Mativ Holdings Inc (MATV) 2014 Q4 法說會逐字稿

Welcome to SWM's fourth quarter and full year 2014 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, Chief Operating Officer, and Mark Chekanow, Director of Investor Relations.

Today's call is being recorded, and will be available for replay later this afternoon.

The dial in number is (855)859-2056.

And the PIN number is 75016264.

At this time all participants are 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.

Thank you Sam.

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 2014 earnings results.

On today's call, Frederic will share some high level comments about our fourth quarter and full year performance, 2015 outlook, and strategic priorities, and he will provide details on our operations, and Jeff will take you through a detailed review of our financial results and 2015 financial guidance.

We'll then take your questions.

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 report on Form 10-Q and our Annual Report on Form 10-K.

Certain financial measures discussed during this call exclude restructuring and impairment expenses, results of discontinued operations, non-cash amortization expenses, start-up costs of a new mill, accelerated depreciations of assets in Brazil, tax valuation allowances and purchase accounting adjustments, and are therefore non-GAAP financial measures.

Reconciliation of these measures to the closest GAAP measures are included in the Appendix of this presentation.

I will now turn the call over to Frederic.

Thank you Mark, and good morning everyone.

Late yesterday we released our fourth quarter and full year earnings, and this morning we present our financial results and business updates.

I would like to begin the call by quickly reviewing our financial performance, and providing some color on the key factors that impacted our results of the quarters of 2014 and our outlook for 2015.

During 2014 we faced some significant headwinds in our tobacco businesses, certainly more than anticipated.

However, we slightly exceeded our earnings guidance of $3.40, aided in part by our share buy back.

Cash flow remains strong despite pressure on operating profits with free cash flow for 2014 finishing at $130 million.

In 2014 we returned more than 70% of free cash flow to investors through our steadily increasing dividend, and a $15 million share buy back.

Our top line reflected the continued challenges in our tobacco end markets, with fourth quarter revenues down 7.5% and full year revenues up only 2.8%, despite the acquisition of DelStar in late 2014.

However, as Jeff and Steve will cover, fourth quarter was literally impacted by currency exchange rates and the short-term labor disruption in France.

Adjusted EPS for the fourth quarter of $0.77 was down from $0.91 in the year ago period, and for the full year was $3.46.

2014 was clearly a challenging year, and while we delivered on plan, our management team was by no means pleased with the overall financial results.

Although we responded to these challenges appropriately, we were not as timely as we could have been regarding several of our restructuring actions.

These restructurings began in 2014, and we expect that the financial benefits will be more fully realized in 2015.

Top line growth was disappointing in 2014, as the revenue from our DelStar acquisition was largely offset by declines in RTL and tobacco paper volumes, and LIP pricing concessions made in 2013.

It is fair to say, however, that while we expected weak RTL volumes and lower LIP pricing, the tobacco paper volume declines were higher than expected.

Consequently, as we face lower capacity utilization we loaded machines with lower value paper products, driving the near term mix impacts.

This development was the primary reason our operating profits for the paper segments and the Company overall were below our initial expectations for the year.

Volume mix and pricing resulted in paper segment revenue decline of 8.7% in 2014, well in excess of the 1% overall volume decline.

With a meaningful balance between volume and revenue performance seen in the latter part of the year.

We also continue to take advantage of our strong balance sheet to grow SWM with investments in our RTL joint venture in China, as well as targeting investments in paper infiltration.

Despite these actions, we expect the continued challenges in the paper segment related to smoking attrition and pricing pressure to offset a portion of those results.

We plan to address these issues with additional capacity rationalizations and restructuring activities.

In defense of our LIP technology we have initiated a patent infringement action against one of our competitors.

In addition, the recent weakening of the euro has presented us with a major headwind for 2015.

Taking all of these factors into account, our guidance for 2015 adjusted EPS is $3.50, up slightly versus 2014.

We note that this guidance assumes a $0.20 negative currency impact given the recent decline in the euro.

While our outlook reflects the stabilization of earnings, we are not satisfied with the modest level of growth built into our 2015 guidance, even when excluding the currency impact.

Looking long-term, Australia remains focused on effectively managing our tobacco businesses, maximizing cash flow for investments and strategic diversification, and creating a more sustainable growth oriented enterprise over the longer run.

The formation of our filtration segment has progressed well over the past 12 months, with the integration of DelStar and subsequent leveraging of this platform with two acquisitions.

We plan to accelerate our efforts to execute on more significant acquisitions, not only in our filtration segments, but also on value-added diversification associated with our paper business.

Importantly, with net debt to adjusted EBITDA at 0.8 times, and strong cash flows of our existing businesses, we remain conservatively levered and prepared for the increased and accelerated investments in both organic growth and acquisition that will be required to execute our strategy.

With that context, I will now go into detail on several of our strategic priorities and development activity key to our long-term plans.

The much anticipated commercial launch of our reconstituted tobacco JV in China, CTS, occurred during the fourth quarter.

While we anticipate quarterly volume lumpiness during 2015, we project CTS to contribute in excess of $5 million of net income, or at least $0.16 of EPS in 2015.

The expected stabilization of the recon segments, combined with this new CTS volume leads to forecasted overall recon volume growth of more than 20% in 2015, demonstrating the positive outlook we have for SWM's global recon operations.

We had an exciting fourth quarter in our filtration segments, executing two strategic acquisitions, and progressing closer to commercialization of our European expansion.

Regarding our acquisitions, each represents an opportunity to significantly expand existing end markets for DelStar.

The assets we acquired from Smith & Nephew in the UK, not only doubled our presence in the medical arena, adding a portfolio of wound management products of films, foams, nets, and tapes, all resin based foam goods, but also accelerates DelStar's international expansion into Europe that we have referenced previously.

This business compliments our existing healthcare product line, which is focused on finger bandages.

We believe we can add value by fostering an integrated sales effort with existing DelStar resources, and gain benefits of scale and leadership in this specialty product area.

The other acquisition was for certain assets of Pronamic Industries, an early stage niche producer of air filtration media.

Pronamic's HVAC products are found in a wide range of residential air filters and high end commercial applications.

We expect this transaction to transform DelStar's small air filtration presence with the addition of new product lines and manufacturing technologies.

We are excited about the long-term growth potential of these early stage assets.

Combined, these assets we have purchased are approximately $30 million, and are expected to add more than $35 million in revenue, and between $0.08 and $0.10 of EPS this year.

Although the size of these deals was at the lower end of the range of transactions we typically target, the value of purchase price relative to EPS accretion is representative of the bolt-on opportunities we anticipated when we acquired DelStar in late 2015.

We look forward to integrating these businesses and driving continued growth in our filtration segments.

Moving to our LIP franchise and the upcoming South Korean LIP implementation, the continued lack of clarity on technical specifications with the Internet in Korea, and the recent large tax hike on cigarettes, is a reason for caution regarding expectations.

It remains unclear whether international standards or less strict biosafety performance standards will be mandated in South Korea.

The latter of which could open the door for competing products and technologies.

The tax increase which recently raised the price of cigarettes to South Korean consumers by about 18% is currently causing reduced consumption.

Based on the current trend of reduced cigarette consumption, and the uncertainty around technical LIP standards, we have factored only a nominal benefit for LIP adoption in South Korea into our guidance.

We can no longer be confident that adoption will offer a meaningful offset to the smoking attrition rates in the US and Europe in 2015.

We've been talking for several quarters about the 2014 impact of lower LIP prices, and we have incorporated firmer price compression in our 2015 outlook.

To provide some [cyclical] perspective, as a product innovator and technology leader, our LIP products have earned a premium versus the industry for several years.

As you may remember, we adjusted prices with several key customers in late 2013 to extend our agreements and maintain share, ensuring that SWM remains the leading provider of LIP papers around the world.

We note that following the pricing concessions in 2014, and those becoming effective in 2015, which are factored into our outlook, our global LIP prices are more in line with our competition now.

While we expect long-term pricing on LIP products to be competitive, we believe pressures we will feel in 2016 and beyond will be less pronounced than those seen in 2014 and expected in 2015.

Regarding LIP litigation, in order to help protect the substantial investment that we've made over the years in our LIP technology and intelligent property, and its economic value to us, in early 2015 we initiated patent infringement litigation in Germany against a competitor not under a current license agreement with us.

The expected impact of such litigation is reflected in our 2015 guidance.

We are limited in our ability to provide you with any further details on this topic at this time.

With respect to our organic diversification efforts, we have taken steps to provide the concentrated focus and leadership needed to both manage our existing non-tobacco product lines, and more importantly accelerate our in-house non-tobacco product development and commercialization.

I am convinced that we now have the vision and know how to more extensively apply our paper engineering expertise outside tobacco.

To lead this effort, we have added a new executive, with significant experience in diversified paper products, and building new channels for advanced fibers and materials.

A more structured approach should result in a more effective effort to transform more sales for position, as we look to utilize our asset base for higher value-add applications, in areas such as consumer products and industrial goods.

This area will also be a target for potential acquisitions of value-added and synergistic products.

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

Thank you, Frederic.

I'll now walk through our volume trends and operational developments beginning on slide six.

Tobacco paper volumes in the fourth quarter, including CTM, our paper joint venture in China, were essentially unchanged.

As mentioned, in reaction to weak volumes in early 2014, we took on lower margin paper business to maintain new efficiencies, however, the relative volume strength of conventional cigarette paper and commodity type non-tobacco paper during the fourth quarter, did carry a substantial negative mix impact.

For the full year of 2014, total tobacco paper volume, including CTM, was down 6.1%.

LIP was down 4.7% for the full year, with more than half of that decline due to the unfavorable comparisons to 2013 associated with the previously disclosed customer restocking after Hurricane Sandy.

The overall reduction in volume was due to a combination of smoking attrition, some one-time inventory corrections, and a small loss of share in certain non-LIP products.

Looking forward to 2015, we expect to see better asset utilization and mix, due to regaining some of the lost share and the benefits of our restructuring and capacity rationalization activities.

Recon segment volumes were down 35% in the fourth quarter, due in part to a strike at our RTL mill in France.

The strike was due to a labor dispute over the terms and conditions of plant headcount reductions.

It lasted four weeks and ended in mid-December.

We estimate that absent the interruption, the 2014 year-over-year decline in recon volume would have been in the mid-20% range, consistent with previous expectations.

2014 was a very challenging year for RTL, affected by an industry-wide inventory overhang of recon product, as well as the impact of blend reformulations by certain customers.

However, we expect stabilization in 2015, with segment volumes expected to grow modestly due in part to some orders delayed from the fourth quarter of 2014 as a result of the business interruption.

While restructuring in this segment will generate cost savings, we expect part of those benefits will be offset by a decline in wrapper and binder, a niche product in used in the manufacture of small cigars, as new tax regulations in Europe will negatively impact their usage.

As mentioned, the ramp-up of CTS, our recon joint venture in China is expected to drive greater than 20% overall volume growth for SWM.

In addition to the restructuring charges and headcount reductions in our recon segment in 2014, we continue to take actions across the Company to reduce costs, increase capacity rationalization, and headcount reductions in Brazil, as well as in corporate overhead.

The total cost reduction actions taken in 2014 should result in an estimated annual impact of $8 million, with more than half of that expected to be felt in 2015.

As part of these actions, we have streamlined the management structure of our tobacco businesses and generated savings across sales, marketing, R&D, and general management.

While these were difficult decisions, we feel our operations, our customers, and our shareholders will be better served.

Moving to DelStar, which comprises our filtration segment on slide seven, DelStar finished 2014 largely as expected, delivering double-digit top line growth for the year and meeting profit expectations.

2014 was a strong year for filtration growth, as more water desalinization capacity is coming online around the world.

We are also seeing momentum in some of DelStar's industrial product lines, for example, demand in netting used in wind turbine blade production is accelerating in multiple geographies.

Fourth quarter highlights include the two acquisitions discussed earlier, and progress toward the commercial launch of DelStar Poland.

Once products are qualified and approved by customers, we plan to focus on aggressively growing the European business, while delivering transportation and duty savings on the products that are currently shipped to Europe from the US and China.

This is a significant organic expansion, which is expected to contribute to another record year for DelStar in 2015.

The DelStar team will be focused on integrating the two bolt-on acquisitions, which when combined with the base business, should make our filtration segment an operation in excess of $170 million, up from approximately $115 million when we bought DelStar a little more than a year ago.

We also expect to see potential for margin improvement at DelStar in 2015 and beyond, as we enhance our Lean Six Sigma activities, and leverage the rapid top-line growth.

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

Thank you Steve.

Fourth quarter net sales decreased 7.5% from the year ago period, while currency movements had been favorable in previous quarters in 2014, the recent sharp decline in the euro created a headwind in the fourth quarter.

On a constant currency basis, fourth quarter revenues were down 3.3%.

Absent the currency and the business interruption impacts mentioned by Steve, sales would have been essentially flat versus last year.

DelStar contributed $30 million of net sales in the fourth quarter.

For the full year 2014, net sales were up 2.8%, with DelStar delivering $127.4 million of revenue.

Fourth quarter paper segment revenue, which includes non-tobacco paper, but excludes sales from our Chinese JV, was down 14.3%.

The negative mix shift discussed earlier in the call, lower LIP pricing, and a weaker euro were the key drivers.

For the full year paper segment net sales were down 8.7%.

The recon segment fourth quarter net sales decline of 36% was in line with the volume performance.

For the full year recon segment net sales were down 24.2%, as mix and price both had positive impacts.

The DelStar business was acquired late in the fourth quarter of 2013 with year ago results including only a two-week subperiod.

For comparison purposes, DelStar revenue grew approximately 10% year-over-year.

Revenue contributions from the two acquisitions executed in the closing days of 2014 were immaterial to the segment results.

As you can see on slide 10, adjusted operating profit was down $13.1 million versus the year ago quarter.

Fourth quarter results suffered from mix, volumes, and pricing, combined with the associated impact of reduced fixed cost absorption.

In addition, we saw the remnants of cost inefficiencies associated with an aligned rebuild in France that is now complete.

All told, fourth quarter operating profits were weak on several fronts.

Non-manufacturing cost reduction efforts executed during 2014 provided a slight offset to these challenges, and are expected to become more evident in 2015.

We should also see the positive impact in 2015 of several restructuring actions taken at the mills in 2014.

The weaker euro affected both paper and recon segments.

Paper segment adjusted operating profit during the quarter was down approximately 24% versus the same period in 2013.

The paper segment's adjusted operating profit margin of 15.8% was 200 basis points below the prior year quarter.

Product mix issues were more pronounced in the fourth quarter of 2014, compounding the pricing impact we had been feeling throughout the year.

For the year the $25 million decline in segment adjusted operating profit could be attributed roughly one-third to the LIP pricing, and two-thirds to volume and mix, as well as start-up issues associated with the paper line rebuild in France.

For the recon segment, adjusted operating profit in the fourth quarter of 2014 was down 38%, with adjusted operating profit margin of 34.5%, finishing 100 basis points below last year's fourth quarter results.

Segment results for the year were below our initial expectation.

But when adjusted for the impact of the fourth quarter strike, were consistent with the revised segment outlook we shared previously.

The filtration segment reported adjusted operating profit and margin of $3.4 million and 11.2% respectively for the fourth quarter, and $17 million and 13.3% for the full year, in line with our expectations.

Unallocated corporate expenses increased by $2.6 million in the quarter, and $4.6 million for the year, largely as a result of the global asset realignment project, and transaction expenses associated with the two acquisitions in December 2014.

As indicated earlier in this call, we have implemented reductions in our non-manufacturing cost primarily in late 2014 and early 2015.

Our consolidated adjusted operating profit margin was 14.1% in the fourth quarter of 2014, down from 19.7% in the fourth quarter of 2013, and was 16% for the full year 2014, down from 21.6% in 2013.

Our fourth quarter 2014 adjusted diluted earnings per share from continuing operations was $0.77, with the full year 2014 finishing at $3.46.

2014 was clearly a challenging year from many standpoints in our tobacco businesses.

Nevertheless, we exceeded our initial guidance despite a handful of unexpected items, particularly the labor strike at our French RTL mill, transaction expenses associated with two acquisitions, and the recent euro decline, all of which impacted the fourth quarter.

Key offsets were the improved tax rate achieved as a result of our global asset realignment, as well as the stock buyback executed earlier in the year.

For the fourth quarter our tax rate was 10.3%, and for the full year it was 18.9%.

The low tax rate in the fourth quarter was also a result of generating a sizable portion of our profits in lower tax jurisdictions.

We believe our tax rate for the full year 2015 will be in the low-20% range.

As a reminder, purchase price accounting adjustments for the DelStar acquisition, start-up losses on the CTS joint venture, and restructuring costs in certain other expenses are excluded from our adjusted diluted EPS.

We note that our CTS joint venture generated a slight profit in the fourth quarter, but for consistency purposes, that EPS contribution was excluded from our 2014 fourth quarter and full year adjusted EPS, but will be included beginning in 2015.

Switching now to our guidance, we are not satisfied with our financial outlook for 2015 and the growth it reflects.

However, it is important to note that we are achieving earnings improvements as a result of the many actions we have taken in the past year, including the cost reduction efforts, CTS recon, JV ramp-up, recon segment stabilization, and two filtration segment acquisitions.

Unfortunately, these are offset by the significant weakening of the euro, as well as ongoing challenges on the tobacco end market, including smoking attrition and pricing pressure.

In addition, as Frederic mentioned, we have only assumed a nominal benefit from LIP in South Korea in our guidance.

We note that our guidance would be approximately $0.20 higher had it not been for the rapid decline of the euro in recent months, for which we have assumed no recovery in 2015.

We believe that our 2014 operating cash flow of $165 million and free cash flow of $130 million, demonstrate the underlying stability of our business.

While we are clearly conscious of EPS, our management team is also highly focused on cash flow, as that ultimately drives our ability to pay dividends, fund growth and diversification initiatives, buy back stock, and make strategic acquisitions.

SWM net debt at the end of 2014 was $150 million, an increase of approximately $37 million since the end of 2013.

As cash generated from operations was more than offset by execution of the Company's $50 million share repurchase program in the first quarter of 2014, two acquisitions, and the final equity infusion to CTS.

Net debt to adjusted EBITDA from continuing operations at the end of the fourth quarter remained relatively low, and we believe that our balance sheet strength and cash flow remain a significant strategic benefit to SWM, as we evaluate organic diversification investments and M&A.

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

Thank you Jeff.

Looking back over the past four quarters, we have been faced with multiple ongoing operating hurdles and our financial results have reflected those realities.

I want to reiterate that despite these challenges, the entire SWM organization has contributed to the initiatives that in aggregate are expected to result in higher earnings in 2015, while excluding the impact of the weaker euro.

Furthermore, while our 2014 acquisitions were strategic, they should offer high returns and serve to rapidly expand our filtration segments, they may not be overly impactful to SWM as a while in the short run, and our sights will be set on larger targets in the future.

We are accelerating our efforts in this area during 2015, and we are focused on more substantive additions, and turn to build the integration capabilities that we demonstrated in 2014.

As Jeff underscored, we remain in a comfortable position to make strategic acquisitions that we believe will transform SWM from a narrowly focused paper manufacturer to a leader in highly engineered materials, serving a diverse set of end markets, and complement those activities with organic initiatives as well.

We look forward to sharing progress on these fronts as appropriate, as well as sharing new developments as they materialize.

We appreciate your continued support and interest, and we look forward to delivering on our 2015 plan and executing our longer term transformational strategy.

That concludes our remarks.

Sam, please open the line for questions.

(Operator Instructions).

Our first question comes from Dan [Gicome] of Sidoti & Company.

Your line is now open.

Good morning, thank you for taking the question.

How are you?

Fine.

Good good.

Just a couple quick ones.

I guess on the South Korea LIP, was there any way to have maybe foreseen this a little bit better?

Any nuance there would be helpful.

Not really.

Let me explain why.

I think the expectation was for the governments to clarify the standards of compliance in the late fourth quarter, early 2015, and this has not been made public yet.

So that's probably the largest unknown at this stage.

Okay.

I know you've been talking about it for the last few quarters.

It looks like the incremental earnings contribution is going to be nominal is what you're saying?

That's what we have built in our guidance.

Okay.

And then on the LIP pattern struggle, or what you want to call it, keeping in mind you have to keep the details kind of limited, any nuance there would be helpful?

Is this similar to what happened in 2011, are you going to be seeking some sort of can royalty stream, or anything you could talk about there would really help us?

It is somewhat similar to 2011, except now we are looking at Europe as opposed to the US markets.

I think right now we cannot provide a lot more details as the infringement action is not filed publicly at this stage.

But I think the way I look at it is obviously European markets adopted LIP in 2011.

It takes time to build pace, but as importantly, now, after several years of potential impact can be assessed, so that's an important element.

Got you.

And so it's not, I don't know if you could speak to this.

It's not the same competitor that you worked with in 2011 and had a settlement with.

It's a new player, or it's another party?

Yes, it is a different party in a sense, we have a global license agreement with the company that you referred to, and obviously I think right now what we have said over the past three or four years, is that both us and have Del [fort] have maintained share, and so it's not a question of us being necessarily on the defensive, it's really looking more at GT's to leverage or take the property in a better way.

The only thing I would add from a cost standpoint, I don't think it's going to be nearly what the Company incurred several years ago, and the costs we do anticipate are factored into our guidance.

Okay.

That was my next question.

It's already in guidance, and it's going to be modest.

I guess and then it looks like you take the midpoint of your two ranges there, scenario A, scenario B, it looks like even organically you're going to be growing earnings again, but you also mentioned you're really not happy with the high end, so maybe taking that $3.70 and it sounds like you have several levers to pull here, just wondering, have you guys internally, with the stock sort of flat here and the 10% earnings yield, and you can borrow at 2%, have you started considering maybe stock repurchases or is that still off the table?

We haven't.

There's no authorization there at this point right now.

We always take a balanced look at how much we return to shareholders versus keeping dry powder for internal growth and potential acquisitions, we've returned a lot over the last several years, just in 2014 alone we returned over 70% of free cash flow.

So at this point nothing on the table.

Okay.

Great.

I really appreciate it.

Thank you.

Thank you.

Thank you.

Our next question comes from Alex Ovshey of Goldman Sachs.

Your line is now open.

Good morning guys.

Thanks for all of the excellent detail here.

A couple of questions for you.

On the RTL segment, would you be able to talk about how volumes have trended so far in 2015, and where virgin tobacco prices are, and whether you see any impact from where prices for virgin tobacco are relative to RTL in 2015?

Alex, this is Steve.

From how things are stacking up so far, and the way that the contract negotiations worked out, I think we're in line with what we're giving from a guidance standpoint, so we're expecting a modest increase from the base business, and part of that is due to some shifting due to the strike in the fourth quarter.

From a virgin tobacco standpoint, the prices are still low, but any impact from that has been factored into our guidance.

Thanks, Steve.

And then would you be able to update us on how you actually see the smoking attrition rates in the US and Europe?

So from your point of view, what is the latest trend right now that you're seeing in Europe and US?

It has been improving in 2014, and the recent communications from key customers in both the US and Europe will trend towards continued improvement, and going back to normalized attrition rate, and possibly even slightly lower attrition rates than historical past.

So that's, I would say if that materialized, probably it would be a little bit of up side for us.

Okay.

Got it, Frederic.

And then on the restructuring side, could clearly a lot of thought and effort is being put behind this.

Could you maybe help us size what the benefit will be for the Company in 2015?

It seems like it will potentially move into 2016 as well, maybe some range of potential outcomes in terms of the benefit there?

Alex, if you'd take the restructuring actions that we took in 2014 on a full year basis, they should be in excess of $8 million, and we would expect incremental improvement, 2014 over 2015, due to the full year wrap around effect and some other things that are anticipated, more than half of that showing up in 2015.

Okay.

Got it Steve.

On the royalty side, maybe we missed it but I didn't see a number in the press release?

Can you talk about what the royalty number was for the Company, and any thoughts around how we should be thinking about that number in 2015?

From a royalty standpoint, what we saw in 2014 was fairly similar to what we saw in 2013.

Going forward, it's pretty much driven by attrition in the market.

So obviously with attrition in the more mature markets going down, that will be impacted as well.

Okay.

Got it.

Just sort of a decline consistent with the attrition, okay.

On DelStar, you pointed to looking at deals that are larger than the two that you closed.

Frederic, would you be able to put some numbers around what sort of a sweet spot in terms of revenue that you're hopeful to be able to acquire in the DelStar business?

Sure.

First of all, I think just to be clear, I mean, the two acquisitions we made in December are very important to our strategic plan to build a large filtration platform but as we noted, on the smaller end, I think it's not a question of size, it is not the number one criteria.

It's really the fit.

The potential for growth.

As we obviously invested a lot of time, looking at opportunities within the filtration, the medical area, and as well as, some specialty paper and the movement to raise some direct synergies from our legacy assets, I think that there are some high quality prospects of more meaningful size.

Timing is key.

Discipline and duration is also key, and none of that will be jeopardized, but we want to continue to focus on those larger targets, knowing that our leverage, as we mentioned, is also very low at the moment.

Makes sense.

Just a last question, can you talk about what your EPS guidance implies for the free cash flow number in 2015 and/or just if there's changes in terms of the key moving items in the cash flow line versus 2014?

I think the free cash flow, we don't provide specific guidance on it, but I think it will be in line with the EPS number, given all the pluses and minuses that are in there, and there are no unusual outlays of anything that we're expecting in 2015.

So I think you can see it pretty much in line with the EPS year-over-year.

Excellent.

Thank you for all the color.

Best of luck in 2015.

Thanks, appreciation the questions.

Thank you.

(Operator Instructions).

Our next question is a follow-up from Dan of Sidoti & Company.

Your line is now open.

All right.

Thanks, just a quick follow-up.

Housekeeping.

On the China RTL, I think I may have missed it.

What is the revenue, the incremental revenue for 2015 off that again?

We account for the joint ventures on an equity income basis, so there wouldn't be any impact on our revenue, so it will be down kind of just below EBIT where we show income and equity affiliates.

I'm trying to back into how you get to the, you said $0.16.

What's the incremental tonnage?

The incremental tonnage, we're looking for at least around 15,000 or so metric tons this year.

Total capacity on that line would be upwards of about 30,000.

30,000 is the stretch goal for the out year?

Yes, that's the capacity.

How we say it, our goal is within two years to ramp up to full capacity.

So we started in late fourth quarter of 2014, so the plan remains to be at near full capacity, so 30,000 tons in the latter part of the 2016.

So you can imagine a somewhat linear progression there, maybe a little bit more, we're progressing faster in 2015, building the capacity then in 2016.

Got you.

Maybe I should brush up on my--

We'll provide an earnings improvement,- we expect to provide earnings improvement in 2016 over 2015.

That's what I've been assuming as well.

On the LIP, and I don't want to get myself in hot water here, but what gives you the confidence that the LIP pricing historically has been so robust, that it's going to come back?

Is there anything there you could give us?

Is it customer discussions, or sort of just reversion to the mean?

For years, because we were the technology and innovation leader, we demanded a premium in the marketplace, and coming in 2013, or at the end of 2013, moving into 2014 and 2014 moving into 2015, our prices have come down more in line with the market.

We're still getting a slight premium but we've got to earn that from a service and a quality, and hopefully further innovation standpoint.

But we pretty much know where the market is, and we're coming in much more in line with the market, so we would expect that the pressure moving forward will be somewhat less.

Okay.

Got you.

You really appreciate the color today.

Thank you and good luck with the rest of the quarter.

Take care, Dan.

Thank you.

(Operator Instructions).

We'll pause one moment to see if there are any further questions.

I'm showing no further questions.

I'd like to turn the call back to management for any closing comments.

Thank you, Sam.

And thank you all for attending the call.

We certainly appreciate your interest in SWM.

Mark, Jeff and I will be in our offices today, and if you have any follow-up questions, please give us a call.

Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program, and you may all disconnect.

Everyone have a wonderful day.