debbie Jones from Deutsche Bank.

Debbie Jones -- Deutsche Bank -- Analyst

Thanks. Just two follow-ups. One, I wanted to understand better the uptick in the CapEx range, I don't know if that was related to some of the new volume you called out in Composite Fibers. And then just my second question is on cash flow, which are done.

Dante C. Parrini -- Chairman and Chief Executive Officer

Sure. I think, that's largely related to the Steinfurt acquisition, but John you can give the details.

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Sure. So there were some in-process projects for Steinfurt to improve their efficiency and finishing. And so as we -- we acquired the business effective October 1. As we've now completely evaluated the project, we expect to continue on with that and so we upped our guidance there. We expect, we'll get some financial benefits from that largely starting in 2020. So that's really the only driver of that change in CapEx.

Debbie Jones -- Deutsche Bank -- Analyst

Okay. And then I just wanted to ask a little bit more about the timing of the payroll employee benefit impact you had in the quarter. Does that -- it kind of confuses us, the wording of that. Does that mean it unwinds in someway in 2019 or you should expect a lower overall other impacts from what you -- that bucket that you put together on slide nine? And then also what's -- could you just give us a little bit more color on your working cap for 2019? Is it potentially flat or maybe a benefit?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Sure. So what happened on the compensation items in Q4 -- what happened was, we had accruals that declined during the quarter and they declined by about $11 million. In the fourth quarter and for the full year, they were down $18 million and that's what you're seeing on that other line on slide nine. And so what happened there is, we had extended downtime in Composite Fibers and people used vacation to cover that. So we saw a vacation accruals decline. We had differences in the -- in just the timing of when payrolls were paid around year-end, this year versus last year.

And then on the incentive side, our short-term incentive, we had very low accruals in 2018, based on the performance criteria. And so we saw those accruals decline. So it's the decline in those accruals that comes through on that line, among other things. But on the compensation side we would not expect that to recur next year. We would expect to have more normalized level of operations and incentive accruals. And so this is something that impacted 2018, but we would not expected to impact 2019 in a negative way.

Debbie Jones -- Deutsche Bank -- Analyst

Okay, and then working cap?

John P. Jacunski -- Executive Vice President and Chief Financial Officer

On working capital, we would expect it to be slightly negative from the growth that we expect in the Airlaid business. Inventory-wise, we expect, we will likely be flat or improve somewhat, but with the 8% to 10% growth on the legacy side for the Airlaid business, and about 3% volume growth for Composite Fibers we'd expect a small use of working capital during the year, but nothing of any significant magnitude.

Debbie Jones -- Deutsche Bank -- Analyst

Okay, great. That's all my questions and good luck for the quarter.

Dante C. Parrini -- Chairman and Chief Executive Officer

Thanks, Debbie.

Operator

There are no further questions at this time. I'll turn the call over to Dante for any closing remarks.

Dante C. Parrini -- Chairman and Chief Executive Officer

Okay. Well, thanks everybody for joining our call today. We look forward to speaking with you again next quarter. Have a good day.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.

Duration: 37 minutes

Call participants:

John P. Jacunski -- Executive Vice President and Chief Financial Officer

Dante C. Parrini -- Chairman and Chief Executive Officer

Debbie Jones -- Deutsche Bank -- Analyst

Anojja Shah -- BMO Capital Markets -- Analyst

Kurt Yinger -- D.A. Davidson -- Analyst

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