Schweitzer-Mauduit International, Inc. 05/06/10 Investor Presentation
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Transcript of Schweitzer-Mauduit International, Inc. 05/06/10 Investor Presentation
Schweitzer-Mauduit
NYSE: SWM
First Quarter 2010
2
Key Investment Highlights
• #1 Global position in cigarette paper and reconstituted tobacco products
• Deep customer penetration and longstanding relationships with western
multinational cigarette companies spanning over 50 years
– Market presence in China for 16 years
• Superior product portfolio featuring high value products
• Regulatory backdrop driving strong growth prospects for “safer” cigarettes
• Executed Asian expansion initiatives with additional opportunities on horizon
• Successfully restructured manufacturing operations driving improved
efficiency and profitability in higher cost regions
• Seasoned management team with over 100 years of industry & manufacturing
experience
3
Schweitzer-Mauduit Profile – Financial Highlights
(1) Includes restructuring and impairment
(2) Excludes restructuring and impairment
$158.4
$688.2
$0.88
$11.8
$30.7
$13.5
$13.3
$184.1
1Q09
$1.19Diluted Earnings per share (2)
$41.7Adjusted EBITDA (2)
$(21.3)Net Debt
$771.5Total Assets
$31.4Cash from Operations
$21.8Net Income (2)
$18.6Net Income (1)
$193.0Net Sales
1Q10(Amounts in Millions, Except Per Share
Amounts)
4
Agenda
Overview of Schweitzer-Mauduit����
Successfully Restructured Operations
Reconstituted Tobacco Leaf (RTL)
Low Ignition Propensity Tobacco Paper
Financial Review
5
Corporate Overview
• Founded in 1545, Schweitzer-Mauduit International’s (“SWM” or the “Company”) strategic focus has been on cigarette papers since the early 1900s
• Became a public company in December 1995 through a spin-off by Kimberly-Clark Corporation
• Market leadership in tobacco-related specialty paper products
– Leading manufacturer of lower ignition propensity (“LIP”) cigarette paper
– Sole independent pioneer of reconstituted tobacco leaf (“RTL”) products
• Global Presence – Sales to 90 Countries Worldwide
RTL Expansion Opportunities (Asia)Operation Sites
6
Management Strategy to Deliver Growth
• Finalize restructuring
activities in France and the
U.S. by 2010
• Optimize cost structure
through repositioned
manufacturing footprint
– Company-wide commitment
to operational excellence
– Shift production to lower cost
regions
Leading Global Manufacturer of Fine Papers and Related Products for the Tobacco Industry
• Establish China paper
JV as technology leader
on domestic premium
brands
• Develop new Philippines
RTL facility
• Create new China JV to
expand RTL capabilities
in the region
• Expand sales of RTL
products through new
production capacity and
increased market
penetration in Asia
• Capitalize on regulatory
requirements for high
growth LIP papers
Continue to upgrade
and expand
operations in Asia
Focus on growth
through high value
products & technology
Complete rationalization
of base paper
manufacturing profile
7
Substantial Market Growth Prospects Globally
Global Cigarette Consumption:
• World-wide cigarette consumption estimated
at 6.2 trillion units
– Growing 0.5% to 1.0% annually
• Market shifting from the West to the East
– Asia growing 2.5% to 3.0% annually
World Cigarette Production by Geography in 2009
SWM Sales by Geography in 2009 1
Source: SWM management
1 Total sales include $ 740 mm for SWM and $32 mm for its unconsolidated joint venture, CTM
SWM Strategy is to Target High Growth Developing Markets
Eastern Eu rope
1 5 %
Western Eu rope
1 1 %
Nor th Am er ica
6%
Latin Am er ica
5 %
Other
4%
Asia Pacific
2 2%
Ch ina
3 7 %
Eastern Eu rope,
1 0%
Ch ina , 9%
Asia /Pacific, 1 1 %
Latin
Am er ica ,
7 %
Other , 3%
North Am er ica ,
2 9%
Western
Eu rope,
3 1 %
0
1,000
2,000
3,000
4,000
5,000
6,000
1995 1996 19971998 1999 20002001 2002 20032004 2005 20062007 2008 2009
Mill
ion U
nits
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
% o
f Pro
ductio
n
Production Developed Countries Production Developing Countries
% Developed Countries % Emerging Countries
8
Full Line of High Value Tobacco-Related Products
• Performance critical to high-speed, low-cost cigarette manufacturing
– Runability
– Consistency
• Premium product quality drives longstanding customer relationships
– Seamless integration with leading global customers’ operations
• Technology and research and development efforts support high-value product applications
– Taste
– Reduced tar, carbon monoxide and nicotine delivery
– Lower ignition propensity
Plug WrapPaper
TippingPaper
ReconstitutedTobacco
CigarettePaper
9
Full Range of Specialty Tobacco Products
� Key to provide full range of products to largest, multinational customers
� More competitive environment due to declining demand in developed world
� SWM restructuring activities focused on maximizing efficiency, reducing costs and shifting capacity towards growth in Asia
Base Paper- Cigarette Paper- Plug Wrap- Tipping Paper- Non-tobacco products
� Controls rate of cigarette combustion by slowing air flow
� High growth due to regulatory-mandated adoption
� European, Australia and likely other Asian countries to adopt through 2012
Lower Ignition Propensity Paper
� Manufactured from tobacco by-products
� Used in cigarette design to provide unique brand taste
� Lower cost than natural tobacco
� Benefitting from regulatory change
Reconstituted Tobacco Leaf
CommentaryProduct Type
10
• Sole independent RTL manufacturer globally
• Leading manufacturer of LIP and only producer of both proven technologies
Leading Global Provider of Cigarette Paper & Related Products
Cigarette Paper (LIP)
RTL
>20%<10%>50%<10%Non-tobacco (% of Net Sales)
Tipping Paper (Base,
Finished)
Plug Wrap (Porous,
Conventional)
Cigarette Paper (Wood, Flax)
Miguel y Costas
Julius Glatz
DelfortSWMKey Products
Global Positioning: Tobacco Paper 1
Note: Circles to left reflect relative estimated market strength by productSource: Company filings, SWM management1 Market share by volume, excluding China2 SWM volumes exclude production from its facilities in France (LTR and
Malaucène)
SWM²
(U.S.)
36%
Delfort (Austria)
34%
Julius Glatz
(Germany)
12%
Miguely Costas
(Spain)
8%Other
10%
11
Strong Relationships with Leading Global Players
• Top six customers account for approximately 80% of the global market (incl. China)
– Relationships averaging over 50 years among six leading western multinational customers
2009 Global Cigarette Production (Units) SWM 2009 Sales by Customer (US $)1
Source: SWM management1 Sales include SWM’s $740 mm and its unconsolidated joint venture, CTM’s, sales of $32 mm
Imperial
5%
Japan Tobacco
9%
BAT
1 1%
China
38%
Other
20%
Philip Morris
International
1 4%
Philip Morris USA
3%
Imperial
8%
China
8%
BAT
14%
Other
30%
Philip Morris
USA
1 1%
Japan Tobacco
1 1%
Philip Morris
International
18%
12
Strong Intellectual Patent Protection
Extensive and Expanding Patent Portfolio
• 150 patents granted (80 patents pending) (1)
– Covers cigarette Papers, RTL and cigar wrapper/binder products/processes
Industry-Leading LIP Patent Protection
• 59 patents plus 18 patents pending and 261 Independent Claims covering LIP
– Patent portfolio provides first-mover advantage and significant barriers to entry
– Establishes SWM as the world's leading independent producer of papers used for LIP cigarettes
– Covers all major components of LIP production: smoking article, wrapper and process
• Smoking article = 78 Independent Claims in 32 countries
• Wrapper = 84 Independent Claims in 32 countries
• Process = 99 Independent Claims in 30 countries
– Patent life exclusivity expiring 2017 through 2022
(1) As of 12/31/09
13
Agenda
Overview of Schweitzer-Mauduit����
Successfully Restructured Operations����
Reconstituted Tobacco Leaf (RTL)
Low Ignition Propensity Tobacco Paper
Financial Review
14
Significant Base Paper Turnaround Implemented
11
37
4.8
10.2
15.3
12
31
35
17
$0
$5
$10
$15
$20
$25
$30
$35
$40
2006 2007 2008 2009 2010e 2011e
$ Millions
Cash Restructuring Costs Operating Profit Benefit
• Significant transformation and improvement
executed in base paper manufacturing profile:
• Over $67 million in one-time cash costs invested
– Additional $50 million of non-cash one-time costs
• $35 million run-rate operating income benefit
– $17 million realized in 2009
• Base papers restored to profitability in 2009
• Restructuring implemented in France and the Americas due to excess manufacturing capacity
– PDM (France) shutdown 3 paper machines
– Lee (U.S.) shut down facility
– Brazil restructured – exited coated papers
– Transferred paper production from U.S. to Brazil
– Malaucène (France) closing facility
– France – announced general staff reduction
– Spotswood (U.S.) shutting down paper machine
SWM Restructuring Cash Costs & Benefits
Source: SWM management
15
Agenda
Overview of Schweitzer-Mauduit����
Successfully Restructured Operations����
Reconstituted Tobacco Leaf (RTL)����
Low Ignition Propensity Tobacco Paper
Financial Review
16
RTL Represents a Key Long-Term Growth Driver
• Today SWM accounts for over 50% of global RTL production
– SWM’s expects market share to grow with Asia expansion
• RTL represents 10-15% of the tobacco blend of American cigarettes
• Global RTL demand of approximately 150K tons (ex. China), growing ~ 3% per year
– 80% of RTL consumption in North America and Europe
– 70K tons used in China – 150K tons by 2015 will drive long-term growth (up from zero in 2004)
– Robust growth to be driven by all of Asia
• Regulatory efforts to reduce tar / nicotine delivery in cigarettes drives demand
– Chinese government currently working to reduce tar / nicotine levels – efforts will effectively double market
• Phased into tobacco blends very slowly by cigarette manufacturers
Total: 150K MT
Global RTL Market Positioning (ex. China)
Source: SWM management
SWM
53%
Reynolds
17%
Philip Morris
USA
11%
Japan
Tobacco
11%
KTG
7%
17
Overview of the Reconstituted Tobacco Process
Tobacco By-Products Water
FibrousPortion
Web formation
SolublePortion
Concentration
Reconstituted tobacco
Separation
Key Benefits
• Batch process for each tobacco blend (e.g. Marlboro)
• RTL adds consistency, flavor and other key attributes for cigarette manufacturers
• Reduced total cost for cigarette production by off-setting new tobacco cost
• SWM acts only as a tolling agent in the process
– SWM does not take on product ownership and maintains no raw material cost risk
Similar manufacturing process to paper products creates a uniform high quality product for customers
18
Significant Strategic Advantages in RTL
• SWM is the sole independent RTL manufacturer globally
– Limited competition from “in-house” producers drives highly attractive
market share
• Growth prospects better than broader cigarette paper market and
exceed cigarette production growth
– Attractive growth prospects for RTL in Asian markets through SWM’s
planned projects in the Philippines and China
– Beneficial global regulatory changes in process
• Attractive margins, given RTL is essentially a tolling operation
19
Opportunities to Expand the RTL Franchise Globally
• Philippines project an estimated $117 million investment
– Production to begin in late 2011
– Potential $65 - $70 million annual revenue
– Run-rate operating profit margins exceeding 40%
– >20% project rate of return
• China Joint Venture an estimated $25 million equity investment
– Total investment estimated at $135 -$140 million
– Two-year construction period
¹ China JV reflects 100% of venture’s projected sales volume
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
200520062007200820092010
20112012201320142015
Metric Tons
Base RTL (France) Philippines China JV¹
SWM RTL Supply Outlook
20
Overview of SWM’s Planned RTL Expansion in Asia
• Driven by demand from multiple leading
customers for second source of RTL production
– Agreement reached with Japan Tobacco; pre-sold
33% of capacity
– Advanced discussions with second customer ongoing,
which would raise pre-sold capacity to ~50%
• Standalone site Manila-area industrial park
– Economic development zone
• Estimated $117 million investment needed
China Joint Venture
• Driven by initiation of RTL use in Chinese
market – robust future growth opportunity
– Response to Chinese regulatory driven need for RTL
– Approximately 67% of output to supply two cigarette
companies that will be partners in the JV
• Standalone site in Yuxi, Yunnan province
–China’s largest tobacco region
• Estimated $25 million equity investment
–Total estimated investment of $135-$140 million
–Financed two-thirds with local debt
Philippines Facility
• Planned Asian facility additions in the Philippines and China expected to add
approximately 30,000 MT annual RTL capacity each
• Anticipated two-year construction period for each facility – Philippines to finish in 2011
21
Agenda
Overview of Schweitzer-Mauduit����
Successfully Restructured Operations����
Reconstituted Tobacco Leaf (RTL)����
Low Ignition Propensity Tobacco Paper����
Financial Review
22
1.5 1.5 2.5
5.5
9.4
17 .6
27.1
46.4
50.3
0
5
10
15
20
25
30
35
40
45
50
55
2005
2006
2007
2008
20092010E
2011E2012E2013E2014E
LIP Volume
Canada US
Australia / Finland EU
S. Africa / S. Korea
LIP Market a Long-Term “Game Changer” for SWM
• Increasing LIP adoption driven by governmental regulation
– Only current viable technology with market acceptance
• Represents a high-margin product driven by technological advantages
– Extensive portfolio of SWM patents and trade secrets
• SWM currently produces two approved LIP products
– Online product developed with Philip Morris
– Offline product manufactured at Newberry (U.S.) facility and a third party converter
Source: SWM management
Global LIP Market Development(000 metric tons)
Areas of low air diffusion
23
Regulatory Backdrop Favors LIP: Global Adoption
• North American LIP compliance requirements
now at 100%
• EU nations have initiated LIP regulatory process
– Potentially 2x North American market size
– Likely effective starting in 2011
Growing Global Commitment to LIP Paper
Source: SWM management
Regulation in Place Regulation Pending
• Australia LIP regulation effective March
2010, Finland in April 2010
• South Africa, South Korea and the
Philippines considering regulation
• Substantial margin improvement potential
24
Agenda
Overview of Schweitzer-Mauduit����
Successfully Restructured Operations����
Reconstituted Tobacco Leaf (RTL)����
Low Ignition Propensity Tobacco Paper����
Financial Review����
25
First Quarter 2010 Financial Highlights
(1) Includes restructuring and impairment
(2) Excludes restructuring and impairment
$158.4
$688.2
$0.88
$11.8
$30.7
$13.5
$13.3
$184.1
1Q09
$1.19Diluted Earnings per share (2)
$41.7Adjusted EBITDA (2)
$(21.3)Net Debt
$771.5Total Assets
$31.4Cash from Operations
$21.8Net Income (2)
$18.6Net Income (1)
$193.0Net Sales
1Q10(Amounts in Millions, Except Per Share
Amounts)
26
SWM Financial Performance Over Time
(US$ in millions)
Adj. Operating Profit Adj. EBITDA
Adj. Earnings Per Share Free Cash Flow¹
Note: Adjusted financials exclude restructuring and impairment expenses 1 Free cash flow defined as operating cash flow less capital and software spending less dividends.
$26
$42 $39
$103
2006 2007 2008 2009
$34
YTD 2010
$58
$75 $73
$142
2006 2007 2008 2009
$42
YTD 2010
$0.83
$1.20$0.97
$4.25
2006 2007 2008 2009
$1.19
YTD 2010
$29
$5$(17)
$33
2006 2007 20082009
$15
YTD 2010
27
Capital Structure & Liquidity Overview
$70Less: cash
$49 Total Debt
$(21) Net Debt
2 Other
3 Bank Overdraft
10 French Employee Profit Sharing
34 Euro Revolver
$--U.S. Revolver
Amount at 3/31/2010Facility
Capital Structure
Debt Maturity Profile
(US$ in millions)
2010 Cash Uses:
• Dividends – $0.15 per quarter (unchanged since second quarter of 1996)
• Capital spending expected to be $105 - $115 million, which includes $60 - $70 million for Philippines RTL project and $25 million for European LIP projects
• Projected equity injection for China RTL JV of $13 - $20 million
• Restructuring-related severance payments expected to be $35 - $40 million
• Other cash needs expected to be $13 - $20 million (including capitalized software spending)
$6$2
$34
$4 $3
2010 2011 2012 2013 2014
Source: Company public filings, SWM management
28
Key Takeaways
• Leading global full-line supplier in the tobacco-related papers industry
• Strong global market position
• Leading position in growing Asian markets
• Focus on high value-added sectors of the market
• Reputation for premium quality and service
• Unique research and development expertise
• History of profitability and earnings
• Strong cash flow and prudent capital structure
• Repositioning through restructuring for future earnings improvement
• Dynamic management team with significant industry experience
29
Appendix / Additional Slides
Appendix / Additional Slides
30
Regulation G
Certain financial measures and comments contained in this presentation are “non-GAAP” financial measures, specifically measurements which exclude restructuring expenses. We believe that investors’ understanding is enhanced by disclosing financial measurements without restructuring expenses as a reasonable basis for comparison of our ongoing results of operations.
31
Reconciliations of non-GAAP Measures
(US$ in millions)
Adjusted Operating Profit: 2006 2007 2008 2009 YTD 2010
Operating Income 5.3 17.9 16.9 53.0 29.1
Plus: Restructuring & Impairment Expense 21.1 24.0 22.1 50.2 4.8
Adjusted Operating Profit 26.4 41.9 39.0 103.2 33.9
Adjusted EBITDA: 2006 2007 2008 2009 YTD 2010
Net income attributable to SWM (0.8)$ 3.4$ 0.7$ 35.6$ 18.6$
Plus: Interest expense 5.5 5.9 10.5 4.8 0.4
Plus: Tax provision (benefit) (4.2) 0.5 (1.9) 12.7 9.7
Plus: Depreciation & amortization 38.2 39.2 47.4 43.9 10.0
Less: Amortization of deferred revenue (5.9) (6.0) (5.8) (5.1) (1.8)
Plus: Minority interest in earnings of subsidiaries 4.1 8.0 0.2 - -
Plus: Restructuring & impairment expense 21.1 24.0 22.1 50.2 4.8
Adjusted EBITDA 58.0$ 75.0$ 73.2$ 142.1$ 41.7$
Adjusted Earnings Per Share: 2006 2007 2008 2009 YTD 2010
Diluted net income per share (0.05)$ 0.22$ 0.05$ 2.20$ 1.02$
Plus: Restructuring and impairment expense per share 0.88 0.98 0.92 2.05 0.17
Adjusted net income per share 0.83$ 1.20$ 0.97$ 4.25$ 1.19$
Free Cash Flow: 2006 2007 2008 2009 YTD 2010
Cash flow from operations 51.8 71.3 33.3 63.4 31.4
Less: Capital spending (9.6) (47.7) (35.3) (15.3) (9.9)
Less: Capitalized software costs (3.8) (8.9) (6.4) (5.5) (2.7)
Less: Cash dividends paid (9.4) (9.4) (9.4) (9.6) (2.7)
Free Cash Flow 29.0$ 5.3$ (17.8)$ 33.0$ 16.1$
32
Changes in Operating Profit
N.M.
$ 53.0
6.617.124.1(11.7)
$ 16.9
As Reported
FY 2009
N.M.
$ 103.2
30.513.931.5(11.7)
$ 39.0
Without Restructuring
and Impairment
$ 33.9$ 29.1 $ 39.0$ 16.9Operating Profit
6.6(1.4)3.71.9
2.2(1.4)3.61.9
(3.4)(3.6)3.01.1
(10.0)(6.4)14.31.1
Changes by Segment
FranceBrazil
United StatesCorporate
$ 23.1$ 22.8$ 41.9$ 17.9Prior Year Operating Profit
Without Restructuring and Impairment
As Reported
Without Restructuring
and Impairment
As Reported
N.M.N.M.-6.9%-5.6%% Change from Prior Year
YTD 2010FY 2008
$ Millions
33
Profit Comparison
• Operating Profit Comparison (1)
(1) Operating profit excludes restructuring and impairment expense.
$23.1
$4.8
$7 .9
$33.9
$0.1
$1.0
$1.7
$0.8
$1.4$0.3
0
5
10
15
20
25
30
35
40
Mar
ch-0
9
Volume
Mix &
Sellin
g Pr
ice
Infla
tion
ary Co
sts
Cost R
educ
tions
Fixe
d Co
st Abs
orpt
ion
Malau
cene
Non
man
ufac
turin
g Co
sts
Curren
cy Tra
nslatio
n
Mar
ch-10
34
0
100
200
300
400
500
600
700
800
2002 2003 2004 2005 2006 2007 2008 2009 Q 1 2010
Changes in Net Sales in Relation to EPS
Currency $ 9
Price/Mix 10
Volume (10)
$4.25
(1) Excludes restructuring and impairment
EPS(1) $2.17 $2.28 $2.36 $1.26 $0.83 $1.20 $0.97
$566
$ M
illio
ns
$768
$501$567
$658 $670 $655$715
$193$184
$1.19
35
Manufacturing Cost Components – 2009
Labor
28%
Wood Pulp
8%
Energy
13%
Chemicals
6%D,T,I
8%
Veg. Fiber
5%
Other
32%
36
Capital Spending
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e
Millions
Average
Banded Cigarette Paper LTRI No. 3
PdMRestructuring
Brazil #6 PM
Philippine RTL
EU LIP
37
Safe Harbor Statement
• This presentation may contain “forward-looking statements.” All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. Caution should be taken not to place undue reliance on any such forward-looking statements because actual results may differ materially from the results suggested by these statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2009 and those described from time-to-time in our periodic and other reports filed with the Securities and Exchange Commission.