Schweitzer-Mauduit International's (SWM) CEO Frédéric Villoutreix on Q1 2014 Results - Earnings Call Transcript

May.11.14 | About: Schweitzer Mauduit (SWM)

Schweitzer-Mauduit International (NYSE:SWM)

Q1 2014 Earnings Conference Call

May 8, 2014 08:30 ET

Executives

Frédéric Villoutreix - Chairman and Chief Executive Officer

Jeff Cook - Executive Vice President and Chief Financial Officer

Steve Dunmead - Chief Operating Officer

Mark Chekanow - Director, Investor Relations

Analysts

Alex Ovshey - Goldman Sachs

Operator

Welcome to SWM First Quarter 2014 Earnings Conference Call. Hosting the call today from SWM is Frédéric 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 beginning at noon, Eastern Standard Time. The dial-in for the replay is 1 (800) 585-8367 and enter PIN number 29344709. (Operator Instructions) It is now my pleasure to turn the floor over to Mr. Chekanow. Sir, you may begin.

Mark Chekanow - Director, Investor Relations

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, Frédéric will share some high-level comments about our first 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, 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 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 Frédéric.

Frédéric Villoutreix – Chairman and Chief Executive Officer

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% that we note that the first quarter of 2013 was an exceptionally strong shipment quarter for our U.S. LIP operations due to inventory deals growing Hurricane Sandy.

Outside of a difficult comparison, LIP had a relatively 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% for the year. Importantly, the declines in cigarette shipment volumes reported by our customers in the first quarter of 2014 are less severe and thus those we saw throughout 2015. 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 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 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’ll now provide an update on several initiatives that we believe provide solid support for 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 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 the facility after 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 a 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 billion sticks and believe global LIP paper demand could increase by approximately 10% with these developments. Why the domestic consumption is relatively easy to gage, natural, potential, financial benefit of LIP regulations to us depends on pricing and share negotiations with our customers. At this preliminary stage, we are estimate an annualized EPS contribution of South Korea LIP paper of approximately $0.20 and we expect to achieve a sizable portion of this annualized potential starting in 2015.

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 inherit 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 phones to advance on 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 market segments such as inflation and healthcare.

While there is nothing to report regarding bolt-on acquisitions, we actively 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 our operations in more detail.

Steve Dunmead - Chief Operating Officer

Thank you, Frédéric. 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 attribution. To expand on the LIP volume decline, we note that the first quarter 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 LIP business performed relatively well. Volumes in Poland 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 experienced 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 actions 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 reducing their inventories to 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 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 this 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 and plan an EPS impact of $0.25 to $0.30 on an annual 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 stringent regulations 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 an example of leadership in the area of harm reduction to other countries within Asia and stimulate long-term demand throughout the region.

As Frédéric 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 U.S. 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 per 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 French government to right size our workforce.

These efforts are underway and should begin contributing to our results later this year. We are also accessing 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 sub-segments 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 terms of profitability, our DelStar operations are running nicely, that 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 the more comprehensive long-term operational improvement program. Lastly, we’d 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 in capacity and DelStar’s relationship in the attractive filtration, industrial and healthcare industries. We look forward to provide 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 – Executive Vice President and Chief Financial Officer

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 excludes 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 in 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 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 cost 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 offset in 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 were 17.5%, 150 basis points lower than the prior year quarter due to a combination of lower segment volume, reduced LIP pricing, and reducing 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% from lower revenue and adjusted operating margin of 36.9% to 250 basis points lower than a year ago quarter. Volume declines and reduced fixed 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 2013. Unallocated corporate expenses increased by $1 million year-over-year due to integration expenses associated with the DelStar transaction and higher professional services from legal entity reorganization activities in connection with efforts to realign our key global assets and improved cash flow.

Our first quarter 2014 adjusted earnings per share from continuing operations was $0.84 down from $1.01 in the first quarter of 2013. First quarter 2014 EPS benefited by approximately $0.01 due to share buybacks conducted throughout the quarter. Excluded from the $0.84 is the first quarter impact of purchased 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 and 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, for 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 and 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 multiyear 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 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 our 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 repurchased 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 remained relatively low at 0.8. We have ample liquidity to fund our internal needs, dividends, and potential future acquisitions and we remained committed to the capital allocation strategy communicated early in 2013.

During the first quarter of 2014, we completed the buyback 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 a total buyback debt activity will be approximately $0.11. This benefit is before the estimated impact of incremental interest expense to fund the purchases of approximately $0.02 to $0.03 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 look clearly beyond 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 in filtration and our 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’ve 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 totaled roughly $17 million of less cash flow versus the first quarter of 2013. Overall, we expect working capital to normalize throughout 2014.

I’ll now turn the call back to Frédéric for his closing comments.

Frédéric Villoutreix - Chairman and Chief Executive Officer

Thank you, Jeff. In closing, we’d like to reemphasize that while tobacco represents challenges in terms of smoking attrition rates, we remain poised to continue our strong performance in the key focus of attracted profit potential. As discussed, LIP adoption remains a strong growth platform and the coming regulations in South Korea to present another important milestone in the global growth of this technology. Secondly, China remains a very attractive opportunity in 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.

Although 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 development is a management team with financial discipline ability to drive down cost for operational excellence and their focus on cash flow.

To that end, our legal entity and global asset realignment activities will be delivering lower effective tax rates for the remainder of 2014 and beyond. All of these efforts support a positive long-term outlook for SWM and we hope our recent stock buyback activities demonstrate our belief in the long-term value in the company.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question is from the line of Alex Ovshey with Goldman Sachs.

Alex Ovshey - Goldman Sachs

Thank you. Good morning, guys.

Frédéric Villoutreix

Good morning.

Alex Ovshey - Goldman Sachs

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?

Frédéric Villoutreix

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 a global market share there is particularly available as a reference.

Alex Ovshey - Goldman Sachs

Got it, Frédéric. 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?

Frédéric Villoutreix

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 that we are providing is a cautious one.

Alex Ovshey - Goldman Sachs

It makes sense, Frédéric. Okay, and then in Russia is there a date that the vote is set this month? Are you aware of?

Frédéric Villoutreix

Yes. There is a date in May. I don’t have it off my head – maybe 20th, yes, it’s the last week of May.

Alex Ovshey - Goldman Sachs

Okay.

Frédéric Villoutreix

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

Alex Ovshey - Goldman Sachs

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

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 from a magnitude standpoint that inventory destocking due to the fact that people were hitting their commitments in 2013 despite the much higher attrition rates and I think they’d expected is probably the top issue. There is certainly the ongoing issue of smoking attrition that, mostly in Europe of somewhere between 4% and 6% on an ongoing basis. It’s a long-term impact and then there is some discussion about reformulations that if it happens, it will be a long-term trend that it's unclear at this stage. So those would be the three key issues.

Alex Ovshey - Goldman Sachs

Got it. 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

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 - Goldman Sachs

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, 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?

Frédéric Villoutreix

Yes, Alex. I think what we stated last quarter is that we see this business continuing at a 8% to 10% rate – 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, the statement that we made about the gross potential of the DelStar business, but obviously more we progress on some of those fronts, the stronger business model debts.

Alex Ovshey - Goldman Sachs

Right, right, that makes sense, Frédéric great. Thanks very much, guys.

Frédéric Villoutreix

Thank you.

Operator

(Operator Instructions) Your next question is from the line of (indiscernible) with Sidoti & Company.

Unidentified Analyst

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

Frédéric Villoutreix

Hi, good morning, how are you?

Unidentified 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?

Frédéric Villoutreix

I think, if you look at across as we said its multi-SKU use within that product line and if you look across, it may be a little bit higher than the average, but from a modeling standpoint, I’d call the same.

Unidentified 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?

Frédéric Villoutreix

Yes, the size of the market is around $90 billion sticks cigarettes.

Unidentified Analyst

Yes.

Frédéric Villoutreix

Which you know as we save in the addressed – prepared remarks is that it’s kind of a 10% growth – approximately 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, if we refer to our market share worldwide ex-China being just a short of 40% on conventional cigarette paper gives you a sense where to stop.

Unidentified 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?

Frédéric Villoutreix

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 receivables there.

Unidentified Analyst

Okay.

Frédéric Villoutreix

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

Unidentified Analyst

Okay, so a bit more muted going forward thinking that year out from here.

Frédéric Villoutreix

Yes.

Unidentified 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?

Frédéric Villoutreix

Yes, it’s obviously depends the magnitude of it and at the location of it, but it’s how we might finance it, but we have good options in either place depend upon what our particular deal calls for.

Unidentified 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?

Frédéric Villoutreix

It was before.

Unidentified Analyst

Before?

Frédéric Villoutreix

Yes, we had about $0.03 in the original one that before.

Unidentified Analyst

Okay.

Frédéric Villoutreix

We look at the overall being about $0.11 and minus $0.02 or $0.03 for financing you’re down around $0.08, we already had $0.03 of that in the guidance so that leaves $0.05.

Unidentified 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?

Frédéric Villoutreix

I mean obviously now the euro has strengthened a little bit this year so far so, it’s been in our favor.

Unidentified Analyst

Yes.

Frédéric Villoutreix

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 so, we’ll see how it grows during the rest of the year because we’re only three or four months into things right now.

Unidentified Analyst

Right, right. Okay, that makes perfect sense. Okay. I’ll step back into the queue. Thank you very much. Good luck with the rest of the quarter.

Steve Dunmead

Thanks, Jan.

Frédéric Villoutreix

Thank you. We appreciate it.

Unidentified Analyst

Okay, bye.

Operator

(Operator Instructions) At this time, there are no further audio questions.

Frédéric Villoutreix - Chairman and Chief Executive Officer

Thank you, Stephanie, and thank you all for attending the call. We certainly appreciate your interest in SWM. Mark, Jeff and I would 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.

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