SWM » Topics » Business Comments and Outlook

This excerpt taken from the SWM 8-K filed Feb 5, 2009.

Business Comments and Outlook

 

Mr. Villoutreix added, “Despite the significant challenges faced by our base paper business throughout 2008, we are confident that Schweitzer-Mauduit is on track to achieve improvement in results as demonstrated by earnings increases during the second half of 2008.  Fourth quarter 2008 results reflect a number of items which masked otherwise continued solid performance gains across our business.  Further, we sustained the improvement in our cash and debt position as compared to peak debt levels realized earlier in 2008.  Available debt capacity and cash generation are expected to meet our current cash requirements.

 

“Our business has improved across a broad front.  We realized earnings improvement from increased sales of reconstituted tobacco leaf and cigarette paper for lower ignition propensity

 

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cigarettes.  Growth in these two products is expected to continue during 2009, especially as the U.S. market implements what is now essentially 100 percent lower ignition propensity regulation by January 2010.  Operational performance has improved in France on the PdM paper machine rebuilt as part of the restructuring plan for that location.  Our Brazilian operation improved to a slight operating profit during the fourth quarter of 2008 as a result of a better currency situation as well as the benefits of restructuring and pricing actions implemented since mid-2008.  We expect an improvement in Brazil’s operating profit during 2009.  We have completed global customer negotiations and achieved results in line with our expectations and goals for 2009.  After a longer than expected period of customer qualifications, we are now gaining sales volume at our new paper joint venture in China and expect to narrow losses progressively through 2009.  Finally, inflationary cost increases are expected to continue to moderate given world-wide recessionary impacts, with lower purchased wood pulp already having provided a benefit to earnings during the fourth quarter of 2008.

 

“Poor world-wide economic conditions may effect our earnings growth during 2009. Likely increases in cigarette taxation to mitigate government revenue declines and lower levels of disposable income among smokers, especially in developing countries, could decrease demand.  The U.S. federal government is likely to pass legislation for child health care programs funded by a significant increase in cigarette and other tobacco product excise taxes.  Further, we continue to evaluate how best to balance our capacity for traditional paper products in France and the United States to available demand and will likely announce additional restructuring actions during 2009.

 

“We expect earnings, both before interest, taxes, depreciation and amortization and per share, will improve during 2009 as the positive aspects of our business are expected to counter challenges.  The expected earnings and cash generation improvement during 2009, coupled with our existing debt capacity, supports our strategies to transform Schweitzer-Mauduit through growth of our high-value franchises for reconstituted tobacco leaf and cigarette paper for lower ignition propensity cigarettes. Also, we will continue the necessary restructuring of our operations to balance capacity between our western and developing country locations.  Although we are fully expecting to realize earnings improvement during 2009, volatility in quarterly earnings will likely persist.  Earnings per share, excluding restructuring and impairment expenses, are expected to improve over 2008 levels; however, the extent is difficult to project with certainty given the breadth of factors impacting results.  As conditions warrant, we will provide updates of our full-year 2009 earnings outlook.”

 

This excerpt taken from the SWM 8-K filed Nov 6, 2008.

Business Comments and Outlook

 

Mr. Deitrich added, “We are pleased with the improved performance seen in the third quarter, both in terms of earnings and cash generation.  Increases in sales of reconstituted tobacco leaf products in France, especially given full ownership of this business, and cigarette paper for LIP cigarettes in the United States are expected to further benefit earnings this year and beyond.  In spite of the good results in the third quarter, Schweitzer-Mauduit faces challenges for earnings in the fourth quarter of 2008, most of which are expected to be contained to that quarter. We anticipate an adverse impact to our fourth quarter results from decreases in sales volumes due to seasonal cigarette customer plant shut-downs, a slow realization of selling price increases undertaken to recover inflation and continuing unfavorable foreign currency impacts until January 1, 2009 when existing commercial supply agreements and currency hedging contracts expire, finalization of certain restructuring activities, slower than expected growth in sales for our new joint venture paper mill in China and other expected one-time expenses. We therefore project that our fourth quarter earnings per share, excluding restructuring expenses, will be low,

 

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and we consequently maintain that our full year 2008 earnings, excluding restructuring expenses, will be at the upper end of our previously expected range $0.75 to $0.90 per share.  We expect working capital, pension plan funding and other cash uses to increase somewhat through the fourth quarter of 2008 and therefore anticipate additional borrowings in the range of approximately $15 to $18 million.

 

For 2009, Schweitzer-Mauduit currently expects earnings per share, excluding restructuring expenses, to be better than 2007 results due to the benefits of further increases in sales volumes for RTL and cigarette paper used in LIP cigarettes, increased operating profit in Brazil due to finalization of restructuring actions and beneficial changes in the relation of the Brazilian real to the U.S. dollar secured through recent hedging transactions, the lack of start-up expenses realized in 2008 from the rebuilt paper machine at PdM, as this machine is now expected to reach targeted output by the end of the first quarter of 2009 and, finally, 2009 customer selling price increases to recover a portion or all of the cumulative inflationary cost increases since 2005.  The extent to which Schweitzer-Mauduit’s earnings per share for 2009, excluding restructuring expenses, will exceed 2007 results is dependent upon the actual level of selling price increases and sales volume changes realized during our annual customer negotiations to be concluded by early 2009.

 

This excerpt taken from the SWM 8-K filed Aug 7, 2008.

Business Comments and Outlook

 

Mr. Deitrich added, “We are pleased with the improved performance seen in the second quarter, both in terms of earnings and cash generation.  Increases in sales of reconstituted tobacco leaf products in France, especially given full ownership of this business, and cigarette paper for LIP cigarettes in the United States are expected to further benefit earnings this year and beyond.  However, significant improvement in our traditional tobacco papers business is less certain. Schweitzer-Mauduit faces continuing challenges for further earnings growth in the second half of 2008 primarily as a result of persistent inflationary cost increases, unfavorable foreign currency impacts, ongoing implementation of customer pricing actions, restructuring activities underway across the company and the start-up of our new joint venture paper mill in China.  We project that quarterly earnings per share, excluding restructuring expenses, during the balance of this year will approximate the level seen during the second quarter, with full year 2008 earnings ranging between $0.75 and $0.90.  This equates to an annualized rate of earnings, excluding restructuring expenses, in the range of $1.00 to $1.20 per share.  Further, we expect cash generation, working capital, capital spending and other cash uses to be relatively stable through the balance of 2008 and therefore anticipate additional borrowings of approximately $10 million.”

 

This excerpt taken from the SWM 8-K filed May 8, 2008.

Business Comments and Outlook

 

Mr. Deitrich added, “Primarily as a result of inflationary cost increases, a longer than expected start-up of the rebuilt paper machine in France and unfavorable foreign currency impacts, Schweitzer-Mauduit faces a more difficult full year earnings outlook than previously expected. Continued growth in sales of reconstituted tobacco leaf products in France, especially given full ownership of this business effective January 30, and cigarette paper for LIP cigarettes in the United States are expected to continue to benefit earnings in 2008 and beyond.  However, for 2008 we now project that full year earnings will not achieve our previous guidance of exceeding $1.50 per share, excluding restructuring expenses.

 

“During the first quarter of 2008, benefits from cost reduction initiatives did not offset inflation.  Inflation impacts on operating results worsened further during the first quarter of 2008 in addition to the negative impacts realized during the fourth quarter of 2007, primarily due to increased purchased energy costs.  During the last six months, inflationary cost increases totaled $13.5 million, or approximately $0.56 per share, well above the impact seen in the preceding twelve months.  The continuing rise in crude oil prices and the resulting eventual impact on our electricity, natural gas, fuel oil and specialty chemical costs will continue to negatively impact our results for the balance of 2008.

 

 “Although the restart of the paper machine at PdM negatively impacted our first quarter results, the overall restructuring activities initiated during the last two years are progressing.  The PdM paper machine start-up is improving, but will continue to negatively impact results, albeit at a declining rate, likely into the third quarter of 2008.  Progress continues to be made in both France and the United States in the transfer of base tipping paper production following the fourth quarter 2007 completion of the base tipping paper machine rebuild in Brazil.  We are on pace to initiate the shutdown of the Lee Mills in May 2008.   However, full realization of the range of earnings improvement from the restructuring actions is now less certain given other factors

 

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impacting our business, including prospects for continuing inflationary cost increases and a weak U.S. dollar.  Given the accelerated rate of inflationary cost increases and unfavorable currency impacts, we are further evaluating actions to curtail operation of certain of our paper machines and are engaging our customers in price negotiations to offset inflationary cost increases and unfavorable currency impacts.  Decisions regarding any further restructuring actions will likely be forthcoming during 2008.

 

“Our reconstituted tobacco leaf business continues to realize sales volume growth and increased earnings.  Full year sales growth above 10 percent is expected for 2008.  Due to the January 2008 acquisition of the minority shareholder interest in LTRI, our consolidated results will reflect 100 percent of LTRI’s earnings for the remainder of 2008.

 

“Based upon the states that have passed LIP regulations, demand for this product is expected to grow from the current level of approximately 20 percent of North American cigarette consumption to approximately 57 percent by early 2010.  Additionally, states representing approximately 97 percent of North American consumption have either passed or proposed LIP regulations, and several cigarette producers have announced voluntary national distribution of this technology, supporting the likelihood that LIP cigarettes will be sold nationwide by late 2009 or early 2010.  As a result, we expect to realize continued growth in demand for cigarette paper used in LIP cigarettes, which would continue to significantly benefit our U.S. business unit’s results.  International LIP efforts are accelerating, especially in the European Union, or the EU.  Continued EU rule-making activities indicate that it is increasingly likely LIP cigarette regulations outside North America will become effective by 2012 and increase demand for cigarette paper used in these LIP cigarettes.  This is a positive development for us given our leadership position in this technology.  We continue to expand our U.S. capacity for cigarette paper processing for LIP cigarettes and have initiated capacity planning activities for this technology in Europe.

 

“Growth in earnings in 2008 is still expected to come from the acquisition of the LTRI minority interest, increased sales volumes for reconstituted tobacco leaf products and cigarette paper for LIP cigarettes and from the benefits of the announced restructuring activities.  The challenges to earnings growth in 2008 will continue to be inflationary cost increases, particularly energy, initial losses associated with the start-up of our rebuilt paper machine in France, as well as start-up expenses to be incurred by our 50 percent tobacco-related joint venture in China, likely further unfavorable foreign currency impacts and the ongoing decline in demand for our traditional paper products.  We anticipate that the first quarter of 2008 will be the lowest earnings period of the year, with some improvement in earnings occurring during the second quarter.  Substantial increases in earnings, excluding restructuring expenses, are not likely to occur until the second half of 2008 following full implementation of the current restructuring activities underway across our businesses along with likely additional pricing or restructuring actions needed to address inflationary cost and currency impacts.”

 

This excerpt taken from the SWM 8-K filed Jan 31, 2008.

Business Comments and Outlook

 

Mr. Deitrich added, “Overall, we are pleased with our improved financial performance for the full year of 2007, as demonstrated by a 45 percent increase in earnings per share excluding restructuring expenses, and we are well positioned to further increase earnings in 2008.  Excluding restructuring expenses, earnings in the fourth quarter of 2007 were, as expected, below the level of the previous three quarters in 2007 but substantially improved over the loss realized during the fourth quarter of 2006.  This continues our recent trend of improving earnings each quarter versus the prior-year comparison.

 

“We are confident that the restructuring activities underway across Schweitzer-Mauduit will not only improve earnings once fully implemented, but will also improve the stability of our earnings by decreasing exposure to the weaker North American and western European markets for tobacco-related papers.  Upon full implementation, the announced restructuring activities are expected to generate annual pre-tax benefits of approximately $21 to $23 million, or $0.88 to $0.96 per share.  Full realization of earnings improvement from these actions is not certain and is dependent upon other factors that impact on our business, including continuing weakness in cigarette consumption in developed parts of the world.

 

“On the cost front, during the fourth quarter we again realized benefits from cost reduction initiatives undertaken to offset inflation.  However, inflation impacts on operating results worsened noticeably during the fourth quarter, primarily due to increased purchased energy costs.  For the full year of 2007, inflationary cost increases totaled $13.0 million, or $0.54 per share.  This is approximately 70 percent of the rate realized in 2006.  Due to the sharp rise in inflationary cost increases during the fourth quarter, the significant full-year benefits of cost reduction activities did not fully offset other cost increases in 2007.

 



 

“The fourth quarter again demonstrated that with the fluctuating quarterly earnings for Schweitzer-Mauduit during the last two years, establishing an accurate projection for full-year results is difficult.  This will continue in 2008 given the changes underway in our business.  Full-year 2007 earnings, excluding restructuring expenses, of $1.20 per share met our most recent guidance to likely exceed the high end of $1.00 to $1.15 per share.  We reiterate that diluted earnings per share in 2008, excluding restructuring expenses, are expected to exceed $1.50 per share.  However, earnings for the first quarter of 2008 will likely be the weakest of the year due to the planned capital investment—related paper machine downtime at PdM as well as one-time unfavorable purchase accounting impacts associated with the announced acquisition of the 28 percent minority interest in LTR.  Growth in earnings in 2008 is expected to come from the LTR acquisition, increased sales volumes for reconstituted tobacco leaf products and cigarette paper for lower ignition propensity cigarettes, as well as from the benefits of the announced restructuring activities.  The challenges to earnings growth in 2008 are expected to include inflationary cost increases, particularly energy, initial losses associated with the start-up of our 50 percent tobacco-related papers joint venture in China, the continued decline in the production of cigarettes and therefore demand for our products, execution of the broad-based restructuring and other cost reduction activities underway and the continued weakness of the U.S. dollar and the resulting impact on earnings for our Brazilian operation.”

 

This excerpt taken from the SWM 8-K filed Oct 25, 2007.

Business Comments and Outlook

 

Mr. Deitrich added, “Excluding restructuring expenses, earnings in the third quarter were at the highest level since the fourth quarter of 2004. Further, earnings have grown over the prior-year comparison each quarter this year. However, we continue to face business challenges associated with execution of the significant level of restructuring underway across the company. We are pleased with the earnings growth experienced so far in 2007 in certain of our product areas, but we continue to sound a cautionary note about weakness in the sales of traditional tobacco-related papers that has been the primary source of our earnings volatility over the last several quarters.

 



 

“Earnings for reconstituted tobacco products and cigarette paper for lower ignition propensity cigarettes improved in comparison with the first nine months of 2006, ahead of our internal expectations, and the third quarter 2007 results for these products continued this year’s trend of sequential quarterly improvements. Improved earnings for reconstituted tobacco leaf products reflected year-to-date sales and production volume growth, which we expect to continue. Sales of cigarette paper for lower ignition propensity cigarettes continue to positively contribute to our operating results.  A total of 22 states, representing approximately 40 percent of U.S. cigarette consumption, have enacted lower ignition propensity regulations that will progressively become effective through January 2009. During the third quarter, we initiated operations at our new production facility in South Carolina dedicated to expanding our processing capacity and capabilities to meet the growing demand for this cigarette paper. With further increases in sales volumes of this cigarette paper, combined with improvements in manufacturing costs, we expect continued gains in this product’s results.

 

“As we signaled in our second quarter earnings press release, we announced additional restructuring activities in France, the United States and Brazil on October 1, 2007. These actions, although regrettable in terms of the impact on the affected employees and the local communities in which our mills have long operated, are necessary to restore a balance between effective and profitable utilization of our papermaking capacity and available demand. We are confident that the restructuring activities underway across Schweitzer-Mauduit will not only improve earnings once fully implemented, but will also improve the stability of our earnings by decreasing exposure to the weaker North American and western European markets for tobacco-related papers. Upon full implementation, the recently announced restructuring activities are expected to generate annual pre-tax benefits of approximately $21 to $23 million, or $0.88 to $0.96 per share.  Full realization of earnings improvement from these actions is not certain and is dependent upon other factors that impact on our business, including continuing weakness in cigarette consumption in developed parts of the world.

 

“On the cost front, during the third quarter we realized an increase in the benefits from cost reduction initiatives undertaken to offset inflation. Inflation has been consistent through the first nine months of 2007, totaling $7.9 million, or $0.33 per share. This is approximately 60 percent of the rate realized in 2006. However, the benefits of cost reduction activities have more than offset inflationary cost increases so far in 2007.

 

“As evidenced by the wide range of quarterly earnings for Schweitzer-Mauduit dating back to 2006, establishing an accurate projection for full-year results is difficult. This will likely continue given the changes in our business that are underway. Year-to-date 2007 earnings, excluding restructuring expenses, of $1.04 per share are already at the low end of our second quarter guidance of $1.00 to $1.15 per share for full year results. We now foresee full year 2007 earnings per share likely exceeding the high end of this range. The fourth quarter of 2007 is expected to be weaker than the third quarter of this year given planned downtime for the paper machine rebuild in Brazil and normal operational downtime in our mills around the year-end holidays. Diluted earnings per share in 2008, excluding restructuring expenses, are expected to consistently exceed prior-year comparisons and $1.50 per share for the full year. Growth in earnings in 2008 is expected to come from increased sales volumes for reconstituted tobacco leaf

 



 

products and cigarette paper for lower ignition propensity cigarettes as well as from the benefits of the announced restructuring activities.”

 

This excerpt taken from the SWM 8-K filed Jul 26, 2007.

Business Comments and Outlook

Mr. Deitrich added, “Though earnings excluding restructuring expenses again grew in the second quarter, the gains were below the level of the first quarter.  This demonstrates the continuing business challenges faced by Schweitzer-Mauduit.  Although we are pleased with the earnings growth experienced so far in 2007 in certain of our product areas, the cautionary note we sounded after the first quarter concerning weakness in sales of traditional tobacco-related papers continues to be appropriate.

“Earnings for reconstituted tobacco products and cigarette paper for lower ignition propensity cigarettes improved in comparison to the first half of 2006, in line with our internal expectations, and the second quarter 2007 results for these products exceeded the first quarter of 2007.  Improved earnings for reconstituted tobacco products reflected year-to-date sales and production volume growth, which we expect to continue.  Sales of cigarette paper for lower ignition propensity cigarettes continue to positively contribute to our operating results.  An additional 12 states enacted lower ignition propensity regulations during the second quarter.  A total of 21 states, representing approximately 40 percent of U.S. cigarette consumption, have now enacted lower ignition propensity regulations that will progressively become effective through January 2009.  During the second quarter, we purchased a production facility in South Carolina dedicated to expanding our processing capacity and capabilities to meet the growing demand for this cigarette paper.  With further increases in sales volumes of this cigarette paper, combined with improvements in manufacturing costs, we expect continued gains in this product’s results.

“Before the previously announced broad restructuring activities in France and the United States have been fully implemented, it is becoming apparent that these actions may not be enough to restore a balance between effective and profitable utilization of our papermaking capacity and available demand and that further restructuring may be required.  The recent announcement from Philip Morris USA of the planned shutdown of its North Carolina cigarette factory coupled with historically high declines in U.S. cigarette consumption during the first half of this year signal continuing weakness in North American demand for our products.  Likewise, the competitive environment throughout Europe presents further challenges for Schweitzer-Mauduit to sustain




sales volumes at present selling price levels.  Finally, the continuing strengthening of the Brazilian real to both the U.S. dollar and euro has unfavorably impacted not only earnings for our Brazilian unit but also its cost competitiveness on a global basis.

“These challenges within our tobacco-related and other paper businesses were evident during the second quarter in the unfavorable earnings impact of fixed cost absorption from increased paper machine downtime, which totaled $2.2 million in the first half of 2007, or $0.09 per share, despite the restructuring activities already implemented.  Upon full implementation, the PdM workforce reductions are expected to generate annual pre-tax labor savings of approximately $14 million, or $0.58 per share, due to both restructuring activities and planned capital investments.  However, full realization of earnings improvement from these savings may be at risk due to increasing weakness in sales volumes across our other French paper operations.

“On the cost front, we sustained efforts during the second quarter to offset inflation through improved mill operations and cost savings initiatives across our business.  Inflation has been consistent through the first half of 2007, totaling $5.3 million, or $0.22 per share.  This is approximately one-half the rate realized in 2006.  In the first quarter of 2007, benefits of cost reduction activities more than offset inflationary cost increases, however we were unable to fully do so in the second quarter.

“We now project that full-year 2007 earnings per share, excluding restructuring expenses, will be in the range of $1.00 to $1.15, which would be an improvement over the 2006 level of $0.83 per share but below the 2005 level of $1.26 per share.  Earnings per share in 2008, excluding restructuring expenses, are expected to increase above the 2007 level as a result of growth in reconstituted tobacco products and cigarette paper for lower ignition propensity cigarettes as well as from the benefits of current and possible additional restructuring activities that may be announced later this year.

This excerpt taken from the SWM 8-K filed Apr 26, 2007.

Business Comments and Outlook

Mr. Deitrich added, “Though we are pleased with a solid start to the year in terms of financial results, we remain focused on completing the significant activity involved in the broad restructuring activities initiated in 2006.  As expected, we made progress during the first quarter in mitigating the continuing, albeit smaller, impact of inflationary cost increases and reduced production schedules that have decreased our earnings over the last several years.  We will continue our efforts to do this through improved worldwide mill operations, the benefits from announced restructuring activities and the continued growth in cigarette paper for lower ignition propensity cigarettes as well as reconstituted tobacco leaf products.

“Total PdM restructuring expenses are now projected to be $8 million for 2007, including cash severance costs of $7 million.  The amount of severance expenses is now expected to be approximately $2 million less than previously projected due to a greater number of employees choosing to leave voluntarily.  The PdM workforce reductions are expected to generate annual pre-tax labor savings of approximately $14 million, or $0.58 per share, due to both restructuring activities and planned capital investments.  Realization of the majority of labor savings is now expected to occur by the end of 2007.  We expect to realize annual pre-tax benefits greater than $14 million upon full implementation of all elements of the PdM strategy, including the planned capital investments.

“Sales of cigarette papers for lower ignition propensity cigarettes continue to positively contribute to our operating results, especially as we realize further manufacturing efficiencies.  California’s lower ignition propensity regulation became effective on January 1, 2007 and we continue to supply product for this new market.  Additionally, 3 states, Utah, Kentucky and Oregon, have passed lower ignition propensity legislation so far in 2007 with effective dates in the first half of 2008 while 2 other states, New Jersey and Maryland, have submitted laws to their respective governors for signature.  When fully effective by mid-2008, the 9 U.S. states that have passed lower ignition propensity legislation combined with Canadian requirements approximately total 27 percent of the combined United States and Canada cigarette consumption.  Another 17 U.S. states have active legislative efforts which, when added to already approved lower ignition propensity regulations, would cover nearly 50 percent of U.S. and Canadian cigarette consumption.  With further increases in sales volumes of this cigarette paper combined with expected continuing improvements in manufacturing costs, this product should continue to provide additional improvement to the U.S. business unit results.

“The cautionary note in our business outlook continues to be weakness in tobacco-related product sales in both the United States and western Europe and the potential for continuing




excess paper production capacity and resulting machine downtime unfavorably impacting operating profit.  Our actions to reduce inventories during the fourth quarter of 2006 as well as the restructuring actions underway place us in a better position to manage these impacts on 2007 results.  However, we continue to evaluate how to operate our worldwide production facilities more effectively with the reduced volumes of tobacco-related papers.  Analysis is ongoing into possible further restructuring activities that could result in additional expenses.

“We reiterate that full-year 2007 earnings per share, excluding restructuring expenses, are anticipated to be at or above the $1.26 level achieved in 2005 as a result of the benefit of announced restructuring activities and our other business improvement actions more than offsetting lower paper sales volumes and continuing inflationary cost increases.”

This excerpt taken from the SWM 8-K filed Jan 25, 2007.

Business Comments and Outlook

Mr. Deitrich added, “Following our disappointing financial results in 2006, we expect to make progress during 2007 in mitigating the continuing impact of inflationary cost increases and reduced production schedules that have decreased our earnings over the last two years.  We intend to do this through improved worldwide mill operations, the benefits in France and the United States from previously announced restructuring activities and the continued growth and cost improvement in producing cigarette paper for lower ignition propensity cigarettes as well as reconstituted tobacco leaf products.

“Inflationary cost increases totaled $18 million in 2006, or $0.75 per share.  Purchased energy cost increases have begun to slow and even reverse in the United States.  Wood pulp prices continue to increase, but at a slower 2 percent rate during the fourth quarter 2006, which brought the full-year 2006 increase to 12 percent.  While inflationary cost increases persist, we believe the rate will slow and will be increasingly offset through improved mill operations and continued efforts to systematically control all areas of cost.

“Overall PdM restructuring expenses are now projected to be in the range of $26 to $28 million for 2006 through 2008, including cash severance and other related costs in the range of approximately $23 to $25 million and approximately $3 million for non-cash accelerated depreciation of fixed assets.  The actual amount of severance expenses will be dependent upon the final number of individuals within each of the three possible categories for employee severance that include early retirement, other voluntary means and involuntary terminations.  The PdM workforce reductions are expected to generate annual pre-tax labor savings of approximately $14 million, or $0.58 per share, due to both restructuring activities and planned capital investments.  Full realization of the labor savings is expected to occur after the first quarter of 2008.  We expect to realize annual pre-tax benefits greater than $14 million upon full implementation of all elements of the PdM strategy, including the planned capital investments.

“Sales of cigarette papers for lower ignition propensity cigarettes continue to positively contribute to our operating results, especially as we realize manufacturing efficiencies.  We experienced increased sales during the fourth quarter prior to the January 1, 2007 effective date for lower ignition propensity regulations in California.  With further increases in sales volumes of this cigarette paper combined with expected continuing improvements in manufacturing costs, this product should provide additional improvement to the U.S. business unit results.

“The cautionary note to our improved outlook for 2007 is continued weakness in tobacco-related product sales. Reduced demand for tobacco-related paper products in western Europe and the United States caused us to have excess production capacity throughout 2006 and increased machine downtime that unfavorably impacted operating profit by $18 million, or $0.75 per share.  Our actions to reduce inventories, especially in the fourth quarter of 2006, as well as the restructuring actions already announced, place us in a better position to reduce these impacts in 2007.  However, we continue to evaluate how to operate our worldwide production facilities more effectively with the




reduced volumes of tobacco-related papers.  Analysis is ongoing into possible further restructuring activities that could result in additional expenses.

“We reiterate that full-year 2007 earnings per share, excluding restructuring expenses, are anticipated to be at or above the $1.26 level achieved in 2005 as a result of the benefit of announced restructuring activities and our other business improvement actions more than offsetting lower sales volumes and continuing inflationary cost increases.”

This excerpt taken from the SWM 8-K filed Oct 26, 2006.

Business Comments and Outlook

Mr. Deitrich added, “Schweitzer-Mauduit’s third quarter diluted loss per share of $0.11 reflected the significant impact of French business unit restructuring expenses.  Excluding restructuring expenses, diluted earnings per share would have been $0.41 for the quarter and mark the first year-over-year improvement in quarterly results in nearly two years.  This reflects further progress in mitigating the continuing impact of inflationary cost increases and reduced production schedules through improved worldwide mill operations, the benefit in the United States of previously announced restructuring activities and the continued growth and cost improvement in producing cigarette paper for lower ignition propensity cigarettes.

“Although it will take more time to fully realize the expected benefits of the significant and broad restructuring activities now underway, it increasingly appears progress in earnings will be possible over the coming year.  In the meantime, further restructuring expenses, reduced operating schedules and inflationary cost pressures, although abating, are expected to continue during the fourth quarter.  However, we also expect to continue to improve mill operations, benefit from cost control activities implemented earlier this year and further grow sales volume and profitability from cigarette paper used in lower ignition propensity cigarettes.

“We expect to record additional restructuring liabilities during the fourth quarter of 2006 for severance offered to and currently being negotiated with the PdM labor unions that is in excess of the legally required minimum amounts.  Such minimum amounts were recorded during the third quarter of 2006.  Negotiations with the PdM labor unions are expected to conclude during the fourth quarter.  These additional severance amounts will be amortized to restructuring expense over the affected employees’ service periods during 2006 and 2007.  The three restructuring activities underway in France and the United States are expected to increase full-year 2006 expenses by $20 to $22 million, or approximately $0.80 to $0.90 per share.

“We continue to experience weakness in tobacco-related product sales. Reduced demand for tobacco-related paper products in Western Europe and the United States, as well as below expected levels of growth in new markets for our reconstituted tobacco leaf products, have caused us to have excess production capacity and increased machine




downtime.  The impact of this downtime, reflected in unabsorbed fixed costs, is expected to have an unfavorable impact on our full-year 2006 operating results of roughly $20 million, or approximately $0.80 per share.  In addition to the three restructuring actions already announced, we continue to evaluate how to operate our worldwide production facilities more effectively with the reduced volumes of tobacco-related papers.  Analysis continues into possible further restructuring activities that could result in additional expenses.

“Inflationary cost increases are expected to have an unfavorable impact on the full-year 2006 operating results of approximately $15 million, or roughly $0.60 per share.  Purchased energy cost increases have begun to slow, however, we continue to experience significant wood pulp price increases with per ton list prices rising 7 percent during the third quarter alone and with a cumulative list price increase of approximately 20 percent expected during the year.  While over $13 million in inflationary cost increases have been realized already this year, the rate of increases is expected to further abate in the fourth quarter and into 2007 as well as be increasingly offset through improved mill operations and continued efforts to systematically control all areas of cost.

“Sales of cigarette papers for lower ignition propensity cigarettes continue to positively contribute to our operating results, especially as we realize manufacturing efficiencies.  In addition to the current demand in the states of New York and Vermont plus all of Canada, we anticipate increased sales during the fourth quarter prior to the January 1, 2007 effective date for lower ignition propensity regulation in California.  With further increases in sales volumes of this cigarette paper combined with expected continuing improvements in manufacturing costs, this product should provide additional improvement to the U.S. business unit results.

“With the announced restructuring activities, difficult business conditions, lower sales volumes, reduced machine operating schedules and significant inflationary cost increases, 2006 will continue to be a very challenging year.  Although our earnings through the third quarter, excluding restructuring expenses, stand at $0.91 per share, we continue to anticipate full-year 2006 earnings, also excluding restructuring expenses, will be in the range of $0.85 to $0.95 per share.  During the fourth quarter, we expect additional production downtime, primarily in France, in order to reduce inventories to ongoing levels.  Earnings at or above the 2005 level of $1.26 per share, excluding any restructuring expenses, are expected to be achieved during 2007 after the benefits of the announced restructuring activities, further increased sales of cigarette paper for lower ignition propensity cigarettes and reconstituted tobacco leaf products and increased fixed cost absorption from improved production schedules are realized.”

This excerpt taken from the SWM 8-K filed Jul 27, 2006.

Business Comments and Outlook

Mr. Deitrich added, “Schweitzer-Mauduit’s second quarter diluted earnings per share of only $0.04 reflect three primary factors: reduced production schedules, primarily in our French operations, causing unabsorbed fixed costs, continuing significant inflationary cost increases and U.S. and French business unit restructuring expenses.  Although we made near-term progress toward offsetting the inflationary cost increases through improved mill operations, the restructuring activities being undertaken in the United States and France will take time to yield financial benefits and their implementation during the interim is costly.

“Reduced operating schedules, continuing inflationary cost pressures, although somewhat abating, and further restructuring expenses are expected during the second half of the year.  However, we also expect to continue to improve mill operations, implement cost control activities and further grow sales volume and profitability from cigarette paper used in lower ignition propensity cigarettes.

“We are experiencing increased weakness in tobacco-related product sales. In particular, sales volumes of reconstituted tobacco leaf products and tobacco-related papers in France will be less than previously anticipated for




 

2006.  Reduced demand for tobacco-related paper products in Western Europe and the United States, as well as below planned levels of growth in new markets for our reconstituted tobacco leaf products, have also caused us to have excess production capacity and increased machine downtime.  The unfavorable impact of this downtime, reflected in unabsorbed fixed costs, is expected to increase our full-year 2006 operating expenses by roughly $20 million, or approximately $0.80 per share.

“Inflationary cost increases are expected to have an unfavorable impact on the full-year 2006 of approximately $15 million, or roughly $0.60 per share.  Higher purchased energy costs alone are expected to have an unfavorable impact of approximately $12 million.  With nearly $10 million in inflationary increases already realized this year, the rate of cost increases is expected to lessen somewhat in the second half of the year and increasingly be offset through improved mill operations and continued efforts to systematically control all areas of cost.

“In addition to the decisions already made, we continue to evaluate how to operate our production facilities more effectively with the reduced tobacco-related papers volumes.  The restructuring activities already undertaken in the United States and France are expected to increase full-year 2006 expenses by $6 to $7 million, or approximately $0.25 to $0.30 per share.  We expect to incur the majority of these expenses by the end of the third quarter of this year, with a $3.9 million impact already realized.  Although analysis is ongoing and no additional decisions have been made nor commitments to any plan beyond the steps already taken, it appears likely that further changes could occur that would require additional write-offs or accelerated depreciation of some production equipment and could possibly include associated restructuring expenses in France or the United States.

“Sales of cigarette papers for lower ignition propensity cigarettes have contributed positively to our operating results, as momentum continues to build for these products.  Canada implemented a requirement for lower cigarette ignition propensity properties for all cigarettes manufactured or imported into Canada on or after October 1, 2005.  Accordingly, a full year of sales of these products in Canada is expected this year.  In addition, the states of Vermont, California, New Hampshire, Illinois and Massachusetts have each enacted legislation requiring lower ignition propensity properties for all cigarettes sold with various effective dates ranging from May 2006 through January 2008.  We began servicing the Vermont requirements during the second quarter and expect to begin supporting the California requirements during the third quarter of this year.  With increased sales volumes of this cigarette paper, we are achieving improvement in our manufacturing costs.

“With the current business conditions, lower than previously anticipated sales volumes, the unfavorable impact of reduced paper machine operating schedules, significant inflationary cost increases and restructuring activities, 2006 will continue to be our most challenging year since the creation of Schweitzer-Mauduit as a stand-alone company in 1995.  In this environment, it is likely that full-year 2006 earnings, excluding restructuring expenses, will be in the range of $0.85 to $0.95 per share.  Earnings at or above the 2005 level of $1.26 per share, excluding any restructuring expenses, are expected to be achieved during 2007 after the benefits of the announced restructuring activities, further increased sales of cigarette paper for lower ignition propensity cigarettes and reconstituted tobacco leaf products and improved fixed cost absorption from improved production schedules are realized.”

This excerpt taken from the SWM 8-K filed Apr 28, 2006.

Business Comments and Outlook

 

Mr. Deitrich added, “Although Schweitzer-Mauduit’s first quarter diluted earnings per share were under the prior year by $0.02 per share, we made notable progress toward achieving improved levels of profitability during the first quarter despite challenging market conditions.  We were able to largely offset significant inflationary cost increases and the unfavorable fixed cost absorption impact of reduced paper machine operating schedules through improved mill operations.  Significant operational improvements were achieved in each of our business units.

 

“Unfortunately, cost pressures are expected to continue during 2006, reflected in higher purchased energy, purchased materials, labor and employee benefit expenses.  The per ton cost of wood pulp has also recently increased and is expected to be above the prior-year level for full-year 2006.  Inflationary cost increases are currently expected to have an unfavorable impact on the full year of approximately $20 million, or roughly $0.80 per share.  Higher purchased energy costs alone are expected to have an unfavorable impact of approximately $15 million.

 



 

“We also continue to experience weakness in tobacco-related paper sales. Reduced demand for our tobacco-related products in Western Europe and the United States has caused us to have excess production capacity and increased paper machine downtime.  The unfavorable impact of this downtime, reflected in unabsorbed fixed costs, is expected to increase our operating expenses during 2006 by roughly $10 million, or approximately $0.40 per share.

 

“Management is currently evaluating how to operate our production facilities more effectively with the reduced tobacco-related papers volumes.  During the first quarter, decisions were made to recognize accelerated depreciation on certain production equipment in both the United States and France.  This accelerated depreciation, as well as related employee severance expenses in the United States, is expected to total approximately $1.6 million during 2006, with $0.5 million of this amount incurred during the first quarter.  Although analysis is ongoing, no additional decisions have been made and we have not committed to any plan beyond the steps already taken, it now appears more likely that changes could occur that would require additional write-offs or accelerated depreciation of some production equipment and could also include associated restructuring charges, particularly in France or the United States.

 

“Sales of cigarette papers for lower ignition propensity cigarettes are contributing positively to our operating results, as momentum continues to build for these products.  Canada implemented a requirement for lower cigarette ignition propensity properties for all cigarettes manufactured or imported into Canada on or after October 1, 2005.  Accordingly, a full year of sales of these products in Canada is expected this year.  In addition, the State of California enacted legislation that requires lower ignition propensity properties for all cigarettes sold in California beginning in January 2007.  We expect to begin supporting the California requirements during the fourth quarter of this year.  With increased sales volumes of this cigarette paper, we are achieving improvement in our manufacturing costs.

 

“With the current market conditions, significant inflationary cost increases and unfavorable impact of reduced paper machine operating schedules, 2006 will continue to be a challenging year.  However, we do expect to offset these unfavorable factors, primarily through improved mill operations, driven by increased productivity and reduced waste, and with increased sales of both reconstituted tobacco leaf products and cigarette papers for lower ignition propensity cigarettes. In this environment, it is likely that earnings per share in 2006 will be approximately in the same range as in 2005, prior to considering the potential impact of any additional downsizing or restructuring activities beyond those initiated in the first quarter.”

 

This excerpt taken from the SWM 8-K filed Jan 26, 2006.

Business Comments and Outlook

 

Mr. Deitrich added, “Schweitzer-Mauduit’s 2005 diluted earnings per share of $1.26 were within the earnings guidance range of $1.25 to $1.30 provided in October 2005.  This level of earnings was well below the financial results obtained in 2004, reflecting more challenging market conditions.  We were unable to offset significant inflationary cost increases through improved mill operations or higher selling prices.  The financial results were also unfavorably impacted by currency exchange rate changes, higher interest expense and a higher effective income tax rate.

 

“Inflationary cost increases had an unfavorable impact on full-year 2005 of $24.9 million or $1.05 per share, with purchased energy accounting for roughly one-half of this amount.  The weakened dollar continued to put pressure on our operating profit, primarily in Brazil, where costs are largely tied to the local currency while selling prices are typically linked to the dollar.  The Brazilian real remained strong versus the dollar and for the full year, the unfavorable currency impact on operating profit in Brazil was $4.1 million or $0.18 per share.  The Company’s effective income tax rate was 29 percent in 2005 compared with 22 percent in 2004.  The prior-year effective income tax rate benefited from utilization of foreign tax credits in the United States and other non-recurring tax items in France. The higher effective income tax rate had a negative impact of $0.16 per share compared with the prior year.  Interest expense was also an unfavorable factor during 2005, increasing by $2.5 million, or $0.11 per share.

 

“Cost pressures are expected to continue in 2006, reflected in higher purchased energy, purchased materials, labor and employee benefit expenses.  A portion of these cost increases will be offset through cost reduction efforts in our operations and through somewhat higher selling prices.  The weakened dollar is expected to continue to put pressure on our profitability in Brazil, similar to 2005.  The Company’s effective income tax rate is expected to be 27 to 29 percent in 2006, approximately at the 2005 level.  Interest expense is expected to be marginally higher in 2006 than in 2005, reflecting higher average interest rates.

 

“In addition, continued weakness is expected in Schweitzer-Mauduit’s sales of conventional tobacco-related papers in our French and U.S. operations.  This anticipated weakness in both sales volumes and selling prices is the result of reduced cigarette consumption, in part due to increased taxes, and a surplus of cigarette paper manufacturing capacity as a result of capacity additions by European competitors in 2003 and 2004.  As a result of this market weakness, we will continue to incur paper machine downtime in each of our business segments. The weakness in tobacco-related paper sales is expected to be partially offset by increased sales of reconstituted tobacco leaf products.

 

“Sales of cigarette papers for lower ignition propensity cigarettes are expected to contribute positively to operating results in 2006, as momentum continues to build for these products.  Canada implemented a requirement for lower cigarette ignition propensity properties for all cigarettes manufactured or imported into Canada on or after October 1, 2005.  Accordingly, a full year of sales of these products in Canada is expected during 2006.  In addition, the State of California enacted legislation that requires lower ignition propensity cigarettes for all cigarettes sold in California beginning in January 2007.  We expect to begin supporting the California requirements during the fourth quarter of this year.

 

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“During 2006, we will continue to upgrade, expand and integrate the operations that we acquired during the past two years in the Philippines and Indonesia.  We will also embark upon the construction of our tobacco-related papers joint venture mill in China.  Governmental approval for the Chinese joint venture was obtained in late 2005 and we are in the process of finalizing project financing and obtaining various governmental permits.  The mill is expected to begin operations in early 2008.

 

“With the current market conditions and inflationary cost increases, it is difficult to project how successful we will be in improving our operating margins during 2006.  We are pursuing selling price increases and opportunities for increased sales volumes.  We are evaluating how to operate our production facilities more effectively with reduced tobacco-related papers volume, while lowering the manufacturing cost of cigarette paper for lower ignition propensity cigarettes.  We are also controlling nonmanufacturing and operating expenses to partially offset the inflationary cost increases.  Our capital spending is being managed at a reduced level, with an emphasis on projects that will most immediately contribute to improved earnings.  In the current environment, it is likely that earnings per share in 2006 will be in the same range as in 2005.  This will be dependent upon our ability to maintain operating profit margins.  Better visibility is expected as we proceed through 2006 and updated earnings guidance will be provided when the first quarter 2006 financial results are released in April.”

 

This excerpt taken from the SWM 8-K filed Oct 27, 2005.

Business Comments and Outlook

Mr. Deitrich added, “Schweitzer-Mauduit’s margins and earnings were comparable to the second quarter of 2005, but well below the financial results obtained during the third quarter of 2004, reflecting more challenging market conditions versus the prior year.  We continue to be unable to offset significant inflationary cost increases through improved mill operations or higher selling prices.  The financial results are also being unfavorably impacted by currency exchange rate changes and higher interest expense.  These negative factors are expected to continue to unfavorably impact our financial results for the balance of the year.

“Cost pressures are expected to continue, reflected in higher purchased energy, purchased materials, labor and employee benefit expenses.  These inflationary cost increases are expected to have an unfavorable impact on the full year of approximately $20 million or $0.84 per share, with purchased energy accounting for roughly one-half of this amount.  The weakened dollar continues to put pressure on our operating profit, especially in Brazil, where costs are largely tied to the local currency while selling prices are often linked to the dollar.  The Brazilian real has continued to strengthen versus the dollar, more than previously expected, and, for the full year, the unfavorable currency impact on operating profit in Brazil is expected to be approximately $4 million or $0.17 per share.   The Company’s effective income tax rate is expected to be approximately 27 to 28 percent, higher than the 22 percent effective income tax rate in 2004.  The prior-year effective income tax rate benefited from utilization of foreign tax credits in the United States and other non-recurring tax items in France.  The higher effective income tax rate is expected to have a negative impact of approximately $0.15 per share compared with the prior year.

“In addition to these negative factors experienced during the first nine months of 2005, further weakness is expected in Schweitzer-Mauduit’s sales of tobacco-related papers from our French operations.  This anticipated weakness in both sales volumes and selling prices is the result of reduced cigarette consumption in several western European countries, in part due to increased taxes, and new cigarette paper manufacturing capacity that was added by European competitors

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in 2003 and 2004.  As a result of this market weakness, we will continue to incur paper machine down time in France.  In addition, it is likely that increased paper machine down time will be required in the United States and Brazil during the fourth quarter, reflecting weakness in tobacco-related papers sales and to achieve lower inventory levels.

“Sales of cigarette papers for lower ignition propensity cigarettes are expected to contribute positively to operating results during the fourth quarter.  Sales of these higher margin cigarette papers are expected to increase in support of the requirement for lower cigarette ignition propensity properties for all cigarettes manufactured or imported into Canada on or after October 1, 2005.  Earlier this month, the State of California enacted legislation that requires lower ignition propensity properties for all cigarettes sold in California beginning in January 2007.

“Although sales volumes of reconstituted tobacco leaf products were above the comparable prior-year quarter during the second and third quarters of 2005, it now appears that for full-year 2005, RTL sales volumes will be near or slightly below the 2004 sales level.  The lower than previously anticipated RTL sales volumes in the fourth quarter are the result, in part, of a recent delay from 2005 to 2006 in the requested shipment dates for a significant RTL order and inventory adjustments by some customers.

“The Company is now expecting diluted earnings per share for full-year 2005 to be in the range of $1.25 to $1.30.  This level of earnings is not acceptable and we are taking steps to achieve future earnings improvement.  We are pursuing selling price increases for 2006 and opportunities for increased RTL sales volumes.  We are evaluating how to operate our production facilities more effectively with reduced tobacco-related papers volume, while lowering the manufacturing costs of cigarette papers for lower ignition propensity cigarettes.  We are also controlling nonmanufacturing and operating expenses to partially offset the inflationary cost increases.  Our capital spending is being managed lower, with an emphasis on projects that will most immediately contribute to improved earnings.”

This excerpt taken from the SWM 8-K filed Jul 28, 2005.

Business Comments and Outlook

 

Mr. Deitrich added, “Schweitzer-Mauduit’s margins and earnings declined during the quarter due to the inability to fully offset inflationary cost increases through either improved mill operations or higher selling prices. The financial results were also unfavorably impacted by currency exchange rate changes, interest expense and the effective income tax rate.  These negative factors are expected to continue to unfavorably impact our financial results for the balance of the year.

 

“Various cost pressures are expected to continue, reflected in higher purchased energy, purchased materials, labor and employee benefit expenses.  Higher purchased energy costs are expected to have an unfavorable impact on the full year of approximately $10 million or $0.42 per share. The weakened U.S. dollar continues to put pressure on our financial results in both Brazil and France, where costs are primarily tied to the local currencies while selling prices are often linked to the U.S. dollar.  For the full year, the unfavorable currency impacts in Brazil are expected to more than offset the benefits of the new cigarette paper production capacity.  The Company’s effective income tax rate is expected to be approximately 28 to 29 percent, higher than the 22 percent effective income tax rate in 2004.  The prior-year effective income tax rate benefited from utilization of foreign tax credits in the United States and other non-recurring tax items in France.  The higher effective income tax rate is expected to have a negative impact of approximately $0.15 to $0.20 per share compared with the prior year.

 

“In addition to these negative factors experienced during the second quarter, continued weakness is expected in Schweitzer-Mauduit’s sales of tobacco-related papers in western Europe.  This

 



 

anticipated weakness in both sales volumes and selling prices is the result of reduced cigarette consumption in several western European countries, in part due to increased taxes, and new cigarette paper manufacturing capacity that was added by European competitors in 2003 and 2004.  As a result of this market weakness, we will continue to incur paper machine down time in France.

 

“Start-up costs related to upgraded paper machines in both the United States and Brazil are behind us, as these machines are now running at end of curve production rates.  With the upgraded production equipment in place, improved mill operations are expected during the balance of the year, especially in the United States.  Sales of cigarette papers for lower ignition propensity cigarettes are also expected to contribute positively to operating results during the second half of 2005.  Sales of these higher margin cigarette papers are expected to increase in support of the requirement for lower cigarette ignition propensity properties for all cigarettes manufactured or imported into Canada on or after October 1, 2005.  Increased sales of reconstituted tobacco leaf products are also anticipated during the second half of 2005.  RTL sales volumes during the second quarter were above both the prior-year quarter and the first quarter of 2005.  Although year-to-date RTL volumes still lag the prior year, for full-year 2005, RTL sales volumes are expected to be above the 2004 level.

 

“As a result of greater than previously anticipated inflationary cost increases and unfavorable currency exchange rate impacts, continued pressure is anticipated on Schweitzer-Mauduit’s gross profit and operating profit margins for full-year 2005.  The Company is now expecting diluted earnings per share for full-year 2005 to be in the range of $1.40 to $1.50.”

 

This excerpt taken from the SWM 8-K filed May 3, 2005.

Business Comments and Outlook

 

Mr. Deitrich added, “Schweitzer-Mauduit’s margins and profitability declined during the quarter due to lower RTL sales volumes, the inability to fully offset inflationary cost increases through either improved mill operations or higher selling prices, unfavorable currency impacts and a higher effective income tax rate.  For full-year 2005, RTL sales volumes are not expected to be a concern, with full year RTL sales volumes anticipated to be above the 2004 level.  The other negative factors, however, are expected to continue to unfavorably impact our financial results for the balance of the year.

 



 

“We will continue to face various cost pressures.  Wood pulp and purchased energy costs are expected to be above the prior-year level.  Higher purchased energy costs alone are expected to have an unfavorable impact on the full year of approximately $6 million or $0.25 per share.  Higher labor rates and employee benefits costs are also expected to continue.  The weakened U.S. dollar continues to put pressure on our financial results in both Brazil and France, where costs are primarily tied to the local currencies while selling prices are often tied to the U.S. dollar.  For the full year, the unfavorable currency impacts in Brazil are expected to offset the benefits of the new cigarette paper production capacity.  The Company’s effective income tax rate is expected to be approximately 28 to 29 percent, higher than the 22 percent effective income tax rate in 2004.  The prior-year effective income tax rate benefited from utilization of foreign tax credits in the United States and other non-recurring tax items in France.  The higher effective income tax rate is expected to have a negative impact of approximately $0.25 per share compared with the prior year.

 

“In addition to these negative factors experienced during the first quarter, further weakness is expected in Schweitzer-Mauduit’s sales of tobacco-related papers in western Europe.  This anticipated weakness in both sales volumes and selling prices is the result of reduced cigarette consumption in several western European countries, in part due to increased taxes, and new cigarette paper manufacturing capacity that was added by European competitors in 2003 and 2004.  As a result of this market weakness, paper machine operating schedules in France for the balance of the year are expected to be less than during the first quarter of 2005 and the prior year.

 

“Start-up costs related to upgraded paper machines in both the United States and Brazil are largely behind us.  The rebuilt paper machines in the United States are now running at end of curve production rates.  Start-up costs in Brazil are expected to total approximately $0.2 million during the second quarter.  With the upgraded production equipment in place, improved mill operations are expected during the balance of the year, especially in the United States.  Sales of cigarette papers for lower ignition propensity cigarettes are also expected to contribute positively to reported operating results during the balance of 2005.  Sales of these higher margin cigarette papers are expected to increase in mid-2005 in support of the requirement for lower cigarette ignition propensity properties for all cigarettes manufactured or imported into Canada on or after October 1, 2005.

 

“As a result of the higher than previously anticipated cost increases, anticipated weakness in the western European tobacco-related papers market and greater than expected unfavorable currency exchange rate impacts, Schweitzer-Mauduit is lowering its earnings guidance for 2005.  The Company is now expecting diluted earnings per share for 2005 to be in the range of $2.05 to $2.15.”

 

This excerpt taken from the SWM 8-K filed Jan 27, 2005.

Business Comments and Outlook

 

Mr. Deitrich added, “Schweitzer-Mauduit’s financial results continue to reflect the benefit of recent capital investments and strategic initiatives as well as related one-time start-up costs.  Increased sales of reconstituted tobacco leaf products are being supported by the recent production capacity expansion in our French operations.  Sales of cigarette papers for lower ignition propensity cigarettes are also beginning to contribute positively to reported operating results.  Sales of these higher margin cigarette papers are expected to increase in mid-2005 in support of the anticipated requirement for lower cigarette ignition propensity properties for all cigarettes manufactured or imported into Canada on or after October 1, 2005.  Start-up costs related to the upgraded paper machines in both the United States and Brazil are expected to continue in 2005, and total approximately $1 million during the first quarter.  Increased cigarette paper volumes in Brazil and improved manufacturing operations in the United States are expected to benefit the financial results.

 

“Market conditions for our businesses continue to be largely favorable, with improved sales volumes and selling prices. However, Schweitzer-Mauduit is experiencing weakness in its tobacco-related paper sales in western Europe caused by reduced cigarette consumption in France and Germany and new cigarette paper manufacturing capacity that was added in western Europe in mid-2004.  This may result in cigarette paper machine downtime in France during 2005.  The Company also continues to face various cost pressures.  Wood pulp and purchased energy costs are expected to be above the prior-year level in 2005. Higher labor rates and employee benefit costs are also expected to continue.  The Company expects to begin expensing stock options in the third quarter of 2005, which is expected to increase non-cash operating expenses by approximately $1 million in 2005.

 

“Schweitzer-Mauduit is currently expecting its operating profit to increase by approximately 12 to 15 percent in 2005.  However, the Company’s effective income tax rate is expected to be approximately 28 to 29 percent, higher than the 22 percent effective income tax rate in 2004.  As a result, the Company is currently expecting diluted earnings per share for 2005 to be in the range of $2.40 to $2.45.”

 

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