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Executives

Jason Thompson - Director of Investor Relations

John A. Luke - Chairman, Chief Executive Officer and Chairman of Executive Committee

James A. Buzzard - President

E. Mark Rajkowski - Chief Financial Officer and Senior Vice President

Analysts

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Mark A. Weintraub - The Buckingham Research Group Incorporated

Mark Wilde - Deutsche Bank AG, Research Division

George L. Staphos - BofA Merrill Lynch, Research Division

Chip A. Dillon - Vertical Research Partners, LLC

MeadWestvaco (MWV) Q4 2012 Earnings Call January 30, 2013 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MeadWestvaco Fourth Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the conference over to our host, Director, Investor Relations, Mr. Jason Thompson. Please go ahead.

Jason Thompson

Thanks, Lori, and good morning, everyone. Now this morning, we announced our results before the market opened. A notification of this morning's call was broadly disclosed. Further, this morning's call is being webcast at mwv.com, and slides that accompany this call are available there, too.

I'll briefly remind you that certain statements we make are forward-looking and are not guarantees of future performance and are subject to known and unknown risks and uncertainties described in our public filings. Furthermore, contents contain time-sensitive information that, although correct today, may change with the passage of time.

All the results we share this morning are presented on a continuing operations basis. For the fourth quarter, the company's income from continuing operations was $17 million, or $0.10 per share. Excluding special items, adjusted net income from continuing operations was $13 million, or $0.07 per share.

Now here to take you through the results are John Luke, Chairman and CEO; Jim Buzzard, our President; and Mark Rajkowski, CFO.

Now I'll turn the call over to John.

John A. Luke

Thanks, Jason, and good morning. 2012 was a good year for MWV, during which we generated profitable sales growth by successfully implementing our strategies focused on commercial excellence, innovation, growth in emerging markets and expanded participation. These initiatives bolstered our results despite an otherwise difficult fourth quarter in which our overall performance was adversely affected by a dramatic, but temporary, decline in market demand, as well as several one-time items.

Despite the difficult operating environment in the latter half of the fourth quarter, we grew the top line 4% during 2012, or 6% on a constant-currency basis. Throughout the year, we intently focused on winning new business for our highest-value solutions in the markets we've targeted for profitable participation. And there are great many signs of our success, including: New business with retailers and branded manufacturers for adherence packaging and health care; new business with the biggest brand owners in the North American beverage market; and new beverage packaging machines placed with global and local customers in both developed and emerging markets; new business for plastic medical dispensers in North America and Europe; new business from food brands specifying our products to their converters and contract packagers; and new customers for corrugated packaging in Brazil, from our newest box plant in Araçatuba.

In fact, we've been able to outperform broader market trends and economic performance based on the strategies we have applied to win in the targeted markets and geographies in which we compete. Throughout the year, you'll recall that we've highlighted stronger-than-market performance in corrugated in Brazil, beverage in North America, personal care in Europe and with a range of solutions across markets in Asia.

Despite our progress, we know that there are some things we still have to address, and we will. And we also know that the political and economic environment in 2013 may likely remain challenging in some of our markets and geographies.

We've already seen a solid resurgence in volume in January from the low levels at the end of the fourth quarter, as well as strong backlogs for February. With this market improvement and our ongoing growth strategies, we're confident that we're still headed in the right direction and will deliver important earnings and cash flow growth in 2013. We'll do so the same way we have been, by executing on the profitable growth strategies we've established and seizing on the opportunities that are well within our control.

We have aggressively sharpened our focus on the highest priority initiatives that will have the most direct impact on our performance, including the 4 strategic areas that have paced our performance over the past year. Our focus on commercial excellence, innovation, emerging markets and expanded participation remains constant and steadfast.

Our push to achieve commercial excellence and earn a larger share of wallet from top customers is leading to significant inroads with branded consumer products and retail customers in our targeted markets. As part of our priority to accelerate the commercialization of innovative value-added solutions, we introduced this year: Shellpak Renew adherence packaging; Melodie fragrance sprayers; Ergosol dispensers for home cleaning products; and just recently launched Intercept, a security package that promotes open merchandising, but also protects against theft. These solutions and others, including Captivate, give us a pipeline of profitable growth opportunities from our special capabilities and insight, innovation and packaging design.

We already have a long-standing leadership position in emerging markets, especially with our business in Brazil. And in addition to generating more than 25% of our revenue in emerging markets last year, we also invested to further extend this competitive advantage long into the future.

Our expanded paperboard and corrugated packaging business in Brazil is coming to fruition as we speak. And we've assembled the building blocks of a similar business in India, with the recent purchase of Ruby Macons. Both will have positive top and bottom line impact on our results this year.

Lastly, expanded participation is about continually assessing our markets for new solutions we can bring to our customers, including technologies and capabilities we may not already have as part of our platform.

Our financial strength has enabled us to make strategic investments such as Spray Plast, Polytop, Ruby Macons and Resitec that add to our portfolio. And we'll continue to look for those opportunities to make selective acquisitions that strengthen our positions in targeted markets.

We're pleased with the progress we've already made and confident in the direction we're headed, even as we recognize there are still challenges in the external political and economic environment in some of our markets and geographies. We have reason to be optimistic about early indicators as we start this year and we are committed to making continued progress by focusing on the right strategies and priorities, including things we directly control, such as the Brazil expansion, the integration of Ruby Macons, commercialization of our innovation platforms and our ongoing productivity projects. Through these initiatives and others, we expect to grow revenue and earnings in 2013, as I mentioned a moment ago. Mark will comment further on our full year outlook during his presentation.

Now I'll turn to Jim for some commentary about our performance in each segment, including more detail on some of the one-time items that impacted our performance during the quarter. Jim?

James A. Buzzard

Thank you, John.

The performance in our business segments during the fourth quarter was good on the top line, but we expected to remain on a higher earnings trajectory, based on the progress we've made with our profitable growth strategies. Instead, earnings were only modestly higher than the fourth quarter last year, which included a significant mill outage.

There was a dramatic drop in customer activity beginning in mid-November that lowered absorption in our mills and also impacted productivity at some of our packaging facilities around the world.

Given an uncertain political and economic backdrop during that time, many of our customers had a wait-and-see attitude, which led to lower demand in many packaging end markets and aggressive inventory management across the supply chain. In addition, our pricing actions and mix improvements were not able to offset inflation during the period.

We did bolster our performance in an otherwise difficult quarter by generating volume growth in some of our targeted packaging and chemicals markets. And we believe we're doing the things we must do to continue to perform well in this tough environment. I'll provide some more detail about performance in each of our segments.

In our Food & Beverage segment, sales were down slightly, but earnings were higher in the fourth quarter compared to last year, and we had a major outage in our Covington paperboard facility. Sales and earnings in this segment were both essentially flat for the full year.

In the fourth quarter, we had strong performance in many of the end markets we serve in this segment, but declines in general packaging grades, especially in China, brought down sales overall.

Beverage volumes and pricing were up, largely due to commercial excellence initiatives with a growing list of strategic global brand owners. Trends for beer and carbonated soft drinks, the primary markets for multi-packs, have been flat in North America and Europe. Our customers there are gaining share with successful promotions, including those based on packaging we've developed. And the multi-pack market is growing in emerging markets, where many customers are investing in our beverage packaging machinery to serve new consumer needs in these emerging markets, especially across Asia. As a result, we outperformed the general trends in the beverage market, including 2% volume growth in the fourth quarter.

The food market has been pressured by higher retail prices and weak consumer confidence in the U.S. and Western Europe. And as a result, market trends have been lower in those regions, with some offsetting growth in targeted, higher-value segments. We have retained our share in developed markets and grown, in some cases, with major brand owners who are focused on strengthening their brands.

In addition, we continue to further our innovation pipeline, in part with successful market tests and trials for several new product platforms based on consumer and retailer insights. In Asia, however, our volumes in some categories are tracking below market rates because a large amount of the growth in general packaging grades in China is being serviced from local capacity. Overall, we are seeing strengthening order patterns and backlogs so far in the first quarter. However, we remain cautious given the uncertain economic environment. As such, we expect segment profits in the first quarter to be modestly below year-ago levels.

In the Home, Health & Beauty segment, sales were about the same in the fourth quarter, and the segment broke even compared to a modest profit last year. Sales and earnings were both essentially flat in the segment for the full year.

The challenging demand environment had an outsized impact on our performance in certain home, health and beauty markets around the world. And the impact was worsened by a weaker mix and operational issues at a couple of our plants.

In the personal care market, we are generally tracking at or just above trends in the industry. We gained share in some categories and markets such as fragrance, skin care and hair care, especially in Europe and Asia, primarily with our dispensing solutions. However, late in the quarter, there was a dramatic drop in orders for folding cartons in Europe and Brazil, which led to a negative impact on results.

In health care, our business continues to be driven by our success with adherence packaging and plastic medical dispensers. During the fourth quarter and for the full year, we continued to grow our market share with preservative-free and metered dosage medical dispensers.

On the adherence side, market trends remain positive, and our pipeline of commercial activity continues to grow. Key customers are making a planned shift from our original Shellpak product to Shellpak Renew, the new paperboard version of this packaging solution for prescription drugs. During the transition, our volumes were down, as major customers managed inventory levels before switching their SKUs to Renew.

Lastly, the home market is somewhat soft, leading up to the spring and garden season -- spring lawn and garden season. Major customers in the category have been tightly managing inventories and taking a conservative approach as they assess consumer demand in the coming months.

The same is true for surface cleaners, which impacted our trigger business in North America during the fourth quarter. We continue to benefit from our Spray Plast and Polytop investments, which helped to drive higher volume in the quarter for triggers, caps and closures, especially in Europe and increasingly in Asia as well.

In the first quarter, we expect profitability in the Home, Health & Beauty segment to be close to the same as last year and significantly improved compared to the breakeven performance in the fourth quarter.

Continued growth in targeted personal care and health care packaging markets and seasonal strengthening in home and garden packaging, along with modest recovery in folding carton product lines are expected to result in better asset utilization and improved operating productivity. These benefits will be partially offset by higher resin costs.

In our Industrial segment, sales and earnings were down during the fourth quarter and for the full year, as the Brazil economy remained weak and our price increases for corrugated packaging lagged behind wage and other inflation. In addition to unfavorable foreign exchange in the quarter, we had $8 million in incremental costs associated with the expansion project as we head toward full utilization later in 2013.

Our performance in the market for corrugated packaging remain good, again outpacing broader industry trends. We grew corrugated volume by 4% during the fourth quarter as a result of continued commercial strategies to extend our leading position with key customers in food and other consumer non-durables markets. I'd add that Ruby Macons results are included in this segment. We acquired the business in late November and are very excited about the potential for growth in corrugated packaging in India.

As you look at results in this segment for 2013, we expect to increase earnings by more than 50% from 2012, with an improvement beginning in the second quarter and accelerating in the second half of the year. In the first quarter, earnings will be lower compared to last year due to one-time startup expenses, negative exchange and the absence of a one-time settlement with our utility. We expect to continue our gains in the marketplace, including volume gains and pricing and product mix improvement, as well as making further productivity improvements at our facilities.

In the Specialty Chemicals segment, sales increased significantly, and earnings were the same as the strong fourth quarter last year. For the full year, we extended gains in both of these metrics. Our commercial work in the marketplace and innovative new formulations continue to be the driver behind strong volume gains for auto carbon and chemicals for asphalt paving, oilfield drilling and adhesives. These markets are growing on the strength of auto production, especially in the U.S. and China; infrastructure investments in emerging markets; a boom in energy exploration and production; and continued growth in our adhesives markets.

In addition to these trends continuing in the quarter, we also acquired Resitec in Brazil. We've been a joint venture partner in Resitec for several years, and the acquisition gives us the opportunity to drive additional global growth in this important market. Some charges from this acquisition and higher spend on plant refinery maintenance as part of our 4-plant outage in the quarter, brought earnings down to the same level as last year.

In the first quarter, we expect to continue our improved year-over-year earnings trajectory in the Specialty Chemicals segment. While we expect the strong margin profile will remain relatively consistent, the absolute profit increase will be more modest as we cycle strong gains in the first half of last year.

In Community Development and Land Management, our fourth quarter performance capped a great year of land sales and development activity. We are continuing to position our business to benefit from strengthening real estate markets, especially in Charleston. We sold 48,600 acres last year, including 15,000 acres in the fourth quarter, and the strong per-acre values we generated drove our annual earnings performance in this segment.

The key to success was our highly targeted sales approach that matches land parcels with buyers' interests and timber needs. With the real estate market getting a little better, interest among both individuals and institutions remains good, and we would expect to move a similar amount of acreage in 2013. But we will have a slower start in the first quarter compared to the large land sale we closed last year.

On the development side of the business, we are making excellent progress and are continuing to gain momentum across the major projects we have underway in the Charleston region, especially Nexton and East Edisto. This includes government funding for a highway interchange, a new school on Nexton and a long-term development agreement with Dorchester County that locks in zoning approval for East Edisto.

These projects and our well-located sites are positioned to benefit from growth in the region, which is expected to accelerate further with expansion of the port and Boeing's recent purchase of 800 additional acres around its 787 plant.

Now I'd like to turn the call over to Mark. Mark?

E. Mark Rajkowski

Thanks, Jim.

We have several positive takeaways from our 2012 performance, including progress across key revenue and operating profit metrics that reflect continued improvement in our business model. However, a significant weakening in demand late in the year across a number of our consumer packaging markets and some one-time expenses negatively impacted our fourth quarter results. And while we expect growth conditions to remain challenging, we have confidence that the gains we are making in targeted packaging and specialty chemical markets, including progress with major customers and our new product platforms, combined with the benefits from our capacity expansion in Brazil, will generate solid earnings and cash flow improvement in 2013.

Before I cover our results and outlook in more detail, let me quickly share some highlights that demonstrate that we are on the right path in executing well on the controllable elements of our business model.

First, we had solid revenue growth for the year, driven by volume as well as price and product mix improvement in targeted consumer and industrial packaging markets, as well as across key specialty chemicals businesses. Our commercial success is helping us deliver sustainable growth that's above broader market trends.

Second, despite our lower-than-expected performance in the fourth quarter, our full year adjusted operating profit and operating margin improved substantially versus the prior year on a currency-neutral basis. And lastly, we had positive top and bottom line contribution from Polytop, a caps and closures business we acquired at the end of 2011.

Now turning to the results, starting with the top line. Fourth quarter revenue grew 4%. Volume growth of 2% was mainly driven by the Specialty Chemicals and Industrial segments. Solid gains in these segments more than offset declines in several of our consumer packaging businesses, including personal care, folding carton and home and garden triggers in the Home, Health & Beauty segment; and in food packaging in the Food & Beverage segment. We saw a significant drop-off in orders in November and December in these businesses as some customers took aggressive actions to reduce their inventories at year end.

While demand in developed markets remain challenging, we saw improving growth trends in emerging markets, where we're investing to create sustainable positions in growing packaging and specialty chemicals markets. Sales accelerated from the pace that we saw through the first part of the year and increased by over 7% year-over-year, excluding the impact of currency and acquisitions. We saw increases across all of our business segments, especially in the Asia Pacific region and Brazil, including strong performances in beverage, personal care dispensers, liquid packaging and tobacco paperboard and in specialty chemicals products. As a result, we finished the year with emerging market sales representing 25% of total MWV sales.

Our adjusted operating profit for the year was $488 million, resulting in an operating margin of 9%. However, excluding $58 million of negative currency impact, adjusted operating profit was $546 million, up 10% versus the prior year on that same basis. And our operating margin would have been 9.7%.

In the fourth quarter, our adjusted operating profit increased compared to the year-ago quarter, $64 million versus $38 million, primarily due to lower mill outage costs and higher land sales in 2012. However, this was lower than what we expected, due to the drop-off in demand that we saw beginning in mid-November across several of our consumer packaging markets and the impact of over $20 million of higher unabsorbed fixed manufacturing costs as we significantly reduced production levels to better position our businesses going into 2013.

We also saw a year-over-year increase in SG&A, largely driven by one-time items including $2 million in acquisition costs related to Ruby Macons and Resitec and $5 million of incremental cost related to employee medical benefit and legal accruals. We expect first quarter SG&A to normalize to a level in line with last year's first quarter.

Also in the quarter, as expected, we continue to have incremental startup costs of about $8 million related to our Brazil expansion. We expect these costs to decline starting in the current quarter as production levels continue to ramp up.

Our cash generation in the fourth quarter of $210 million was very strong. Full year cash flow from operations of $330 million was below last year, negatively impacted by several one-time items, including: Almost $40 million of prepaid taxes related to the capacity expansion in Brazil, which will get repaid to us over the next couple of years; $30 million of payments to settle legacy environmental and legal matters; $50 million related to the timing of VAT and income tax payments. Cash flow was also impacted by higher inventories at year end.

We closed out 2012 with a cash position of over $660 million, which is after paying dividends totaling $173 million and reinvesting $656 million in the business between maintenance capital and strategic growth projects, as well as acquiring new businesses worth approximately $100 million.

With a substantial reduction in our capital spending for growth investments and significant improvement in operating cash flows, we expect to generate higher levels of free cash flow this year. With improved cash flows and our large cash balance, the board has authorized the company to repurchase 5 million additional shares, giving us total buyback capacity of over 8 million shares, or approximately 5% of the company's outstanding shares. Our plan is to be in the market opportunistically over the next year.

Now turning to the outlook. We expect to grow earnings and cash flow in 2013 relative to 2012. Earnings growth will come from our recent and new commercial wins, revenues from new products and improving strength in emerging markets. We also expect our capacity expansion in Brazil and year-on-year gross productivity benefits of 3% to 4% to be significant contributors to the company's earnings and cash flow growth in 2013. We will also see contributions from the recently acquired Ruby Macons and Resitec businesses.

In addition to these drivers, our outlook for the year assumes the following: Current macroeconomic conditions continue, including modest growth in the U.S., improving growth in our key emerging markets, and no significant deterioration in Europe; relatively stable price and mix; modest input cost inflation of 2% to 3%; stable foreign exchange rates in line with current trading ranges; and a tax rate of 31%.

Given the current demand environment and the timing of expected benefits from our capacity expansion in Brazil, we expect the majority of our earnings growth to be achieved in the second half of the year.

Looking at the first quarter of 2013, while we're encouraged by the strong bounceback in demand that we've seen in January, we remain cautious on our demand outlook for the full quarter, given the uneven demand patterns that we've seen over the last several quarters. Also, while we expect earnings in Home, Health & Beauty to significantly improve from the fourth quarter, we have difficult compares in our Industrial segment, due to higher startup expenses and last year's one-time gain from a settlement with our utility company, and also in our Land segment, where we expect lower land sales due to a large 12,000-acre transaction that we closed last year. As a result, we expect overall earnings to be lower versus the first quarter of 2012.

Now back to John.

John A. Luke

Thank you, Mark.

To summarize, we are continuing to manage through a tough environment. We've had success implementing our profitable growth strategies across the company, with good results in many businesses. We're confident in the direction we're headed and pleased to see a modest uptick in demand compared to the very low levels at the end of the fourth quarter. With this improvement and our priority focus on continued execution of our strategies, we expect to deliver sales, earnings and cash flow growth in 2013 and to make further progress toward our long-term profitable growth goals.

This concludes our prepared remarks this morning, and we'd now be happy to turn to you to address your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question from the line of Phil Gresh with JPMorgan.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

So my first question is on Industrial. You talked about a 50% improvement -- 50%-plus improvement in the EBIT there. I just want to come back to kind of the project there and the math around that, make sure I have the numbers kind of square here. So it's a $408 million investment with a 20% return expectation, 2/3 of which is supposed to be cost saves. So according to my math, that's about a $75 million EBIT benefit on the cost side. And if we look at what you're guiding to for the year, it's about $25 million higher in EBIT, understandably with 1Q still having some investments. So it's kind of maybe $40 million outside of 1Q. So I just want to make sure, number one, do I kind of have those numbers right? And does that mean it's just pushed into 2014? Or is the return profile less than what you were thinking before?

E. Mark Rajkowski

Phil, it's Mark. No, the -- we still expect a very strong return profile on this project. We're ramping up really largely in the second half. So to your point, some of that really does push into 2014. But we are -- we remain very bullish on the opportunity for getting good returns from this project and significantly growing cash and earnings in Brazil.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Okay. So would you -- I mean, is it $75 million-ish from cost saves? Is that the right number to be thinking about at this point still?

E. Mark Rajkowski

Yes. That's roughly in line. Yes. That's roughly in line.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Okay. And then just on the land side. Obviously, you guys sound reasonably upbeat, and others have as well. So I'm just wondering how you're thinking about the opportunity over time here to start monetizing some of this value. I know a couple of years back, when you held the Analyst Day, you said you wanted to wait a couple of years for the cycle to turn, and we are starting to see that. So just some broader perspective, perhaps John, around how you're thinking about this today?

John A. Luke

Sure, Phil. I'd be happy to. Our position remains very much unchanged, and that is we continue to actively evaluate the potential for creating value with that business. We've got a number of very successful initiatives underway, or initiatives that we have every reason will be successful. And those, as they come to fruition, will enhance the overall value of the property. So we're -- it's a both-end situation very much before us.

Operator

We'll go next to Gail Glazerman with UBS.

Gail S. Glazerman - UBS Investment Bank, Research Division

I guess, just -- can you talk a little bit about -- there were some headlines during, I guess, earlier in the month, about investments in India. Can you just discuss a little bit about what you've committed to and what you had planned to do over the next year or 2? Yes, I mean, obviously, beyond the acquisition, but building machines?

John A. Luke

Gail, I'll start and ask Mark and Jim to chime in. We concluded the acquisition of Ruby Macons, a very attractive, well-run producer of paperboard for the corrugated packaging market. It's the highest quality producer in India with a low capital base and a low production cost basis. And we're very enthused, both about the opportunity to leverage the market, the leading market position that Ruby Macons has in India; and with that, to participate in the fairly significant growth in that market, driven both by demand, driven by increased consumer market activity, as well as industrial market activity, and a simultaneous recognition of a significant need for the overall improvement in quality in the corrugated marketplace in India. For those of you who travel there, you know that within 24 hours. We have a number of expansion initiatives underway that we have assumed by assuming the ownership, including the addition of a new machine, which is well under construction to serve that market growth. And we're actively evaluating what our strategy should be for downstream participation in the corrugated market.

E. Mark Rajkowski

And relative to that, Gail -- I mean, there's -- we see great opportunity, bringing some of the capability and knowledge that we have in our manufacturing processes around corrugated business from Rigesa to India. And with that -- and with a modest amount of capital, we believe we can significantly increase yield and capacity on the existing machine. And as John pointed out, given the growth profile in that marketplace, we are also investing in capacity, in a new machine, which, in terms of cost, is at a -- it's very, very modest relative to what you'd see in other parts of the world.

John A. Luke

Yes, a modest fraction of -- this is relatively modest capital investment as Mark is indicating. But one of the things that, just building on Mark's point, that I would emphasize, and we'll talk more about, is that while the structure of the business is different, in that as opposed to being driven by a strong virgin fiber, low-cost virgin fiber mix in Brazil, this is largely OCC recycle-driven. Again, as I mentioned, very high quality. But many of the similarities and experiences that we have learned over many successful years in Brazil are -- will drive our strategy as they apply to India.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just one last question, sort of following up on Phil's on Brazil. If you think about that 50% growth in guidance that you're looking at, it would seem that you'd get a good portion of the way there just from not having the headwinds that you had as you were executing the project in 2012. I mean, does that suggest -- I'm just trying to understand the trajectory and the ramp-up, going back to the point about 2014, that there's even that much more benefit to come, kind of in 2014, as you fully executed, even relative to the numbers that Phil was putting out?

James A. Buzzard

Gail, I think that's right. Clearly, we have had the headwinds that go with any startup, as well as the expenses. The team is making good progress on moving up the curve. And we'll see, as I've said, improvement in Q2, but the real benefit beginning to flow in the back half of this year and then certainly trending even more and accelerating in 2014.

Operator

Next question from the line of Mark Connelly with CLSA.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Two things. As you think about this expanded buyback, can you help us understand it in the context of your aspirations for dividend policy and whether this materially influences what the boards might do with dividend policy over the rest of the year? And also, with respect to how you think about the capital structure, you're one of the few companies with an overfunded pension plan. So I'm wondering how you think about that impact on your leverage, and whether this is the beginning of a new phase or whether you're -- we're going to see you shift back towards dividend. I do have a second question. Sorry, that one's so long. Can you help us just walk through the corporate line item? We all mostly strip out interest expense and restructuring costs, and we're still left with about a $15 million delta from Q3 to Q4.

E. Mark Rajkowski

Yes, Mark. Actually, I think it was more like 5 questions in there. But let me see if I can -- John, you want to...

John A. Luke

Yes. Let me start with the questions related to the board and the dividend policy. I think, Mark, a good, fair question. Let me begin by saying we and our board believe strongly in rewarding our shareholders. We have a long history of both preserving and steadily increasing our dividend. And I can assure you that this position has in no way changed. Our buybacks, on buybacks, we will consider those as we go forward, as a function of cash availability, as Mark said in his comments, and market opportunity. The new authorization by the board enhances that flexibility, but it in no way signals a change in direction with respect to approach to rewarding shareholders, specifically with regard to the dividend policy.

E. Mark Rajkowski

Yes, John. I think that's well said. That is -- that has been -- remains a priority. And we look at it -- as we look at our financial policies and our capital structure and our cash balances, we want to make sure that we have -- we're being prudent in terms of how we economically deploy capital. And obviously, one of those options or tools is the repurchase of shares that -- as John said, opportunistically. So they're not mutually exclusive and really reflect, I think, the confidence in our ability to continue to grow our cash flows, as well as the current level of our cash balances. On the corporate expense question, Mark, I think you were referring to a ramp up from Q3 to Q4. So just a little bit of context. Remember that our Q4 spend is seasonally the highest in the year, due to a number of true ups that we make typically at the end of the year for accruals around incentive comp, deferred long-term comp, medical benefits, et cetera. And if you look at last year, you'd see a similar ramp up in Q4 spend. And a chunk of this is non-cash. It's not headcount-related, not reflective of run rate. And if you just look at some of the items that we had, if you look -- bridge from Q3 to Q4, you had -- we trued up our incentive accruals for about $4 million. We had deferred comp expense true ups for about $6 million related to stock price and other accruals. We had legal, employee, medical and other accruals that were up $6 million in the quarter. So a number of these things hit when they hit. Typically, our Q4 spend is higher. But importantly -- we also had acquisition costs related to Ruby Macons and Resitec for $2 million. But as we look out at Q1 next year, we expect to see a spending level that is consistent with what we spent in the first quarter of last year, or I -- yes, the first quarter of 2012. Roughly around $58 million.

John A. Luke

Mark, you also raised a question on pension. I just want to close the loop there. And I'll tee that up and then pass over to Mark. I think, suffice it to say, yes, we are gratified by the strongly overfunded pension plan. It gives us very, very strong flexibility as -- and in no way would be a funding drain as we execute our strategy. So we're pleased to have that. I think, with respect to the asset itself, I think, as everyone knows, the rules are understandably very restrictive with respect to how you can utilize that asset. But we have used portions of it for special payments from time to time as permitted by law. And beyond that, it is used for its intended purpose.

E. Mark Rajkowski

Yes. And as we look at our total compensation structure, we have a very strong benefit around our retirement benefits. And it's a competitive advantage, and we're in a position where we do not have to ever worry about having to fund that again. So it's a good place to be. But really, it doesn't factor in how we think about our leverage or capital structure.

Operator

And our next question from the line of Ghansham Panjabi with Robert W. Baird.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

In your comments on Health, Home & Beauty, you pointed towards customer inventory management at the end market level. But just kind of looking at the results from the various consumer staples guys from Friday, P&G, Kimberly-Clark, et cetera, their volume profile seems to have picked up. So can you just help us reconcile the disconnect there?

James A. Buzzard

I think it was as much about their sales into their markets, and yet they manage their supply chains very tightly. So I think as we have seen over the last several years, as people get to the end of the year, they're really working their supply chains hard. I think it's part of the reason we've seen a nice uptick as we come into 2013, is that they've run those supply chains down and now were seeing the benefit of that through some stronger order flows.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then the second question I had was on raw materials. Clearly, plastic resin has ticked higher. Are you seeing some customers sort of order ahead of that? And how should we model the impact on each of your businesses? And if you can comment on the cost basket on Specialty Chems also?

James A. Buzzard

Sure. The -- as you noted, resin prices are moving up in January. As you'll recall, much of our business is covered by contractual inflation resin increases. So we will capture those. We're not seeing what I would characterize as prebuying ahead of that. So we will begin to move prices in Q2 as we can and recapture that. So it's a -- while it is an impact, it's more of, like a 1-quarter lag and maybe 2 or 3 months, depending on the timing. So it shouldn't be significant to us over the course of the full year. And in terms of some of the Specialty Chemicals baskets, we're seeing some pressure in some of their raw materials. We're seeing some offsetting declines. But all in, I think we would expect to see a slight increase in their raw material costs in 2013.

Operator

And we'll go next to the line of Mark Weintraub with Buckingham Research.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Just was hoping to get some color on the $1.2 billion EBITDA goal you had laid out a while ago for 2014. Have there been any significant moves one way or the other that would color your confidence on achieving that?

E. Mark Rajkowski

Mark, let me tackle that one. I think, certainly, we've got a lot of levers that we can pull. Okay? And we highlighted a few of those in our prepared remarks earlier. Certainly, what we've seen relative to the economic climate over the last year or so, including the currency impact, represents a little bit of a headwind. But we're -- as I said, we've got a lot of opportunities to profitably grow our business. We are going to see significant benefits from our capacity expansion in Brazil, from the investment that we've made in Covington and in our Mahrt mill. And we really do expect to continue to see good successes in terms of winning position and share with new products, with our largest customers. We're going to get a nice contribution from Ruby Macons and Resitec. So there's -- it certainly hasn't gotten easier because of some of those headwinds, but we're pushing hard to make it. And I think, as you look at that, too, that we talk about our revenue target of $1 billion, that was -- that's over the next 3 to 5 years. So that -- we might be on the longer end of that. But still, all in, we feel we've -- these are things that are achievable.

John A. Luke

Yes. And I would just add, Mark, I think you've said that well. I think that, as hopefully my comments reinforced this morning, we are very bullish on the opportunities in our markets. None of us would have predicted the timing of certain events and/or some of the economic turmoil, but that has not deterred us or dissuaded us with respect to the ambition. We see good opportunities here in the United States. Europe clearly has its own set of challenges. But Brazil, India, China, other parts of Southeast Asia that we are working to develop are excellent opportunities that will contribute nicely to the ambitions we laid out.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Would it be fair to say that while the cushion may be less, that you're still hopeful that you can achieve that $1.2 billion 2014 goal?

John A. Luke

Yes, I think that's fair. The cushion -- just look at the impact of currency alone. I mean, that's a $100 million impact, right? So that -- I would say yes, cushion is probably nonexistent. But the fact is that we do have these significant drivers and levers that we can execute against to give us confidence that we've got a decent shot at making it.

Operator

And we'll go next to Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Question first on just SG&A. I know, when we were down in Richmond a little over a year ago, you talked about some spending in anticipation of growth, and you've highlighted that at a couple of points last year. I just wonder, with this kind of slower growth market and the fact that your SG&A for the full year is up around 12.5%, whether you're now starting to kind of rethink any of that spend?

E. Mark Rajkowski

Mark, I think that's a fair observation. I would put it this way. We have invested, as you said, to try this profitable revenue growth. And I think I'd characterize it a little bit ahead of the curve. Tougher economic environment, no doubt. I think we have an opportunity, and I think John highlighted it in some of his remarks, to really get focused and prioritize where we see the biggest opportunities and to look at allocating resources to those opportunities. But by getting more focused, I think there's an opportunity, as we grow that top line, to see some real improvement on the total spend level and therefore, to see an improvement in that rate of SG&A as a percentage of sales. And certainly, it's our intention to reduce that level this year.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then the second question I had is just around Health, Home & Beauty. It just seems to me that if we look at sort of all of the capital that you've put in that business, the investment in Calmar, the investment in Spray Plast, the investment in PolyTop and then the things that you've just done internally, the number for the full year in terms of EBIT, sort of a $35 million to $40 million number, doesn't seem like a great return on all of those investments over the last 6 or 7 years. Can we get your thoughts on that?

E. Mark Rajkowski

Yes, let me start, and Jim or John can fill in. Yes, it's not where we wanted it to be. I mean, that's a fact. I think we have an opportunity to significantly improve the operating model, and we are intent on doing that. And while there are some cost opportunities there, we can run more efficiently in our factories, injection molding, on assembly. The big opportunity comes from us being much more successful commercially and continuing to grow our share in big accounts and really, to bring these new product platforms that we're very excited about to market. We believe our Airless technology is going to be a significant driver of revenue growth over the years to come. And we have invested heavily in our adherence business, right? We think there's a great opportunity, given where that market is heading, the market, frankly, that we're creating, to see significant revenue growth in our health care adherence packaging, as well, and leverage that -- the investments that we've made in SG&A and innovation to grow that business. So we are going to improve that business model, and that's largely going to come through some profitable revenue growth.

John A. Luke

Yes. And I would just add to that a little bit of color. Mark alluded to the commercialization of the innovation initiatives we have underway. That is one of those very top priorities, as is taking technology that has come from the Polytop acquisition and leveraging that around the world and doing all of this without a huge investment in capital, but leveraging the investment that we have made, making modest investments to support that growth. But we have, as you alluded, Mark, made investments in these markets that have yet to generate the returns that we desire, but we see significant opportunity with what we have in the pipeline, particularly when matched up against these significant growth potentials that, not only do we see, but frankly are underway in markets like Brazil, India and China, among others. And I would just punctuate Mark's comments on adherence packaging. We have been one of the leaders -- really the leader in this field. The pharma -- while we've had very, very good success, that success pales with respect to the size of the prize, the powerful opportunity that exists. As we do more work in this field, the more we learn from the big pharma companies, that they see the whole field of adherence as a huge untapped opportunity, both for revenue growth for themselves, as well as a major contributor to the health of individuals around -- here and around the world. And they see packaging as playing a key role in ensuring that, that adherence gap is closed. So we're disappointed. We've got initiatives underway. We're working very hard at them, and we're optimistic about the potentials.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. Well, that's great. I think we can all kind of see the opportunities, and we can see some of these very innovative products that you've come up with. We just -- we'd like to see it on the bottom line.

John A. Luke

Well, you -- we're all there, Mark.

Operator

And we have a question from the line of George Staphos with BoA Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

Mark basically took both of my questions there. I'm going to try to take a difference swag on it, starting with Home, Health & Beauty. If we look at peer companies within packaging, they have been doing very much the same thing that MeadWestvaco has been doing: investing for growth, investing in emerging markets, adding talent. And yet, when we compare your margins with this peer set, and it's not just this year, guys, the margins have, for a number of years, been below where the peers are. And so I recognize that you're not happy with the performance. But when you audit your performance versus peers, aside from just not being happy, what is it that you think isn't going as well for MeadWestvaco as might be going well for the overall specialty packaging sector? Where is it that you think you could do better? And in turn, what discrete goals do you have for profit improvements this year within that segment? And then I had a follow-on.

James A. Buzzard

George, good question. As I look at it and sort of parse it a little bit, you have to remember that our business is a mix of business. So we have both folding carton, injection molding plastics. As we look at those separately and sort of look at our plastics business, we compare pretty well with the competition out there. We have a little bit of a different mix of business, which may be a little bit of a drag to us. But all in all, while we're not satisfied, we certainly are not giving up on efforts to improve it. We actually compare pretty well in that segment. Folding carton is a disappointment to us. As I said in my comments, some of it was self-inflicted operational issues. You can -- rest assured that the team is really working hard to correct that. That hit us in the fourth quarter. Some of it was significant reductions in demand. So we need to continue to focus on that part of the business as well and drive it.

John A. Luke

And I would just add to what Jim has said, George. I think very specifically, picking up on part of the comments that Mark and I offered in response to Mark's question, commercializing innovations. We look at what others are doing. I think they've been much more successful in tapping new opportunities on a more aggressive and successful basis than we have. And we have good initiatives in the pipeline. We've got to capitalize on those, and we have to ensure that, that pipeline is continually refilled.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. My follow-on, and I appreciate it, what could you do more aggressively to tap into those market opportunities that you're not doing right now? And what discrete profit improvement goal might you have, if not for this year, over the next 2 years, for that segment?

E. Mark Rajkowski

I think it gets back to executing against our commercial plans. Right? I think we've got to penetrate our bigger accounts with some very attractive new product platforms that we're developing, and that is going to be the key to our success. And as Jim said, there's certainly operational things that we'll need to address in folding carton, and we're going to fix those as well. But the -- where we see the growth is in the -- I think Mark Wilde referred to it as the plastics business that was formerly Calmar and Polytop and Spray Plast. And we are looking to see substantial operating profit growth in that business next year, margin expansion in that business next year, as well as in the years ahead, as some of these platforms really take root in the marketplace. And...

George L. Staphos - BofA Merrill Lynch, Research Division

Mark, when you say next year, do you mean '13 or '14?

E. Mark Rajkowski

2013.

Operator

And I believe we have time for one last question. That is from the line of Chip Dillon with Vertical Research.

Chip A. Dillon - Vertical Research Partners, LLC

I don't think you went over this. Could you tell us where CapEx ended for the company for this -- for 2012 and sort of give us your view of how it should unfold in '14 and '15, sort of given that you're coming off both of Rigesa and the Covington projects?

E. Mark Rajkowski

Yes, sure, Chip. We closed out the year at $600 million -- roughly $660 million of capital. We will see, as we now completed the expansion in Brazil, as we have -- we will be competing the boiler project in Covington, we will see a substantial decline in our overall capital spend, somewhere between $175 million, $200 million year-over-year. We will have -- we are going to invest some capital to expand capacity in Ruby Macons. But we are going to be on a substantially reduced level of spend beginning in 2013, and that will continue to decline in 2014.

Chip A. Dillon - Vertical Research Partners, LLC

Got you. And just real quickly, one quick follow-up, what -- could you give us a view of how you plan to time, or at least the timing of the -- you mentioned the 5% shares or 8 million shares available for buyback. Often, companies in the packaging world will talk about a time period. They're not going to tell us the day, because -- for obvious reasons. But is that something you would plan to try to get done in the next year, barring some unusual acquisition opportunity? Or is it a little looser than that?

E. Mark Rajkowski

As I mentioned in my remarks, we're going to be opportunistic. We're looking to do that over the next year. It could be sooner, it could be later, depending on what the, the opportunities out there. And as you said I'm not going to give away the secret sauce here, right? But that's the plan.

Operator

And I'll turn it back to our speakers for any closing remarks.

Jason Thompson

Okay. Thanks, Lori, and thanks, everyone, for joining us. And I look forward to follow-ups.

E. Mark Rajkowski

Bye.

Operator

Ladies and gentlemen, this will conclude your conference. Thank you for your participation and you may disconnect. Speakers, you can remain on the line.

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