Schweitzer-Mauduit's Q3 net income down 50.5% year-over-year to US$9.0M influenced by restructuring, impairment charges; sales up 16% to US$211.2M with increased volumes, favorable foreign currency impact
November 2, 2011
– SWM (NYSE: SWM) today reported third quarter 2011 earnings results for the period ended September 30, 2011.
Third Quarter Financial Highlights:
"The RTL segment's operating profit, excluding restructuring and impairment expenses, decreased $2.9 million primarily due to a 9% decrease in sales volume and resulting unfavorable mill cost performance partially offset by favorable currency impacts. Paper segment results were favorably impacted primarily by increased EU LIP sales volume which more than offset unfavorable inflationary cost increases, increased nonmanufacturing expenses, currency exchange impacts and start-up costs associated with new European LIP capacity. We also recorded $1.4 million in net sales of royalty income associated with customer LIP patent license agreements primarily in Europe."
"Third quarter results are within our expectations for full-year results. We reiterate our previous guidance to generate earnings of at least $5.40 per share for the full year 2011, excluding ICMS valuation allowance and restructuring and impairment expense. Additionally, during the fourth quarter of 2011, we expect to benefit further from royalty revenues resulting from LIP patent license agreements. Looking forward to 2012, we expect royalty income to grow. The expected annual growth in our full-year 2011 earnings stems from achieving an approximate 40% share of European market LIP demand which should be in place by the end of the year. We expect RTL results to stabilize in 2012; although, we anticipate its results to be lower than what we saw first half 2011. Across our operations, the primary factor expected to pressure earnings is continued inflation in energy costs. Wood pulp costs are improving and currency exchange impacts remain volatile. We are confident our continued success in driving cost reductions through our operational excellence and lean manufacturing efforts as well as reaching full efficiency across our European LIP capacity will help mitigate inflationary impacts. For 2012, earnings are expected to be above 2011 levels due to the benefit of full-year European LIP demand as well as royalty revenue from LIP patent license agreements combined with an otherwise relatively stable business environment. At this time, a specific range of 2012 earnings per share is unclear because of ongoing European LIP conversion and patent licensing efforts."
Third Quarter 2011 Results
Net sales were $211.2 million in the three-month period ended September 30, 2011, versus $182.0 million in the prior-year quarter. Net sales increased due to $15.9 million in favorable effect of changes in sales volume and $13.4 million favorable foreign currency impacts primarily from the U.S. dollar and euro.
Operating profit was $11.2 million in the three-month period ended September 30, 2011 versus $30.7 million in the prior-year quarter. The $19.5 million decrease in operating profit is due to a $15.9 million valuation allowance recorded against ICMS business tax credits in Brazil, $5.9 million in increased restructuring and impairment expense, $4.5 million in increased nonmanufacturing costs, $3.2 million increase in inflationary costs, primarily energy and labor, and $2.4 million of European LIP start-up costs. These items were partially offset by $13.5 million favorable effect of higher sales volumes.
ICMS Valuation Allowance
The company recorded a $15.9 million valuation allowance against the entire carrying value of its Imposto sobre Circulaçao de Mercadorias e Serviços, or ICMS, business tax credits in Brazil. The company had been seeking a special government action to obtain tax exempt status for the paper industry to enable more rapid utilization of these credits. During the third quarter of 2011, the government of Rio de Janeiro state signed into law an action that included certain limitations on the use of these credits for the paper industry and has a finite life of 48 months. As a result, utilization of the company's credits may be delayed barring other changes outside of the company's control. The credits do not expire. The company is pursuing other actions to utilize its credits and the future benefit of any material changes as a result of new legislation or a change in our operations will be reported separately.
Operational Trends (Volume, Pricing and Cost)
During the third quarter, sales volumes of LIP cigarette paper increased 63% versus the third quarter of 2010 due to ramp-up of sales in Europe. Volume declined for traditional tobacco-related papers during the third quarter versus the prior-year quarter, reflecting lower demand in certain markets. Overall demand for tobacco-related papers declined 4% for the quarter. Including sales volume increases at our Chinese paper joint venture, which are not reported in consolidated SWM results, SWM world-wide tobacco-related papers sales volume declined 1%.
Third quarter sales volume of RTL decreased versus the prior-year quarter primarily reflecting decreased requirements from major customers. In January 2011, we announced changes to our Asian reconstituted tobacco strategy including the suspension of the greenfield RTL facility in the Philippines which was completed during the third quarter.
Our Chinese paper joint venture, CTM, generated $1.4 million in income for the company during the third quarter, reflecting continued growth in sales volumes and operational improvements. Sales volume in the third quarter of 2011 at CTM increased 23% versus the prior-year quarter.
Year-to-Date Cash Flow and Quarterly Dividend
Cash provided by operations was $37.9 million for the nine months ended September 30, 2011, compared with $105.2 million in the prior year. The lower cash generation during the 2011 period was largely due to a planned increase in working capital, totaling $29.2 million, primarily reflecting new working capital needs to support operations in Poland.
Net debt, at September 30, 2011 was $103.6 million, compared with cash, net of debt, of $35.5 million at December 31, 2010. Total debt was 27.2% of capital at September 30, 2011.
Capital spending was $51.9 million and $45.7 million during the nine-month periods ended September 30, 2011 and 2010, respectively. The increase in capital spending was primarily due to expenditures of $9.2 million on construction of the LIP printing facility in Poland and $30.8 million in 2011 toward construction of the RTL facility in the Philippines which has been completed to a state in which it can be held until the company determines to complete construction and initiate operations.
In 2011, capital spending is projected to total $55 million to $65 million. In July 2011, the company completed previously announced open market share repurchase plans totaling $105 million. Other cash uses during 2011 are expected to be $65 million to $70 million including increases in working capital, employee severance payments in France, pension contributions, China joint venture funding and other uses. In 2012, capital spending is currently projected to be approximately $35 million. Other cash uses during 2012 are currently expected to be $40 million to $50 million including funding of the new China RTL joint venture and excluding the expected proceeds of the sale of RTL equipment from the suspended Philippine project to the China RTL joint venture.
SWM announced today a quarterly common stock dividend of $0.15 per share. The dividend will be payable on December 29, 2011 to stockholders of record on November 29, 2011.
SWM will hold a conference call to review third quarter 2011 results with investors and analysts at 8:30 a.m. eastern time, on Thursday, November 3, 2011. 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.
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 reported Q3 2010 net income of US$18.2 million.