Schweitzer-Mauduit's Q1 net income down 9.9% year-over-year to US$14.6M impacted by restructuring and impairment expenses; net sales up 11.8% to US$202.1M positively influenced by changes in sales volume, royalty income

Kendall Sinclair

Kendall Sinclair

May 3, 2012 – SWM

ALPHARETTA, Georgia , May 3, 2012 (press release) – SWM (NYSE: SWM) today reported first quarter 2012 earnings results for the period ended March 31, 2012.

First Quarter Financial Highlights:

  • Net sales of $202.1 million, an 11.8% increase over the prior-year quarter
  • Operating profit, excluding restructuring and impairment expense, of $43.1 million compared to $27.4 million in the first quarter of 2011
  • Net Income of $14.6 million
  • Restructuring and impairment expenses of $18.7 million pre-tax, including $16.9 million of impairment charge on property, plant and equipment
  • Adjusted EBITDA from Continuing Operations of $54.1 million (see non-GAAP reconciliations)
  • Diluted net income per share from continuing operations of $0.90, compared to $0.93 per share in first quarter 2011; Adjusted income per share from continuing operations of $1.78 compared to $0.98 per share in the first quarter of 2011 (see non-GAAP reconciliations)

First Quarter Operational Highlights:
  • Lower Ignition Propensity (LIP) cigarette paper sales volumes increased 47% versus prior-year quarter
  • Reconstituted Tobacco volumes increased 13% versus prior-year quarter
  • Continued cost savings and benefits from operational excellence initiatives
  • Customer invoicing dispute for banded cigarette papers withdrawn

Frédéric Villoutreix, Chairman of the Board and Chief Executive Officer, commented, "SWM's strong first quarter 2012 performance versus the prior-year quarter reflects the expected increase in volumes of LIP papers to meet EU regulations, which became effective during the fourth quarter of 2011. In addition, we are no longer incurring start-up expenses as experienced in 2011. Reconstituted Tobacco volumes were also stronger than the prior-year quarter and we now expect a moderate increase in total year 2012 RTL volume.

"We remain focused on repositioning our business portfolio towards higher-value products and growing our market presence in Asia", added Mr. Villoutreix. "Continued instability in macroeconomic factors and foreign exchange volatility remain challenging. Although overall first quarter inflationary impacts were not significant, we expect pulp prices will start to increase over the course of 2012. In addition, the future impact of foreign currency exchange rates remains an important variable. However, despite unfavorable year over year currency impacts already experienced in the first quarter and assuming no worsening during the remainder of 2012, we expect 2012 adjusted diluted earnings per share (a non-GAAP metric) of $7.20. This excludes the impact of 2012 share repurchases. Repurchases in 2012 through April 27 are estimated to provide an upside of approximately $0.22 per share. We expect our continued success in driving cost reductions through our operational excellence and lean manufacturing efforts, as well as improved efficiency across our European LIP capacity, will offset unfavorable inflationary impacts."

First Quarter 2012 Results

Net sales were $202.1 million in the three-month period ended March 31, 2012, versus $180.7 million in the prior-year quarter. Net sales increased due to $21.7 million in net favorable effects of changes in sales volume, net of mix and selling price impacts, and $3.9 million due to royalty income, partially offset by $4.2 million in unfavorable foreign currency impacts primarily from the U.S. dollar and euro.

Operating profit from continuing operations was $24.4 million in the three-month period ended March 31, 2012 versus $26.4 million in the prior-year quarter. Excluding the impact of $17.7 million in higher restructuring and impairment expenses, operating profit improved by $15.7 million. The $15.7 million improvement was due to the $11.8 million favorable effect of improved sales volumes, net of mix and selling price impacts, $3.5 million in reduced manufacturing costs, primarily due to benefits from our operational excellence initiatives, and $3.9 million in royalty income. Partially offsetting the improvements were $1.5 million in higher general and administrative expenses. First quarter 2012 operating profit compared with the prior-year quarter was negatively impacted by a $0.9 million unfavorable effect of currency.

The $18.7 million in first quarter 2012 restructuring and impairment expense included a $16.9 million non-cash impairment charge on North American property, plant and equipment. This impairment resulted from an amendment to the company's cost-plus contract with Philip Morris-USA, a subsidiary of Altria Group Inc. The company expects to continue supplying banded paper product to Philip Morris-USA through the term of the amended agreement which expires in 2016. Philip Morris-USA has also withdrawn its dispute over the manner in which SWM calculated costs for certain banded cigarette papers under the contract. SWM looks forward to continuing a positive, long-term relationship for the production and sale of banded cigarettes papers and other products to this valued customer.

During the three months ended March 31, 2012, SWM's effective tax rate was 40.8%. The first quarter included a $2.0 million valuation allowance on certain deferred tax assets that are not expected to be realized. Excluding this item, SWM's effective tax rate would have been 32.4%.

Operational Trends (Volume, Pricing and Cost)

During the first quarter, sales volumes of LIP cigarette paper increased 47% versus the first quarter of 2011 due to higher sales in Europe. Volume declined for traditional tobacco-related papers during the first quarter versus the prior-year quarter, reflecting lower demand in certain markets. Overall demand for tobacco-related papers increased 1% for the quarter. Including sales volume increases at our Chinese paper joint venture, CTM, which are not reported in consolidated SWM results, first quarter SWM world-wide tobacco-related papers sales volume increased 2% over the prior-year period.

Cash Flow, Debt and Quarterly Dividend

Cash provided by operations was $48.4 million for the first quarter ended March 31, 2012, compared with cash used of $0.2 million in the prior year quarter. The higher cash generation during the 2012 period was largely due to higher profitability net of the non-cash impairment charge and to improved working capital management versus an increase during 2011 primarily reflecting decreased severance and income tax liabilities.

Net debt at March 31, 2012 was $62.2 million, a $7.3 million improvement compared with $69.5 million at December 31, 2011. Total debt was 23.4% of capital at March 31, 2012. "We continue to focus on strong operational cash flows, and this is reflected by the improvement reported during the first quarter, despite the impact of $21.6 million in share repurchases," commented Jeff Cook, Executive Vice President and Chief Financial Officer.

Capital spending was $7.8 million and $27.7 million during the quarters ended March 31, 2012 and 2011, respectively. The 2011 capital spending included $19.0 million toward construction of the RTL facility in the Philippines to a mothball state and $4.4 million toward completion of the LIP printing facility in Poland.

Capital spending is projected to be approximately $35 million in 2012. Through April 27, 2012, the Company has purchased 672,727 shares of its common stock for $45.6 million at an average price of $67.84 under the 2012 Board authorization of $50 million. Other cash uses during 2012 are currently expected to be $30 million to $40 million including funding of our China RTL joint venture, CTS.

SWM announced today a quarterly common stock dividend of $0.15 per share. The dividend will be payable on June 29, 2012 to stockholders of record on May 29, 2012.

Conference Call

SWM will hold a conference call to review first quarter 2012 results with investors and analysts at 8:30 a.m. eastern time, on Thursday, May 3, 2012. The conference call will be simultaneously broadcast over the Internet at www.swmintl.com. To listen to the call, please go to the Web site at least 15 minutes prior to the call to register and to download and install any necessary audio software. For those unable to listen to the live broadcast, a replay will be available on the Web site shortly after the call.

SWM will use a presentation in conjunction with its conference call. The presentation can be found on the company's Web site in advance of the earnings conference call. The presentation can also be accessed via the earnings conference call webcast.


About SWM

SWM is a diversified producer of premium specialty papers for the tobacco industry. It also manufactures specialty papers for other applications. SWM and its subsidiaries conduct business in over 90 countries and employ 2,800 people worldwide, with operations in the United States, France, Brazil, the Philippines, Indonesia, Canada, Poland and two joint ventures in China. For further information, please visit the company's Web site at www.swmintl.com.

Industry Intelligence editor's note: In an omitted table, SWM recorded Q1 2011 net income of US$16.2 million.

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