If you think American unions are tough, try French unions.
In July, workers at a French cigarette-paper mill owned by Schweitzer-Mauduit International (NYSE:SWM - News) held their bosses hostage for four hours during layoffs talks. The workers want someone to buy the 489-year-old mill before its planned shutdown this month.
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Either way, Schweitzer is determined to shed the mill because it sees few alternatives. Smoking rates have been falling in the Western world, even in tobacco-loving France. As the planet's leading supplier of paper for tobacco products, Schweitzer has felt the withdrawal symptoms. Last year, profit fell to 97 cents a share, down from $2.36 in 2004.
In addition to the current shutdown in Malaucene, France, the firm last year closed a 200-year-old mill in Lee, Mass., and exited a non-tobacco paper mill in Brazil.
New Products, Countries
But that's not the end of the story. Even as it's been closing mills, Schweitzer has been investing in two fields: higher-margin products and countries where smoking is still growing.
In the former category, Schweitzer is actually benefiting from tighter regulations on smoking. In the 1990s, the firm developed low ignition propensity (LIP) paper. This paper goes out by itself when the cigarette is not being smoked, helping prevent those "smoking in bed" fires.
Since 2000, U.S. states have started requiring cigarettes to be fire-safe this way. By now, such laws are getting so popular in North America that by next year, tobacco producers won't even bother making non-LIP cigarettes here anymore.
Schweitzer already owns at least 70% of North America's cigarette-paper market. But it stands to get even bigger with LIP.
"Competitors have had quite a while to formulate a competing product," said analyst Torin Eastburn of CJS Securities. "Nobody's found a way to do it that doesn't break the patent."
Meanwhile, the European Union has mandated that all cigarettes be fire-safe by 2011. And Schweitzer officials have hopes for the future.
"The big deal comes as time goes by, and LIP regulation moves around the world," said Chief Financial Officer Pete Thompson. "If we're successful at continuing to have a leadership position in this product, it will be an opportunity to grow the company."
Exactly how much Schweitzer will benefit from the European regulation still isn't clear. The market there is 21/2 times the size of the U.S. market, but Schweitzer's share there is only about 30%. And European officials won't set the exact LIP standards until next July.
Eastburn expects the firm to enter into some kind of licensing arrangement with a European producer or, perhaps, multiple producers.
Meanwhile, the company is developing another higher-margin product that seems to be taking off. Reconstituted tobacco leaf, or RTL, is made from the stems and detritus of tobacco leaves. It's mixed into tobacco blends to lower the nicotine and tar content of the products. It's also cheaper for the cigarette makers, who are themselves looking for ways to cut costs.
Chinese Market
Currently, most of Schweitzer's RTL is produced in France. But it is planning a big new RTL facility in the world's biggest emerging tobacco market: China.
Schweitzer realized some time ago that it needed to penetrate the smoke-happy havens of Asia and Latin America. A 2007 Gallup poll found that while a record-low 24% of Americans were currently smoking, 33% of Chinese, 36% of Indonesians and 37% of Chileans were puffing away.
Schweitzer bought mills in Brazil in 1998, Indonesia in 2004 and the Philippines in 2005. Also in 2005, it formed a joint venture with China's state-run National Tobacco Corp. Once Schweitzer was satisfied it could maintain control of its technology, it was eager to get a crack at China's 300 million smokers.
"In China, and in Southeast Asia collectively, there's a whole different perception of smoking," Thompson said. "People give gifts in business settings by handing out cigarettes."
That tobacco gift exchange is a large part of the reason why the Chinese invited Schweitzer in to begin with, Eastburn says. While Chinese companies make paper domestically, giving prestigious foreign cigarette brands as gifts lends a certain cachet.
Thompson says Schweitzer is close to reaching a new joint-venture deal to build the Chinese RTL plant, but he admitted, "We've been 'close' for three years now in reaching that deal." In the meantime, though, the firm is building its biggest year of profit growth since it was spun out of Kimberly-Clark (NYSE:KMB - News) in 1995.
In the first half of this year, earnings vaulted to $1.32 a share from just 5 cents a year ago, even as sales fell 6% to $367 million. This shows the effect of the shift in product mix. In the second quarter, sales of LIP paper and RTL together rose 10% while traditional paper sales dropped 15%.
Analysts polled by Thomson Financial expect earnings per share to hit $3.75 this year, up 287% from last year. Next year they expect 25% profit growth to $4.70 a share, with sales growing again as Schweitzer wraps up its plant closings. Enditem
