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Schweitzer-Mauduit Posts First Quarter 2008 Loss

May 8, 2008 - Schweitzer-Mauduit International, Inc. today reported a first quarter 2008 net loss of $1.2 million compared with 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, earnings per share of $0.01 for the first quarter of 2008 declined relative to diluted earnings per share of $0.38 for the first quarter of 2007.

Wayne H. Deitrich, Chairman of the Board and Chief Executive Officer, commented that, "The first quarter 2008 financial results for Schweitzer-Mauduit 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 significant inflationary cost increases, especially energy, combined with a longer than planned start-up of a 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 used in lower ignition propensity, or LIP, cigarettes, but this was not enough to offset negative changes in our business. During the first quarter, we completed the 35 million euro acquisition of the 28 percent minority share in our reconstituted tobacco leaf business in France. As a result of the acquisition, as well as lower cash generation from operations due to lower earnings, higher capital spending and increased working capital, we increased debt by $93.9 million during the first quarter."

Restructuring Expenses

Schweitzer-Mauduit initiated restructuring activities during 2006 and 2007 in France and the United States and during the third quarter of 2007 in Brazil. As a result of these restructuring actions, employment at the affected locations is expected to decrease by approximately 600 employees from 2006 levels. Reductions totaling approximately 420 employees have been achieved through March 31, 2008 at these locations, with decreases of nearly 40 employees occurring during the first quarter of 2008. The announced restructuring activities are expected to be completed during 2008.

The primary restructuring activities that occurred during the first quarter of 2008 include completion of the capital investments and initiation of those operations at Papeteries de Mauduit, or PdM, the largest of the Company's three French paper operations, and progress towards qualification of base tipping paper from our Brazilian operation to replace current supplies from the Lee Mills in the U.S. and the Malaucene mill in France.

In accordance with applicable U.S. generally accepted accounting principles, restructuring expenses associated with these actions were recognized during the first quarters of both 2008 and 2007, resulting in pre- tax charges of $2.0 and 2.7 million, respectively. We currently estimate pre- tax expenses from 2006 through 2008 for all announced restructuring activities to be in the range of $51 to $54 million, comprised of $29 to $31 million in severance and other cash costs and $22 to $23 million in asset impairment charges, accelerated depreciation and other non-cash costs. Restructuring expenses of $47.1 million, or approximately 90 percent of the total projected, have been recognized through March 31, 2008

First Quarter 2008 Results

Net sales were $189.8 million in the three month period ended March 31, 2008, an 11.5 percent increase over the prior-year quarter. Net sales increased $11.4 million as a result of favorable foreign currency exchange rate impacts, $7.4 million due to higher average selling prices, primarily due to an improved mix of products sold, and $0.7 million from increased sales volumes.

Operating profit was zero in the three month period ended March 31, 2008 versus an operating profit of $9.1 million in the prior-year quarter. Excluding pre-tax restructuring expenses, operating profit was $2.0 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 start- up costs related to the rebuild of a paper machine at PdM and $4.0 million from unfavorable foreign currency impacts, partially offset by an improved mix of products sold and increased sales volumes.

Excluding restructuring expenses from each unit's results, the French segment's operating profit was $0.7 million in the three month period ended March 31, 2008, a decrease of $8.9 million from an operating profit of $9.6 million in the prior-year quarter. The U.S. segment's operating profit was $5.8 million for the first quarter of 2008, a $1.0 million increase from an operating profit of $4.8 million during the prior-year quarter. Brazil's operating loss was $1.7 million during the three month period ended March 31, 2008, compared with an operating profit of $0.2 million during the prior-year quarter.

Interest expense of $2.4 million during the first quarter of 2008 increased from $1.3 million in the prior-year quarter due to higher outstanding debt levels. Other income (expense), net was an expense of $1.6 million versus income of $0.1 million for the three month periods ended March 31, 2008 and 2007, respectively, primarily due to foreign currency transaction losses in the current period.

The provision (benefit) for income taxes in the three month period ended March 31, 2008 reflected an effective tax rate of 65 percent compared with 24 percent in the prior-year quarter. The difference in effective tax rates was primarily due to the loss in 2008 versus income in 2007, the favorable tax impact of our foreign holding company structure and the geographic mix of taxable earnings.

Minority interest in earnings of subsidiaries decreased from $1.7 million to $0.2 million in the current year quarter due to our January 2008 purchase of the 28 percent minority interest of LTR Industries, S.A., or LTRI.

The net loss and diluted loss per share were unfavorable versus the prior- year net income and diluted income per share by $5.4 million and $0.35 per share, respectively. Excluding restructuring expenses, earnings per share totaled $0.01 during the first quarter of 2008 compared with $0.38 per share in the prior year quarter.

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 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."

SOURCE: Schweitzer-Mauduit International, Inc.




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