Welcome to SWM's Fourth Quarter 2011 Earnings Conference Call. Hosting the call today from SWM is Frederic Villoutreix, Chief Executive Officer. He is joined by Mark Spears, Interim Chief Financial Officer; and Scott Humphrey, Corporate Treasury Director. Today's call is being recorded and will be available for replay beginning at noon, Eastern Standard Time. The dial-in numbers are (800) 585-8367 or 404-537-3406. And the PIN number is 43058172. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. Humphrey. Sir, you may begin.

Thank you, Jackie. Good morning. I'm Scott Humphrey, Corporate Treasury Director at SWM. Thank you for joining us to discuss SWM's fourth quarter 2011 earnings results. Frederic will provide -- will discuss the key factors impacting our business. He will then provide additional detail related to our fourth quarter results and outlook. We will then take your questions. Before we begin, I would like to remind you that the comments included in today's conference call constitute forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed in more detail in the company's Securities and Exchange Commission filings, including our annual report on Form 10-K. Certain financial measures discussed during this call exclude restructuring expenses and valuation allowances and are therefore, non-GAAP financial measures. I will now turn the call over to Frederic. Frédéric Villoutreix: Thank you, Scott, and good morning, everyone. On today's call, I will share some high-level comments about our fourth quarter and full-year 2011 performance and cover our initial 2012 outlook and priorities. I will then take you through a more detailed review of our financial results and guidance. Slide 4 summarizes our financial results for the quarter. Improvement in fourth quarter revenue and earnings measurements finally reflect gains in our Paper business, driven by an increase in EU LIP volume and profitability, as well as LIP royalty income, which includes the settlements of past sales from Delfor as a result of the agreements announced in October. Our tier sales volumes increased sequentially during the fourth quarter and brought full-year sales volume to essentially the same level as prior year. Fourth quarter earnings also benefited from several unusual items, including approximately $6.9 million in net favorable tax benefits. Continued inflationary cost increases, higher mill operating…

[Operator Instructions] Your first question comes from the line of Bill Chappell with SunTrust.

You talked a little bit -- but just kind of understanding capital allocation in terms of your cash flow, I mean it seems like now for the next few years, you had almost annuity of cash coming through and hopefully, more cash than you know what to do with. Will we hear from the Board a dividend share repurchase step-up, something else near term, if you really feel like the cash has better use there than earning kind of 0.1%?

This is Scott. We do presently have a new share repurchase authorization from the Board for up to $50 million in share repurchases. Any additional share repurchases or changes to dividend levels will be determined in balance with other potential strategic cash uses. In the meantime, any excess cash generation will be used to reduce debt. Frédéric Villoutreix: And I think, Bill, it's fair to say that we will remain opportunistic as we progress throughout the year in terms of share buyback, as demonstrated with actions we took last year. And I think we also will progress on our thinking in terms of whether there is value to split the stock and modify the dividend yield.

Okay. And then in terms of cash, just make sure I understand you, shouldn't you in 2012 also be getting something from the joint venture in terms of the property that was in the Philippines that's being sold, the equipment being sold to the joint venture? Frédéric Villoutreix: Yes, this is our expectation that we will transfer equipments that are currently on our books to do the CTS joint venture and get some cash as a result. On the other hand, when we mentioned the equity injection that we require, the net-net of this should be a positive for SWM. So that will be an upside to cash flow generation.

Okay. And then just trying to understand in a good way, RTL missed your expectations in terms of -- we started this year, assuming it was going to be almost -- or started at '11, thinking it was going to be a $0.50 hit to earnings, down 10% volumes and it really outperformed. Now what gives you confidence that it remains flat in 2012 and why shouldn't actually, we see it start to pick back up as we move closer to 2013 and virtually prices seem to be picking back up as well. Frédéric Villoutreix: Yes, I think we need to refine this. Let's go back a year ago. I mean, a year ago, we got very short notice from 2 of our customers about reducing their projected purchases of RTL, which led us to making some adjustments with our business strategy for that segments and being cautious in February of 2011, as to the outlook of last year. Now we -- obviously, our business has outperformed that projection in a big way. I think it shows the resilience of our business model that in a down cycle, '11 and '12, our down cycle in terms of being balanced between demand and supply of virgin tobacco, that we are able to maintain our ground at the very high ground level because both in terms of revenue, volume and earnings, 2011 RTL segment is the best year ever for SWM. And we project to maintain it at about that level in 2012, which for me is obviously, that's stage 1. Stage 2 is, as you pointed, we need to go back on the growth mode based on a lot of actions that are ongoing and we certainly expect, we're trying now coming on board by the end of 2013, early 2014, to be a significant step-up in revenue and sales volume levels. And obviously, this doesn't happen overnight. So this is what we're working on. And we only expect to see growth in 2013 and maybe some in 2012 but it's still too early to call.

And then just one last one on Glatz. You competed with Glatz in Europe over the past year and from my understanding, all the competitors in Europe kind of assumed your patents weren't valid and they just kind of go into money market, that you still kind of come up with the share you did. Why wouldn't -- why haven't other players like Glatz taken a bigger share? I mean, if they have a cheaper better product and it was just patents, how come they haven't taken such a bigger share in Europe? Frédéric Villoutreix: Well, because the LIP technology is a lot more than patents. It's about knowing the right products that performs, that gives the technical performance that the cigarette producers need in terms of making low-cost, high efficiencies cigarettes and also the consumer acceptance factor is important. And I think you're touching on some important facts, which is right now, as we enter 2012, we reiterate our views with approximately 40% of share without excelling, which is a significant increase from the past where we had about 30% share of the EU market prior to LIP regulation coming along. And also that, with existing license agreements in place, we see right now at least another 40% of the EU market that is covered by both license agreements. So obviously, we do not have a license agreement with Glatz. Otherwise, we have announced it. And so it clearly shows that competitors like Glatz today within an industry that did not look at intellectual property as the major criteria, as far as EU is concerned, that does not get a lot of share, which to some degree, speaks for the value of our product proposition -- the value proposition of our product and also the other players covered on their license agreements.

Our next question comes from the line of Alex Ovshey with Goldman Sachs.

A couple of questions, Frederic. On the non-manufacturing expense, I'm assuming most of that was legal in the fourth quarter. It seems like there was a meaningful step-up in that legal expense relative to where it was running for the first 3 quarters. Can you just comment on that and whether you have any incremental outlook for what that legal expense could look like for you in 2012? Frédéric Villoutreix: Yes. I think you're right. Our legal expenses in the fourth quarter were in the higher level than we have seen even in the third quarter. That is in line with also the amount of activities possibly related to the IPC case that took place in the fourth quarter. The trial, the preparations for these hearings, it's very labor intensive in terms of legal services and also drafting and negotiating the global license agreement with Delfor. All of that took place in the fourth quarter. So this being said, we certainly expect this intensity of legal expenses to decrease in 2012, starting with first quarter of the year.

Fred, is that a decrease relative to the fourth quarter run rate or relative to the full-year 2011 expenses? Frédéric Villoutreix: As for the quarter, definitively to the run rate of the fourth quarter. For the full-year of 2012, the latter, which to a decrease -- projected decrease at this stage, from the total amount of legal expenses we incurred in 2011.

That's helpful. Would you be able to comment on what the implied revenue base is that the $12 million royalty figure covers in 2012? Frédéric Villoutreix: That, I will say, this is what I just mentioned. Our view is approximately 40% plus of the EU market covered by license agreements. [indiscernible] So you see the 40% becomes 50% or more, expect this number to climb.

Okay, understood. Last question. Can you comment on what the profitability in EU LIP was in the fourth quarter, relative to what you expect the full run rate to be, which is north of $50 million or about $12 million to $13 million of operating earnings per quarter? Frédéric Villoutreix: Different ways to look at it. So one, in terms of manufacturing efficiencies, we have a minimum amount of start-up expenses. We have more in the beginning of the fourth quarter. So I think, we still have opportunities to improve efficiencies. But we are kind of getting well to that into the learning curve, if you want. I think, when you look at the fourth quarter, you always have to be careful that there is a major impact of royalty income, which is much more than just one quarter. And so some adjustment needs to be made there. But I think it's fair to say that if we were to adjust the fourth quarter for a normal level of royalty income on an ongoing basis, the possibility of the paper segments will be somewhat in line with what we expect in '12 and we probably are a little bit more upside due to the deflation projected at least on wood pulp prices compared to previous year and the gains in efficiencies in manufacturing of those LIP products.

[Operator Instructions] The next question comes from the line of Ann Gurkin with Davenport.

I wonder if you could help me with what should be your tax rate for '12, given the business in Poland now and the Brazilian tax credit adjustment.

Ann, this is Mark Spears. I'll take a shot at that question. We're projecting an ongoing normalized tax rate in 2012 in the range of 30%. In fact, that takes into account that we have recorded as a deferred tax asset the credits that we'll be utilizing in Poland, 2012. So that's it. The use of those credits then is part of our expense in 2012.

Okay. And then you all, at the start of your presentation, talked about the potential for additional LIP market. Can you give me an update on how things are progressing? Any markets close to requiring the use of LIP on cigarettes? Frédéric Villoutreix: But it's still rumors and activities in various countries. We mentioned South Korea and Japan in Asia, the CIS countries, Russia, Turkey in the whole of Europe. And I think for us, there is enough activity to think that new markets will come long, whether in 2013 or 2014. But there's also an important event later of each year with the World Health Organization and the SCTC convention, which will meet and discuss the working agenda for new regulations around tobacco and LIP regulation is one of the 5 priorities of the SCTC. So I would expect we'll have greater clarity as to which countries and the timing of adoption around that meeting, which is scheduled to take place in early November of 2012.

Okay. And then in your earnings outlook for 2012, do you incorporate your share repurchase program? How should we think about that? Frédéric Villoutreix: The one last year?

The $50 million that has been approved by the board. Frédéric Villoutreix: No, we have not. Because, again, it's opportunistic and we'll [indiscernible] as we go through the year. But no, there's no -- for this $50 million authorization, none of that has been built in the $7.20 guidance.

Great. And then what are you assuming for worldwide cigarette volume in 2012 and U.S. cigarette volume? Frédéric Villoutreix: Well, I think we are assuming for U.S. market continuation of experience 2011, which was around 3.5% decrease in consumption of cigarettes. I think Europe is in the same ballpark, 3%, 3% to 4%, and probably more tax increase activities in some of the European countries to come in 2012 and worldwide, it's just going to be a small -- a slight increase and it's all coming from China. I mean, China continues to be a healthy -- show healthy growth in the [indiscernible]. And I don't see a reason for that to change.

Okay. And then plant downtime in Q4, was that in line with your targets? Frédéric Villoutreix: Can you repeat the question?

The plant downtime you took in the fourth quarter, was that in line with your expectations? Frédéric Villoutreix: Yes. It think this -- again, this is induced by actions taken by our customers [indiscernible] saying they want to maximize shipments but also optimize their working capital as we close the year. So as you know, historically, cigarette factories are taking downtime in December and I think this year was probably -- maybe slightly higher than what we are used to. This one we have seen on key customers. But all in all, I think it’s part of the seasonality of the business and it was something that we had in mind when we discussed the outlook for the year end last November.

At this time, we have no further questions. I'll turn the floor back over to management for any closing remarks. Frédéric Villoutreix: Thank you, Jackie. And thank you, everyone, for your attendance and the support and confidence you put in SWM and look forward to talking to you or meeting you in the foreseeable future. Bye-bye.

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