Business News

Schweitzer-Mauduit Announces Third Quarter 2009 Results and Asian RTL Expansion Project

Wednesday 04. November 2009 - Schweitzer-Mauduit International, Inc. (NYSE:SWM) today reported third quarter 2009 earnings results for the period ended September 30, 2009 and announced plans to construct an Asian greenfield production site to produce reconstituted tobacco leaf (RTL).

Third Quarter/Year-To-Date Financial Highlights:
— Third quarter net income of $4.5 million; $24.9 million year-to-date
— Third quarter net sales of $184.5 million; $551.9 million year-to-date
— Third quarter adjusted EBITDA of $44.4 million (excluding
restructuring and impairment expenses); $108.5 million year-to-date
— Free cash flow of $23.4 million and $35.3 million year-to-date
— Diluted net income per share of $0.27, compared to $0.43 per share in
third quarter 2008; excluding per share restructuring and impairment
expense of $1.12 and $0.11, respectively, adjusted net income per
share of $1.39 compared to $0.54 per share in the third quarter of
2008

— Net debt decreased to $126.7 million from $167.9 million at December
31, 2008

Third Quarter Operational Highlights:
— Continued growth in high-value products
— Growing demand for RTL products helped drive gains from this
high-value product
— Expanding demand for Low Ignition Propensity (LIP) cigarette
papers in North America and beyond
— Improved operational performance from our China joint venture

— Continued sales volume decline in traditional tobacco-related papers



Frederic Villoutreix, Chairman of the Board and Chief Executive Officer, commented, “Our third quarter results continue to build on the broad-based improvement in our business achieved in the first half of 2009. Our excellent results for the quarter demonstrate the continuing success of our restructuring initiatives to transform our core manufacturing operations toward higher-value products. During the quarter, we progressed in closing our Malaucene, France production site and announced further restructuring activity in France and the U.S. resulting in additional restructuring and impairment expenses. These actions are anticipated to be the last of our downsizing steps for the foreseeable future and were due to continued declines in demand for our traditional tobacco-related papers in North America and western Europe. We are focused in the near term on successfully executing the remaining restructuring activities, continuing to grow our RTL and LIP business franchises and sustaining profitable operations at our Chinese paper joint venture, CTM. We are also excited to announce a major growth initiative: the planned approximate $117 million investment to establish a wholly owned greenfield RTL production facility in the Philippines.”

Mr. Villoutreix continued, “By expanding RTL through a planned production facility in the Philippines, we expect to significantly strengthen our leadership position in this key product segment while expanding our presence in emerging markets with strong growth prospects. Also, through our RTL and LIP technologies, we are poised to benefit from increased regulatory efforts to reduce undesirable aspects of cigarettes. The transformation of our RTL franchise into a truly global operation, ongoing efforts to expand our LIP franchise to Europe and beyond and the revitalization of our base paper business establishes a formidable foundation for future revenue and earnings growth.”

“SWM is becoming a premier specialty company and living up to our vision of being the undisputed leader of engineered solutions to the tobacco industry. We now expect to achieve full-year 2009 earnings of at least $4.00 per share, excluding restructuring and impairment expenses but including expected operating losses of approximately $0.50 per share related to the closure of the Malaucene facility. For 2010, we estimate earnings per share of approximately $5.00, excluding restructuring and impairment expenses, with growth attributable to expanding RTL and LIP sales, full year profitability at our China paper joint venture and sustained profitability in our base paper business despite expected pressures on current margins caused by lower demand, a likely difficult pricing environment for major customers’ 2010 contract renewals and inflationary pressures.”

Third Quarter 2009 Results

Net sales were $184.5 million in the three month period ended September 30, 2009, a 7% decrease versus the prior-year quarter. Net sales decreased $14.7 million as a result of $11.7 million from a 4% decrease in unit sales volumes, $9.1 million in unfavorable foreign currency exchange rate impacts and $8.8 million sales decrease at our Malaucene facility which is pending closure. These declines were partially offset by a $14.9 million improvement in the mix of products sold and higher selling prices.

Operating profit was $6.5 million in the three month period ended September 30, 2009 versus an operating profit of $14.6 million in the prior-year quarter. Excluding pre-tax restructuring and impairment expenses, operating profit was $33.4 million during the third quarter of 2009 compared with $17.2 million during the third quarter of 2008. The higher operating profit was primarily due to $20.3 million from an improved mix of products sold and higher selling prices and $4.2 million in lower inflationary costs, including lower wood pulp costs. These favorable impacts were partially offset by $3.0 million in higher non-manufacturing expenses, reflecting higher incentive compensation accruals due to improved results. Operating losses at the Malaucene facility, excluding pre-tax restructuring and impairment expenses, totaled $4.4 million during the quarter resulting in a $3.4 million unfavorable impact on operating profit compared to the prior year quarter.

Operational Trends (Volume, Pricing and Cost)

During the third quarter, Schweitzer-Mauduit benefited from favorable pricing impacts versus the comparable prior year period. The approximate 58% rate of LIP regulation in effect in the North American market by the end of the third quarter 2009 caused a 26% increase in sales volume of this high value product, as compared to the prior year quarter.

Volume weakness for tobacco-related papers continued in the third quarter. Schweitzer-Mauduit was able to offset the impact of the third-quarter volume decline on its financial results due to the actions of the last several years to decrease higher-cost capacity, especially in the U.S. and France. Schweitzer-Mauduit’s volume decline during the quarter primarily reflects reduced finished tipping paper sales in France after the announced closure of our Malaucene facility, lower base tipping paper sales following the shutdown of the Lee Mills in the U.S. combined with decreased demand in the North American and, increasingly western European markets, all of which have been impacted by the global economic recession and increases in taxes on cigarettes and cigars. CTM, our Chinese tobacco-related papers joint venture, sold out its cigarette paper production capacity by the end of the third quarter contributing to its first quarterly net income.

Inflationary cost decreases in total had an overall $4.2 million positive impact on the operating profit comparison versus the prior year. Moderate increases in inflationary costs of labor and materials during the quarter were more than offset by lower energy prices and wood pulp costs compared to the third quarter of 2008.

Expected sales volume declines and resulting isolated paper machine downtime, in part to reduce our inventory levels, are the company’s biggest challenges for the balance of the year and are the cause of the projected lower level of fourth quarter earnings as compared to the first nine months of 2009.

Year-to-Date Cash Flow and Quarterly Dividend

Net cash provided by operations totaled $53.7 million for the first nine months of 2009, compared with $28.0 million in the prior-year period.

Net debt at September 30, 2009, was $126.7 million compared with $167.9 million at December 31, 2008. Total debt was 28.0% of capital.

Capital spending was $7.7 million and $30.0 million during the nine month periods ended September 30, 2009 and 2008, respectively. The decrease in capital spending was primarily due to expenditures of $11.0 million included in the 2008 period for a paper machine rebuild. Capital spending for 2009 is now projected to range from $10 to $12 million before increasing substantially in 2010 to $80 to $100 million, including $60 million to $70 million for the planned RTL expansion in the Philippines. Other cash needs, including pension funding, employee severance payments associated with restructuring actions and capitalized software spending, are now projected to range from $20 to $25 million during 2009 and $50 to $60 million in 2010. Net debt is expected to decrease in the fourth quarter of 2009.

Schweitzer-Mauduit announced today a quarterly common stock dividend of $0.15 per share. The dividend will be payable on December 28, 2009 to stockholders of record on November 23, 2009.

RTL Production Expansion

In order to meet a growing demand for RTL and to diversify our existing production base in France to meet customer security of supply needs, we intend to expand our RTL production capacity into Asia through the construction of a wholly owned facility in the Philippines focused on RTL production. The stand-alone, single-machine facility, separate from our current paper mill, will be located near Manila and is expected to have approximately 30,000 metric tons of annual capacity which will increase our total world-wide RTL production capacity by approximately 38% when completed. We expect operations to commence in late 2011. We already have entered into a seven-year supply agreement with one of our current customers and are in advanced supply discussions with another multinational cigarette manufacturer that together would sellout approximately 50% of the new facility’s capacity. We are exploring options to fund the expected approximate $117 million total investment of the new production facility, including using our existing credit agreement as well as potentially securing new debt or equity capital.

Restructuring and Impairment Expenses

During September 2009, we announced a 106-person reduction of our factory and general administrative staff in France as part of a continuing strategy to restructure our traditional tobacco-related papers business to make it more cost competitive. Meetings with the unions and the Work’s Council must be completed before the amount of the restructuring expenses, timing and ongoing benefits of the changes can be definitively known. However, cash severance expenses associated with this action are expected to total approximately $14 million through the planned completion of the actions in the second quarter of 2010 and result in annual pre-tax savings of approximately $8 million, or approximately $0.36 per share, with roughly half of this savings expected to be realized during 2010. Our third quarter results include $6.2 million of expense from this action primarily due to expected legal-minimum employee severance payments reduced by projected reversals of certain employee-related liabilities that are expected to be eliminated as a result of the employee terminations.

In the third quarter, we also recorded asset impairment charges of $11.9 million. These charges include a $9.2 million impairment charge for a large paper machine and related equipment at our Spotswood, New Jersey facility. Our operations in Spotswood will concentrate on the online LIP technology we operate for Philip Morris USA, and we will transfer remaining production of cigarette paper from this machine to our lower-cost facilities in France and Brazil. The impairment charges also include a $2.7 million impairment charge for an idled small paper machine and related ancillary assets at our PDM facility in Quimperle, France.

In the quarters ended September 30, 2009 and 2008, the company incurred $26.7 million and $2.6 million, respectively, in expenses related to restructuring actions and asset impairments.