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Executives

Peter J. Thompson - Chief Financial Officer

Wayne Deitrich - Chief Executive Officer and Chairman of the Board

Mark Spears - Corporate Controller

Analysts

Jonathan Lichter - the Sidoti & Company

Schweitzer- Mauduit International (SWM) Q1 2008 Earnings Call May 8, 2008 10:30 AM ET

Operator

Good morning. My name is Demetrius, and I will be your conference operator today. At this time, I would like to welcome everyone to the Schweitzer-Mauduit 2008 Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer session after the speakers' remarks. (Operator Instructions)

Thank you, Mr. Thompson, you may begin your conference.

Peter J. Thompson – Chief Financial Officer

Thank you, Demetrius Good morning; I am Peter Thompson, Chief Financial Officer of Schweitzer- Mauduit International. With me are Wayne Deitrich, our Chief Executive Officer and Chairman of the Board, Mark Spears, our Corporate Controller and several other Executive Officers of the Company. Thank you for joining us for review of our first quarter 2008 financial results. Which were file with the United States Securities and Exchange Commission and Form 10-Q 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 comments 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 first quarter of 2008; Wayne will then provide additional discussion of key factors impacting our results. We reported a first quarter 2008 net loss of $1.2 million compared to the net income of $4.2 million during the first quarter of 2007. The diluted loss per share was $0.08 compared with diluted earnings per share of $0.27 in the prior year quarter.

Restructuring expenses decreased earnings per share during the first quarters of 2008 and 2007 by $0.09 and $0.11 respectively. Excluding restructuring expenses, diluted earnings per share $0.01 for the first quarter of 2008 declined relative to $0.38 for the first quarter of 2007. Net sales were $189.8 million during the first quarter of 2008 and 11.5% increase over the prior year quarter.

Approximately 60% of the increase, or $11.4 million, was due to favorable foreign currency exchange rate impact, while the balance was primarily due to an improved mix of products sold Operating profit was zero during the first quarter of 2008 versus an operating profit of $9.1 million in the prior year quarter. Excluding pre-tax restructuring expenses, operating profit was $2 million during the first quarter of 2008 compared with $11.8 million during the first quarter of 2007.

The lower operating profit was primarily due to $8.3 million from inflationary cost increases, especially energy, $5.3 million from startup costs related to the rebuild of a paper machine at PdM, and $4 million from unfavorable foreign currency impact, partially offset by an improved mix of products sold and increased sales volumes.

Excluding restructuring expenses from each Unit's first quarter 2008 results, the comparison to prior year quarterly results follows; the French segment's operating profit was $700,000, a decrease of 8.9 million, the U.S. segment's operating profit was $5.8 million an increased of $1 million and Brazil's operating loss was $1.7 million compared with an operating profit of $200,000. Interest expense increased to $2.4 million during the first quarter of 2008 from $1.3 million in the prior year quarter due to higher outstanding debt levels. Other income and expense net was an expense of $1.6 million versus income of $100,000 for the first quarters of 2008 and 2007 respectively primarily due to foreign currency transaction losses in the current period. We recorded an income tax benefit during the first quarter of 2008, reflecting an effective income tax rate of 65% compared with an income tax provision of 24% in the prior year quarter. The difference in effective tax rate was primarily due to the loss in 2008 versus income in 2007, the favorable tax impact of our foreign holding company structure and the geograhic mix of taxable earnings.

Minority interest in earnings of subsidiaries decreased from $1.7 million to $200,000 in the current year quarter due to our January 2008 purchase of the 28% minority interest of LTR Industries, our French reconstituted tobacco leaf business.

Net cash used in operations totaled $8 million for the first quarter of 2008 compared with $10.1 million provided by operations in the prior year quarter. Our current period operating net cash flow was negatively impacted by a $12.1 million increase in operating working capital and a lower and a lower operating result.

Capital spending was $18.6 million and $9 million during the three month period ended March 31, 2008 and 2007 respectively. The increase in capital spending was primarily due to $7.2 million incurred at PdM for a paper machine rebuild and improvements to the bobbin slitting process.

In January 2008, the EUR 35 million, approximately $51 million acquisition of the minority shares in LPRI was completed, along with the final $1.9 million equity injection into the China Paper joint venture, and both were funded from existing credit facilities.

As a result of these factors, combined with foreign currency translation impact, total debt increased by $93.9 million or 93% during the first quarter of 2008. With continued costs and operational pressures, especially in France, total debt has in creased to approximately $220 million as of today.

Schweitzer-Mauduit announced a quarterly common stock dividend of $0.15 per share on April 25th, 2008. The dividend will be payable on June 9th, 2008 to stockholders of record on May 12th, 2008.

I will now turn to Wayne Deitrich to cover Schweitzer-Mauduit's business comments and outlook.

Wayne Deitrich – Chairman of the Board and Chief Executive Officer

The first quarter 2008 financial results were disappointing. Although we expected the first quarter of 2008 to be the lowest earnings quarter of the year, results were more severely impacted than expected by inflation, a longer than planned startup in the rebuilt paper machine in France, and unfavorable currency impacts. We realized increased earnings from higher sales volumes of reconstituted tobacco leaf products and cigarette paper use in lower ignition propensity, or LIP cigarettes, but this was not enough to offset negative changes in our business.

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. This is well above the impact seen in the preceding 12 months.

Pending rise in crude oil prices and the resulting eventual impact on our electricity, natural gas, fuel oil, and specialty chemical costs will continue to negative 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 startup is improving, but will continue to negatively impact results at a declining rate likely into the third quarter 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 initiating the shutdown of the Lee Mills this month, and in China, we recently initiated startup of our Greenfield cigarette and porous plug wrap joint venture. Full realization of the range of earnings improvement from the restructuring actions is now less certain given other factors 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 operations 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 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 of about 10% is expected for 2008, and we have authorized a capital project to increase capacity on our largest machine by 10%. Based upon the States that have passed LIP regulations, demand for this product is expected to grow from a current level of approximately 20% of North American cigarette consumption to approximately 57% by early 2010.

In addition, States representing approximately 19% of the North American consumption have either passed or proposed LIP regulations, and several U.S. cigarette producers have announced voluntary national distribution of the LIP technology. This now supports the likelihood that LIP cigarettes could 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 units' results.

International LIP efforts are accelerating, especially in the European Union. Continued EU rule-making activities indicate that it is increasingly likely LIP cigarette regulations outside North America will become effective by 2012 and increase the demand for cigarette paper used in 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. Schweitzer-Mauduit faces a more difficult full year earnings outlook than we previously expected. The challenges to earnings growth in 2008 will continue to be inflationary cost increases, particularly energy, initial losses associated with startup of our rebuilt paper machine in France, as well as startup expenses that we are incurring in our 50% tobacco-related joint venture in China, likely further unfavorable currency impact, foreign currency impacts, and the ongoing demand, decline in demand for traditional paper products in North America and Europe.

Continued growth in sales in reconstituted tobacco leaf and cigarette paper for LIP products in the U .S. 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 a restructure in expenses. We anticipate that the first quarter of 2008 will be the lowest earning period of the year, with some improvement in earning occurring in the second quarter. Substantial increases in earnings, excluding restructuring expenses, are not likely to occur until the second half of 2008 following the full implementation of the current restructuring activities underway across our businesses, along with likely additional pricing and restructuring actions needed to address inflationary costs and currency impacts.

I yield to Peter to conclude the call.

Peter Thompson – Chief Financial Officer

Thank you Wayne; that concludes our planned comments. Operator, please open the phone line for questions.

Question-and-Answer Session

Operator

(Operator Instructions).your first question comes the lime of Jonathan Lichter, from the Sidoti & Company.

Jonathan Lichter

Good morning; how certain are you of these price increases at this point?

Peter Thompson

If we at this point implemented some price increases, it would be mostly with independent companies, ones that are not governed by global negotiating because with the multinationals on a global negotiating basis, it is harder to get mid-contract price changes. The multinationals, which of course would be the majority of our sales, we're still in discussions with key customers about pricing actions. So the way it's going to play out is we will start to book some price increases here in the second quarter above and beyond anything that we had previously seen, but then it will build from there. Now, how successful we'll be in total, at this point I couldn't say because we haven't completed it. We are resolved that we do need to get price increases in the environment that we're in, especially with inflation and currency doing what it's doing, supports that it's obviously quite visible. So it will be continuing and not something that will happen in a large single event.

Jonathan Lichter

So, would it happen primarily, the multinationals do you think in Q3, or could that be stretched out into Q4?

Peter Thompson

I think probably what will happen is we'll see price increases that will come this year, and then we will hopefully be successful in having some type of adjustors going forward that we would have pricing reset, again in the beginning of 2009. So I think we'll see it in waves, and how much we get, that is very hard to predict at this point, but I think specific to the multinationals, we'll see it come in kind of periods, now and then another increase further in 2009, at the beginning of the year.

Jonathan Lichter

Okay, how is the startup of the machine in China going so far?

Peter Thompson

So far so good; it's very early in the process, but all of the mechanical operations, the way that the machine would start up is it would sequentially begin to operate first in the stock making area, mechanically operating, electrically operating, etc. We're at the point where we're making fiber into paper. We haven't yet gotten to the point we're making sellable paper, but we are progressing pretty much along our line of expectation, and so far, it may be very early to say, but better than the same type of experience we saw with the machine rebuild in France. And obviously, having come off the heels of that at this moment, we don't want to see a repeat of that type of experience. Now, it's too early to say that startup in China will go perfectly, but we are seeing good progress so far.

Jonathan Lichter

And the French machine, you mentioned that it would extend into Q3; is that, are you being cautious there, or do you really think, will it take that long?

Peter Thompson

I think it will probably take that long. What we are seeing right now is in April and in May so far, we've seen good progress, but we're basically on the same startup curve that we should have been on back in February when we first turned on the machine. So we lost two months, and we'll never get that back. From where we are right now, we're progressing up the startup curve. Will we be at 100% by the end of June; probably not. So that's where we would see some impact going into the third quarter.

Jonathan Lichter

Are you, how certain are you that that will be resolved during Q3?

Peter Thompson

Fairly certain; we're getting to the point now where we're achieving 80-plus plus percent of the eventual production rate of the machine. What we're still struggling with is being able to produce the full range of products on this machine that would represent the full spectrum of paper specifications. So it's still dealing with primarily meeting the variability issues that we have with certain key physical properties of the paper. When that and how that will be exactly resolved is the hardest part to know. Now, what that means, though, form a financial standpoint is we have enough of a breadth of a spectrum of paper products that can be made on this machine that it can be operated at a full schedule. So financially, we should see the impact of this machine not operating where we thought it would be end up or wind up here in the second quarter. I would expect at this point that unless we have a new issue, which shouldn't happen, that in the third quarter, we will not see much of a financial negative form this machine. That's our current expectation. But operationally, we'll continue to work on this machine to make it meet fully all of our objectives, but financially, the third quarter it should be neutral in terms of any further impact.

Jonathan Lichter

Thank you.

Operator

(Operator Instructions). There are no further questions at this time; do you have any closing remarks?

Peter Thompson

Not at this time, just to thank everybody for taking the time to join us today.

Operator

This concludes today's conference call. You may now disconnect.

Peter Thompson

Bye.

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