Schweitzer-Mauduit International, Inc. (SWM)

SWM 
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Schweitzer-Mauduit International, Inc. (SWM)

Q4 2008 Earnings Call

February 05, 2009, 10:30 am ET

Executives

Frederic Villoutreix - Chairman and CEO

Pete Thompson - Treasurer, CFO and Strategic Planning Officer

Analysts

Jonathan Lichter - Sidoti & Company LLC

Ann Gurkin - Davenport & Company LLC

Operator

Good morning. My name is April, and I will be your conference operator today. At this time, I would like to welcome everyone to the Schweitzer-Mauduit Fourth Quarter 2008 Earnings Release 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. Frederic Villoutreix, you may begin your conference.

Frederic Villoutreix

Thank you, April. Good morning, I am Frederic Villoutreix, CEO and Chairman of Board of Schweitzer-Mauduit International. And along with me Pete Thompson, our CFO we would be leading our conference call today. With us today is Mark Spears, our Corporate Controller. Thank you for joining us as we review our fourth quarter and full year results. I will discuss the key factor impacting our business. Then Pete will provide highlights of full year and fourth quarter 2008 financial results.

A more detailed review of fourth quarter financial performance is included in our earnings press release issued this morning. The copy of the press release can be found on our website. The comments included in today's conference call constitute forward-looking statements; actual results may differ materially from the projected results. Certain financial measures discussed during this call exclude restructuring and impairment expenses and are therefore non-GAAP financial measures.

I will now review the highlights of the full year and fourth quarter of 2008.

Earnings per share excluding restructuring and impairment expenses, were $0.97 for the full year and $0.14 for the fourth quarter. The fourth quarter results contain approximately $0.13 per share on tax impacts appreciated with the reorganization of legal entities and severance expenses associated with management changes finally impress.

Excluding these items as well as item losses from start up of our China joint venture paper mill and final cost on the shut down of the Lee Mills. Our business improved compared to fourth quarter of 2007.

As we continue to realize benefits from increased sales volume, only consist of equities and cigarette paper lower ignition propensity cigarettes, and began to realize favorable foreign currency impacts and the lower level of inflationary cost increases.

Our most significant achievement in 2008 was a purchase of a 28% minority interest in our reconstituted tobacco leaf operation in France LTR industries or LTRI.

We completed the $51 million acquisition in January 2008 and thus retained for shareholders 1% of this substantial earnings improvement in the year caused by 21% increase in sales volume.

The LTRI acquisition was accretive to earnings $0.32 during 2008. 2008 was also a very strong year for our cigarette paper for lower ignition propensity cigarettes or LIP.

Our LIP paper of sales volume grew 56% during 2008 as regulatory requirements across North America reached an estimated 34% of cigarette consumption by year end.

Essentially 1% of the North American market of cigarette will be LIP by January 2010. Thus we expect to realize even greater increases in sales volume of this value added product during 2009.

We continue to maintain our leadership position in LIP technology and our advancing plans to expand our capacity outside of North America to meet demand as other markets move toward implementing LIP regulations.

Currently, Australia, the entire European Union, Finland, South Africa, South Korea and the Philippines have taken actions towards implementing LIP regulations.

We expect demand for LIP outside of North America to begin by late 2009 with EU likely to require compliance by 2011 or 2012. Let me now turn to cost initiatives. We made significant progress during 2008 implementing restructuring actions in France, the US and Brazil initiated since 2006.

Essentially all restructuring related expenses for these actions have been recorded as of year end 2008. The key achievements are, in France progress continues to be made in implementing of strategy to become a low cost and the highest quality cigarette along side our paper manufacturing in Western Europe.

Our capital investments including improved performances of rebuilt paper machine, workforce reduction and other paper machine restructuring activities are in place and improvement in operations was realized during the fourth quarter.

In the US, the LEE Mills facility, in Massachusetts, seized operations earlier in 2008. Production of total of its products has been transferred to other locations including base tipping paper to our Brazilian mill. And the sale of remaining assets is progressing.

We exited the non-profitable coated papers business in Brazil in mid-2008. The restructuring actions announced for the Malaucene Mill remains to be fully implemented. But severance expenses associated we have announced plan and substantially all being recorded. All these restructuring actions will benefit annual pre-tax earnings by approximately $25 million.

Now, a word on Brazil. The currency situation in Brazil has become more favorable and along with selling price increases and the transfer of base tipping paper production from the US. We expect substantially improved operating profit in 2009.

We generated a near breakeven level of operating profit during the fourth quarter of 2008 despite $1.1 million in unfavorable impact from currency hedges placed earlier in the year. These unfavorable hedges expired at the end of December and we have rehedged approximately 50% of our net US dollar exposure in Brazil at a favorable exchange rate for all of 2009.

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