Mativ Holdings Inc (MATV) 2016 Q4 法說會逐字稿

Welcome to the SWM Fourth Quarter 2016 Earnings Conference Call.

Hosting the call today from SWM is Frederic Villoutreix, Chairman and Chief Executive Officer.

He is joined by Allison Aden, Chief Financial Officer, and Mark Chekanow, Director of Investor Relations.

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

At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation (Operator Instructions).

It is now my pleasure to turn the floor over to Mr. Chekanow.

Sir, you may begin.

Thank you, Glenda.

Good morning.

I am Mark Chekanow, Director of Investor Relations at SWM.

Thank you for joining us to discuss SWM's fourth quarter and year end 2016 earnings results.

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

Some financial measures discussed during this call are non-GAAP financial measures.

Reconciliations of these measures to the closest GAAP measures are included in the appendix of this presentation and our earnings release.

Unless stated otherwise, financial and operational metric comparisons are comparable to the prior year period and relate to continuing operations.

This presentation and the earnings release are available on the Investor Relations section of our website, www.swmintl.com.

I'll now turn the call over to Frederic.

Thank you, Mark, and good morning, everyone.

We finished 2016 on a strong note with full quarter adjusted EPS of $0.80 driving full year adjusted EPS to $3.26 above annual guidance of $3.15.

Echoing comments on recent quarters for the year, (inaudible) deliver about plan.

Excellent cost management and solid manufacturing execution, as well as very strong performance from our niche wrapper and binder reconstituted tobacco products, provided powerful upset to the expected volume declines in LIP and RTL.

Also for full year 2016, Argotec delivered an efficient target and currency translation was less impactful than we assumed.

The primarily areas of underperformance were DelStar top and bottom line and the other oil contribution of our Chinese joint venture.

Operating cash flow of $130 million was about 10% lower than 2016 and we've lowered our total CapEx of about $30 million, free cash finished at roughly $100 million.

One significant item relating to GAAP EPS but excluded from adjusted EPS was $0.39 non-cash impairment charge related to rebranding activities within AMS which we will elaborate on shortly.

Looking back on 2016, we made significant strides in our strategic transformation highlighted by the late fourth quarter announcement of the Conwed acquisition, which just closed in January.

Conwed adds scale to our AMS platform and it's an attractive standalone business with solid growth prospects and the trailing EBITDA margin of 20%.

More importantly though Conwed is expected to be a most synergistic acquisition to date as its specialty netting products and manufacturing operations are highly complementary with those of DelStar.

While the effective purchase multiple was less than 8 times EBITDA when considering the sizable cash tax benefit of the deal structure, that multiple could end at being below 6 times if we achieve targeted synergies.

With Conwed, annualized AMS segment sales are well over $400 million and Conwed's existing margin structure coupled with synergy potential yield a clear path to several AMS segment margin expansion.

AMS now participates in five key end markets, filtration, infrastructure and construction, transportation, industrial and medical.

And in several of these areas, we believe our specialty applications at industry leading positions and high long-term growth prospects.

More broadly speaking, our total non-tobacco sales including non-tobacco papers are expected to grow from $340 million or 40% of total sales in 2016 to about $500 million or approximately 50% in 2017.

We consider 50-50 threshold a significant milestone in SWM expectation efforts.

Other recent highlights and actions include the initiation of rebranding activities in the AMS segment, progress on global ERP system implementation in the AMS, derisking part of filtering rates, debt structure and other dividend increase.

Regarding the rebranding initiative as part of our vision to optimize the operations of the acquired businesses and one AMS as one seamlessly integrated segments, we made a strategic decision to rebrand and to have a corporate SWM name in 2017 and move away from the legacy corporate names of DelStar, Argotec and now Conwed.

While we will keep the vast majority of the product brand names recognized in the marketplace, we'll continue in customer service, the decision to rebrand at a high level to trigger the impairment of the acquired trade names.

These non-cash impairment affected our GAAP financial results.

However we believe it is positive move that we deliver our long term benefits.

As we transition from a legacy tobacco paper company to a more diversified manufacturer of engineering materials it is important that we shape SWM marketplace image as a producer of customized solutions with multiple fiber and resin based technologies for specialty applications across industries.

Furthermore, these actions will facilitate stronger customer relationships and cost selling opportunities as our realigned AMS sales organization, we focused on selling products from across AMS platform as oppose to selling mostly products on their respective legacy operations.

Supporting those cost selling efforts, as well as our other segment optimization plants is the ongoing roll-out of shared ERP system which we'll think values operational aspects across those things.

Consistent with our actions to manage AMS more holistically, we have also begin communicating about AMS in a new manner of beginning with first quarter results.

We will focus more on our five key end markets and application performance, as oppose to the DelStar and Argotec businesses.

The Engineered Paper segment delivered solid fourth quarter and full year despite the expected LIP and RTL volume declines.

Cigarette paper volumes including our Chinese joint venture CTM were down 9% in the fourth quarter and 2% for the year.

LIP volumes were down sharply as a year ago quarter was the initial inventory built by our RLT and LIP customers ahead of changing packaging regulations, making this an especially top comparison.

While sales orders have resumed in a more normalized level, we will face another difficult comparison in the first quarter of 2017.

Fourth quarter recon volumes including our Chinese joint venture CTS were down 20% and down 10% for the full-year.

We had communicated an expected 10% plus decline for the year thus we did somewhat outperform our forecast.

Customer reblending decisions materialized as anticipated.

However we expect the full annualized impact will continue to affect the results into the first half of 2017.

Separately, 2016 volumes from our French mill benefited on the favorable timing of certain orders into China which will likely create a difficult comparison in 2017.

Lastly during the fourth quarter and throughout the year we had better than expected performance from our niche wrapper and binder reconstituted tobacco products which finally serve the US.

cigar markets other than domestic facility.

This business was expected to decline in 2016 however we had strong sales growth in these high margins specialty products which contributed nicely to overall earnings performance.

Unfortunately it is ours to assume this sustainable and a project that also adds further pressure to the comparison for 2017.

Non-tobacco paper volumes continue to show strong growth and include profit margins partly due to some price increases.

With respect to our Chinese joint ventures, full quarter strong with an $0.08 EPS contribution.

However, weakness earlier in 2016 was not recovered and they finished the year with a $0.16 EPS contribution, little over $0.22 in 2015 and well below our expected world plants.

Results of our multinational customers continue to indicate annuals smoking attrition in Europe and the US.

remains lower relative to historical norms and market data suggest the Chinese cigarette market continue to contract from peak 2014 levels.

Regarding execution of our EP segment priorities, cost actions in the Asia operations were far liability to deliver strong EP segment results as we combated lower volumes.

While new products that leverage our paper and reconstitution technology did not contribute to financial results in 2016, we have made headway on several fronts.

In the first half of 2017 we completed $10 million investment to modify an existing data machine to produce a specialty inflation paper.

We delivered positive results in production trials and expect to begin customer qualifications in the second half of the year with commercial sales potentially beginning in 2018.

This marks the first major cost selling synergy of legacy SWM and AMS.

Leveraging products, leveraging our EP segment paper technology and capacity with AMS commercial relationships and filtration.

Separately while too early to assume significant sales in 2017, customer trails are on the way with reconstitution technology in the cosmetics and packaging industries.

Furthermore, SWM reconstituted tobacco plays a permanent role in certain Heat-not-Burn reduced risk tobacco products.

We are working with several major cigarette manufactures on this rapidly emerging reputation and are already gearing sales to one, two partner with an expected ramp-up beginning this year.

Long term increased consumer adoption of this technology may represent a significant opportunity to recoup some of the last profits on recent RTL weaknesses.

Now switching to AMS.

For the fourth quarter net sales were up 14%, while organic sales were down 3% and essentially flat on a constant currency basis.

Similar to recent quarters, water filtration remains soft, but we saw offsetting growth in other filtration areas.

For the full year the most impactful item that drove the 2% constant currency organic sales decline was lower sales in the industrial channel much of which we exited intentionally certain products and customers carried low possibility.

Argotec delivered another solid quarter and for the full year delivered sales growth at the high end of our stated long-term expectation of 5% to 7% driven by automotive paint protection products Argotec largest and fastest growing product line.

Regarding 2016 strategic priorities, Argotec delivered on plan and was highly accretive as expected.

Integration went smoothly and we are progressing on a more holistic segment wide optimization plan.

Conwed also now fits into these plans as we further leverage our assets and capabilities to grow sales, improve manufacturing operations and ultimately drive margin higher.

With respect to volatility we had previously experienced in filtration sales related to the oil, gas and mining industries, we are encouraged by the stabilization and return to growth in this other filtration markets which include both in the energy and commodity industry, but also other areas of liquid filtration.

We will begin referring to these non-water filtration applications as processed filtration.

On the commercial synergies front, we have laid the groundwork for enhanced ability to cross-sell with a state rollout of a new ERP system and increase cost business engagement of our R&D teams and sales organizations.

Furthermore, the AMS segment reblending activities mentioned earlier are also expected to enable more cost selling.

As we look ahead to 2017, our outlook of $3.15 of adjusted EPS represents a slight decline of 3% versus 2016.

The most significant items incorporated in our 2017 outlooks are the projected accretion on the Conwed acquisition and the expected offsetting weakness in the recon business.

As described earlier based on performance of our niche wrapper and binder product line is likely to reverse and we expect that sales timing of RTL sales and our French mill into China will negatively impact year-over-year comparisons.

These two factors add to the carryover effect of customer reblending decisions that impacted us in 2016.

Although customer discussions are particularly limited to one year for our volume commitments, our best indication are currently for a return to a more normalized business conditions beyond 2017.

To the extent this business stabilize although the long-term -- although our financial results should benefit from reduced volatility as a significant portion of Engineered Papers headwinds in recent years relate to the consequences of the Belgium lease other supply.

Though less significant indeed really there also settled puts and takes the cost of business that factor into our outlook.

On the positive side, we anticipate a year of resumed AMS segment organic growth.

Within DelStar we expect growth across the business with the exception of some share loss with one customer.

We are working on technology improvements within this business, as well as other initiatives to find opportunities to replace this large volume in a possible manner.

In addition to improve organic sales growth, we anticipate higher margin on operational improvements and cost reduction actions we have taken in response to sales softness in the past year.

Another area of expected profit growth is our Chinese joint ventures.

We faced challenges last year and fell short of our goals, but we expect strong double-digit profit growth from the $0.16 of EPS contribution we delivered in 2016.

With respect to some of the headwinds factored into guidance, the operational ones stand mostly from the recon business as well as one other item in the Engineered Papers segment.

As part of our long-term contract with an LIP competitor, the royalty rate we receive will decrease in 2017 by about half.

Third, the contract, the reduced rate will remain and to our key patterns escalation in 2022.

The other negative factors were largely non-operating.

Thus we have entered into a new interest rate swap which will result in higher interest rate expenses, though it will reduce our exposure to rise in interest rates.

Second, with our fewer tax credits and due to tax flow changes in Europe, we no longer receive payable tax treatment at our LIP printing facility in Poland.

In summary, with Conwed and RTL offsetting each other and most of the other operating and financing related items balancing out, our projected decline is approximately equal to the tax driven headwinds.

Though we see it as a prudent at this early stage to be conservative with our 2017 guidance, should some of the positive trends in Engineered Paper carrying into 2017 specifically sales momentum of niche reconstituted tobacco products and the strong cost management of across our business that could be upside to this guidance.

Segment priorities remain largely unchanged from 2016.

In AMS we will be highly focused on integrating Conwed and delivering on expected synergies.

These actions are part of the larger goal of optimizing the entire AMS segment operations to unlock the value of running the highly complementary business of DelStar, Argotec and Conwed as one units.

Within Engineered Papers we will continue to maximize cash flow by efficiently managing our capacity, selectively trading price concessions on market share and making prudent investments to monetize our paper assets and technology.

I will now turn the call over to Allison.

Thank you, Frederic.

I'll now review some financial highlights for the fourth quarter.

Net sales declined 5.3% or 6.3% on a constant currency basis.

The quarter benefited from the addition of Argotec however that was more than offset by the expected sales weakness from lower LIP and RTL volumes.

Fourth quarter EP segment net sales were down 12.5% or 14.7% on a constant currency basis.

We know that given the strong LIP volumes in the fourth quarter of 2015 this was anticipated.

Within the AMS segment net sales were up 14% in the fourth quarter however excluding the effect of the Argotec acquisitions, sales declined with 3% due to unfavorable currency movement.

The Engineered Paper segment adjusted operating margin was up 60 basis points in the fourth quarter consistent with strong recent trends in overall segment profitability as we manage our cost structure efficiently.

The AMS segment adjusted operating profit margin improved by 170 basis points and benefited from the Argotec acquisition and lower revenue cost.

Consolidated adjusted operating margin was 15.6% in the fourth quarter.

For the full year we highlight that despite higher corporate cost and the operating challenges of lower LIP and RTL volumes, we see margin expansion not only within the paper business within our consolidated results as well.

Regarding items excluded from our adjusted operating profit which typically only include restructuring charges and non-cash amortization of intangibles, we recorded trade name impairment in conjunction with the rebranding activities discussed earlier.

The pre-tax expense was approximately $20 million.

Shifting to consolidated earnings, fourth quarter 2016 GAAP EPS was $0.55 down from $0.71 in the prior year driven primarily by the operational trends already discussed and the trade name impairment.

Restructuring and impairment expenses, intangible asset amortization, and certain favorable tax items are excluded from adjusted EPS which was $0.80 down from $0.91 in the prior year.

To clarify, the tax benefits we received during the fourth quarter were excluded from adjusted EPS most had to do with the late 2016 legislative tax change in France.

In short, legislation tax that will lower our effective tax rate beginning in 2019, while there is no 2017 tax rate benefit, the expectation of lower future taxes for significant reductions in deferred tax liabilities on the balance sheet creating positive GAAP earnings.

Had it not been received and several relatively smaller items, our effective tax rate for 2016 would have been approximately 30% which is a good proxy for 2017 expectations.

Moving on from tax, the impact of currency translation was negative $0.01 to both GAAP and adjusted EPS of the fourth quarter, while fourth quarter sales and adjusted EPS were down, results exceeded our expectation and contributed to exceeding our annual guidance of $3.15 by $0.11.

Full-year GAAP EPS of $2.70 was slightly lower than the $2.76 implied by our guidance.

As the fourth quarter, trade and impairments and the one-time tax benefits were not known at a time we issued that outlook.

2016 free cash flow was just under a $100 million down to about $120 million a year ago, the key factor in this decrease was a working capital outflow of revenue versus an inflow of $13 million in 2015 resulting in a negative $24 million year-over-year impact.

A decrease in income tax payable accounted nearly be entire impact for business related working capital items such as inventories, receivables and payables were essentially net neutral.

From a leverage perspective, for the terms of our credit facility we were at two times net debt adjusted EBITDA at the end of 2016 down from 2.3 times at the beginning of the year.

However more importantly immediately following the close of Conwed transaction in January, pro forma leverage was at 3.2 times and as communicated at the time we announced the Conwed transaction we expect to return to the mid two times range by the end of 2018.

Now back to Frederic.

Thank you, Allison.

Outside of our 2016 results and 2017 outlook, I would like to address the significant progress of SWM's strategic transformation.

When we announced our intention to diversify the business and reposition the company as a more growth oriented enterprise, back in 2015 we had only about $50 million in sales outside of our tobacco operations.

With Conwed, we expect to be around $500 million this year most of which is in the advanced materials and structures growth platform.

We have executed a plan.

We would characterize as patience and discipline and while our passed, has had obstacles along the way, we are quite pleased with the acquisitions we made and the opportunities ahead.

AMS is a portfolio of highly complementary businesses.

It has attractive sales flow prospects and the potential for adjusted operating margins to expand another several hundred basis points into the high teens.

The key element of realizing this opportunity is exhibiting on the Conwed integration and synergy plans this year.

As we stated when we announced the acquisition, Conwed has been an acquisition target since late 2013 when we acquired DelStar given the two businesses highly synergistic fit.

We believe this acquisition represents exceptional value to our shareholders.

In the context of SWM order, why we are disappointed that our 2017 guidance reflects a slight decrease in earnings, we are not losing sight of our estimated goals to reposition the company for structural long-term profit growth.

We define this as AMS having enough scale and growth to offset the normal attrition challenges of the tobacco business and believe we are nearing that tipping point.

Through this transition, cash flow has remained relatively strong, balance sheet leverage remains comfortable despite several sizable acquisitions.

We have steadily increased our dividends and we have made many positive organizational changes to better equip SWM to deliver on that goal of long term profit growth.

We will work diligently to execute our plans this year and aim to deliver above guidance as we did in 2016 but more importantly as we look forward to setting the stage for input long term results.

We appreciate your continued interest and support.

That concludes our remarks.

Glenda, please open the line for questions.

(Operator Instructions) And our first question comes from the line of Julie Li from Drexel Hamilton.

Your line is now open.

Good morning.

Thank you so much for taking my questions.

My first question is about RTL's sales decline.

Can you give us a little bit more color in 2017 RTL?

Do you see the 20% sales reduction in fourth quarter would continue, let's say maybe first half of 2017 there will be similar level of decline and then over the whole year 2017 there will be low double digit decline in RTL or do you see we are already at the worst time and soon RTL would properly maintain the same sales levels in fourth quarter?

First of all I think fourth quarter's are usually week quarters.

That is a typical time of a year where customers adjust their inventories and also shutdown -- lower their production.

So I don't believe we can take last quarter as an indication of how we are going to start 2017.

Just let me recap maybe some of the key drivers.

The continuation in the first half of 2017 of the consequence volume drop due to reblending decisions that were made over a year ago resulting from the other supply of the Belgium tobacco leaf.

On the other hand, we have add the strong activity on wrapper and binder for machine-made small cigars and there is a solvency has to be outlook going forward, but we finished the year 2016 with total momentum and that will not disappear immediately.

So net-net our weak - recons of cigarette due to the reblending decision, but 2017 as to when we will see a weakening of wrapper and binder sales during the course of 2017 kind of neutralize some of the effects that you described in your question.

I think what we can say, is that we are projecting an overall year of decline and will be qualified in 10% plus.

The two upsides are the wrapper and binder situation I just described but also the ramp of Heat-not-Burn RLT grade if you want and there's been a lot of discussions by our customers about the momentum we are seeing in their own sales of the numbers, reduce risk products and this is going to be a tailwind to our results this year but I think apparently in the years to come and that really is what fuel some of the projections that we have made in our prepared remarks as we look at 2018 and beyond where we see RTL stabilize both because the other supply of leaf is going to be progressively corrected but also because of the potential for recovery in both volume and profit coming from the ramp up of this big number and reduce risk tobacco products.

And continue on that question, can you give us a sense as to how difficult for RTL revenue to come back if the virgin leaf prices going up and do you see that could happen in maybe next two years time frame?

All the players the tobacco dealers and ourselves I think we intend to be somewhat cautious because in order this correction of the market has been expected for already in excess of two years, there are some signs that due to linear effect in South America, the size of the crop in 2016, 2017 coming out of Brazil is much smaller than normal, which will help with the tightening other markets but I think it's difficult at this stage it's too early to really say there is going to be a change in the dynamics demand supply in the leaf market.

What is clear to me though is that the hit number on demand is going to be a long term prospect for us, which this coupled with no view -- and discussion with customers of any major replanting decision that could affect future years would lead to more stable and hopefully improving revenue and the profit from RTL in years to come.

And obviously as you know just stabilizing this piece of our business we've tremendous policy impact to the overall performance compared to dealers.

So from the news that Philip Morris has been investing large amounts of money in the new Heat-not-Burn tobacco systems the devices, so do you have any sales in that product right now for RTL?

For confidential reason we can not specify to whom we sell our RTL product Heat-not-Burn applications, but where we materialized some revenue in 2016, but most importantly we are seeing some strong ramp in demand in 2017 and that's built in the guidance.

I think just building on your question, I think it's important to mention that customer like Philip Morris see a tremendous potential in the Heat-not-Burn category, what's already just testing in the few markets more than 2% of their worldwide sales in last quarter and they see a day where possibly they can be selling more number than we do sales conventional cigarettes.

And the Heat-not-Burn as a reminder is sticks that putting those devices are pure concentrated tobacco materials and RTL our RTL is a very good vehicle for all that.

So 100% of this stick actually be made of RTL type products as oppose to conventional cigarette RTL is only a small amount of whole tobacco blend.

So big potential.

It's too early to really have strong forecast because we obviously following the successes of our customers that something to we'll keep talking quarter-after-quarter.

And the next question is about your IP business, we saw 9% decline in fourth quarter from cigarette paper sales.

And you have also mentioned the royalty revenue due to deteriorating competitor issue made it the revenue decrease about half and there is also returning back to normalize level from elevated supply condition in early 2015 first quarter of 2015.

So among these two reasons what do you think is the key reason causes decline, is more of a deteriorating compared to?

Yes, I think first of all our LIP franchise did very strongly for the last two years.

The decline is all you mentioning is really due to a very tough comparison with this inventory build in Europe that's started in the fourth quarter of 2015.

What we have said in our prepared remarks is that, the top comparison will continue for another quarter, first quarter of 2017 comparing to which will be normalized, there is no build, there is no build but it is compared to third quarter of 2016 where our inventory build was into full motion.

That being said, we are continue to gain market share on the LIP halt and our cost performance is very good and it's a big part of the fact that in spite of negative mix in 2016 for both lower volume of LIP due to the build and lower volume of RTL which we just discussed, copy margin expanded over a 200 basis points for Engineered Paper.

So a favorable mix and yet our profit margins are expanding 200 basis point plus.

The really one new challenge and I would say the only challenge in LIP in 2017 is this reset of the LIP of royalty.

So for everyone on the call this loyalty agreement based on 2011 with our largest competitor worldwide royalty agreement on LIP paper and this is an agreement that will run through the course -- the life of the patterns which is 2022.

Follow that agreement was that as a way through that mix of 10 year royalty agreement it would be lowering of royalty rates which takes place in 2017 and which reduced by half of the income with the life on this agreement.

But then that new royalty rate will stay flat through 2022.

Now because of us gaining incremental shares in 2017 to LIP, I think my sense is we can absorb the lower royalty rates due to increase market share by rate gained on the LIP side.

So LIP is strong, we just add this knowledge coming from the build unbuild and that will be gone by the end of this coming quarter but on the other hand we continue to gain market share and do quite well in terms of delivering strong cash flows from LIP sales.

And thanks for the color.

And my final question is about AMS business is among good service protection business and could you tell us about filtration business and the new Conwed business which piece of business you think have the strongest growth rate.

Thanks very much.

So if I look back at 2016 and clearly the Argotec franchise did extremely well.

It was on the high end of our land of 5% to 7% growth and our expectation is that this momentum continues in 2017 as with penetration of this firm on the new card -- still remains low in the US and we have the entire rest of the world to compare in large initiatives to pull that in these areas in 2017.

On the filtration side obviously we had a challenging period with a oil and gas, balance cycles that we have recovered on that and as we said positive filtration delivered growth in 2016 and expect that to continue to improve in 2017.

We have sales mix in the water filtration segments and right now and its driven primarily by China and in China its really slowing down new infrastructure projects due to the uncertain economy and other factors but this is on the temporary and certainly if we know that water filtration will clean solid growth of a midterm just to keep us with the population and the need to increase the amount of drinkable water around the world, so no major concern there

Thank you so much.

I would jump back in the queue.

Thanks, Julie.

(Operator Instructions) And our next question comes from the line of Dan Jacome from Sidoti & Company.

Your line is now open.

Good morning, how are you?

Good, appreciate the time as always.

I just wanted to stay on the RTL subject a little bit, it looks like the market is still sloppy but then longer-term you have these potential tailwinds from the HMB, I was just trying to understand better, what you think is going to happen to like industry wide capacity over the next -- at least over the next year, I think you guys still have half of the market, what's your line of sight on what other competitors might be doing either because of the demand slack or maybe because of build-up due to the HMB longer term, any color there?

I think this is very good question because obviously there is significant excess capacity in the RTL sector.

As a reminder it's mostly the excess capacity is obviously us, because we have unused capacity in France but I think the situation we are seeing in the US.

those assets are owned by cigarette companies.

And as we have said there would be a time where industry consolidation will of interest to various players and it could be a positive for us.

Now that doesn't -- it's not necessarily tied to hit HMB number down necessarily because it is really -- paper making technology is the same but the design of the product is extremely different on conventional and obviously PMI has their own channels relatively integrated and I would say we have the eyes on it.

Got it.

So you said PMI did its own RTL?

As they communicated that it is a different type of RTL but the entire Heat-not-Burn product that PMI 100% manufacturer by PMI so far but as you know there are other capacities you have read in the publication due to the very successful and production of that product and we have been in talks with them for several years in terms of being another source.

Okay, got it.

And then just one more, the Heat-not-Burn I don't want to make it topic in the entire call but you said you need 10 times as much RTL for an HMB product versus a traditional cigarette, so I'm just wondering if this thing takes off will you going to be able to meet that future demand if it happens with your current capacity I think you have 49,000 tons of RTL?

Or you would have to build out some more, what is your best call in that?

It is not 10 times more, it's around five times of that.

Got it, sorry.

So it is multiple time and the amount of hitting on the sticks rate being sold today still small, so there is plenty of capacity for years to come to meet that demand even if its exponential increase.

Okay, great.

And then return to AMS, I think the press release said that the water filtration market is a little bit soft and that would kind of be in line with some of your peers are saying.

Can you just give us a little bit better understanding of what is happening there, do you think that is going that pressure might continue or is it just maybe some growing pains for the industry?

Thanks.

Sure.

That's the point I was making earlier.

It's really driven by China or Asia in general and it's the slowdown of new large infrastructure of projects in terms of desalination, new desalination capacity and probably it's kind of a growth thing that has been significant investment made in the last five years.

We had a record year and I think the industry had a record year I mean in 2015 and that industry goes to cycles due to a very capital intensive nature of new infrastructure.

Okay, I appreciate.

And then last one quick housekeeping question, I think you guided CapEx to $35 million you did, $28 million in 2016, what $24 in 2015, so just what exactly -- that wasn't incremental part of the CapEx, is it all because of the recent acquisitions or is there something else that I missed?

CapEx in 2016 when we take into account the software, it's about little over $30 million and the increase $30 million to $35 million prior of it will be due to investment and acquisitions and then just continue the production growth.

Okay.

That should I figure.

Okay, all right.

Thanks a lot.

I appreciate everything.

Thank you.

And I'm showing no further questions over the phone lines at this time.

I would like to turn the call back over to Frederic Villoutreix for closing remarks.

Thank you, Glenda.

Thank you all for attending the call.

We certainly appreciate your interest in SWM.

Allison, Mark and I will be in our offices today and if you have any further questions, please give us a call.

Have a nice day.

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

This does conclude the program and you may now disconnect.

Everyone have a great day.