Mativ Holdings Inc (MATV) 2013 Q4 法說會逐字稿

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  • Operator

  • Welcome to SWM's fourth quarter 2013 earnings conference call. Hosting the call today from SWM is Frederic Villoutreix, Chairman and Chief Executive Officer. He is joined by Jeff Cook, Executive Vice President and Chief Financial Officer;Steve Dunmead, Executive Vice President and Chief Operating Officer; and Mark Chekanow, Director of Investor Relations.

  • Today's call is being recorded and will be available for replay beginning at noon, Eastern Standard Time. The dial-in for the replay is 1-800-585-8367, and enter PIN number 48333402. (Operator Instructions).

  • It is now my pleasure to turn the floor over to Mr. Chekanow. Sir, you may begin

  • Mark Chekanow - Director of IR

  • Thank you, Jackie. Good morning. I am Mark Chekanow, Director of Investor Relations at SWM. Thank you for joining us to discuss SWM's fourth quarter and full year 2013 earnings result.

  • On today's call Frederic will share some high level comments about our fourth quarter and full year performance and strategic priorities. Steve will provide details on our operations and then Jeff will take you through a more detail review of our financial results and guidance as reported in our release filed with the SEC yesterday and available on the SEC website and on our Investor Relations website. We will then take your questions.

  • Before we begin, I would 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 Exchange Commission filings, including our quarterly report on Form 10-Q, our annual reports on Form 10-K and our 8-K filed last night.

  • Certain financial measures during this call exclude restructuring and impairment expenses, result of discontinued operations, noncash amortization expenses and valuation allowances and are, therefore, non-GAAP financial measures. Reconciliations of these measures to the closest GAAP measures are included in the appendix.

  • I will now turn the call over to Frederic.

  • Frederic Villoutreix - Chairman, CEO

  • Thank you, Mark, and good morning, everyone. Late yesterday we released our fourth quarter and full year 2013 earnings, and this morning we are pleased to present our results and update you on our more recent acquisition of DelStar which was a key fourth quarter highlight and important milestone for SWM. We have long been discussing our intention to carefully and selectively diversify the Company, and believe our patience and financial discipline lead us to the right targets in the right industry. DelStar is a high growth, high margin company in an attractive space. In addition to acquiring a foothold in growing niche filtration market segments, we are uniquely suited to capitalize on several synergistic projects with DelStarmany of which are already under way. We intend to grow this new filtration segment while not losing focus on our core tobacco business to which we remain committed.

  • We will also provide financial guidance regarding our expectations for 2014. As shown on slide four our fourth quarter showed solid earnings performance in the face of a challenging tobacco industry back drop. Revenue grew 1% with DelStar contributing $4.2 million of revenue during the fourth quarter. Excluding the DelStar revenue sales would have been down 1%.

  • Within the paper segments LIP volumes were up 1%. A strong performance given the accelerated smoking attrition rates in the U.S. and Europe. While it is difficult to draw conclusions regarding our share from quarter-to-quarter, our LIP volume growth of 3% for full year 2013 suggests we have increased penetration with major tobacco customers in this high margin product line. Despite head winds in tobacco paper volume, our ability to navigate contract negotiation and strategically position ourselves as a leader in LIP technology and service has enable to us to maintain good profitability.

  • As we discussed on our third quarter call several of our large RTL customers with annual commitments (Inaudible) during the fourth quarter driving higher volume than we saw in the third quarter of 2013. We achieved adjusted earnings per share from continuing operations of $0.91 in the quarter bringing us to $3.82 for full year 2013. We are pleased with these results as it exceeded both our initial guidance of $3.70 and the updated guidance of $3.75 which we provided mid year, and it is a testament to our strengthening relationship with customers, our technology leadership, our operational excellence program and overall commitment of our organization to deliver under challenging circumstances.

  • Cash flow from continuing operations for the full year 2013 total $175.8 million. After capital investments, our full year 2013 free cash flow was $146.7 million. Our management team remains highly focused on cash flow as this will be the primarily driver of our ability to invest in growth initiatives and return capital to investors for dividends and share buybacks. We have a net debt position of $113.4 million. As opposed to a net debt position of $4.8 million at the end of 2012. Largely as the result of funding the full price of the DelStar acquisition through an expanded credit facility at highly attractive rates.

  • As we look forward to 2014, we see a combination of challenges specifically in RTL, but also opportunities to set the stage for expected profit growth in future years. Without new LIP conversions providing revenue growth, 2014 will be influenced by smoking attrition rates in our key U.S. and European geographies. Regarding RTL, as we communicated in our third quarter call, 2014 will be a difficult year. Since then we have concluded our customer commitment discussions and forecast 2014 RTL in our weakened segment to decline close to 20% from 2013. This is due to a combination of external factors as well as a plan transfer of some Chinese customer volume from our French mill to our Chinese joint venture. Viewing a weakened segment and Chinese joint venture in aggregates total recon volumes are expected to be down approximately 10% in 2014.

  • During 2014 however we expect to have strong financial contributions from DelStar, lay foundations for multiple joint commercial projects to grow our newly established filtration segments and continue to innovate in our core LIP and RTL product areas. In addition, our Chinese RTL mill is set to open, volumes will ramp over the next three years with profit contribution expected to begin in 2015.

  • I would now like to introduce Steve Dunmead, our Chief Operating Officer, who joined SWM almost one year ago. Steve has been in immersed in our tobacco operations and also play an integral role in the DelStar acquisition. The heads of our three segments; Global Paper, Reconstituted Tobacco and Filtration report directly to Steve. He has more than 20 years of operational, technical and management experience particularly with companies pursuing growth initatives. And I recruited him to our management team to add depth that will help us (Inaudible) efforts in the core tobacco franchise and our industries to diversify the Company. Steve.

  • Steve Dunmead - EVP, COO

  • Thank you, Frederic. It is a pleasure to join the call. Referring to slide five tobacco paper volumes in the fourth quarter including CTM our joint venture in China, were down 8%, with LIP volumes up 1%. For the full year tobacco paper volumes were down 2%, with LIP volumes up 3%. Strength in LIP and non tobacco volumes were key in supporting our profit margin as we gained share in high margin LIP paper while backfilling lower conventional cigarette paper volumes with higher levels of non tobacco products. We believe this strategy paid off well in 2013, contributing to our ability to exceed our EPS guidance despite the higher than expected declines in smoking rates. While we have successfully gained shared in 2013, it is difficult to assume further gains in 2014, though we will work diligently to optimize our mix and drive as mush profitable through our paper mills as possible.

  • RTL volumes rebounded sequentially from an unusually low third quarter of 2013, but still saw volume declines of approximately 7% versus last year's fourth quarter. Full year 2013 recon segment volumes declined 10%, consistent with the expectations we communicated on our third quarter call. As anticipated, our customers with annual purchase commitments met those obligations during the third quarter, though we believe it has left some of them with some levels of excess inventory.

  • Now turning to slide six. Regarding the LIP contract extensions referenced in our earnings release, we proactively worked with several key customers to extend our existing contracts. Here our strategic focus is on the combination of share and term in exchange for some levels of price concession. Solidifying ourselves as the market leader for several years is strategically important. As we believe locking in shares is the best way to protect ourselves amidst tobacco industry volume declines. The impact of these extensions is incorporated in our 2014 EPS outlook. Although Western Europe the primary region where our RTL products are currently sold will face challenges next year, we remain enthusiastic about the opening of our Chinese RTL mill in 2014. A JV with the Chinese tobacco monopoly. Demand is expected to be strong as government regulations being adopted in China on harm reduction in cigarettes should bolster long-term demand for RTL in this large and growing Chinese tobacco industry. As we have communicated we expect startup losses in 2014 for the JV, profit contributions in 2015 and achievement of full profitability of approximately $8 million to $10 million of net income on a run rate basis during 2016.

  • Moving on to DelStar. Our integration processes are largely complete and we are settling in to a business as usual state as DelStar begins to execute on its 2014 plan. As intended there were very few changes to the DelStar organization, with integration mainly focused on IT and financial reporting. In addition to the strong growth prospects we see in DelStar base business through its long-term relationships in the filtration space, our teams have begun to work closely together on several projects that could provide exciting synergistic gains. These projects are in both product development and geographical expansion, as the SWM paper technologies and global footprint are paired with DelStar expertise and customer relationships in the growing filtration industry particularly in water filtration.

  • We will be updating our general presentation on our Investor Relations website in the coming days to include several slides about DelStar's operation, products, end markets and growth prospects. This will build upon what we presented on our November call when we announced the deal. In short DelStar and SWM are a great fit, and we look forward to sharing updates on this business and our progress on these initiatives with you.

  • Now I will turn the call back over to Frederic to share his comments on our outlook and strategic priorities.

  • Frederic Villoutreix - Chairman, CEO

  • Thank you, Steve. When we reported our third quarter 2013 earnings in November, we were in the process of customer discussions regarding RTL commitments for 2014 with that limited information. Thus why we expressed directional caution about 2014 expected volumes. We were not in a position to provide further details. At the same time we were reporting several customers to expand LIP contracts with a goal of securing market segment shares in future years in exchange for some pricing concessions. These discussions were also in early stages, and their recent conclusions have left us with more clarity on our 2014 tobacco paper outlook.

  • With both of the development we now have a clearer view of financial impact each are expected to have on our 2014 financial performance. We now expect recon segment volumes to decline close to 20% in 2014, due to a combination of factors which we discussed last quarter as well as a planned volume transfer to CTS. First we believe many of our customers are already in excess inventory following their fulfillment of2014 purchase obligations. Second, higher than expected smoking attrition rates in 2013 have created a very cautious environment with respect to 2014 purchase commitments. Lastly, as we discussed last quarter, a few customers are preparing to potentially alter their tobacco blends in an effort to reposition certain brands. While the longevity of success of these efforts by our customers remain to be seen, we believe they will impact our 2014 RTL volumes and are reflected in our guidance accordingly. We should note throughout its 50 year history RTL has experience these types of (Inaudible) overhangs and customer reformulation and has consistently bounced back to grow over the long-term.

  • In summary while recon segment volumes may be down close to 20%, we will likely see total RTL volumes for SWM including our China JV down approximately 10%. The transfer volume as well as new volumes for the CTS mill will partially offset the decline in our recon segment. However as the new mill will not be running at high utilization rate in 2014, the associated profit from the transfer volume previously produced in France will be overshadowed by the solid expanses for the Chinese mill.

  • As indicated in our earnings release, we expect the DelStar acquisition to add $0.25 to $0.27 to our adjusted EPS in 2014. This excludes the impact of noncash flow purchase price accounting charges. As result of these two factors and the addition of DelStar, our guidance for adjusted diluted EPS from continuing operations is $3.40 for 2014. Jeff will provide more details on our guidance shortly.

  • Moving to slide eight. I will now provide an update on several initiatives to support our long-term growth strategy. Within Reconstituted Tobacco while much focus has been placed on gaining clarity on customer commitments in 2014 our R&D teams continue to work with customers on developing improved RTL products, which could result in higher RTL use in our customers' tobacco blends over the long-term. Initial tests have been promising and this remains (Inaudible) efforts key to originating growth in our recon segments.

  • As we enter 2014, CTS, our Chinese RTL mill, is still set to open mid year. Given the success of our conventional paper JV with the Chinese tobacco monopoly, we expect similarly strong results of CTS. To help our investors understand our confidence in this project given the expected weakness and impairment charge in our recon segment, I would like to refresh everyone on the history of the Philippine RTL mill, the Chinese JV and their key differences.

  • In the late 2000's we began assessing potential RTL demand in Asia outside of China as our customers indicated interesting needs for RTL material to the point that future demands could no longer be met by our existing facility in France. We began to construct a new mill in the Philippines In 2010 the Chinese Tobacco Monopoly accelerated talks for second joint venture this time for RTL to help China Tobacco comply with new regulations set to go into place in 2015. Without the resources to develop and construct two RTL mills concurrently, we halted work on the Philippine mill to focus on the Chinese JV which is now nearing completion. The Chinese mill will exclusively serve China with a solid business plan supported by multi year commitments from several large customers. Concurrently without the benefit of regulations demand for RTL in the rest of Asia has developed slower than we originally expected while attrition rates accelerate in the Western geographies. With the decline expected to continue in 2014, our French mill will have more than enough capacity to serve all geographies outside of China for the foreseeable future. This new development effect on our mothball Philippine mill (Inaudible) fourth quarter impairment charge. All told while RTL makes a challenging recon segment our Chinese JV is set for a solid launch, and we expect it to have a profitable future.

  • On the LIP France we have been informed that the vote on stand outs in Russian and several neighboring countries has been postponed until May 2014. We remain in discussions with key regional players and (Inaudible) to support them when LIP eliminated in Russian and other countries around the world. In addition to anticipating new adoptions, we are focused on continuous innovation of the LIP product line to better serve our customers. Our R&D teams are developing next generation LIP products focused on both improved taste profiles as well as other production processes and technologies to lower the cost. Success in these efforts should help to mitigate the impact on our margins from pricing pressure in the marketplace.

  • On our diversification and M&A initiatives we choose to diversify into filtration arena due to its adjacent technology and its sound long-term growth and margin fundamentals. We launched these long-term commitments by closing the DelStar acquisition in mid December. The strategic entry into filtration set the stage for a new and exciting trajectory for SWM as we expand and diversify our product and customer base. DelStar has strong and growing presences in filtration, healthcare and several niche industrial segments. The DelStar leadership team shares the enthusiasm about our combination, and we will be focused on (Inaudible) the DelStar 2014 financial goals as well as pursuing several growth opportunities not previously available to them. We believe that over the next several years DelStar will provide growth revenues above and beyond what was originally expected as we continue to uncover new synergistic opportunities. In addition, our (Inaudible) experts are working with DelStar teams to efficiently expand capacity, reduce scrap and drive other operating efficiencies.

  • Let me now turn to you over to Jeff to discuss our financial results and guidance in more detail.

  • Jeff Cook - EVP, CFO

  • Thank you, Frederic. Fourth quarter net sales increased 1% versus the prior year quarter. Currency continued to benefit us in the fourth quarter, and on a constant currency basis revenue was down 2%. The DelStar acquisition, which closed on December 12, 2013, contributed revenue of $4.2 million in the fourth quarter. For full year 2013 consolidated revenues declined approximately 1% and 2% on a constant currency basis. Fourth quarter paper segment revenue, which includes non tobacco paper but excludes sales from our China JV, was down 3%. This decrease was driven by lower tobacco paper volume as LIP volume growth was offset by lower margin conventional cigarette paper volume declines. Our recon segment volumes declined 7%, but improved mix and a stronger Euro drove a revenue increase of 2%. For the full year 2013 paper segment revenue was essential flat and recon segment revenue was down nearly 4%.

  • As you can see on the chart on slide 11, adjusted operating profit was essentially unchanged versus a year ago though we did have several puts and takes. Volume was the biggest negative factor mostly tobacco papers as well as some recon products. Offsetting these declines were profit lists from non manufacturing costs as the fourth quarter of 2012 had some elevated expenses due to certain strategic initiatives and the currency benefits we continue to experience from a strong Euro in the fourth quarter of 2013. Wood pulp prices continued to have a limited impact on profits though they remain at high levels. In our 2014 outlook we have assumed modest gains for our reduction and wood pulp prices.

  • Paper segment adjusted operating profits during the fourth quarter were down 7% versus the same period in 2012. The adjusted paper segment margin in the quarter was 17.8%, 90 basis points lower than the prior year quarter in part due to planned machine down time at year end. For the year adjusted paper segment profit was up 3%, with segment margin up 50 basis points. This illustrates the positive trade off discussed early regarding our strategy to focus on high margin LIP and other non tobacco papers. Operational excellence was also a strong contributer to this performance.

  • Adjusted operating profit in the Reconstituted Tobacco segment for the fourth quarter of 2013 was down 8% and 10% for the year. Volume declines and reduced fix cost absorption were partially offset by improved mix and pricing. The filtration segment, which is comprised of DelStar, reported a loss of $1 million for the two weeks from mid December through the end of the year primarily driven by the impact of inventory step up charges necessitated by purchase price accounting adjustments. Absent this noncash purchase accounting item, filtration was break even for those weeks. We note this abbreviated period as not indicative of DelStar's expected performance given the low volume nature of the year end holidays.

  • Our consolidated adjusted operating profit margin was 19.7%, down 30 basis points from the fourth quarter of 2012 and down 60 basis points to a 21.6% on a full year basis. Excluding the DelStar revenue, which had no associated operating profit for that two week period, adjusted operating profit margin would have been 20.2% in the fourth quarter up slightly from the year ago period.

  • Our fourth quarter 2013 adjusted earnings per share from continuing operation was $0.91 down from $0.95 in the fourth quarter of 2012. Full year adjusted EPS was $3.82 versus $3.77 in 2012. We exceeded our initial and mid year guidance of $3.70 and $3.75 respectively. Excluded from our fourth quarter and full year 2013 adjusted EPS is the noncash non tax deductible impairment charge of $37.2 million related to our Philippine RTL mill assets. However we still remain hopeful that our future Asia market demand for RTL will grow and support resumption of mill construction. We did not write down the full value of the assets as the facility and related equipment does have resale value.

  • While we are pleased with our accomplishments in 2013 including our financial performance and acquisition of DelStar as a new growth platform, we now turn our attention to 2014. As Frederic mentioned we expect 2014 adjusted EPS from continuing operations to be $3.40 assuming currency exchange rates remain in line with current levels. Included in this projection is a combination of several factors. Primary challenges are the expected RTL volume decline, pricing concessions on LIP and other tobacco papers and continued elevated smoking attrition rates in the U.S. and Europe. While we don't provide segment profit guidance, proportionately we would expect RTL to account for two-thirds of the decrease in year-over-year operating profit with the remaining one-third in the paper segment.

  • On the positive side operational excellence should continue help offset cost increases and provide additional efficiencies. We will also benefit from our share buyback program being executed in early 2014, and we expect a lower tax rate as a result of certain legal entity reallignemnt activities. Our annual effective tax rate for 2014 is expected to be in the mid to high 20% range higher in the earlier quarters and trending lower throughout the year. While these tax savings will be mostly offset in 2014 by several million dollars of expenses incurred to execute the legal entity realignment, which will appear in unallocated corporate expenses, they will support our earnings and even more importantly improve cash flow for years to come. We also continue to pursue additional actions that will enhance our conversion of operating profits into cash flow such as working capital improvements.

  • Lastly, we note that our new legal entity structure will allow improved access to our cash balances currently held in Europe. Embed in this guidance is the appreciation from the DelStar acquisition. Consistent with our previous discussions on DelStar we expect revenue to grow from its $110 million base at the time of the deal with continued high teens EBITDA margins. Our financing terms were attractive and we assume a 36% tax rate given its U.S. centric operations. Prior to the impact of purchase accounting items the acquisition is expected to add between $0.25 and $0.27 to 2014 EPS. Included in the $0.25 to $0.27 estimate are integration costs and near term management retention expenses. Regarding purchase accounting impacts some of these items are one time specifically in noncash step up charge and some are ongoing such as the amortization of acquired intangibles. These ongoing amortization expenses equate to approximately $0.06in EPS; however, 2014 charges will be higher due to the inventory step up which is expected to be fully expensed by the end of the first quarter. Once again our consolidated adjusted EPS guidance excludes all of these noncash purchase accounting items.

  • Lastly, our guidance excludes the impact of one time startup expenses associated with the upcoming launch of the Chinese RTL mill which we estimate will have a $0.12 impact on RTL mill. GAAP EPS. As a reminder, our JVs are reported below the line as equity income from affiliates.

  • SWM net debt is now $113 million an increase of $109 million since the end of 2012, primarily due to the acquisition of DelStar aggregating $231.3 million offset by continued strong cash flow from operations during the year net of capital expenditures and dividend payments. SWM remains a high quality credit and the recent expansion of our credit facility at attractive rates demonstrates confidence in our future cash flows despite our outlook for lower EPS in 2014. We have ample liquidity to fund our internal needs, our dividends and potential future acquisitions, and we remain commitment to the capital allocation strategy communicated earlier in 2013.

  • Net debt to adjusted EBITDA from continuing operations at the end of the fourth quarter was a relatively low 1.5 times EBITDA. Capital spending was approximately $29 million in 2013 up from $27 million in 2012. As you may recall, we recently raised our dividend per share by 20% to $1.44 on an annual basis marking a nearly five fold increase in our dividend per share in the past two years. In 2013 we have paid out nearly $40 million and absent any further changes in our dividend rate would expect to pay out approximately $45 million in dividends in 2014. Although we did not purchase any stock under our $15 million authorization in 2013, we have begun purchases in early 2014. To date we have bought approximately 294,000 shares aggregating $13.6 million in total purchases demonstrating our confidence in SWM's long-term prospects.

  • As we look to the remaindered of 2014, it is possible that we may continue to make purchases under our buyback agreement as well as make further acquisitions in filtration and/or specialty papers to strengthen and diversify the Company. In addition, while we are looking at diversification we will continue to selectively invest where appropriate in our core tobacco operations. Lastly, we expect to contribute our final capital infusion in to our Chinese RTL joint venture in an amount less than $10 million.

  • Return on invested capital in 2013 was 24.9%, well above our cost of capital. This measure excludes the impact of the DelStar transaction. Further ROIC calculations will be impacted by acquisitions. We expect to acquire companies with strong top line growth prospects, which typically can not be acquired for book values, thus our invested capital base will not just reflect our depreciated asset base and tobacco but also the market values of acquired higher growth enterprises. Our acquisition criteria are highly driven by discounted cash flow and IRR methodology and our acquisitions are expected to exceed our conservative cost of capital assumptions. DelStar for example exceeded our hurdle rate even before consideration of long-term joint commercial synergies. We will continue to focus on ROIC; however, given the acquisition of DelStar and potential future transactions we will likely expand our key metrics to include other measures and financial benchmarks.

  • I will now turn the call back to Frederic for some closing remarks.

  • Frederic Villoutreix - Chairman, CEO

  • Thank you, Jeff. Before we take questions from the investment community, I would like to comment on our near-term and long-term outlook. As we have said for some time tobacco is a challenging industry due to consistent volume declines in the U.S. and Europe. Despite that, there are areas of highly attractive growth and possibility including LIP and over the long-term RTL both due to their favorable attributable safety and harmful (Inaudible) reduction.

  • For several years we have capitalized on positive trends in RTL and LIP regulations, and we have benefited from a strong customer relationships, leading technology and global platform. 2013 was a year where we saw RTL declines and no new LIP regulations to boost volumes; however, SWM strength in LIP penetration, cost reductions, currency benefits and other efforts by your management team and worldwide organization support a strong financial performance in an otherwise difficult year.

  • Finally, we were pleased to conclude the year with the acquisition of DelStar, the culmination of several years of patient, financially disciplined strategy planning. We remain highly focused on optimizing our organization and capacity, prudently capturing share where possible and investing for long-term growth both in tobacco and now filtration. We are actively pursuing new innovations in both LIP and RTL, working to ensure the long-term success of DelStar and provide support for acceleration in several filtration segment areas and assessing new acquisition targets. We are also focused on maximizing cash flow to support further investments as well as maintaining a strong return of cash to our stockholders. While 2014 may be a reset year of sorts, we believe we have multiple catalysts to resume earnings growth in the long-term and look forward to providing updates on those initiative as the year unfolds.

  • That concludes our remarks. Jackie, please open the line for questions.

  • Operator

  • (Operator Instructions). Our first question comes from the line of Alex Ovshey with Goldman Sachs.

  • Alex Ovshey - Analyst

  • Good morning, everyone.

  • Steve Dunmead - EVP, COO

  • Good morning, Alex.

  • Alex Ovshey - Analyst

  • On the RTL side, so you are transferring 10% of your volume from the French facility into the Chinese joint venture, so you are essentially going from being the sole owner of the volume to having to split that with the joint venture partner. Are you getting reimbursed for that in any way?

  • Frederic Villoutreix - Chairman, CEO

  • Alex, let me correct this impression we may have left with our prepared remarks. The volume transferred to China is in fact small. We are talking about incremental revenue growth in China out of the joint venture and that was the plan all along. In order prime the pump if you will in terms of demand for Chinese market we served a few customers including the ones that are our JV partner out of France, but the significant volume growth we expect out of China is purely based on having the technology into place in China with CTS. There are very large import duties into China for RTL and other tobacco products which makes it cost prohibitive to address the domestic market from abroad. The effects really the volume drawn at out our French mill is really the consequence of a number of factors, and I would list the three of them by, I would say, degree of importance in terms of magnitude of the impact on volume. The first one is we have inventory adjustments, access inventories on the of balance sheet of our customers at the end of 2013 that is being corrected in 2014. The second one is the challenging environment in terms of smoking attrition rates particularly in Europe that are leading our customers to be very prudent as we forecast 2014. In fact it is fair to say most customers see 2014 to be in line with 2013, so no real improvement in terms of smoking attrition rates. Then the third factors which is somewhat unclear at this stage of how much it will impact RTL segment. That is the information we got from a few customer of their intent to do reformulation of cigarette designs as they are struggling to either maintain share or in an environment where the demand is dropping the smoke attrition rates are accelerating to gain market share at the expense of other as some through marketing programs.

  • Alex Ovshey - Analyst

  • Got it, Frederic. Thanks for all that, great color there. Shifting to the LIP side and the contract extensions. Is the majority of your LIP business both in Europe and North American now under the extent of contracts? Is there any risk to having to renegotiate any of the business again in 2015?

  • Steve Dunmead - EVP, COO

  • Alex, this is Steve. Certainly we are not going to go into specifics on the percentages, but more than half of it is under contract. If we get the opportunity quite honestly to continue to extend contracts and protect share or grow share, we will certainly do that. But certainly it is more than half.

  • Alex Ovshey - Analyst

  • Okay. Steve, is that more than half comment does that apply both Europe and North American, or is one region above that level and one below?

  • Steve Dunmead - EVP, COO

  • It applies to both.

  • Alex Ovshey - Analyst

  • Okay. Thank you. And then on the DelStar front you talked about some exciting projects you are doing there with the legacy SWM business. Do you expect any financial benefit in terms of revenues and their profits in 2014, or is that going to be potentially beneficial to the Company beyond this year?

  • Jeff Cook - EVP, CFO

  • I think Frederic in his prepared remarks talked a little bit about the fact that we have some operational excellence things going on that should start to pay dividends this year. We may on a couple of the more strategic synergistic projects toward the fourth quarter see a little bit, but certainly it is mostly focused on 2015 and beyond, but really exciting work going on between the two teams.

  • Alex Ovshey - Analyst

  • Okay. And one last question from me and I will turn it over. Looking at the M&A pipeline and infiltration is the expectations you could do another deal in 2014, or do you view 2014 as really a year where you really try to fully integrate DelStar and work on the organic growth profile of sort of the combined DelStar and legacy as one business? How do you see that?

  • Frederic Villoutreix - Chairman, CEO

  • Alex, clearly the number one priority for us is to leverage the acquisition of DelStar. The integration as Steve mentioned in his prepared remarks is for the most part behind, and now we are really focusing on growing the core DelStar business and pushing hard for those synergies both commercial and industrial synergies that frankly speaking we see as an add on in terms of the benefits of that investment. It was not part of how we looked at the business when we acquired it. Synergies having impact in 2014 but clearly meaningful impact in 2015. In particular we are looking at ways to build on the platform on this filtration platform with some bolt on acquisition moves. And I think we are advanced enough at this stage to say that we could be acting in 2014. And the could is moderated by the fact that we will maintain the same financial discipline we have used in the past. So we are not going to rush into anything. But we clearly see opportunities, and we will be exploring those opportunities during the course of the next several months.

  • Alex Ovshey - Analyst

  • Very helpful. Thanks, Frederic. I'll turn it over.

  • Frederic Villoutreix - Chairman, CEO

  • You're welcome.

  • Operator

  • Our next question comes from the line of Ann Gurkin with Davenport.

  • Frederic Villoutreix - Chairman, CEO

  • Good morning, Ann.

  • Ann Gurkin - Analyst

  • I wanted to start with customer demand for your products. As you move from Q3 into Q4 was there any change in customers plans or order rates for 2014?

  • Frederic Villoutreix - Chairman, CEO

  • Not really. I think on the RTL we already commented that probably we had a little spike due to the annual commitments, but I think on the paper side we are experienced the same kind of slower fourth quarter with machine down time in December, which we experience every year, due to customers making inventory adjustments , cigarettes then sales. I think the trends have been unchanged for the past two to three quarters. And I think it is also reflected in the forecast that customers have on whether it is Europe, Russian the rest of the world which seems unfortunately at that stage does not see a lot of improvements from the challenging conditions of 2013 but for the most part no worsening either.

  • Ann Gurkin - Analyst

  • Okay, that helps. And then you reference share repurchase to date, is the share repurchase in your 340 guidance?

  • Jeff Cook - EVP, CFO

  • Yes. What we have done to date probably looking at around $0.02 to $0.03, so a pick up from what we have already done, so that is the in the 340.

  • Ann Gurkin - Analyst

  • Okay, great. That helps. Can I get an update on potential LIP adoption in Russian. I know you commented that you do not see any pick up in LIP sales in 2014 in Russian, but can I get an update on the status of that?

  • Frederic Villoutreix - Chairman, CEO

  • Sure. I think the vote by the parliament in Russia and the common unions, so two adjacent countries, initially scheduled for December has been moved to May, and at this stage I think the there is still the same activity and on discussions with customers the same need to achieve a state of readiness, but just with the shift of four months and then how it would impact or color 2014 at this stage we have not included in our guidance any pick up in demand in 2014. But obviously we will update the investment community as we know more around the May period.

  • Ann Gurkin - Analyst

  • Great, that helps. And then finally, as you integrate DelStar, I'm just curious positive surprise, challenges. Can I get an update on how that integration is progressing?

  • Frederic Villoutreix - Chairman, CEO

  • I think so far it has been going very smoothly. We have great team work happening at the management level. We have been able to deploy our synergy teams and they have already identified some short wins and longer term opportunities. At this stage we are (Inaudible) progress we have made, and again I think some of the synergies that we see out of those could be transformational.

  • Ann Gurkin - Analyst

  • Great, that helps. Thanks for your time.

  • Jeff Cook - EVP, CFO

  • Thank you.

  • Operator

  • Our next question comes from the line of Kenneth Smith with Lenox Equity Research.

  • Frederic Villoutreix - Chairman, CEO

  • Ken, good morning.

  • Kenneth Smith - Analyst

  • Good morning, Frederic and guys. A couple of years ago you had forecasted difficult RTL environment and then it turned out to be a much better year than you anticipated. Is there anything about the current environment that could cause your pessimistic outlook to really change for the better, or is this a much more clearer situation than it was a couple of years ago?

  • Frederic Villoutreix - Chairman, CEO

  • I would like to be wrong a second time. (Inaudible). I think what we know is that many of our customers are working the balance sheet to reduce inventory of both virgin tobacco and RTL. The magnitude of this correction is not necessarily clear and it is somewhat related to the attrition rates in Europe, in Russian. We have based on (Inaudible) taxes without being implemented in Russian, which are really causing the market to shrink at a pace that has not been seen in many years. So I think this is probably the area to monitor whether or not the attrition rates remain line with the forecast of our customers or whether there is an improvements. I would say at this stage we feel comfortable relying on this forecast that the customers have given us to build our guidance, and obviously we are working hard, the teams are working hard to go after additional volumes.

  • Kenneth Smith - Analyst

  • Second question more for Jeff. On the guidance on the tax rates and your ability to move more of your operating profit into cash flow, you said that the tax rate will be lower in the second half later in the year than the first part. Where do you see this settling out as a tax rate you expect to get into, and what is the overall impact going to be on your cash flow relative to say 2013?

  • Jeff Cook - EVP, CFO

  • For 2014 there will be some improvement overall but not significant because we are spending money to implement a lot of these changes. But we will net-net have a benefit this year, but I'm talking $1 million or $2 million. The important thing is going forward when we get to 2015 then I would see our tax rate getting down to the mid 20% if maybe not even a bit lower.

  • Kenneth Smith - Analyst

  • Thank you.

  • Operator

  • (Operator Instructions). At this time it appears that we have no further questions. I would like to turn the floor back over to management for any additional or closing remarks.

  • Frederic Villoutreix - Chairman, CEO

  • Thank you, Jackie, and thank you all for joining the call. While disappointed in the 2014 outlook, we remain confident in the strength of our business model and the ability to bounce backas evidenced by 20% increase in our quarterly dividend we announced last quarter. I feel very good about our paper segment as performed in 2014 and the competitive strength of our paper business as we enter 2014. We have obviously headwind on RTL but we have this growth opportunities on DelStar. So for me it is a balanced outlook with if you want, with some ups, some downs, some opportunities, but we will continue to work hard on (Inaudible) as we have done for many years to generate some growth and be vigilant on the cost and capacity efficiencies of our units.

  • We appreciate your interest in the Company. Mark, Jeff and I will be in our offices today, and if you have any follow up questions, please give us a call. And have a nice day. Thank you.

  • Operator

  • Thank you. This concludes today's conference call. You may now disconnect.