Schweitzer-Mauduit International, Inc. (SWM)

SWM 
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Schweitzer-Mauduit International, Inc. (SWM)

Q3 2008 Earnings Call Transcript

November 6, 2008, 10:30 am ET

Executives

Torben Wetche – CFO and Treasurer

Presentation

Operator

Good morning. My name is Adriane and I will be your conference operator today. At this time, I would like to welcome everyone to the Schweitzer-Mauduit International conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you, Mr. Wetche, you may begin your conference.

Torben Wetche

Thank you, Adriane. Good morning, my name is Torben Wetche, thank you for joining us for a review of our third quarter 2008 financial results which were filed with the United States Securities and Exchange Commission on Form 10-Q yesterday evening. I will be leading our conference call today. I have been the CFO for Schweitzer-Mauduit since August 11, 2008. Prior to this, I was Chief Financial Officer for Performance Fibers, a $1 billion global high tenacity fiber manufacturer owned by a private equity company. I have spent more than 60% of my time so far with Schweitzer-Mauduit learning the business through visits with our key managers and travels to our mills in the US, Brazil and France. I have had several meetings with our banks, investors in New York and Boston and I would like to say that I continue to be very excited about having joined Schweitzer-Mauduit. With me today is Mark Spears, our Corporate Controller.

Various comments or remarks that we may make during today’s conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from the results suggested by these statements for a number of reasons. Such factors are discussed in more detail in the company’s Securities and Exchange Commission reports including the company’s 2007 Annual Report. Certain financial measures that will be discussed during this call exclude restructuring expenses. Financial measures which exclude this item have not been determined in accordance with accounting principles generally accepted in the United States and are therefore non-GAAP financial measures.

I will now review the highlights of the third quarter 2008 before providing additional discussion of key factors impacting our 2008 full year. Our third quarter 2008 net income totaled $6.7 million compared with a net loss of $4.3 million during the third quarter of 2007. Diluted earnings per share were $0.43 compared with the loss of $0.27 this year in the prior year quarter.

Restructuring expenses decreased earnings per share during the third quarter 2008 and 2007 by $0.11 and $0.73 respectively. Excluding restructuring expenses, earnings per share of $0.54 for the third quarter of 2008 increased 17% from $0.46 for the third quarter of 2007. All announced restructuring activities are expected to be completed during 2008 except for the shutdown of the Malaucene, France base tipping paper machine which has been postponed pending ongoing customer qualifications.

Net sales were $199.2 million during the third quarter of 2008, a $15 million increase over the prior year quarter. $12.8 million of this increase was due to favorable foreign currency exchange rate impacts plus $10.6 million increase from higher average selling prices and an improved mix of products sold partially offset by $8.4 million volume decrease mainly related to the announced closing of the Lee Mills and the exit of the Brazil coated paper business.

Operating profit was $14.6 million during the third quarter 2008 versus a $3 million operating loss in the prior year quarter. Excluding pretax restructuring expenses, operating profit was $17.2 million during the third quarter of 2008 compared with $15.2 million during the third quarter of 2007, an improvement of 13%. The third quarter 2008 improvement in operating profit was primarily due to improved mill operations in France and in the United States and a favorable mix of products sold of $2.8 million due to benefits from reconstituted tobacco and cigarette paper for lower ignition propensity or LIP cigarettes partially offset by inflationary cost increases of $8.3 million. Excluding pretax restructuring expenses from each unit’s third quarter operating results for 2008 and 2007, the French segment improved by $2.5 million, the US segment improved by $2.4 million, and the Brazilian segment increased by $1.8 million.

Interest expense totaled $3.1 million during third quarter of 2008, an increase of $1.5 million from the prior year quarter due to higher average debt levels. The loss from equity affiliate of $1.6 million is related to the start-up of our joint venture paper mill in China. We recorded a $2.6 million provision for income taxes during the third quarter of 2008 compared with a $2.6 million benefit during the third quarter of 2007, mainly due to higher taxable earnings. There was no minority interest in earnings of subsidiaries in third quarter of 2008 compared with $2.2 million during the third quarter of 2007 as a result of our acquisition in January 2008 of the 28% minority interest in our French reconstituted tobacco leaf business LTRI.

Net cash provided by operations totaled $15.7 million for the third quarter 2008 compared with $20.3 million in the second quarter of 2008 and $8 million used by operations during the first quarter of 2008. Our third quarter 2008 net operating cash flow was positively impacted by $9.8 million improvement in operating profits compared to second quarter 2008 whereas working capital was flat. Capital spending was $6 million during the third quarter compared with $24 million during the first six months of 2008 reflecting the absence of any major capital projects during the third quarter. Increased net cash provided by operations enable us to reduce net debt during the third quarter of 2008 by $19.5 million to $159.1 million as of September 30, 2008 or a decline of almost $61 million from the peak level reached in early May 2008.

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