Schweitzer-Mauduit International, Inc. (SWM)

SWM 
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Schweitzer-Mauduit International, Inc. (SWM)

Q2 2008 Earnings Call

August 7, 2008 10:30 am ET

Executives

Peter J. Thompson – Chief Financial Officer

Analysts

Jonathan Lichter – Sidoti & Company, LLC

Ann H. Gurkin – Davenport & Company LLC

Thomas Rousseau – Gardner, Rousseau, and Gardner

Presentation

Operator

Welcome everyone to the Schweitzer-Mauduit International second quarter earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to Peter Thompson, Chief Financial Officer.

Peter J. Thompson

I’m Peter Thompson, Chief Financial Officer of Schweitzer-Mauduit International. With me is Mark Spears, our Corporate Controller. Thank you for joining us for a review of our second quarter 2008 financial results which were filed with the United States Securities and Exchange Commission on Form 10Q yesterday evening. I will be leading our conference call today.

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 report, 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 second quarter of 2008 before providing additional discussion of key factors impacting our results. Second quarter 2008 net income totaled $2 million compared with net income of $1 million during the second quarter of 2007. Diluted earnings per share were $0.13 compared with $0.06 in the prior year quarter. Restructuring expenses including amounts associated with the recently announced exit of the Coated Papers Business in Brazil decreased earnings per share during the second quarters of 2008 and 2007 by $0.15 and $0.14 respectively. Excluding restructuring expenses earnings per share of $0.28 for the second quarter of 2008 increased 40% from $0.20 for the second quarter of 2007.

Net sales were $202 million during the second quarter of 2008, a 17.6% increase over the prior year quarter. Approximately 50% of the increase or $15.1 million was due to favorable foreign currency exchange rate impacts while the balance was due to an improved mix of products sold and increased sales volume. Operating profit was $4.8 million during the second quarter of 2008 versus $6 million in the prior year quarter. Excluding pre-tax restructuring expenses, operating profit was $8.5 million during the second quarter of 2008 compared with $9.4 million during the second quarter of 2007, a 9.6% decline.

The lower operating profit was primarily due to $9 million from inflationary cost increases, especially energy, $3.9 million from start up costs related to the rebuild of a paper machine at our largest French paper mill, PdM, and $1.8 million from unfavorable fixed cost absorption. Partially offsetting these negative factors were higher average selling prices including an improved mix of products sold of $7.6 million, increased sales volume of $3.7 million and lower non-manufacturing expenses.

Excluding restructuring expenses from each unit’s second quarter 2008 results, the comparison to prior year quarter results follow: the French segment’s operating profit was $7.5 million, a decrease of $1.5 million; the U.S. segment’s operating profit was $4.7 million, an increase of $900,000; and Brazil’s operating loss was $2.5 million compared with an operating loss of $400,000. Interest expense totaled $2.8 million during the second quarter of 2008, an increase of $1.3 million from the prior year quarter due to higher average debt levels.

We recorded no income tax provision during the second quarter of 2008 compared with an effective income tax rate of 28% in the prior year quarter. The difference in effective tax rates was primarily due to the favorable tax impact of our foreign holding company’s structure and the geographic mix of taxable earnings. Minority interest in earnings of subsidiaries decreased from $2.1 million during the second quarter of 2007 to zero during the current year quarter. 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 $20.3 million for the past quarter of 2008 compared with $8 million used by operation during the first quarter of 2008.

Our current period net operating cash flow was positively impacted by a $10 million decrease in operating working capital and improved operating results. Capital spending was $5.4 million during the second quarter compared with $18.6 million during the first quarter of 2008 reflecting the absence of any major capital projects during the second quarter. As a result of these factors net debt decreased during the second quarter to $178.6 million as of June 30, 2008, a decline of $10.7 million from March 31, 2008 and a decline of approximately $40 million from the peak level reached in early May 2008.

Today, Schweitzer-Mauduit announced a quarterly common stock dividend of $0.15 per share payable on September 15, 2008 to stockholders of record on August 18, 2008. I will now cover Schweitzer-Mauduit’s business comments and outlook. As expected, the second quarter 2008 financial results for Schweitzer-Mauduit improved both sequentially and versus the prior year quarter. Earnings increased primarily due to higher sales volumes for reconstituted tobacco leaf, or RTL, and cigarette paper used in lower ignition propensity, or LIP cigarettes. Additionally, we benefited from the LTRI minority interest acquisition.

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