Mativ Holdings Inc (MATV) 2014 Q1 法說會逐字稿

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  • Operator

  • Welcome to SWM first quarter 2014 earnings conference call. Hosting the call today from SWM is Frederic Villoutreix, Chairman around Chief Executive Officer. He is a joined by Jeff Cook, Executive Vice President and Chief Financial Officer; Steve Dunmead, Chief Operating Officer; and Mark Chekanow 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 1800-585-8367 and enter PIN number 293-44-709.

  • At this time, all participants have been placed in a listen-only mode and the floor will be opened for 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 - Director of IR

  • Thank you, Stephanie. Good morning. I am Mark Chekanow, Director of Investor Relations at SWM. Thank you for joining us to discuss SWM's first quarter 2014 earnings results.

  • On today's call, Frederic will share some high level comments about our first quarter performance and strategic priorities. Steve will provide details on our operations and Jeff will review our financial results. You'll 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 and Exchange Commission filings, including our quarterly report on Form 10-Q, our annual report on Form 10-K.

  • Certain financial measures discussed during this call exclude restructuring and impairment expenses, result of discontinued operations, non cash 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'll now turn the call over to Frederic.

  • Frederic Villoutreix - CEO

  • Thank you, Mark, and good morning, everyone. Late yesterday we released our first quarter 2014 earnings and this morning we are pleased to present our results and update you on our operations, initiatives and tobacco industry developments.

  • This quarter also marks our first full quarter with DelStar included in our results and we will share further details on commercial synergy projects and operational performance of our new penetration segments.

  • We were pleased that while the tobacco industry's continued penetration presents challenges to our operations, we performed essentially in line with our expectations during the first quarter. As shown on this slide, we did experience a year-over-year earnings decline in line with the 2014 EPS guidance we issued on our fourth quarter 2013 conference call.

  • Although revenue grew by 5.2%, our [weather extreme] DelStar -- our revenue declined 11%. DelStar contributed nearly $32 million of revenue in the quarter marking a solid start to the year for our newly acquired business.

  • Within the paper segments, LIP volumes were down nearly 7% but we note that the first quarter of 2013 was an exceptionally strong shipment quarter for our US LIP operations due to (inaudible) Hurricane Sandy. Outside of a difficult comparison, LIP had a relative good quarter and we believe we have at least maintained our share in this product category.

  • Reconstituted tobacco second volumes were down 26%. But given the quarter-to-quarter filtrations of that business, we still expect volumes to be down approximately 20% of the year.

  • Importantly, the decline in cigarette shipment volumes reported by our customers in the first quarter of 2014 are less severe and thus those we saw throughout 2013. This offers some encouragement that the highest looking attrition rates seen early last year particularly in Europe appear to be moderating and that we might be returning to a more normalized cycle attrition plans.

  • We achieved adjusted earnings per share from continued operations of $0.84 in the quarter. Operating cash flow from continued operations for the first quarter was nearly $19 million.

  • First quarter cash flow comparisons just of last year had some unfavorable timing of certain working capital items, which we expect will normalize. Jeff will provide further details shortly.

  • Our management team remains highly focused on cash flow as it will largely dictate our ability to invest internally and return capital to our investors. On that note, we completed our $50 million share buyback authorization during the first quarter demonstrating our confidence in the long-term prospects of the Company. As a result of the buyback, our net debt position has increased to $170 million.

  • I will now provide an update on several initiatives that we believe provide solid support for our long-term growth strategy.

  • We are rapidly approaching the opening of our new RTL joint venture in China. This has been a highly anticipated event for SWM leveraging our relationship with the China tobacco monopoly and the proven success of conventional TIP joint venture of CTM.

  • As we have discussed in previous calls, this year we'll exclusively sell Chinese customers. And as a support of volume commitments to ramp (inaudible) a strong utilization rates. Keep in mind our 50/50 CTS JD partners are also our customers who share our interests in the long-term financial success of the project.

  • Regarding our ongoing R&D initiatives of Recon tobacco products, we continue to drive toward taste and delivery improvements, which if successful could result in our customers' ability to incorporate more RTL into their tobacco plans. While we have nothing new to share on this front today, this remains a high priority for us in SWM.

  • On the LIP front, we are pleased to share that South Korea appears to be the next country that will adopt LIP regulations. Their government announced at July 2015 effective date and all indications point to the adoption of international standards which we believe favor us a SWM, as the global leader in LIP technology.

  • We are currently engaged in preliminary discussions with several key cigarette manufacturers regarding South Korea LIP data supply. We estimate South Korean cigarette consumption to be in excess of 85 billion sticks and believe global LIP paper demand could increase by approximately 10% with these developments.

  • We are currently engaged in preliminary discussions with several key cigarette manufacturers regarding South Korea LIP data supply. We estimate South Korean cigarette consumption to be in excess of 85 billion sticks and believe global LIP paper demand could increase by approximately 10% with these developments.

  • Outside of South Korea, we have received no news regarding the plan votes in the coming weeks on LIP standards in Russia and several neighboring countries. Given recent political evidence in the regions, there may be some [internal] risk with the timing of the vote when nothing has been announced. Russia remains one of the largest tobacco consuming countries in the world and we expect LIP regulation if and when it occurs will be a substantial profit provider for SWM.

  • Moving on to DelStar, after an integration process largely focused on IT and financial reporting, the organization remains focused on execution and capitalizing on the new opportunities ahead. 2014 is off to a good start and outside of delivering on the days' business plan, we are rapidly moving forward on several fronts to advance commercial synergy projects.

  • Good examples of these initiatives are the international expansion efforts at DelStar leverages as the then global footprint which should deliver financial benefits in 2015. And non-tobacco paper product developments whereby SWM could use paper that DelStar could sell in its attractive end market segments such as (inaudible) and [healthcare].

  • While there is nothing to report regarding bolt-on activities, we are tedious assessing several opportunities that complement DelStar's current business and will provide strategic product and industry extensions. Our [slide view] with DelStar is to create a growth platform and all the pieces are in place to begin executing on both internal and M&A related opportunities.

  • Let me now turn the call over to Steve to discuss operations in more detail.

  • Steve Dunmead - EVP, COO

  • Thank you, Frederic. I'll now walk through our volume trends and operational highlights on slide 6. Tobacco paper volumes in the first quarter including CTM, our joint venture in China, were down 9% with LIP volumes down nearly 7%. Partially offsetting these declines will strengthen our non-tobacco paper volumes. Non-tobacco related papers remain a key focus as we backfill cigarette paper products in response to tobacco industry attrition.

  • To expand on the LIP volume decline, we note that the first quarter of 2013 saw high volumes following supply chain disruptions caused by Hurricane Sandy. These high volumes naturally created a difficult year-over-year comparison. Outside of the anniversary of these high shipment volumes, the remainder of our leadership business performed relatively well. Volumes in [POW] and LIP printing facility were up slightly versus last year despite continued smoking attrition in Europe.

  • While difficult to isolate the exact impacts of certain customer-related order patterns, we believe we have held onto our share gains of the past year and that our LIP volume is consistent with the rest -- the results of our key customers have been reporting in recent weeks.

  • In terms of conventional cigarette paper, we did experience volume declines in excess of industry attrition. Certain customers have been adjusting inventories lower and those actions impacted the first quarter results and will likely persist into the second quarter. Volume declines driven by industry attrition will continue to be a challenge in 2014 and we are consistently re-evaluating the capacity of our paper mills and taking appropriate cost reductions action in response to lower expected volumes.

  • RTL segment volumes were down 26%. Our RTL business remains lumpy and difficult to predict from quarter to quarter, but we believe our expectations for approximately 20% volume decline in 2014 remains valid. Customers are reducing their inventories to a more normalized levels, purchase commitments for 2014 reflect the uncertain attrition rates in Europe at the time of our negotiations last year and certain key customers are exploring blend adjustments. We believe inventory de-stocking will work its way through the supply chain over the next several quarters as customers are holding excess inventories purchased in late 2013 under their annual contract commitments.

  • Now if we can turn to slide 7. Despite the weakness in European RTL demand expected in 2014, we're excited about the upcoming opening of our RTL JV in China. Although it is generating start-up expenses in 2014 as production ramps, our expectations remain to achieve profitability in 2015 and hit an annual run-rate of net income to SWM of $8 million to $10 million during 2016 imply an EPS impact of $0.25 to $0.30 on an annualized basis. The mills production is expected to ramp-up to its 30,000-ton capacity from the next several years as Chinese tobacco companies steadily incorporate RTL into their blends to comply with more stringents regular on tar and nicotine delivery which begin to take effect in 2015. The standards being adopted in China are similar to those in the EU and we hope to serve as and example of leadership in the area of harm reduction to other countries within Asia and stimulate late long-term demand throughout the region.

  • As Frederic highlighted, South Korea set to adopt LIP regulations by July 2015. This is an important development in the world growth story for LIP cigarette paper technology. While regulations are in place in the US and Europe, we are encouraged to see that South Korea is the first of several countries where LIP regulations have been contemplated that will enact legislation.

  • While still early, our preliminary assessments indicate that our annualized EPS benefit from LIP adoption in South Korea to be approximately $0.20 a share. As discussed, this projection is highly dependent on pricing and share negotiations with several of our key customers. We also highlight that we have sufficient capacity to support South Korea from our Poland facility with minimal investment.

  • In response to continued cigarette consumption declines, we've been actively implementing cost controls across the Company. We have idled one of our three production lines in our RTL facility in Spain and France and are currently working on labor reduction plans with the French government to right-size our workforce. These efforts are underway and should begin contributing to our results later this year. We're also assessing multiple cost savings efforts in our paper operations and corporate activities.

  • Moving on to DelStar which comprises of our filtration segment on slide 8, with the critical integration steps largely behind us we're highly focused on the execution of DelStar's business plan and providing the operational financial and strategic support necessary to drive maximum value from this platform. As we communicated at the time of the transaction, DelStar had annual revenues of about $110 million and high teens EBITDA margin. We consider first quarter results indicative of expected revenue and profit metrics for our new segment.

  • Water and other filtration industry subsegments continue to drive the DelStar platform as roughly two-thirds of its revenue is in the filtration space. The remainder comes primarily through other industrial and healthcare applications for their plastic netting, films and [melt-on] products.

  • To illustrate DelStar's strength in product development and forging long-term customer relationships, we highlight the recent addiction of a leading manufacturer of few filters for the automotive industry to DelStar's blue chip customer list.

  • In late 2013, DelStar signed a 10-year exclusive supply contract for this multi-SKU product line. This was the result of a lengthy sales process involving a cross-functional team from DelStar resulting in the addition of a new multi-million dollar customer and forging of a long-term strategic relationship in the automotive filtration space.

  • In late 2013, DelStar signed a 10-year exclusive supply contract for this multi-SKU product line. This was the result of a lengthy sales process involving a cross-functional team from DelStar resulting in the addition of a new multi-million dollar customer and forging of a long-term strategic relationship in the automotive filtration space.

  • In terms of profitability while DelStar operations are running nicely, there remains opportunities for improvement particularly in the areas of scrap production and other manufacturing efficiencies. This is another area where we believe SWM can offer our core competency, our lean Six Sigma program to DelStar's operations. We've already begun and will continue to deploy Six Sigma black belts in DelStar's facilities to score quick wins as well as to develop a more comprehensive long-term operational improvement program.

  • Lastly, we would like to provide some color on our commercial synergy efforts although details may be somewhat limited for competitive purposes.

  • First, we have identified opportunities to advance DelStar's international sales efforts by expanding production of certain product lines into SWM facilities overseas. The CapEx associated with this investment will be less than $5 million but will immediately generate substantial freight and duty savings on DelStar's existing sales base in the region. Furthermore, new production capabilities will allow for a more aggressive regional sales effort and is expected to generate incremental growth for the next three plus years. As a result of our legal entity restructuring activities our international expansion project with DelStar will have favorable tax treatments boosting the fall through to our bottom-line.

  • Secondly, our product development and R&D teams have already held exciting innovation and planning sessions. The result of which is a pipeline of products and targeted industries that will leverage SWM's paper manufacturing expertise and capacity and DelStar's relationship in the attractive filtration, industrial and healthcare industries. We look forward to providing more details on these efforts in the coming quarters.

  • Lastly, while we're focused on diversifying our revenue base, there may also be opportunities for SWM to leverage DelStar's technologies into the tobacco industry and we are actively exploring those opportunities as well.

  • I'll now turn the call over to Jeff to take you through the detailed review of our financials.

  • Jeff Cook - EVP, CFO

  • Thank you, Steve. First quarter net sales increased 5.2% versus the prior-year quarter. Currency impact was slightly positive for the quarter. And on a constant currency basis, revenue was up nearly 5%. The DelStar acquisition which occurred on December 12, 2013 contributed revenue of nearly $32 million in the first quarter, excluding DelStar revenue was down 11%.

  • First quarter paper segment revenue which includes non-tobacco paper but exports sales from our Chinese JV was down 7.3%. This increase was driven by lower tobacco paper volume including LIP paper and the effect of contractual price reductions in LIP partially offset by volume growth and certain non-tobacco product lines.

  • As we discussed on our fourth quarter 2013 earnings call, we proactively renegotiated and extended several customer contracts to secure recent LIP share gains in exchange for some pricing concessions. Our key segment volumes declined 26% but improved mix made a stronger euro resulted in our revenue decline of 20%. The DelStar business was acquired during the fourth quarter of 2013 and thus we have this no year-over-year revenue comparison to report. However, top-line results were very strong as expected.

  • As you can see on the chart on slide 11, adjusted operating profit was down $6 million versus the year-ago quarter. Volume and other cost of sales were the biggest negative factors though they are largely interdependent as reduced overhead absorption caused by lower volume drives the other cost of sales impact. These drivers have more than offset the operational excellence benefits we achieved in the quarter. With pulp prices continue to have a limited impact on profit and although softwood remains elevated, eucalyptus wood has been to decline. DelStar contributed $4.5 million of adjusted operating profit partially offsetting the decline in our tobacco operations.

  • Paper segment adjusted operating profits during the first quarter were down approximately 15% versus the same period in 2013. The adjusted paper segment margin in the quarter was 17.5%, 150 basis points lower than the prior-year quarter due to a combination of lower segment volume reduced LIP pricing and reduced fixed cost absorption. These issues will continue to impact our financial results through much of 2014 and responsive cost containment actions are being taken.

  • Adjusted operating profit in the reconstituted tobacco segment for the first quarter of 2014 was down 26% on lower revenue and adjusted operating margin of 36.9% was 250 basis points lower than the year-ago quarter. Volume declines and reduced fixed cost absorption were partially offset by improved mix and favorable cost actions.

  • The filtration segment which is comprised of DelStar reported adjusted operating profit of $4.5 million and generated a 14.2% operating profit margin. These results exclude the impact of inventory step-up charges necessitated by purchase price accounting adjustments as well as the amortization of acquired intangible assets such as technology and customer lists.

  • Our consolidated adjusted operating profit margin was 18.2%, down from 22.3% in the first quarter of 2010. Unallocated corporate expenses increased by $1 million year over year due to integration expenses associated with the DelStar transaction and higher professional service fees from our legal entity reorganization activities in connection with efforts to realign our key global assets and improve cash flow.

  • Our first quarter 2014 adjusted earnings per share from continuing operations was $0.84, down from $1.1 in the first quarter of 2013. First quarter 2014 EPS benefited by approximately $0.11 due to share buybacks conducted throughout the quarter.

  • Excluded from the $0.84 is the first quarter impact of purchase price accounting adjustments for the DelStar acquisition as well as start-up losses on the CTS joint venture mill set to open in mid 2014 in China. DelStar's contribution to our first quarter EPS was in line with the total year 2014 EPS estimate of $0.25 to $0.27 provided in our last earnings call.

  • The effective tax rate for the first quarter was 30.2%, up 90 basis points versus the year-ago period. The legal entity realignment activities mentioned previously which are currently under way are expected to result in a lower tax burden to the Company for the full year of 2014 beyond and we expect our effective rate for the year to be in the mid-to-high 20% range. We are incurring several million dollars of expenses to execute these changes primarily in the first half of the year.

  • Until this year, ROIC had been a component of our management compensation plan. However, per our proxy statement, we have transitioned in 2014 to EPS and EBITDA metrics, which we believe are more appropriate given the long-term investments we expect to make in diversifying our business.

  • While our ROIC has exceeded 20% in recent years and we are proud of this achievement, we note those returns are generated on a depreciated asset base that serves a mature global tobacco industry. As we invest in diversification, our investments are expected to have substantial future growth opportunities. Therefore, the year one return on that invested capital will likely be lower than the historical rates of our traditional tobacco business as they may not fully capture the multi-year growth we expect.

  • However, it is important to note our M&A discipline is highly driven by internal rate of return with a conservative hurdle rate which we believe appropriately represents the long-term value creation. These assets, however, will likely be acquired at market values which we expect will exceed book values. To that end we may evaluate other return or margin metrics to benchmark our performance in place of ROIC and incorporate these metrics into management compensation in the future.

  • SWM net debt is now $169.7 million, an increase of $56 million since the end of 2013 primarily due to the execution of the Company's $50 million share repurchase authorization. Despite the decline in profits during the first quarter of 2014, net debt to adjusted EBITDA from continuing operations at the end of the first quarter remain relatively low at [0.8]. We have ample liquidity to fund our internal needs, dividends and potential future acquisitions and we remain committed to the capital allocation strategy communicated early in 2013.

  • During the first quarter of 2014, we completed the buy back program purchasing approximately 1.1 million shares for $50 million. All told, we repurchased more than 3% of the outstanding common stock. The 2014 EPS impact of the total buy back activity will be approximately $0.11. This benefit is before the estimated impact of incremental interest expense to fund the purchases of approximately $0.2 to $0.3 per share.

  • As we have communicated over time, we do share repurchases as opportunistic activities to return capital to shareholders above our stated dividend and believe recent share prices presented such an opportunity. We will clearly be on track to deliver well more than one-third of free cash flow to our shareholders this year.

  • Capital spending was $8.1 million in the first quarter of 2014, up from $5.6 million in the first quarter of 2013 in part due to the addition of DelStar as well as capital improvement projects. We expect 2014 CapEx to be approximately $30 million.

  • In 2014, our current per share dividend would require nearly $45 million. As we look to the remainder of 2014, it is possible that we may make further acquisitions infiltration 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 recently contributed our final capital infusions into our Chinese RTL joint venture of which $3.3 million was made during the first quarter and another $5.5 million was made in April.

  • Our first quarter 2014 operating cash flow was $18.6 million versus the year-ago period of $40 million. In addition to lower earnings, much of the decrease was a function of sales timing on receivables including the addition of DelStar which typically experiences higher sequential first quarter revenue growth as well as timing of foreign tax payments. These two working capital items totalled roughly $17 million of less cash flow versus the first quarter of 2013. Overall, we expect working capital to normalize throughout 2014.

  • I will now turn the call back to Frederic for his closing comments.

  • Frederic Villoutreix - CEO

  • Thank you, Jeff. In closing, I would like to re emphasize that while tobacco represents challenges in term of smoking attrition rates, we remain poised to continue our strong performance in the key profits of attractive profit potential. As discussed, LIP adoption remains a strong growth platform and the coming regulations in South Korea represent another important milestone in the global growth of this technology.

  • Secondly, China remains a very attractive opportunity and the largest tobacco marketplace in the world and the launch of our RTL joint venture there further solidifies SWM as a leading partner to the Chinese tobacco industry and supporting its long- term trend toward premium cigarettes for which we have supplied premium papers and now RTL.

  • Over the long-term, we believe we have established a truly transformative growth platform with DelStar and expect strong growth margin expansion and potential further acquisitions to develop our filtration segments into a much more significant contributor to SWM. Underscoring all of this commercial developments is the management team with financial discipline ability to drive down costs for operational excellence and to focus on cash flow. To that end, our legal entity and global asset realignment activities will be delivering lower effective tax rates through the remainder of 2014 and beyond. All of these efforts support a project long-term outlook for SWM and we owe our recent stock buyback activities demonstrate our belief in the long-term value of the Company. That concludes our remarks. Stephanie, please open the line for questions.

  • Operator

  • (Operator Instructions). Alex Ovshey, Goldman Sachs.

  • Alex Ovshey - Analyst

  • Thank you, good morning, guys. (multiple speakers)

  • First in South Korea can you just talk about what your current commercial position is in the country? What is your market share on none LIP cigarette papers? Can you discuss that?

  • Frederic Villoutreix - CEO

  • We happen to provide specific information for comparative reasons but I think we have a good presence in Korea and a good presence in Korea for decades and I would just point to our global market share there is particularly available as a reference.

  • Alex Ovshey - Analyst

  • Got it, Frederic. And then the $0.20 benefit that you talked about from South Korea moving to LIP, would that be based on your current position there or would that be assuming that you would be able to grow your share? Can you talk to that?

  • Frederic Villoutreix - CEO

  • Yes. Certainly our ambition is to grow our share, but as you will understand being ahead of any discussion with customer negotiations on price and share, you know, we -- the estimate we are providing is a cautious one.

  • Alex Ovshey - Analyst

  • Makes sense, Frederic. Okay. And then in Russia is there a date that the vote is set this month? Are you aware --

  • Frederic Villoutreix - CEO

  • Yes. There is a date in May. I don't have it off my (inaudible) -- maybe it's the 25th. Yes. It's the last week of May.

  • Alex Ovshey - Analyst

  • Okay.

  • Frederic Villoutreix - CEO

  • And obviously difficult to get information this stage whether the parliament will gather and vote on that resolution concerning the political environment.

  • Alex Ovshey - Analyst

  • Sure. Sure. And then just shifting to RTL so the 26% volume decline year-over-year, is there a way to parse that out in terms of how much that is driven by attrition, how much of that to you think is destock, and how much of that is customers looking at altering the blend?

  • Steve Dunmead - EVP, COO

  • Yes, Alex. This is Steve. I'm not sure we're going to be able to break it down to that level but certainly if you look at it from a magnitude standpoint that inventory de-stocking due to the fact that people were hitting their commitments in 2013 despite the much higher attrition rates than I think they had expected is probably the top issue.

  • There's certainly the ongoing issue of smoking attrition that, you know, mostly in Europe of somewhere between 4% and 6% on an ongoing basis that's a long-term impact. And then there's some discussion about reformulations that if it happens it will be a long-term trend, but it's unclear at this stage. So those would be the three key issues.

  • Alex Ovshey - Analyst

  • Got you. That's helpful color, Steve. And then you talked about closing a line on RTL line. So is that going to impact your stated capacity in RTL? I believe in the past we've talked about 80,000-ton capacity number. Does that change?

  • Steve Dunmead - EVP, COO

  • This is a temporary measure so at this stage we haven't completely -- it's in a mothball state and the rate to turn it back on if need be.

  • Alex Ovshey - Analyst

  • Got it. Okay so it's temporary at this point. And then shifting to DelStar, you know, a couple of questions there. Just on the revenue profile, you know, given the nice win on the automotive side and some of the cross-border, you know, potential sales that you guys are talking about as well as cross product sales I mean can you help us with how we should be thinking about the relevant revenue profile for the business once we incorporate those factors?

  • Frederic Villoutreix - CEO

  • Yes, Alex. I think what we stated last quarter is that we see this business continuing to grow at a 8% to 10% rate, you know, annual rate, although the need to long-term and some of the moves that we talked about that you just outlined are there to support that growth. I think it's too early at this stage to revise our board, you know, the statement we made about the gross potential of the DelStar business but obviously the more we progress on some of those fronts, you know the stronger business model gets.

  • Alex Ovshey - Analyst

  • Right. Right. That makes sense, great. Thanks very much, guys. (multiple speakers)

  • Operator

  • (Operator Instructions). [Jan Shicom] Sidoti & Company.

  • Jan Shicom - Analyst

  • Hi. Good morning, guys. Can you hear me?

  • Frederic Villoutreix - CEO

  • Hey. Good morning. How are you?

  • Jan Shicom - Analyst

  • Great. I'm good. Thanks. Thanks for taking the question. Just on the DelStar congrats on the 10-year contract. Do you know if this auto business run higher margin versus the rest of the business or is it kind of like in parity with the filtration side? If you could discuss that at all?

  • Steve Dunmead - EVP, COO

  • I think if you look at the -- across as we said it's multi SKUs within that product line and if you look across it, it may be a little bit higher than average.

  • Jan Shicom - Analyst

  • Okay.

  • Steve Dunmead - EVP, COO

  • But from a modeling standpoint I'd call it the same.

  • Jan Shicom - Analyst

  • Okay. Great. And then on the South Korea that sounds very promising. I guess my understanding is that's kind of like a $9 billion market over there and I think you talked your customers might have even 40%, 50% of the market. Is that in the ballpark?

  • Frederic Villoutreix - CEO

  • Yes. The size of the market is around 90 billion sticks, you know cigarettes.

  • Jan Shicom - Analyst

  • Yes.

  • Frederic Villoutreix - CEO

  • Which you know as we site in the addressed -- prepared remarks is that it's kind of a 10% growth -- unfortunately 10% growth of the LIP current market so just the size opportunity and again we're not going to give any specifics on market share, but if we refer to our market share worldwide ex China being, you know, just short of 40% conventional cigarette paper gives you a sense where to start.

  • Jan Shicom - Analyst

  • Okay. Great. And then I think you said that DelStar receivable in the first quarter is the highest balance quarter on a seasonal -- I mean is that going to continue kind of into perpetuity? Is that kind of we can think about the business that way?

  • Jeff Cook - EVP, CFO

  • Yes. What I was saying the receivables their first quarter revenues is like it's generally stronger than the fourth quarter in terms of filling orders and shipping so that's why we saw and increase the in the receivables there.

  • Jan Shicom - Analyst

  • Okay.

  • Jeff Cook - EVP, CFO

  • Going forward I think it will be a lot more level now because we just came out of a quarter with lower revenue. You know, and that we saw some of that in other parts of the business as well, which is why we use cash in first quarter but nothing outside the ordinary. It's just that quarter to quarter timing issue.

  • Jan Shicom - Analyst

  • Okay. So a bit more muted going forward thinking that (multiple speakers) --

  • Jeff Cook - EVP, CFO

  • Yes.

  • Jan Shicom - Analyst

  • Okay great. And then you mentioned more potential M&A. How would you be thinking about that just from cash but would it be using cash on the balance sheet or maybe kind of taking leverage up a little bit more?

  • Jeff Cook - EVP, CFO

  • Yes. I mean it's obviously depends the magnitude of it and the location of it, but as to how we might finance it, but we have good options in either place depend upon what our particular deal calls for.

  • Jan Shicom - Analyst

  • Okay. Great. And then lastly looks like you got a nice lift on the accelerated buy back. In the original guidance, I think you had assumed maybe -- was it -- was that before or after incremental borrowing costs what you had in your original guidance?

  • Jeff Cook - EVP, CFO

  • It was before.

  • Jan Shicom - Analyst

  • Before?

  • Jeff Cook - EVP, CFO

  • That was before. We had about $0.3 in the original one. That was before.

  • Jan Shicom - Analyst

  • Okay. That's really --

  • Jeff Cook - EVP, CFO

  • So if we look at the overall being about $0.11 and minus $0.2 or $0.3 for financing you're down around $0.8. We already had $0.3 of that in the guidance so that leaves $0.5.

  • Jan Shicom - Analyst

  • Okay. And then do you guys have think thoughts on just kind of FX or what might be embedded in guidance just kind of thinking what the euro has been doing?

  • Jeff Cook - EVP, CFO

  • Well, I mean obviously now the euro has strengthened a little bit this year so far --

  • Jan Shicom - Analyst

  • Yes.

  • Jeff Cook - EVP, CFO

  • So it's been in our favor.

  • Jan Shicom - Analyst

  • Yes.

  • Jeff Cook - EVP, CFO

  • So obviously that helps us. That's a good tail wind to move us along. But overall we're -- it's too early in the year to look at any kind of change in guidance. We'll see how that goes during the rest of the year because we're only three, four months into things right now.

  • Jan Shicom - Analyst

  • Right. Right. That makes perfect sense. Okay. I'll step back into the queue. Thank you very much. Good luck with the rest of the quarter.

  • Frederic Villoutreix - CEO

  • Thanks, Jan.

  • Jeff Cook - EVP, CFO

  • Thank you. We appreciate it.

  • Jan Shicom - Analyst

  • Okay. Bye.

  • Operator

  • (Operator Instructions). At this time already no further audio questions.

  • Frederic Villoutreix - CEO

  • Thank you, Stephanie, and thank you all for attending the call. We certainly appreciate your interest in SWM. Mark, Jeff and I will be in the offices today and if you have any further questions please give us a call. Have a nice day.

  • Operator

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