Jonathan Lichter - Sidoti & Company LLC Ann Gurkin - Davenport & Company LLC

Good morning. My name is April, and I will be your conference operator today. At this time, I would like to welcome everyone to the Schweitzer-Mauduit Fourth Quarter 2008 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you, Mr. Frederic Villoutreix, you may begin your conference.

Thank you, April. Good morning, I am Frederic Villoutreix, CEO and Chairman of Board of Schweitzer-Mauduit International. And along with me Pete Thompson, our CFO we would be leading our conference call today. With us today is Mark Spears, our Corporate Controller. Thank you for joining us as we review our fourth quarter and full year results. I will discuss the key factor impacting our business. Then Pete will provide highlights of full year and fourth quarter 2008 financial results. A more detailed review of fourth quarter financial performance is included in our earnings press release issued this morning. The copy of the press release can be found on our website. The comments included in today's conference call constitute forward-looking statements; actual results may differ materially from the projected results. Certain financial measures discussed during this call exclude restructuring and impairment expenses and are therefore non-GAAP financial measures. I will now review the highlights of the full year and fourth quarter of 2008. Earnings per share excluding restructuring and impairment expenses, were $0.97 for the full year and $0.14 for the fourth quarter. The fourth quarter results contain approximately $0.13 per share on tax impacts appreciated with the reorganization of legal entities and severance expenses associated with management changes finally impress. Excluding these items as well as item losses from start up of our China joint venture paper mill and final cost on the shut down of the Lee Mills. Our business improved compared to fourth quarter of 2007. As we continue to realize benefits from increased sales volume, only consist of equities and cigarette paper lower ignition propensity cigarettes, and began to realize favorable foreign currency impacts and the lower level of inflationary cost increases. Our most significant achievement in 2008 was a purchase of a 28% minority interest…

Thank you, Fredrick. I'm happy to be back as CFO and enthusiastic about the opportunities in our business. I will now review our recent financial performance and outlook. Net sales increased versus 2007 by 7.4% for the year, and declined by [0.2%] in fourth quarter. Both the full year and the quarter benefited from higher average selling prices. However, the weakening of the euro compared to the US dollar in the fourth quarter partially offset favorable impact experienced during the first three quarters. For the full year, sales volume declined 1.2% due to closure of the Lee Mills and our exiting of the coated paper business in Brazil. In the French segment, volumes increased 8.8% due to higher sales of reconstituted tobacco leaf products. Sales volumes for cigarette paper for lower ignition propensity cigarettes also increased during 2008. Restructuring and impairment expenses were $22.1 million in 2008, compared with $24 million in 2007. The 2008 expenses, mostly related to asset impairment, up $13.5 million recorded in the fourth quarter for write-downs taken on certain French paper grouped assets, given continuing losses that triggered required impairment testing under US GAAP. Nearly, all announced restructuring activities were completed during 2008, except for they shutdown of Malaucene, France base tipping paper machine which has been postponed until the late first or early second quarter of 2009 depending ongoing customer qualification. Operating profit excluding restructuring and impairment expenses was $39 million for the year and $11.3 million during the fourth quarter, compared with $21.9 million and $5.5 million for the respective periods of 2007. The decline in full year operating profit was attributable to higher inflationary costs, which decelerated in the fourth quarter to one thirds of rate realized during the first three quarters of 2008. These higher costs were partially offset with higher…

(Operator Instructions). We do have a question from Jonathan Lichter. Your line is open. Jonathan Lichter - Sidoti & Company LLC: Yes. How much did the Lee Mills shutdown cost, I think that was said there were $2.2 million worth of cost overall, but nothing had broken down?

Yeah, Jonathan in the fourth quarter, well to answer your question in total, the Lee Mills shutdown in 2008, the restructuring expenses that we took were [$159 million]. What we alluded to in the fourth quarter is, we had about $1.4 million in cost associated with shutting down Lee that were restructuring related. $700,000 of that was due to an accrual for a repair to one of the water dams that we have the site, it really had nothing to do with restructuring. It was repair that we need make in order to hold the integrity of that dam. The other $700,000 that incurred during the quarter was the cost associated with the final winding up of activities at the site. Jonathan Lichter - Sidoti & Company LLC: So those you wouldn’t to expect to recur then?

No. Jonathan Lichter - Sidoti & Company LLC: Okay. Is that the higher maintenance that you are referring to in another area of the release?

Yeah. That’s the part of it and than typically in the fourth quarter we do have higher maintenance expense and we did also our add our increment spots with facilities in the US. Jonathan Lichter - Sidoti & Company LLC: Okay. And then how much of the restructuring benefit will we see in '09, I guess the overall annual number is $25 million, how much did we see in 08?

The best way to think about that, roughly half of the $25 million is the labor savings with the downsizing primarily in France at PdM, and that's largely in place now. We have a very small percentage of that yet to go. And that was put into place aggressively over the last two years, so it's essentially on place now. The half of the $25 million is in our results from the first quarter going forward, a little bit further to go. And that benefit does not count the difficulties we had with the start up of the number 10 machine at that site. So, we also expect on half of the $25 million, we also expect improvement out of France with improving base of operations on the PdM number 10 machine. The other half of restructuring benefit is somewhat spilt between the US and Brazil, and with the Lee Mills now essentially fully down, we are seeing that benefit on a going-forward basis in place starting really here in January. So we will see that on a going forward. The difficulty with the Lee Mills' benefit is, over the last two years once we announced the shutdown of Lee, we had poor result at Lee, which is why we shut it down, then we built inventory for about nine-month period late '07 into '08 and that benefited result, because we were building inventory and absorbing overhead. We unwound that inventory now, finish that all up in December, so we have got kind of a mix of results in the past. But from here forward Lees is gone and losses that we were incurring at Lee, go away and then we get the benefit of having transfer based tipping production to Brazil along with the restructuring in Brazil and that brings substantial benefit going forward. So, I would say the best way to think about restructuring the short answer is we've seen roughly half of the $25 million, and the other half will be fully realized this year. And you’ll really see it in all three business segments, US, France and Brazil. Jonathan Lichter - Sidoti & Company LLC: Okay and then just lastly the difference I guess between what you kind of had as guidance last quarter and this quarter, is that all just related to what your thinking on the overall economy and the earlier passage of the SCHIP?

Yeah. The SCHIP really did not factor in at all. That is consistent with actual amount of the tax increase and the timing are too close to call in terms of being any different than our original thinking, so no. That doesn't impact us specifically. The reason we are not providing a specific earnings guidance number is much like most publicly-traded companies, the uncertainty in the current economic environment makes predicting our business much more difficult. If we knew right, now that the current rate of lower inflation, selling prices and volume were stable, we would be indicating very positive earnings guidance coupled with the improvements we expect in our business. The thing that we can't say with certainty is, as quick as oil prices and wood pulp prices drop as much as there has been a worldwide economic contraction in activity, will that show up as higher inflation later this year, significantly lower demand for cigarette consumption and can therefore impact our business one way or the other. So it’s really the macroeconomic conditions that are causing us just like essentially all other companies to not provide a specific earnings guidance. Jonathan Lichter - Sidoti & Company LLC: But if economic conditions were let's say the same as they are now throughout the year and you held the other factors steady, what kind of outlook would you think you would expect?

Positive, the factors we within our control were quite positive about as, Frederic reviewed. So things in front of us are all better. France will perform better, especially with the number 10 machine improving, we still have restructuring activity ahead of us in the US and in France that is an unknown at this point that's a headwind. But that aside, we are looking at a better operating situation in France, in the US we have the benefit of LIP, again our France we have got further we can grow, we won't have 21% growth like we did in '08 again in '09, but we do expect further growth narrowing of losses in China, and then a very important swing to what we now know given currency will be a pretty healthy operating profit from a pretty significant operating loss in Brazil. So factors within our control, we are quite bullish about the outlook of our business. And if we didn’t have the worldwide economic conditions, which is the big if, we would be most likely increasing our earnings guidance from last quarter. Jonathan Lichter - Sidoti & Company LLC: So it is the current weak economy, not inflation later on that you are concerned about?

Both, I would say first we would be concern about volume. If the economy stays depressed and unemployment keeps arising worldwide, eventually two things will happen. The taxation is going to go up in the western world just like yesterday’s announcement SCHIP that will drive consumption lower in North America and Western Europe and Japan. And then in developing countries, last time we saw this was in the Asian economic crisis of the late '90. If disposable income drops significantly in the developing countries, cigarette consumption will drop with it. That will show up to us is reduced demand for our products and heightened competition, so that is the concern that we have from a macro basis impacting our business as the year goes on and if the economy continues worldwide to be depressed. Jonathan Lichter - Sidoti & Company LLC: Okay. Thank you.

Okay.

And we have a question from Ann Gurkin. Your line is open. Ann Gurkin - Davenport & Company Llc: Good morning.

Hello Ann. Ann Gurkin - Davenport & Company Llc: For 2009, can you increase RTO volumes till double-digits is that still the target versus '08?

Good morning, Ann. Ann Gurkin - Davenport & Company Llc: Good morning.

This is Frederic here.

Good morning.

I think we are still positive in terms of continuing to grow the business. However it’s fair to say that the growth rates we have realized in last two years are not sustainable on an ongoing basis. So we see some growth probably at a reduced rate. Ann Gurkin - Davenport & Company Llc: So that is the long-term target of mid to high single-digits, is that fair?

Yeah. That sounds reasonable, that is reasonable. Ann Gurkin - Davenport & Company Llc: And then baked into your outlook right now in the US, can you comment on what you forecast for domestic cigarette volumes?

Yeah, Ann. $we specifically took in to account kind of a normal what’s been normal here in the last several years of a 2% to 4% decline in cigarette consumption, plus the impact of SCHIP. And so we have a fairly significant negative one-time impact from SCHIP that we built into our thinking about 2009 volumes in the US. Ann Gurkin - Davenport & Company Llc: So that’s in your comments that you made today?

Yes. Ann Gurkin - Davenport & Company Llc: Okay and then…

And, Ann if I may, keep in mind that our franchise wrappers and binders serves the small cigars is likely to be more impacted than the average paper business supplying the cigarette industry. Ann Gurkin - Davenport & Company Llc: Okay. Because I start with the $0.97 reported in '08, and if you add back improvement for number 10 PdM, favorable currency, I think you should pick up a little bit more from the LTRI acquisition, and then any benefit from restructuring or easily a $1.20 which was the number you all indicated you had meet in last quarter's press release. So, can you help a little bit more? I know you just talked about this a little bit, but what are we missing?

No. I don’t think you're missing anything. The positive items that you listed and then add to that Brazil and narrowing losses in China will be all be positive for the business. The only negative that we would really have is the macro economic issues, plus any further impact on restructuring, should we decide to do anything further. And that would potentially hurt us significantly in terms of earnings. So, absent what we don't know, we would be giving guidance that’s probably more bullish, more upbeat than we gave last time. However, with so much uncertainty, we think it's more prudent not to give any guidance at all. Ann Gurkin - Davenport & Company Llc: Okay. And at what point, or what data point or what timeline should we look for when you will give more concrete?

What we will do is as quarter-by-quarter it goes by, I don’t think we will do anything outside of earnings releases. As quarter-by-quarter goes by, obviously we can talk more specifically about what have we achieved and what's our in our control outlook, and then that will give more visibility as to what's happening with the overall economy as time goes by. So I think we are going, each quarter, we will make a decision, do we give specific guidance, but at each quarter we will for sure stay qualitatively where do we see earnings going. Ann Gurkin - Davenport & Company Llc: Okay, moving to China, we have a positive contributor to earnings in '09, so I think that's too aggressive, our results in China can be more flat to down a couple pennies this year?

Yeah, I would say that given from where we ended up in 2008 on China, that’s way to think about it will narrow loss through the year ideally getting to a near breakeven or slightly positive level by the fourth quarter of 2009, of course that was a original expectation for the fourth quarter of 2008. So what we are going to see about a year long delay in getting to that point. Now the rate that which losses go from, $4 million our share of losses in 2008 was $4 million, $2 million in the fourth quarter, how quickly that goes to zero, it's hard to say. Obviously, we are working to do is build sale as quick as we can ideally we will see good efficiency of the paper machine and good cost performance. But that that's harder to predict, but it will be moving from where it is towards zero as the year goes on, but what that line looks like is hard to project. Ann Gurkin - Davenport & Company Llc: Okay. And then if you could update. In the press release, you commented on your success in negotiating contracts and pricing with customers last year, particular towards end of last year. And is there a growing risk that those prices aren't going to stick or move to the year. Are you getting pressure from customers to get back some of that margin?

I would say Ann, that Arkansas are more the impacts of the global academy and price increases on volume, which in my mind would be more in the second half of the year, which could affect the volume commitments of our customers, I think in terms of pricing, the pricing that we have negotiated is good for 2009. However, the situation of the economy inflationary factors and volume demand situation will certain impact the picture as we look to 2010 pricing. Ann Gurkin - Davenport & Company Llc: Okay. That’s great. Thank you.

Thank you.

At this time there are no other questions in queue.

Okay. Alright then April and all on the call, thank you for joining us today.

Thank you, sir. And you have a great day, sir.

Okay.

Bye-bye.

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