Q4 2019 Earnings Call Transcript

Published: 21 Feb 2020

[Operator:]

Welcome to SWM's Fourth Quarter and Year End 2019 Earnings Conference Call. Hosting the call today from SWM is Dr. Jeff Kramer, Chief Executive Officer. He is joined by Andrew Wamser, Chief Financial Officer; and Mark Chekanow, Director of Investor Relations.Today's call is being recorded and will be available for replay later this afternoon. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator instructions]It is now my pleasure to turn the floor over to Mr. Chekanow. Sir, you may begin.

[Mark Chekanow:]

Thank you, Cindy. Good morning. I'm Mark Chekanow, Director of Investor Relations at SWM. Thank you for joining us to discuss our fourth quarter and year end 2019 earnings release.Before we begin, I'd like to remind you that the comments included in today's conference call include forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed in more detail in our Securities and Exchange Commission filings, including our quarterly reports on Form 10-Q and our Annual Report on Form 10-K. Some financial measures discussed during this call are non-GAAP financial measures. Reconciliations of these measures to the closest GAAP measures are included in the appendix of this presentation and the earnings release. Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations.This presentation and the earnings release are available on the Investor Relations section of our website, www.swmintl.com.I'll now turn the call over to Jeff.

[Jeff Kramer:]

Thank you, Mark, and good morning, everyone. Yesterday, we reported fourth quarter and full year 2019 results with full year adjusted earnings per share of $3.5, in the high end of the guided range we’ve provided last February. In short, it was a positive year with adjusted EPS up 2% and up 5% if you exclude the $0.09 of negative currency impacts. Free cash flow was also strong increasing 16% to $126 million.This is our second straight year of adjusted EPS and cash flow growth and it was all organic demonstrating our success to transforming SWM into a more diversified and growing enterprise. Both segments achieved increased profitability. Combined, EP and AMS operating profits grew 8%.We will cover our guidance in more detail shortly, but our outlook reflects core business earnings growth of up to 6% before including any expected accretion from our recently announced acquisition. Hopefully, you saw the announcement earlier this week of our pending purchase of two technical film converting businesses, Tekra and Trient.We are excited to add these new converting capabilities to AMS as we will significantly expand the value-added solution set we can offer customers, while bolstering our presence in several existing markets and gaining access to a host of new customers and film technologies.For the quarter, things were largely as expected with adjusted EPS of $0.80. Margins were quite healthy across the business though we did see some disruption of AMS sales from typical year-end customer inventory rebalancing, which curbed our full year’s sales growth. We also were impacted by a higher quarterly tax rate, which was just a timing issue versus last year’s low fourth quarter rate.Overall, we delivered at our targeted earnings results and look forward to another strong year ahead with continued stability in EP and growth in AMS.At this point, and before we get further into results, I’d like to briefly comment on the Coronavirus developments in China. We are in regular contact with our teams in the region and continue to be impressed by their resilience and dedication to operating during what are challenging times.To that end, we are pleased to report that our people and facilities have been largely unaffected to-date and we’ve resumed operations. We are closely monitoring the situation and remain in close contact with our people and our customers.Now shifting to our operating segments. AMS achieved 2% organic sales growth for the year with 3% ex currency. This was on top of the 6% organic growth in 2018.Beyond continued growth in our paint protection products for transportation, we also saw excellent performance from our optical films, which are used to reinforce glass and variety of applications, from bulletproof glass for cars to high speed rail windows, to switchable privacy glass for aircrafts.Filtration sales also increased for the year with water filtration products again driving growth and we expect momentum to continue into 2020. The specialty applications in transportation and filtration that our products support continued to demonstrate solid fundamental demands and we have made additional investments in 2019 to expand global capacity to keep up with projected growth.Lastly, we highlight that medical was another good performer in 2019 driven by the finger bandage category. In addition to capitalizing on solid overall fundamentals, we successfully introduced a new innovative waterproof packing tape that is both breathable and comfortable on the skin.Turning to fourth quarter as mentioned, we did see some customer adjusted year-end inventories in our Transportation and Filtration businesses, resulting in a fourth quarter sales decrease of 4%. However, recall that in last year’s fourth quarter AMS sales were up 9%, which set up a challenging fundamental comparison.On a positive note, AMS segment adjusted operating margin saw significant improvement and segment operating profits were up 20% in 2019. In addition to the higher sales, we saw the benefits of efficiency projects, as well as low resin cost following a challenging 2018. Of note, fourth quarter margins and profits were still up year-on-year despite the sales softness.In addition to strong financial results, we continue to progress our key strategic priorities. We have increased our global capacity in transportation film with several new international production lines and are now serving this fast-growing market from multiple sites offering our customers unmatched global service capabilities. We also continue to expand our water filtration capacity and capabilities.In 2019, we began ramping up sales of a water filtration paper product to our existing customers in this industry and expect acceleration of re-sales into 2020.Lastly, as always, we are executing ways to improve our cost structure without disrupting our growth or customer service. Those efforts were quite evident in the margin expansion in 2019 and we continue to look at improvement projects across the business.Moving to engineered papers, full sales decreased 5%, but were down only 2% ex currency. Our trend all year has been strong price mix nearly offsetting lower volumes, while price benefits were a component of some contracts reset early in the year recouping higher pulp cost from 2018, our mix benefit was the more significant contributor.Strong focus on our highest value products remains a priority and an effective component of our multi-prong strategy to offset industry attrition. As a percentage of our total volume, LIP and other cigarette papers, as well as wrapper and binder products increased versus last year, while non-tobacco papers contracted as planned.Industry attrition in the U.S. was elevated versus long-term historical trends due mostly to increased prevalence of vaping products, but that impact seems to be moderating. While difficult to predict, we generally believe attrition peaked in mid-2019 and could moderate in 2020.From an OP perspective, the key takeaway is that we delivered stable profits for the third consecutive year. Despite lower sales, operating profits were up slightly as we continue to take steps to reduce costs and improve efficiencies, the second component of our strategy to offset industry headwinds.From a margin standpoint, we did see expansion as price mix and lower cost both benefited us after a challenging year for pulp in 2018. We note that while pulp did trend lower throughout the year, we did not begin seeing P&L benefits until the second half.Specifically on the fourth quarter, trends largely mirrored the full year. Like AMS, there were some isolated cases of some inventory draw downs as certain customers planned changes in their supply chains. We had previously commented earlier this year that some of the relative strengths of LIP sales in the U.S. were likely due to some inventory builds and these were unwound in the third and fourth quarters.Regarding our 2019 strategic priorities, we believe we continue to gain incremental share in key products and we continue to work with our wrapper and binder customers to keep that category momentum going. Our heat-not-burn sales picked up in the fourth quarter and we look forward to higher volumes from customers rolling out new products in 2020.Lastly, we have begun developing and test marketing some other unique products. Working with several independent players, we have prototyped proprietary hemp and coco-based materials. These products which we have presented at trade shows and are with several customers for testing range from filler products to wrappers and binders for small cigars.While these products are in the early stages, and we want to be measured in how we talk about them, we are excited about the innovations we have achieved and our customers’ enthusiasm gives us optimism that these new fibers will meet a growing demand for niche products.I will now turn the call over to Andy.

[Andy Wamser:]

Thank you, Jeff. I’ll now review our financial results. For the full year 2019, AMS sales increased 2% or approximately 3%, ex currency to $477 million. Operating profits for the segment grew 20% or $14 million to nearly $86 million.This growth was driven by 270 basis points of margin expansion to 18%. Organic sales growth, particularly in some of our higher value products, combined with cost reduction initiatives and lower resin cost drove improved profitability.Polypropylene prices trended lower through most of the year, though they seem have stabilized at current levels. At present, we do not expect much volatility from resin in the near-term. Resin costs have swung our results in both directions over the past two years, but for context our two year operating profit CAGR is just over 6% and 4% sales growth. Those metrics both reflect organic growth.For the fourth quarter, AMS sales declined 4% to $104 million, versus the exceptional 9% growth during last year’s fourth quarter. As Jeff mentioned, in addition to this already challenging comparison, several customers pared back year-end inventories.However, we still increased operating profits by nearly $0.5 million to $15.8 million, which equated to about 90 basis points of margin improvement.For engineered papers, full year 2019 sales finished down 5% to $546 million, but were impacted by a weak euro. Absent currency impacts, sales were down 2% which reflects a 10% volume decline and includes the planned exits of lower margin printing and packaging papers. The volume decrease was mostly offset by 8% positive price and mix effect.Segment margins expanded by 130 basis points to 22.6% from the positive price mix shifts and lower cost which drove a slight increase in operating profit dollars. We improved our efficiencies and cost structure, and similar to AMS, benefited from lower input costs. While energy cost remains higher for the year, we did see the benefits of lower wood pulp costs which flowed to our P&L during the second half of 2019.We highlight that this is the third consecutive year of operating profit stability for our EP segment, as we continue to deliver annual operating profit in the low $120 million range. We also think it is worth noting that 2019 segment profits reflect a $4 million hit from currency, otherwise segment OP would have been up 4% for the year.For EP, fourth quarter sales declined 4% to $135 million or down 2% absent currency impacts. Price mix provided a positive 11% benefit, which nearly offset the 12% volume decline. Segment profits increased 15% with over 400 basis points of margin expansion from favorable mix and lower costs.Going forward, we would expect less volatility on wood pulp prices than what we have seen over the past two years, as well as a tighter band on volume declines and price/mix offsets. While we understand there is a natural focus on volumes, we continue to manage the business for profitability and believe the profit stability that we’ve demonstrated in recent years validates our strategy as a positive result in the tobacco industry.We intend to continue this strategy and we’ll use the lower volume base as an opportunity to remove fixed cost and pare back capacity. We’ve taken some actions this past year and we’ll continue those efforts in 2020.Unallocated expenses increased $13 million for the year to $49.5 million. Three components of that increase were; higher deferred compensation expenses versus 2018; the planned IT investments that we signaled at the outset of the year, as well as some corporate development costs related to strategic projects during the year.Regarding deferred comp, we are currently evaluating program changes that would minimize potential volatility going forward. For a historical perspective, our unallocated costs were in the low $40 million range for several years.Excluding deferred comp expenses, our 2019 unallocated costs were about $47 million. This increase reflects typical inflation, some organizational investments to support growth, and several million of IT investments we made this past year. Bottom-line, we expect a reduction in unallocated expenses in 2020. For the quarter, unallocated costs were up largely to the reasons just discussed.On a consolidated basis, sales were $1.02 billion, down 2% for the year or flat ex currency. Adjusted operating profits were about $160 million, up approximately 1%, but ex currency would have been up 4%. Furthermore, if we also exclude the impact of the year-over-year change in non-cash deferred compensation expense of $5 million, OP would have been up 7%.For the fourth quarter, consolidated sales were down 4% or 3% ex currency and adjusted operating profit was down 2% to $31.5 million, but essentially flat ex currency. Despite this currency drag, the combined OP growth of AMS and EP was $4.6 million, representing 11% growth in the quarter.Shifting to consolidated earnings, full year GAAP earnings per share was $2.76 versus $3.06 in 2018. There were several large items between the two periods that skew this comparison, which are detailed in our press release.For adjusted EPS, we finished 2019 at $3.55 in the high-end of our guided range of $3.40 to $3.60, which we issued at the beginning of 2019. We were pleased to finish in the high-end of that range despite a weaker than expected euro and the unpredictable deferred compensation expenses.Working in our favor were raw material costs that were build out than what we had assumed. The rest of the positive performance was related to strong operational execution and a slightly better tax rate than originally expected.Overall, adjusted EPS increased 2% excluding the currency impacts on EPS of $0.09 would have increased 5%.For the fourth quarter, adjusted EPS was $0.80, down from $0.87 last year as EP and AMS profit growth were offset by a higher quarterly tax rate and increased unallocated expenses. Our adjusted EPS quarterly tax rate was 15.8%, up significantly from 4.9% in last year’s fourth quarter, which was very low as we trued up to our full year range.This increase represented approximately a $0.09 hit to adjusted EPS versus the fourth quarter of 2018. Our full year adjusted EPS tax rate finished 2019 at 19.3%, up slightly from 18.1% in 2018 representing approximately a $0.05 impact to adjusted EPS. Recall that our adjusted EPS tax rate excludes non-GAAP adjustments to pretax income and the associated tax impacts and is the normalized rate implied by our adjusted EPS.2019 free cash flow was very strong at a $126 million, up 16%. CapEx was approximately $34 million for the year, up $4 million or slightly below the $35 million to $40 million guided range. Some of this underspending will flow into our 2020 CapEx plans.From a leverage perspective for the terms of our credit facility, we finished 2019 at 2.1 times net debt-to-adjusted EBITDA, down from 2.5 times at year end 2018.We reduced net debt by nearly $90 million during the year and have our full $500 million credit revolver undrawn to fund future investments including our pending acquisition.Switching now to our 2020 guidance. We expect adjusted EPS to be in the range of $3.50 to $3.75, implying growth of up to 6% compared to 2019. This range equates to a GAAP range of $2.74 to $2.99. I want to be clear that this guidance does not include expected accretion from the pending Tekra and Trient acquisition as it is not yet closed. Thus our guidance is only related to the base business.Our guidance incorporates a continuation of the segment trends we saw in 2019 with stability in EP profits, and growth in AMS profits. On the unallocated expenses we would expect a reduction of several million dollars to approximately $45 million.Regarding CapEx, we project to be in the $40 million to $45 million range and despite that increase, we still expect another year of free cash flow exceeding $100 million. For modeling purposes, we expect our effective average interest rate to be approximately 5% on our total debt.Additionally, we forecast that JVs to contribute about $2 million of net income, which we again project to be back-end loaded and an adjusted EPS tax rate one to two points higher in the 2019 rate of 19.3%.Regarding seasonality, while much contains throughout the year, at this point we would expect our second and third quarters to remain our highest EPS quarters followed by the fourth quarter and then the first. This is consistent with our 2019 pattern.Now back to Jeff to review the Tekra and Trient acquisition.

[Jeff Kramer:]

Thanks, Andy. In addition to good performance in the base business in 2019, and a positive outlook for 2020, we were pleased to announce our next acquisition earlier this week. Tekra and Trient are carve outs of a private equity-owned company and we are excited to bring their complementary set of technologies and capabilities to SWM.We expect to close the transaction towards the end of the first quarter with a purchase price of $155 million, subject to typical closing adjustments. Combined, these two businesses have approximately $100 million of annual sales and EBITDA margins of about 16%.To preface my comments and caveat the Q&A session, I would reiterate that we do not yet own these businesses and thus, maybe somewhat limited with certain responses other than clarifications of what we have already disclosed.In short, Tekra and Trient are compelling adjacencies for AMS and a natural expansion of our capabilities. These companies have a broad set of technical film converting capabilities, which pair well with our extrusion technologies as we can now offer customers a more comprehensive suite of solutions.In addition to bringing new capabilities, the acquisition will increase our presence in many of our existing end-markets, give us access to new markets and customers and expand our expertise to a wider range of films and other substrates. Over time, we believe there are actionable sales synergies we can also deliver together.To summarize the financial impacts, we will be using our credit revolver to fund the full purchase, which would bring our pro forma net leverage to about 2.7 times, representing only a minor increase from where we began 2019. After the incremental interest expense, we expect the deal to add approximately $0.10 to adjusted EPS in 2020.This assumes three quarters of ownership, as well as roughly $2 million of transaction and integration expenses in the first year. Normalizing for these two items, we believe the acquisition adds like $0.20 of annualized EPS with potential to exceed that over time with growth in sales synergies.For our usual practice, the transaction and integration expenses, which our cash will be included in our adjusted EPS, whereas the non-cash purchase accounting expenses associated with acquisitions will be excluded.At this point, hopefully you have been able to review the slides that accompanied our acquisition press release and have a clear understanding of how these two businesses complement AMS. Together, they bring a host of converting capabilities ranging from slitting, sheeting and laminating to die cutting and packaging.In short, these significantly improve our ability to deliver products to our customers in various configurations and formats across multiple segments. Also, the materials Tekra and Trient handle are a diverse set of films and other substrates broadening our technical expertise to new materials and new customers.Tekra and Trient are also diversified with respect to their end-markets. Their largest presence is in medical with a focus on diagnostics strip tests that for example are used in glucose monitoring for diabetes. They also have a solid business in digital printing and graphics, an area where we currently play, but have a limited product set and commercial reach.This transaction offers access to new customers and potential to cross-sell across our combined product set and customer base. From a high-level strategic perspective, a core principle is that they are focused on high value applications where they deliver critical components to their customers that support key performance features in their end-products. This theme aligns perfectly with SWM.Our culture and approach to delivering value to customers through highly collaborative partnerships are well aligned and we expect our new team members will integrate smoothly into SWM. We look forward to welcoming the team aboard in the coming weeks.So in closing, I just want to reiterate some key takeaways regarding our business fundamentals. 2019 overall results were positive as we grew EPS and our two operating segments delivered strong operating profit growth of 8%. We are building our track record of growth for AMS and stability in EP and we believe this balanced mix of growth and high cash flow create a powerful financial profile.This strong cash generation supports a robust dividend to investors enables internal investments and allows us to delever the balance sheet and maintain comfortable leverage ratios as we grow.In recent years, we have executed well on our organic growth plans, acquisition, integration and synergy delivery, met or exceeded our financial commitments to the investment community and most important, taken the steps necessary to support continued strong performance in 2020 and beyond. We appreciate your continued interest and support.That concludes our remarks and Cindy, please open the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from Steve Chercover from Davidson. Please go ahead sir.

[Steve Chercover:]

Thank you. Thanks. Good morning everyone.

[Jeff Kramer:]

Hey, Steve.

[Steve Chercover:]

So, the first question is on the Tekra and Trient deal, which looks same from both a strategic and financial perspective. So, how international is the current business? And how easy is it to expand it across your footprint?

[Jeff Kramer:]

Yes, so, good question, Steven. So, this is another example of something that we are particularly excited about is, the businesses currently are focused mostly in the North American region. And as you know, in many of our acquisitions previously, one of the benefits we’ve been able to do to leverage our global presence to be able to internationalize those businesses.And so, we think there will be opportunities to do that, as well. That is not the core reason for us investing in the properties, but it’s a nice upside for us.

[Steve Chercover:]

Okay. And the obligatory question on Coronavirus, it’s good to know that your facilities appear safe, but how might it impact either your end-markets or your supply chain?

[Jeff Kramer:]

Yes, so, we have been monitoring it quite closely. We are really blessed to have a very strong local leadership team and they’ve actually been speaking to all our customers throughout the region on a direct basis to really get a sense of what’s happening on the ground. Right now, our plans are up and running.We are not yet at full capacity, but we are getting there quickly. There is some limitations on how quickly some of our employees can come back from the Chinese New Year holidays. But we are meeting well our orders at this time.On the Filtration business, we have high confidence of where we are in the product line and our customer and demand for the quarter. Surface protection is holding up. But we may see some weakness or some impact in this business if this continues. So it’s a little bit hard to have that crystal ball. But for the first quarter, we seem to be in a good position, but things change daily on the ground. And so, we are monitoring it on almost daily basis.

[Andy Wamser:]

And maybe just…

[Steve Chercover:]

Sorry. Go ahead.

[Andy Wamser:]

And maybe just to add to that, what I would say is, our expectation right now is, any sort of sales softness that we would have, a potential sales softness that we would have in the first quarter maybe on the film side could be made up to the balance of the year. But it’s in line with sort of our guidance that we are talking about and our 2019 where a second, third quarters will be the strongest follow the fourth and then the first.

[Steve Chercover:]

Got you. Okay. And then, one of the other observation is about Coronavirus, is that it’s particularly lethal to old men, primarily because they are smokers. So, you guys are still kind of in the business, any observations or implications from that perspective?

[Jeff Kramer:]

No, I think we all have to be very careful. I don’t think anybody knows at all what the implications of who lives and who dies in this kind of a situation and I’ve lived through this before, because I was living in Asia during the SARS epidemic. So, I’d be very cautious about it. Typically, people who were impacted by Coronavirus or things like the flu, et cetera tend to be more elderly and have other medical problems. But I don’t think anybody is aware of any connection at this particular point. I think everything is speculation at this point.

[Andy Wamser:]

And just to add one reminder is, if you think about then the impacts for us financially, what I would say is, our EP business, if you recall is very U.S. and European centric. So, the sales into China are fairly limited and that we just had those two JVs which contributed - our guidance was about $2 million of net income in the back-end of the year.

[Steve Chercover:]

Got you. Okay. Switching gears a wee bit. When will the purchase accounting expenses associated with the establishment of AMS diminish or go away? Or in other words, when is GAAP and operating earnings going to kind of converge?

[Andy Wamser:]

Well, as we continue to make acquisitions, we are kind of continuing to see this – as we continue to do more M&A, as we expect, I think we’ll have this convergence. So, I think some people look at on a GAAP basis, some people look at on a non-GAAP.We are focused more on just on the adjusted EPS numbers. But we can follow-up with the bridge for you in terms of where we are today to then when we finalize the numbers for Tekra and Trient, when we close it, then we can walk everyone through it.

[Steve Chercover:]

Okay. Last question I promise.

[Jeff Kramer:]

No problem.

[Steve Chercover:]

So to the best of my knowledge, you guys still don’t have a stock repurchase authorization. And I am not saying it should be at the top of your capital allocation hierarchy. But I think it’s a good tool to have in your toolbox when you have surplus capital and you want to send a signal about your view of intrinsic value. And with the stock at $33 and the deal looks great.But when the stock gets dislocated like I think it was recently, and you can eliminate a dividend that the same yield as your debt, do you guys reconsider or is it something the Board is talking about?

[Andy Wamser:]

Well, let me give you a couple perspectives on this. I would say that we are somewhat surprised in terms of where the share prices has performed over the past.

[Jeff Kramer:]

Actually not, somewhat

[Andy Wamser:]

Yes, it certainly surprised, in terms of how the share price has performed in the past couple months on really no news. As Jeff has said in his closing remarks, we’ve consistently met or exceeded the promises we’ve made whether on synergy targets or on for guidance for the past couple of years. I think, 2018, we were very focused on making sure we deliver those – the synergies related to Conwed.And you saw – that you saw some of those this year. So, as we – as a management team, and I think as a Board, we always have to say, we have to earn the right to do the next deal. And Tekra and Trient, what we’ve got we did earned that, and we think we found, frankly a great deal. That being said, for 2019, we did look at a number of transactions and they kind of range and size.And this deal I think, we end the year at 2.7 times on – sorry, as we close, this will be about 2.7 times on a net debt basis. We think the balance sheet is in a healthy position. So, after this deal closes, like we always do, I think we’ll take a fresh look at our capital allocation process. I think as you pointed out, it’s fair to say that M&A will still continue to be our primary focus.But on share repurchase and also additional investments into the business as part of that. So, I think it’s fair to say we’ll take a fresh look at everything.

[Steve Chercover:]

All right. Thanks, Andy. Thanks, Jeff.

[Andy Wamser:]

Sure.

[Operator:]

Your next question comes from Chris McGinnis from Sidoti and Company.

[Chris McGinnis:]

Good morning. Thanks for taking my questions.

[Jeff Kramer:]

Sure, Chris.

[Andy Wamser:]

Hey, Chris.

[Chris McGinnis:]

Hi. I just want to start just on the Q4, you talk about the inventory rebalancing, are you starting to – I know, Q4 last year was very strong. Are you just maybe starting to see, at least in Q1, I know trends pick up in Q2. But maybe normalization in the trends for the segments that were maybe a little bit weaker in the quarter?

[Jeff Kramer:]

Yes. Just on this inventory rebalancing question, so I just want to emphasize, it’s nothing extraordinary. So it’s nothing out of the ordinary. If you think about our approach to our business with our key strategic customers, we approach it as a value-added supplier and people think about that and usually it’s the types of materials, but it also involves the actions you can do around the supply chain.And so you hear us talk about the competitive advantage our global supply chain has. So, we work very closely with our customers to be able to enable us jointly to manage supply chains et cetera. So, that is just something that sometimes in the fourth quarter it goes one way or it goes the other.We’ve just seen it some of our markets. But it happens in both the EP and the AMS side and it’s just something that I think actually is a value creation competitive advantage for us.

[Chris McGinnis:]

Okay. Thanks for that color.

[Andy Wamser:]

And Chris, maybe just one more thing to add on that side is that I would say, from an - if you kind of look at this business on a two years sort of basis, the sales performance has been about 4% ex currency and we would expect that to continue going forward. So we don’t see any - the health of the business is the same as it ever was.

[Chris McGinnis:]

Okay. Understood. Thanks for that color. And just on the acquisition this week. Can you just talk about, was there any – is there any customer overlap now or is that one obviously the potential sales synergy is an opportunity?

[Jeff Kramer:]

Yes. We are really excited about this acquisition, because it actually meets multiple of our investment criteria. So I think as we discussed in one of the calls, there are customer overlaps and that’s always something that we look for. But there are also a large number of new customers and so that’s kind of the optionality we bring.It really is a great complement to many of our technologies, but it overlaps several of the end-markets we always participate in, like medical, like in automotive, in graphics, so, those are really key areas for us. And it brings those complementary skills which is something that we are always looking to add to our sandbox.So, on a number of strategic overlaps, we are excited about the joining of these two companies to us.

[Chris McGinnis:]

Great. And – just, I know it’s not closed yet, but, just once it is closed, hopefully, just your appetite for more M&A. And where would you think the balance sheet and talk about how strong it is obviously, even post – if the deal closes?

[Jeff Kramer:]

Sure. Yes, no, I get your question. So, I think we’ve continued to emphasize we are very disciplined in the types of acquisitions we go after. Hopefully, the Trient and Tekra acquisition illustrates another example of how we continue to emphasize the strategic fits and optionalities it brings. We think it’s a well-valued acquisition.We don't believe we paid an extraordinary price for it and we will continue to look at those types of acquisitions that complement our strategic intent. But again, as you heard throughout the call, one of the things that we’ve been trying to emphasize to our investment community is that, we are focused on organic growth.And so, we are only going to be looking at properties that we believe will help boost that in the long run. And we’ve been working hard to demonstrate that when we say we are going to be able to deliver the organic growth, we show it.

[Andy Wamser:]

And just additional context maybe I can’t help myself sometimes with we getting into the leverage numbers, as Jeff smiles at me, but pro forma for this deal, we will be at 2.7 times net leverage and for the terms of our credit facility, we could theoretically go up to 4.5 times.We are not saying we are going to 4.5 times, but we do have that capacity and frankly, in an acquisition holiday, we can go up to 5. That being said, this will close it to 7. We’d expect to delever like we did this year in terms of continue to reduce the balance sheet. And so, we’d expect leverage to tick down if it’s balanced and I think our balance sheet still allows this flexibility.

[Chris McGinnis:]

Okay. And then just two quick questions, one, it sounds like you still benefit on lower pulp prices in the first half in EP. Is that correct?

[Jeff Kramer:]

Yes. So in the second half of last year, we did benefit from some of the pulp prices, but if you recall, we do have price adjusters that go into effect for this year. So, we would expect a moderate sort of tailwind. But effective, we're still thinking that the EP business is going to be of it as this performed in the last three years, it’s stable and we are looking for to another fourth year of stability.

[Chris McGinnis:]

Great. And then, just lastly, quickly on the unallocated, you talked about that maybe coming down obviously in 2020. Is that more towards that $40 million that you referenced on that three year average?

[Andy Wamser:]

No, so, what I was mentioning about, if you kind of look back historically, if you go back to 2016, 2017, we were in that low $40 million, $41 million, $42 million range. We’ve gone – we’ve made significant investments particularly within IT over the past couple of years we have gone through an ERP implementation upgrading a lot of our systems to support a lot of our growth initiatives.So, when you factor some of the IT investments and some of the other strategic projects we’ve worked on, the unallocated would be about $45 million what we are – with what I mentioned and that would be down several million from where we ended the year.

[Chris McGinnis:]

Thanks very much for the color and good luck in Q1.

[Jeff Kramer:]

Great. Thanks.

[Operator:]

There are no further questions at this time. I would now like to turn the conference back to Dr. Jeff Kramer. Please go ahead.

[Jeff Kramer:]

Well, thank you, Cindy. Yes, thank you, Cindy. I appreciate that. So, again we just to close – I think, the SWM story continues to evolve. I continue to be comfortable in our executive team in delivering what we’ve said. I think our performance is a positive. And I think with the acquisition of Tekra and Trient gives us additional flexibility, continue our growth journey.So, I look forward to your continued support and we will talk again in another quarter hopefully with more positive results. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.