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MeadWestvaco Corp. (NYSE:MWV)

Q4 2008 Earnings Call

January 28, 2009 10:00 am ET

Executives

Jason Thompson – Director of Investor Relations

John A. Luke, Jr. – Chairman and Chief Executive Officer

James Buzzard – President

Mark Rajkowski – Senior Vice President and Chief Financial Officer

Analysts

George Staphos – Banc of America Securities

Claudia Hueston – JP Morgan

Gail Glazerman – UBS

Peter Ruschmeier – Barclays Capital

Mark Weintraub – Buckingham Research

Richard Skidmore – Goldman Sachs

Operator

Welcome to the MeadWestvaco fourth quarter 2008 results conference call. (Operator Instructions) I would like to turn the conference over to your host Director of Investor Relations, Mr. Jason Thompson. Please go ahead, sir.

Jason Thompson

This morning we announced our results before the market opened. The 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 as well. I’ll briefly remind you that certain statements we make may be 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.

First, a brief recap of the results we reported this morning. For the fourth quarter, we reported a loss from continuing operations of $16 million or $0.09 per share. This included after tax restructuring charges of $33 million or $0.19 per share, and those charges related to facility closures, asset write downs and employee separation costs. For the full year, income from continuing operations was $80 million or $0.46 per share and included after tax restructuring charges of $44 million or $0.26 per share.

Now here to tell you more about our results for the fourth quarter and full year are John Luke, Chairman and CEO, Jim Buzzard, our President, and Mark Rajkowski, CFO. I’ll now turn the call over to John.

John A. Luke, Jr.

The weak global economy and resulting difficult operating environment continue to have an impact on MWV’s earnings performance during the fourth quarter, and for that matter the results for the entire year. Throughout 2008, seeing clear changes in the macro environment we took a number of portative steps to strengthen our financial position and improve our performance. For that reason, we entered 2009 on sound footing. While the environment remains difficult, we are confident in our ability to endure the challenges of this period and outperform when economic conditions improve.

Let me take just a moment to explain why MWV will weather the current storm and emerge as a stronger performing company and attractive investment for more stable periods that are sure to come in the future.

First, we have taken aggressive proactive steps to solidify our liquidity and financial strength. Early last year we began efforts to fortify our cash position and our balance sheet allowing us now to capitalize on this strength. Beyond this, we recently announced and began to implement a series of broad actions to reduce our overhead cost and restructure our manufacturing footprint. Many of these actions are part of the strategic cost management plan we initiated in mid-2008 that we have now accelerated in order to achieve more savings this year.

As we recently announced, this includes corporate overhead reductions, which we expect to save $100 million in 2009, and the closure or restructuring of 12 to 14 of our manufacturing facilities, which will save another $25 million in 2009. In total, these accelerated actions, along with our broader cost program, will save $250 to $300 million on a run rate basis by 2010. These are important and necessary steps to improve our immediate performance and position MWV for greater future strength.

Second, we are managing through the current challenges in a way that sharpened our business model and strategies to maximize value for our shareholders. In taking these steps to improve our performance now, we are enhancing the strategies we’ve put in place to win in the marketplace and gain share in targeted global packaging markets.

In recent years we have taken several actions to shape our global packaging platform, and during 2008 we took further steps by aligning our commercial resources into strategic business units focused on each of the markets that we’ve targeted for profitable global growth.

As a critical dimension of this work, we have been proactively conducting a rigorous review of each business including every market, product line and customer to determine what additional actions need to be undertaken to generate appropriate above cost of capital returns for our shareholders. With this information, we are making explicit determinations about the nature of our participation between those markets that provide the potential for attractive returns and those that no longer do so due to changing competitive dynamics or customer preferences.

This clearly involves making choices about each of our product lines and manufacturing facilities, as well as about innovation imitative and the direction of our future growth. This work is directly influencing the strategic cost and restructuring actions we announced. In every case, these decisions and actions are guided by a singular and very determined focus on maximizing the value we create for our shareholders.

By actively managing both our cost structure and value creation focus in every business, we will strengthen our focus and performance as a company. This will support us well during this challenging period while positioning MWV very well as conditions do improve in a position to capitalize on the profitable growth opportunities that exist in targeted global markets.

I’d now like to turn the call over to Jim Buzzard to discuss our operational highlights for the packaging platform and other businesses during the fourth quarter. Jim.

James Buzzard

From an operational standpoint, each of our businesses took actions this year to ensure that we delivered the best possible performance in this difficult economic environment. Demand was lower virtually across the board due to the global recession, and so we focused intently on managing for cash preserving and increasing prices, reducing costs and improving our productivity.

As a result, in many markets we outperformed the competition and positioned our businesses to further improve when the economy recovers. For the first time in more than two years, our sales performance in the quarter decreased when compared to the same period in the prior year. Continued pricing and mix improvements were not sufficient to counteract the impact of lower demand due to the economy, and while there were many signs of our progress in reducing costs and improving productivity, our overall earnings declined significantly as a result of lower volumes and higher inflation.

As I provide some additional detail about our performance in each business during the fourth quarter and the year, I’m also going to discuss our view of the current market dynamics in this difficult economy and some of the ongoing strategies and initiatives we are executing to endure this uncertain period and emerge as a stronger competitor when conditions improve. As usual, you’ll find additional information for all of our business segments in the slide presentation that accompanies this call.

In the packaging resources segment, the fourth quarter and the entire year followed similar trends, higher sales but lower overall profitability due to input cost inflation. This business continued to improve pricing across our key paperboard grades, but we are still pushing to catch up to unprecedented inflationary pressures.

In 2008, we experienced $200 million in increased input costs for the year, including $45 million during the fourth quarter, especially in the areas of energy, raw materials and freight. Even as oil prices moderated during the fourth quarter, cost for some of our key raw materials and other inputs, including caustic soda and sulfuric acid remained at historically high levels.

The commercial team have worked hard to drive through price increases with our customers and still hold volume relatively steady, but a 6% overall price and mix improvement during the quarter could not overcome this drastic inflation. In terms of our paperboard production and shipments, we’ve been doing a good job of managing our system to control inventories and meet demand for the most profitable opportunities.

Amidst a global economic slowdown, we only saw a small overall decline in volume during the quarter consistent with declining demand for consumer products. We are gaining share in the aseptic liquid packaging market to commercial printing markets in the U.S. and in bleached board for frozen food applications.

Overall shipments of bleached paperboard during the quarter increased by 5%, while coated natural kraft volume declined by 12% as we tightly managed inventories. For both of these grades, backlogs are normal heading into 2009 and we will continue to manage production to market demand signals. [Inaudible] continued to perform reasonably well, as the high-value, low-cost provider of corrugated solutions in Brazil.

During the quarter, earnings in this business were negatively impacted by rising costs and the continued depreciation in the Brazilian real. The packaging resources segment will continue to manage production and control costs, while working to extend gains in several markets for our key paperboard grades.

In the consumer solutions segment, overall sales and earnings were lower for the forth quarter. We are starting to see results from our pricing initiatives, especially pass-throughs for resin, as we more than offset input cost inflation during this quarter with pricing and mix improvement. However, steep declines in demand had an impact on each of our consumer packaging lines of business, especially personal carry and media packaging, as well as the negative impacts on productivity in this segment.

Let me give you a sense of the commercial drivers in each of our consumer lines of business in the areas on which we are focused to improve our business model and our performance. Much of the reported weakness in the broader beverage market has come in single-serve, as opposed to the more resilient take-home market for soda, water and beer, as more consumers budgets by eating meals at home.

During the four quarter, our beverage business performed reasonably well in North America with some increased volume for Coca Cola and Anheuser-Busch InBev for soda and beer multi-packs. We gained some share in this market with the acquisition of Oracle Packaging and will continue to exploit our advantage in this multi-pack space, including our large glass initiative.

In addition, we are expanding our presence in emerging markets in Asia and Brazil, for growth trends have slowed, but are still positive. We've seen some areas of strength in an otherwise declining market for media packaging, including one of the worst holiday retail seasons in recent memory.

We continue to grow volumes for our Vortex package, as Blu-ray DVD builds momentum as a preferred high-definition format. We've also built a strong position in the growing videogame packaging segment, both in North America and Europe, and continue to work to replace lost volumes in CDs and DVDs.

We continue to take advantage of growth trends in healthcare packaging, especially for generic prescription drugs and low cost retail programs. In particular, our leadership in adherence and compliance packaging, especially Shellpak, is helping us serve the rapidly expanding needs of Wal-Mart's growing $4 drug program. This product is especially attractive, as it not only improves patient outcomes, but also delivers real productivity benefits for our customers.

We are currently producing about $4 million Shellpak units per month for ten drugs in Wal-Mart's generic program, and we expect that volume could double by the end of this year. We are also a leader in advanced pharmaceutical pumps, an increasingly popular application for our customer’s over-the-counter products, and this area of our healthcare business continues to perform well.

The personal care market is in an unusual situation, as virtually every customer’s question in consumer demand, de-stocking inventory, and postponing launches of new and enhanced products. The worldwide decline in consumer spending is being felt strongly across this industry, though mass market products are faring slightly better than high-end luxuries, and dispensing solutions are holding up better, compared to sharp declines for folding cartons.

We have some strong positions, especially in dispensers for the mass market, as it may provide some stability in an otherwise grim environment. We also know that this market will turn around. Eventually customers will launch new products, and they'll want to do so with the help of a packaging partner like MWV, that has a strong innovation pipeline, a broad global footprint, and the design capabilities to help their brands stand out.

We are using the current market situation to organize our personal care business to take advantage of long-term trends that give us an edge on the competition, including sustainable packaging solutions, security packaging alternatives, and airless dispensers. At the same time, we are moving to exit some unprofitable product lines, consistent with the process John mentioned earlier.

Similar to personal care, the market for home and garden sprayers and dispensers is experiencing an impact from the slowdown in spending, especially as consumers choose bulk purchases and refillable products over single-use solutions. We have picked up some share in this market with the purchase of assets from Continental AFA, and our customer-retention rate for this new business has been excellent.

We continue to improve the business model and operations of the consumer solutions segment with actions to align our commercial resources, focus on the most profitable markets, and increase productivity, including closing and restructuring facilities in our global converting network.

During the fourth quarter, and the first part of this year, we announced the closure of four consumer solution facilities, two media packaging facilities and two primary packaging facilities for the home and garden and personal care markets. These decisions were made as a direct result of the focused business review John discussed a few minutes ago, and we've accelerated implementation in order to achieve this savings as soon as possible.

We will continue with additional actions of this nature through the rest of 2009 to refine our focus on the markets and facilities that create the most value for shareholders.

Turning to our non-packaging businesses, lower volume and higher input costs combined to drive down results for the consumer office products segment for both the fourth quarter and the year. We continue to feel the direct impact of reduced consumer spending. Our North American business saw sales decline as retailers slowed replenishment orders after the back-to-school season, and end-of-year time management and envelope sales slowed along with the rest of the economy.

Partially offsetting these declines, the business recorded strong productivity gains and our Brazilian business had another good quarter as back-to-school selling was strong.

The consumer office products business managed its spending and working capital very prudently and delivered solid cash flow in 2008, despite lower earnings. This business is focused on creating flexibility in its cost structure, as well as from its working capital management to weather the uncertain economic environment that will continue into 2009, as evidenced by the recent announcement that we will close an envelope production facility in Enfield, Connecticut and streamline other operations.

The specialty chemicals segment was able to deliver year-over-year earnings growth, despite the difficult quarter. Pricing improved across the board for our carbon and pine chemicals products and fully offset the impact of cost inflation. This segment also benefited in the quarter from a favorable comparison of inventory counting year-over-year.

However, this segment was not immune to the economic slowdown as volumes declined compared to last year. In our activated carbon business, decreased demand from the weakening global automotive market was partially offset with growth from new applications for water and food purification. And while volumes were lower for all of our performance chemicals, the asphalt additives business is taking advantage of increased government spending on infrastructure, especially in China and the United States.

The community development and land management segment continues to perform well in a difficult market for real estate. Proceeds from small-tract land sales in the fourth quarter were $16 million, $2 million more than last year, bringing total proceeds for the year to $57 million. We recorded an average price per acre during the quarter of roughly $2,200 consistent with our expectations for the year.

Most of the 33 transactions we closed during the quarter were in Georgia, Alabama and Virginia where per acre values are slightly slower than for our prime holdings in South Carolina. We will continue to weigh out the market in South Carolina in order to extract maximum value. Overall, we've had a great deal of success with our sales strategy for small, rural tracts. We currently have more than 100,000 acres on the market, and we continue to attract interest from our targeted advertising campaign and revamped website.

We believe we are setting the market for land sales in these areas because we have well-located and high-quality land tracts. We maintain and share valuable data and information about our land with prospective buyers and we know our customers as neighbors, friends and fellow foresters.

Now I'd like to turn call over to Mark to discuss some more financial metrics for the fourth quarter. Mark.

Mark Rajkowski

The slowing of the worldwide economy resulted in weaker financial results for the fourth quarter, but we responded with aggressive actions to solidify our cash position and ensure that we entered 2009 in a strong financial position.

Our businesses did a tremendous job of staying competitive in our markets meeting the demands of our customers and executing on the controllable elements of our business plants, while also managing aggressively for maximum cash generation.

We are continuing to do the right things to manage through this difficult economy and position our company to outperform when conditions improve. John and Jim have addressed the strategic and operational elements of our plans. I’ll discuss some of the financial levers we’re pulling to achieve better near-term results and improve long-term value creation for our shareholders.

We’ve prioritized cash generation as an operating principle across our businesses and our disciplined approach provided cash flow from operations in the fourth quarter in excess of $175 million. Improved working capital was the main driver and generated $166 million in the quarter, primarily from the strong collection of receivables and inventory management.

Our working capital initiatives resulted in a five-day improvement of our cash-to-cash cycle in 2008. Capital spending in the fourth quarter was $81 million and we paid $40 million in dividends. By executing on our cash management programs, we entered 2009 with about $550 million in cash and short-term investments, approximately $30 million higher than the end of the third quarter.

The credit quality of our portfolio is excellent with substantially all cash invested in U.S. Government Treasuries. We have about a billion dollars of available liquidity and we expect to generate positive free cash flow in 2009, which is cash after funding CapEx and our dividend.

As you know, we also recently announced a broad set of actions to reduce our overhead costs and restructured our manufacturing footprint. These steps are part of the ongoing initiatives we began earlier this year to expand our margins and our targeted packaging end-markets by improving our commercial performance and better managing our costs.

We have thoroughly reviewed our targeted markets, our product lines in each of our manufacturing and converting facilities, with a focus on maximizing value for shareholders by operating as efficiently and as effectively as possible. We’ve accelerated elements of this program to deliver more immediate savings, including the facility closures and 2,000 position reductions we recently announced.

Of the 2,000 position reductions, we expect 800 to be completed by the end of the first quarter and the rest by the end of 2009. The reduction of SG&A in overhead staff and related costs will deliver $100 million in savings this year, beginning in the first quarter. Facility actions will add another $25 million to savings. We’ve identified 12 to 14 facility closures and restructurings and we’ve begun to work this with the five facility closures Jim mentioned, four in the consumer solution segment and one envelope plant from our consumer and office product segment.

By mid-2010, we expect to fully complete our strategic cost program to generate pre-tax run rate savings of $250 to $300 million. This represents cash savings in the following areas, corporate and business overhead $100 to $140 million, manufacturing and facility rationalization of $75 to $80 million, and global sourcing savings of about $80 million.

These structural reductions are in addition to the ongoing operational productivity programs taking place across each of our business units. We expect restructuring charges related to our strategic cost program to be between $200 and $250 million, $29 million was booked in the fourth quarter of 2008, and the remainder will be taken in 2009.

The majority of the expected restructuring costs will be non-cash asset write-downs, and U.S. employee severance costs that we can fund from the company’s over-funded pension plan without impacting cash reserves or cash flow.

We are taking these permanent actions to build a more focused and more profitable MWV for the long-term. Beyond helping to mitigate expected near-term declines in demand, these structural cost reductions will contribute to higher earnings per share and cash flow performance when the economy recovers.

Now I’ll turn to the outlook. Given the worsening global economic recession, there is a high degree of uncertainty about forward-looking demand in many of our markets. In the first quarter, we expect our normal seasonality to be compounded by continued weakness in demand. While we entered 2009 with low inventory levels in all of our businesses, we’ll continue to manage for cash and match production with demand.

This will result in lower factory loading levels in the quarter, including expected market down time of up to 40,000 tons across our mill system. We will aggressively manage our manufacturing cash overhead costs during this time, but we do expect that under-absorbed fixed overhead costs will significantly impact profitability during the first quarter.

We expect to partially offset the impact of underutilization, with a continued focus on the controllables, including savings from the cost actions we’ve already begun to implement, additional price and mix enhancements, operating productivity improvement and other measures we’re taking to reduce discretionary spending, including pay freezes for salaried employees.

Lastly, I’ll provide you with 2009 targets for key items, including CapEx, pension income, and depreciation. CapEx for the full year in 2009 is expected to be around $250 million down from $288 million in 2008. This includes all the capital required for restructuring our manufacturing footprint. As we’ve indicated, by narrowing our focus on the highest value opportunities, we’ll be able to reduce overall capital spending levels and continue to make targeted investments to profitably grow our business. DD&A is forecasted to be approximately $450 million down from $480 million in 2008.

Pension income is expected to be over $60 million in 2009. Our team has done a terrific job managing our pension plans during this difficult period. As a result, we ended the year with a pension surplus of more than $630 million in our U.S. qualified plans representing a funded position of 125%.

Despite the unprecedented drop in demand we experienced in the fourth quarter, we’ve entered this downturn well-positioned, both competitively and financially. Our cash flow generation, strong balance sheet, and the focus we have on improving our business model will allow us to not only weather this downturn and take on potential additional stresses, but also outperform on the other side.

Now, I’ll turn the call back over to John.

John A. Luke, Jr.

Before concluding and turning to your questions, I’ll summarize what you heard today and what it means for MWV going forward.

We are all operating in a fundamentally different world, including the intense challenges of a global recession. MWV’s earnings results for the fourth quarter and for 2008 clearly reflect these external pressures. Through this difficult period, however, we have implemented a broad series of actions to increase our cash reserves and solidify our balance sheet to include the strong benefit of our over-funded pension plan.

In addition to this financial strength, we’re working aggressively to cut costs and rationalize our manufacturing footprint, both to weather the near-term challenges and support our efforts to advance strategic imperatives, sharpen our commercial focus and business model and improve the value creation profile of our business.

For all of these reasons, and the benefit of exiting more commoditized businesses in recent years to focus on global markets that provide the potential for profitable growth, we are confident that we’re on the right path. Mindful of the immediate challenges and economic uncertainties, all of this amounts to opportunity for MWV as a sound reliable partner for customers and as an attractive investment for our shareholders.

We’ll now be happy to address whatever questions you have this morning.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from George Staphos – Banc of America.

George Staphos – Banc of America Securities

Bigger picture question maybe first John, realizing that you are taking what you believe to be proactive steps to restructure the business and certainly we'd be constructive on that, how do you guard against being too incremental too marginal in the restructuring action that you're taking now. From the research that we've done on paper, there's good evidence that during recessions consumers become much more productive in their consumption. They take it down, but then that behavior's not unlearned when they come back at the recovery, so ultimately how do you right size the office products business in what particularly could be a secular downturn for products that you produce? And I had a follow one.

John A. Luke, Jr.

George, I think that's a great question and let me try to offer a little perspective, and I'll turn to Jim since you also reference consumer and office products.

First of all, I think it is very important to be proactive as we've said. You are absolutely right doing so incrementally assuming that things would return back to some semblance of normal, is often a fool's game. And so we're not just working on the margin, we're looking across the platform insuring that we don't lose sight of where the growth potentials can be around the globe. But really be sure that we're focused on our capacity to deal thoughtfully with changes that may come in consumer behavior but do so in a way that has a stronger business model to enable us to grow and serve those opportunities that do come along. Jim?

James Buzzard

George, maybe a couple of other thoughts on that and this differs across the various elements of that consumer office products business. Clearly in the areas of the financial segments for envelopes for example, credit card solicitation and others, we do believe that there's a structural change that will not come back, and that's why we've closed the facility in Enfield and restructured another one and we will continue to look at all those issues.

In areas like the calendaring and time management business, in past recessions we have seen that that's driven more by job creation and unemployment and when those come back again, the business does snap back. So what we're already focused on now is making sure managing to the current volumes, we're moving crews out, having temporary layoffs in the facilities and making sure we're producing where demand is, and obviously if as we view these things, if we see more structural change, we'll continue to take additional steps.

John A. Luke, Jr.

Right, and let me just follow on that George, before turning to you for the second question you have, just to punctuate I think what both of us are saying, we are not only dealing with a difficult downturn, but we're also dealing with one as we've emphasized in this call today, that has uncertain characteristics and an uncertain duration to it in addition to the potential for very real changes in consumer behavior across the board.

And I think for that reason the changes that we've announced and continue planning to make or prepared to make, are substantively more than merely on the margin or incremental. They are ones that are going to really position us much more soundly going forward, particularly with respect to, not only much greater cost efficiency, but the value creation lends in each of our businesses that will support that.

George Staphos – Banc of America Securities

I just maybe respectfully, I’m concerned that past recessions might not be a guide here because you may lose a whole class of the workforce that doesn't come back to time management products, and demographically you'll have a new class that is less anchored to using that type of product going forward. But in any event, the more minutia types of questions, can you tell us what you're seeing in beverage packaging trends both in North America and outside North America early on in 2009, and what impact are you seeing, if at all, from the dollar on bleached board?

John A. Luke, Jr.

George, many thanks, I'll turn it to Jim to share some perspective.

James Buzzard

George, in terms of the beverage packaging that I referenced, on the beer side we continue to see things holding relatively steady. I think that historically we have seen in these markets the take home multi-packs in beer do hold up. We are seeing declines in North America in the carbonated soft drink business. I think some of that is the economy and some of it. Frankly, is pricing actions taken by some of the beverage companies that's hitting demand in the multi-packs.

Europe was a little bit slower to feel the downturn, but we're now experiencing on the beer side, which is the largest part of our business in Europe, that slowed down as well. So, all in all, I think reasonably good with some signs of softness continuing into 2009.

In terms of our bleached board business, so far the strengthening of the dollar we don't yet see that as an impact on our volumes. Obviously there's the translation effect that occurs with that, but our products remain very competitive, especially in the European markets at this point in time.

John A. Luke, Jr.

And I would just punctuate that to your earlier question George, the past is hardly prologue, but I think that at current rates the dollar versus euro relative to other currencies as well, historically our business has remained very competitive on a global basis. It's only been with unusual strengthening that we’d be well ahead of the current levels that we, and no doubt, U.S. manufacturers have seen unusual pressures.

Operator

Our next question comes from Claudia Hueston - JP Morgan.

Claudia Hueston – JP Morgan

Just a couple of questions about consumer solutions, I was hoping you could give just a little bit of detail on the price cost recovery in that segment, and maybe where you were as you came out of the quarter, and then how you're thinking about both resin price movements and price recovery as they go through the first quarter. And if you have, how much of that business works on a pass-through that would be helpful as well.

John A. Luke, Jr.

Jim, do you want to pick that up?

James Buzzard

Sure. On the plastic side of the consumer solutions business, about 60% of that volume is tied to pass-through, 40% of it we move with open market moves. What we have seen as you know over the course of 2008 was a dramatic run up in resin pricing. Some of our contracts are 90-day re-openers, some a little bit longer, some 30-day. But by and large we spent 2008 behind the curve relative to resin pricing. That passed itself in the November time frame, and so now we're seeing some advantage on the down side of that. But by and large we’re able to recapture all the resin price increases, or cost increases rather, through market-based pricing.

Claudia Hueston – JP Morgan

And most of that you should feel as we get to the first quarter because you're still catching up in the fourth, is that right?

James Buzzard

That's correct.

Claudia Hueston – JP Morgan

Then just also within that segment, just given the acquisitions and restructuring over the last couple of years, I was wondering if it's possible just to get a breakdown of the major product categories and what they represent as maybe a percentage of sales, or just sort of order of magnitude size at this point just given some of the actions you've taken?

Mark Rajkowski

Claudia, this is Mark. A big part of our consumer solutions group is our beverage business. That is a substantial portion of our revenues in that segment. Media is still a fairly substantial portion of our segment revenues as well. As we've said that's a business that is slightly north of $500 million of sales, beverage is approximately $1 billion of sales.

We have a personal care business that includes folding carton as well as plastic products from our Calmar business that is in the neighborhood of $400 million business. Healthcare is again a combination of folding carton and pumps from our Calmar business and that's closer to a $200 million business. And then we've got tobacco, which is slightly less than $300 million. And then we've got a home and garden business that's about $250,000, so that's kind of the run down for that segment in terms of revenues.

Claudia Houston - JP Morgan

Finally, given the strength of the balance sheet and the relatively good outlook for cash, could you maybe just talk about your priorities for your cash and how you prioritize the dividend and debt reduction and how you're thinking about acquisitions and that sort of stuff?

John A. Luke, Jr.

Let me offer just a couple of high level thoughts and I'll ask Mark to supplement. I think as we move through this period for all the reasons that we emphasized in our prepared comments, we are dealing with an uncertain period one that will be of uncertain duration and tenor. And our focus is to keep our cash reserves full where we can with plans that we have and intend to execute to enrich those reserves and those remain priorities along with maintaining other elements of our financial strength.

You mentioned the dividend and you'll note that our board reinforced that this week with a positive vote. Debt reduction is as prudent, always attractive, but that has to be weighed in the moment against the value of cash preservation. So, Mark?

Mark Rajkowski

I think that's well said. We're going to work really hard this year. We've got a lot of actions underway in terms of cost reductions. We think we can take more cash out of the balance sheet around working capital and our focus is through our operating cash flow to be able to fund our CapEx as well as the dividend. And as John said, I think given what is a very, very uncertain and fuzzy next 12 plus months, I think hanging on and preserving the cash that we have right now makes a lot of sense.

Operator

Our next question comes from Gail Glazerman - UBS.

Gail Glazerman - UBS

Maybe just following up on Claudia's question for a minute, last quarter you made some small [inaudible] acquisitions. I'm just wondering if from, I guess, distressed properties, have you seen any more opportunities like that or going forward with the opportunity really just be taking share from producers that are in stress?

John A. Luke, Jr.

I think that's a great question, Gail. We're not actively looking and frankly I'm not aware of any that have come along that have caught our fancy. I think that in this macro environment in this industry as with virtually every other industry, such defined distress assets will be available probably in an increasing abundance. But our priority is on financial strength, furthering that financial strength and executing the significant programs we have very much on our plate right now, and that remains our priority.

Gail Glazerman - UBS

Switching to demand a little bit, two things there, is there anything specific you can talk about in bleached board that would explain why that seems to still be showing year-over-year growth while so much of the rest of the product areas in the economy in general is weaker. Is that really share gains on your part, or are the markets really still growing? And also if you could talk a little bit about, I guess, sequential trends you saw moving through the fourth quarter and what that implies for 2009.

John A. Luke, Jr.

I'll turn to Jim to offer some perspectives on that.

James Buzzard

On the demand side with bleached board, I think clearly in selected markets there were main strengths with tobacco markets. Also the aseptic markets continue to show global growth. Food service is strong as well. Part of what helps us clearly is the global reach that we have. So we do have a strong presence in Asia and other growing parts of the world.

Having said that, there are certain parts of the business that throughout the quarter we saw begin to decline. So our commercial print business sequentially began to show some weakness and, frankly, we saw some of the journal packaging applications as well. But we've seen, as I'm sure you have, the unmade orders backlog beginning November begin to decline. So we are seeing some moderation in those markets in total.

But we would counter that by saying that where we are today is about where things were back in 2007. So we will continue to closely monitor our demand side and we'll manage the business against that.

Gail Glazerman - UBS

Obviously not all input costs have fallen and on the year-on-year basis you're still in some areas chasing that. But can you talk a little bit about the sequential cost trends overall moving from the third quarter into the fourth quarter?

James Buzzard

Sure, Gail. What we saw from Q3 to Q4, we didn't see a lot of real significant movement down as we began the quarter. So as I said in my comments, certainly in the areas like freight, caustic soda, sulfuric acid, latex, our outside electrical purchases and others, we continue to be subjected to strong inflation pressures. Those are beginning to moderate. So we are working hard through our sourcing group to begin to move in those areas. But we expect to see, again as I referenced, fairly significant inflation in Q1. What we do see, though, as I referenced, is beginning to see the moderation and as we move throughout 2009, we expect to see that trend turn the other way for us.

Gail Glazerman - UBS

Could you just remind us of your hedging position right now in terms of natural gas?

James Buzzard

Gail, we're slightly less than 60% hedged going into 2009.

Operator

Next question comes from Peter Ruschmeier - Barclays Capital.

Peter Ruschmeier - Barclays Capital

I had a couple questions. John, I was curious on your capital spending $250 million, certainly a very low number from historical standards. How long do you think you might be able to sustain that level without impacting the business?

John A. Luke, Jr.

Pete, we have obviously rationed it back, but I think as we have moved forward over the last several years we've found much more efficient ways to spend and engineer solutions in our business. And so we are not going to put the company at an unsustainable capital spend level, and we think this is a level that supports the business as is needed and could be sustained if this downturn continues.

Peter Ruschmeier - Barclays Capital

Maybe a question for Jim on the inflation question, I know you have a lot of puts and takes and lags on when things pass through, but if you had $200 million cost inflation in 2008 based on the trends you see today, what kind of delta do you think you might see in '09?

James Buzzard

Peter, at this point I think it's really too early for me to tell. As I said, we're working hard in this area. We don’t have a picture as to where things are going to wind up. Clearly we see a rapid deceleration, but I would say that whether it's through inventories or lags through the first quarter, we will continue to be impacted by heavy inflation.

Peter Ruschmeier - Barclays Capital

And quick question for Mark, if I could, Mark, do you have a preliminary estimate on the over-funded pension situation? How that may be finalizing for 2008?

Mark Rajkowski

Yes. We're going to end the year at 125% over-funded, Peter.

Peter Ruschmeier - Barclays Capital

So what is that - what kind of balance is that?

Mark Rajkowski

That's well over $600 million.

Peter Ruschmeier - Barclays Capital

And then just lastly maybe for John, I'm curious we've seen as recently as two weeks ago continued interest in timber transactions very high price points and we know you've got some makers on the block, but the question really is does it make sense to consider, at least in this environment, accelerating some of those bulk timber sales given the very strong appetite and given that, at least in my opinion, your timber land is worth a large percentage of your market cap and you could potentially financial engineer with that at a very opportune time.

John A. Luke, Jr.

Pete, I think that's a question that certainly lets us build on the points that Jim made in his comments and that is we do have strong assets and high quality assets we have got a lot of things going on that are good within that business today. You will see some continued select transactions. Our cash position, overall financial strength lets us select those very, very prudentially so that we can capitalize on those that even by historic measures are very attractive and lucrative. And as those come along and we can capitalize on them we will continue to build those revenues, but we are not going to engage in any fire sale activity that you would expect are driven in part by the appetite of some buyers in this credit market.

Operator

Our next question comes from Mark Weintraub - Buckingham Research..

Mark Weintraub – Buckingham Research

Following up really in the vein of the prior question, do you at this point have a share repurchase authorization still outstanding?

John A. Luke, Jr

Yes we do.

Mark Weintraub – Buckingham Research

And how much is left on that?

John A. Luke, Jr

I think it’s roughly 2.5 million shares.

Mark Weintraub – Buckingham Research

I apologize if you already mentioned this. Did you buy back anything in the fourth quarter?

John A. Luke, Jr

We did not.

Mark Weintraub – Buckingham Research

On the $550 million of cash on the balance sheet, how much of that is in the U.S. and really, I guess the point of the question is, how much cash do you think you need to carry on the balance sheet as an ongoing entity?

John A. Luke, Jr

Well more than half of that cash is in the U.S., Mark, and certainly the answer to the last part of the question probably answer that differently today than I would have 12 months ago, I think in a normal environment there are working capital needs. Some capital needs particularly in the first half of the year for us given the cyclical, or I should say seasonal nature of our business and you could think of that as roughly being a couple hundred million dollars.

So with conditions the way they are, I think given some of that uncertainty we think it’s prudent to have higher levels of cash balances.

Mark Weintraub – Buckingham Research

I guess what I’m just trying to understand is that not that long ago you sold a big chunk of assets and bought back stock with a portion of that. And as you mentioned, John, you certainly don’t want to be doing fire sales in this type of environment, but given that your stock is a lot lower doesn’t the economics give you room to actually sell things at a lower price and it work better for you because you can buy your stock back at a much lower level?

How does that affect your thinking as you look at potential arbitrage opportunities with regards to unlocking value?

John A. Luke, Jr

Mark, you can be sure that you’re not the first person to raise that question and it’s one that out of respect for those who are raising it that as well as just good business prudence that we evaluate on a continuing basis.

At this stage of the game there has been no clear evidence of sound economic value in our analytics to point to a clear benefit from such an arbitrage. We continue to evaluate these things and again weighing them against the backdrop, as we’ve reinforced this morning, of the benefits of holding onto cash just for overall security and financial prudence in today’s uncertain world as well.

James Buzzard

Yeah. Mark what you’re suggesting certainly we’re taking a hard look at it. It would appear to make sense in theory but when the cash is gone it’s gone and I certainly like to see a little bit of light at the other end of this tunnel as we work through what is just a probably one of the most unsettled and most distressed periods in this country’s economic history.

Mark Weintraub – Buckingham Research

I guess the question was also linked though to the potential that you might have some assets that actually could still be monetized. Maybe not at as high prices as they could have been six months ago, but at still pretty high prices so that you wouldn’t actually even have to weaken your financial position in going through this strategy.

John A. Luke, Jr

Well, my response would be the same. That would still represent potential cash reserves that we may want to get our hands on in and use in an alternative fashion beyond either buying back stock or debt.

James Buzzard

But I think you raised a good prompt and we’ll just continue to evaluate the question as we have.

Mark Weintraub – Buckingham Research

On the pension, was there any meaningful change on your discount rate and what was planned performance in ‘08?

John A. Luke, Jr

We lowered our discount rate to 6.25 from 6.5 so that did have the effect of increasing our liabilities and our performance I think year-to-date in the pension plan was roughly 10%, down 10%.

Operator

Our next question comes from Richard Skidmore - Goldman Sachs.

Richard Skidmore – Goldman Sachs

Just wanted to focus a little bit maybe on the cost cutting restructuring that you’re doing the $125 million, what is sort of the net benefit that you would anticipate in 2009, or perhaps another way to ask it is, what kind of transition costs might there be and/or what’s sort of the normal inflation costs that you’d expect in your business?

John A. Luke, Jr

Let me take a shot of that one, Rick. Our expectations is that the $100 million of SG&A in overhead reductions is just that. We’re looking to taking $100 million of our overhead cost out net of inflation, inflation being salaries, benefits and things to that nature. In terms of the manufacturing capacity rationalization, again, those are going to be real cost that comes out net of some of that transition, moving equipment some product lines, re-staffing, getting lines up and running.

Richard Skidmore – Goldman Sachs

And do those transition costs sort of occur through the first half of ’09?

John A. Luke, Jr

Those transition costs will occur as we actually close and move product, if we are moving product, from each of the facilities. So that will take place over the course of the year.

Richard Skidmore – Goldman Sachs

Then just shifting to a bigger picture question for John, maybe following up a bit on Mark Weintraub's question, as you look at the business and accelerated this restricting, how do the consumer and office product and specialty chemicals businesses fit into the strategy of being a global packaging company?

John A. Luke, Jr

Rick, again, as we’ve talked about that in the past I think that we have clear distinct areas of focus and profitable growth opportunities in the packaging space. We’ve got excellent teams leading excellent businesses in consumer office products and in specialty chemicals.

Good cross linkages in terms of business model idea exchange innovation, go to market strategy and so they are positive contributors not only to our thinking about what we can continue to do in our packaging business, but they are positive and welcome contributors to our company’s overall financial performance.

Operator

With that, ladies and gentlemen, we turn the conference back to Mr. Jason Thompson for closing remarks.

Jason Thompson

Thanks everyone for joining us and, Alex, please give out the replay information. Good bye.

Operator

Ladies and gentleman, this conference will be available for replay after 12 pm today until February the 28th at midnight. You may accesses the playback service at any time by dialing 1-800-475-6701 and entering the access code of 977652. International participants may dial 1-320-365-3844 and entering the access code of 977652. That does conclude our conference for today. Thank you for your participation. You may now disconnect.

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Source: MeadWestvaco Corp. Q4 2008 Earnings Call Transcript
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