MeadWestvaco Corporation Q4 2009 Earnings Call Transcript

Jan.27.10 | About: WestRock Company (WRK)

MeadWestvaco Corporation (MWV) Q4 2009 Earnings Call Transcript January 27, 2010 10:00 AM ET

Executives

Jason Thompson – Director, IR

John Luke – Chairman and CEO

Jim Buzzard – President

Mark Rajkowski – SVP and CFO

Analysts

Claudia Hueston – JP Morgan

Mark Connelly – Sterne, Agee & Leach

Gail Glazerman – UBS

Mark Weintraub – Buckingham Research

Mark Wilde – Deutsche Bank

George Staphos – Banc of America/Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by. Welcome to MWV fourth quarter and full year 2009 conference call. All lines are in a listen-only mode. Later we will conduct a question-and-answer session. All instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call will be recorded.

I would now like to turn the call over to Director of Investor Relations, Jason Thompson. Please go ahead, sir.

Jason Thompson

Thanks. Good morning, everyone. This morning we announced our results before the market opened. 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 will 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.

First, a brief recap of the results we reported this morning. For the fourth quarter, we reported net income of 51 million or $0.29 per share. These results include net favorable after tax items totaling 13 million or $0.07 per share.

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

John Luke

Jason, thanks very much and good morning. 2009 was a good year for MWV and the environment that was difficult for our industry and the broader economy. We set a course to manage through a challenging and uncertain economic period and we executed on those plans. Improved earnings and increased shareholder value by focusing on sound strategy, strategies that worked and will enhance our overall competitiveness. This work continues.

We have made choices about marketplace participation that have both increased our earnings and positioned us for greater profitability going forward. We have made improvements to our business model that have had immediate impact on bottom line results and importantly that will provide us greater operating leverage as demand event eventually improve. And we have preserved and strengthened our sound financial position making us standout as a stable and reliable partner for our customers in an uncertain environment while also giving flexibility to invest in future growth for and with those customers.

Continued progress in these areas in 2010 is a high priority. In a few moments, Jim will talk about our strong operational performance during the fourth quarter and the dynamics we obtain in our markets. And then, Mark will highlight some of the financial metrics and outline our financial priorities as we move into 2010.

Before turning to them, I wanted to elaborate briefly on a few aspects of our fourth quarter performance that punctuate the progress we have made on our value creation strategies during the year.

First, we continue to strengthen partnerships with customers and to capitalize on our strengths to win business with new customers. We're helping major beverage customers take advantage of a growing market for multi-pack packaging in Asia and we added new customers during the quarter for Shellpak, Natralock, MWare and other innovative offerings across our marketplace market place.

Second, our aggressive cost and productivity initiatives have resulted in a more competitive business model. We expanded margins in each of our businesses during the fourth quarter capping off the year were MWV's overall operating profitability improved significantly. This has been a dedicated and determined effort across the company. We reached our immediate targets and have set our sights additional improvements going forward.

Finally, our financial strength continues to be a valuable asset for all of our businesses. And it has allowed to us meet our commitments to both customers and shareholders through a very uncertain year. We added more cash to our balance sheet during the fourth quarter and we're gratified that we preserved and increased shareholder value during this tremendously difficult period.

As we look forward, we're expecting continuation of the same challenges we have been facing and increasingly stable but still weak economy, as consumers and cautious customers and public policies that may stifle rather than stimulate economic growth. Despite the still uncertain market outlook, we're confident, however, we're focused on the right things.

MWV's strategy for 2010 is built on the principle that drove our positive results in 2009. We're already working hard on another series of deliberate actions that will further strengthen our business including the priority emphasis on growth and developing geographies, especially Brazil, organic growth in our most attractive end-markets, particularly healthcare packaging and additional reductions in our cost structure and refinement store overall market participation. With continued vigilant in these areas and many more, we'll build on our recent performance record and generate additional positive momentum in 2010.

I would now like to turn the call over to Jim Buzzard to talk about our business results in the fourth quarter before Mark discusses our financial metrics and a more detailed outlook for the first quarter as well. Jim?

Jim Buzzard

Thank you, John. I am pleased to say that the tremendous work we put in both our operational performance and commercial strategies this year delivered strong results. We have taken significant steps toward our goal of world class costs and productivity performance and we're demonstrating the market knowledge and commercial excellence that will be required to turn the operating leverage we created into dramatically improved earnings results as markets improve.

Our progress this year has been apparent even in this difficult economic environment. Sales were down about 9% across the company for the year and yet, we've increased earnings from our business segments by 24% compared to 2008. We're beginning to see some early positive signs from customers. No one expects a dramatic recovery in the near future. However, many of our markets have stabilized and we're seeing some year-over-year improvements in order patterns.

As we have noted throughout the year, our business in consumer staples such as food, beverage, healthcare and home and garden has held up as well as you might expect during this economic downturn where as the luxury and consumer discretionary categories have seen more protracted declines including personal care, fragrance and entertainment. The commercial organization we built over the past year continues to provide improved visibility into these market dynamics. And our value based assessment in each of our businesses has us focused on the right strategic opportunities in the most attractive end-markets for our products and services.

As these trends continue in our markets gain momentum, we are positioned to capitalize on our improved operating leverage. In anticipation of the severe economic challenges, we took steps to speed up and resize our strategic cost management program. We exceeded our targets for overhead cost savings in 2009 adding together overhead cost savings, capacity actions and ongoing plant productivity initiatives that total impact from our cost management program was more than $275 million this year. And in 2010, we expect to deliver an additional 3 to 4% of operating productivity improvement.

Let me share some details about the impact of our commercial strategies and operating productivity actions on each of our businesses and consumer packaging markets. As always, you will find additional information in the slide presentation at the company's for this call.

In the packaging resources business, segment profits were down only slightly during the fourth quarter despite volume decreases due to the economy, inventory control and our decision to exit certain low return business. Pricing was up year-over-year and we experienced some modest cost deflation. However, this was offset by the impact of lost volumes.

As a result, profits were down about 11% for the quarter and 7% for the year. Given the very difficult year in 2009, this was a great effort by our team. Compared to last year's fourth quarter, shipments of SBS were down 16% but were essentially flat versus the third quarter.

CNK volumes were down 9% compared to last year as several beverage customers delayed taking shipments in order to balance year-end inventories. We're gaining market share in key value-added paperboard markets, especially commercial print, tobacco in China and Japan and aseptic liquid packaging across Asia.

We've also had good traction with the recent launch of MWare line of food service products and new business from our effort to work with brand owners to specify our products for their offerings in food markets.

In addition, Rigesa continues to maintain its profitability with strong productivity gains. Our business in Brazil rebounded more quickly than elsewhere in the world and we expect the recovery we have seen over the past several months to continue. These trends should be a tail wind for Rigesa in 2010.

The consumer solutions segment had another strong quarter to finish on a much improved year. Profits doubled in this business during the fourth quarter from $11 million in 2008 to $22 million in 2009. And profits for the year were up 70%. The team has done a good job reducing costs, eliminating unprofitable products and seeking out opportunities to win with our customers in an environment that still saw a 10% overall decline in sales for the year. The rate of decline moderate rated in the fourth quarter. Our markets have stabilized and some of our customers are beginning to sound more optimistic about demand in 2010.

Let me go through each of the consumer packaging markets we serve in this business and give you a sense of the performance in the quarter. Our global beverage business, sales and earnings increased again during the fourth quarter, in part thanks to new business in Asia as well as outstanding productivity at our operating facilities. Our business in China was up 50% this year and our customers are firmly focused on this region for their future growth.

Our business in China was up 50% this year and our customers are firmly focused on this region for their future growth. We are pursuing additional opportunities to grow with these customers by helping them win with our proprietary products and machinery both in traditional multi-pack markets as well as new in the adjacent categories.

Meanwhile, trends in the beer and soft drink business in North America and Europe have remained relatively stable. We're still seeing resiliency for beer in North America and we have even had a small increase in volume for carbonated soft drink which has generally been declining the past few quarters.

In our healthcare business, sales and earnings were up for the year. The focus of this business continues to be on our Shellpak solution and other adhering packing as well as valuable pumps for pharmaceuticals requiring Nasal or Oral applications. We increased our Shellpak volume from about 3 million units per month at the beginning of the year to more than 7 million units per month in the fourth quarter by adding new drugs for Wal-Mart's generic prescription program and add a new brand in generic pharmaceutical customers.

There is also been some moderate improvement in the market for our preservative free pumps in Europe as customers restock inventory and consider the benefits of this innovative application. We've added new customers for this solution as well during the quarter, including our first two customers in India. These innovative products as well as the recently launched Med-Easy package we introduced in Europe and North America will be the central focus of our growing healthcare business in 2010.

We have begun to see a small amount of progress in the global markets for personal care. Sales were up during the fourth quarter compared to last year when the bottom really fell out of the luxury product sector and they are beginning to emerge from a very difficult year in this business with positive momentum. We have heard from fragrance customers who are beginning to restock inventories as well as considering new launches for their product pipelines and we continue to benefit from an increased emphasis on healthy habits involving hand soaps and sanitizers.

We remain excited about opportunities for our innovative airless pump dispensers, a solution that helps customer lower their costs and manage their supply chains by avoiding the need to add preservatives to their formula. As in our other businesses, we have taken aggressive action to reduce costs, resize our manufacturing footprint and increase productivity in the personal care business which has helped improve margins and raise profits during the fourth quarter and the entire year.

In home and garden, activity remains positive in advance of the all important lawn and garden maintenance season in the United States. Sales and earnings were about even in the fourth quarter and profitability was up significantly for the entire year. We have benefited from an upward trend in home and hard surface cleaning solutions this year and recently secured an extended contract with a refresh trigger sprayer we provide for Procter & Gamble's popular Febreze product.

As I noted before, we're actively managing our media and entertainment business for maximum cash generation and doing so very successfully. Sales continue to decline in this business, especially for printed media and specialty packaging. And we've taken actions to rationalize capacity and costs as a result.

Sales are still relatively strong for injection-molded products including our popular EcoLite DVD and Blu-Ray cases, as we've emerged as one of only a small handful of suppliers to the major studios. We also continue to make inroads into consumer electronics and other markets with our Natralock security packaging. The team was recently at the consumer electronics show in Las Vegas and announced several new customers for this innovative packaging including Kodak and Swiss Army. This business should continue to expand nicely in 2010.

Turning to our non-packaging businesses, our positive earnings momentum has continued in both the consumer and office products and specialty chemicals segments. Coming off of some historic lows last year, the consumer and office products segment had another solid performance in the fourth quarter to finish a very good year. We continue to benefit from strong placement and sell through for proprietary branded consumer and office products at leading North American retailers and distributors. Our alignment and collaboration with these winning retailers led to volume increases for the all important back-to-school and year-end planning seasons in this business.

Along with some significant productivity improvements, these volume gains contributed to a strong increase in profitability for the consumer office product segment during both the quarter and the year. While the Brazilian back-to-school season is just underway, we had good initial placement for Tilibra and Grafons whose high-end stationary products we acquired to extend our reach in the attractive Brazilian market. The integration of Grafons is well underway and is expected to contribute to earnings in 2010.

Sales increased slightly in specialty chemical segments and the business posted another increase in earnings compared to a weak fourth quarter in 2008. Despite the difficult economy, we reported strong sales in several markets including asphalt, printing ink, adhesives and absorption technologies for water treatment which set a record for sales in the year.

Our auto coverage business was also stronger than expected, as North American manufacturers increased production slightly and sales in Asia nearly reached an all-time high. We continue to see momentum for our asphalt pavement products around the world, including commitments in China to use Evotherm for cold weather paving.

Market conditions for the community development and land management segment continue as they have throughout 2009. The overall real estate market was soft, but there was some momentum in our current area of emphasis, small rural land tracks. We closed 11 of these smaller transactions during the quarter with an average price per acre of more than $2,100. Similar to last quarter, we also closed a larger force land sale in South Carolina, more than 10,000 acres for a total of $18 million. In total land sales during the quarter were more than $23 million and were the primary contributor to segment earnings of $20 million.

We continue to make progress in our development activities as well. We unveiled the master plan for our large East Edisto property which was met with a very positive reaction from the community in South Carolina. We're already working with local governments on long-term development agreements and infrastructure plans and we expect that work to continue through 2010.

We also signed the previously announced lease agreement with a tenant for our industrial and distribution park joint venture with the Rockefeller Group serving the Port of Charleston. We are actively pursuing prospective tenants for a second site on this property as well as other industrial and development projects. The long-term dynamics for these properties are very strong, especially with the recent announcement that Boeing will open a second assembly plant for their Dreamliner aircraft in the North Charleston area and bring as many as 10 to 15 suppliers to the region along with them.

Now, I would like to turn the call over to Mark to discuss some of our financial metrics for the fourth quarter. Mark?

Mark Rajkowski

Thanks, Jim. During the fourth quarter, we continued to execute the game plan we laid out at the beginning of 2009 to improve our business model and strengthen our financial position. We had a strong finish to what was a year of substantial progress. As a result, we delivered increased earnings and cash flow in both the fourth quarter and full year. More importantly, the improvements we have made to our cost structure and financial flexibility provide us with an excellent foundation on which to build the 2010.

Consider these highlights from 2009. We expanded operating margins in each of our businesses, resulting in 170 basis point improvement in the company's operating margins year-over-year. We permanently eliminated more than $150 million of overhead and fixed manufacturing costs and we continue to make our cost structure more competitive. And we generated over $870 million of operating cash flow and added about $300 million of cash to our balance sheet. We achieved this during one of the most difficult economic environments ever. This is a record of accomplishment of which we are proud, but not satisfied. Our plans for 2010 build on this progress and momentum.

Let's take a closer look at these areas of our performance. We expanded our gross margin in each of our businesses. On an adjusted basis, we saw a total gross margin improvement of 360 basis points and 240 basis points in the fourth quarter and full year respectively. This margin improvement reflects both a significant cost savings we generated from our over head and manufacturing capacity actions, as well as the enhanced product mix we achieved for more focused market participation strategies that emphasize higher margin products.

Much of our success during the year was driven by determined effort to implement our strategic cost management program. During the fourth quarter we generated an additional $64 million of savings from the reduction of overhead and fixed manufacturing costs.

For the year total costs savings were $154 million, which we achieved by closing or restructuring 16 facilities and eliminating almost 3,000 positions which is 13% of our global workforce. As a result of this progress and ongoing work to further reduce overhead costs, we continue to expect at least $250 million of one rate savings by the middle of this year.

In the fourth quarter our SG&A spend was reduced $35 million related to our over head cost savings. This represents a 20% reduction compared to the previous year. And we will continue to benefit from these savings going forward.

These reductions however, were more than offset by higher performance based compensation as a substantial portion of these full year costs were accrued in the fourth quarter. Higher earnings and our ongoing working capital discipline contributed to an excellent year of cash flow generation.

Excluding the impact from the alternative fuel credits and other special items, cash flow from operations was about $640 million. That's an improvement of almost 50% over 2008. Free cash flow which is cash after CapEx, dividends was $258 million.

We had $850 million of cash-on-hand at the end of 2009, also a substantial improvement. We leveraged the strong cash performance with actions to further improve our liquidity and financial flexibility. 2009 we reduced outstanding debt by over $200 million, exiting the year with a total debt to capital ratio of 39%.

We also took advantage of the improved credit markets to greatly increase our overall financial flexibility by optimizing our debt maturity schedule and renewing our $600 million credit facility. Our financial strength has been a clear advantage in a tough environment. We have continued to invest in innovation, we have won business with new customers looking for reliability and stability in their supply chains and of course we were able to maintain our industry leading dividend for our shareholders.

As we look ahead to 2010, we expect another challenging year with an uneven global economic recovery. While we expect continued steady growth in Brazil, China and India, high unemployment, ongoing tight credit, a weak housing market and rising saving levels are likely to continue to depress US economic growth this year.

While demand has stabilized at current levels and in some markets is beginning to pick up from the lows we experienced in 2009, resiliency and trajectory of these trends through this year remains unclear. As such we are continuing to focus on the key controllables in maintaining the priority that drove our success in 2009, improving our business model, enhancing our financial strength and selectively investing capital to profitably grow our business.

Turning to the first quarter outlook, we expect our businesses to experience typical seasonality, but we are seeing some favorable volume trends as we begin to compare to the severe declines we saw at this time last year. Backlogs at the mills are stronger and customer tone and other key packaging markets has become more positive. As a result, we expect volumes to improve modestly year-over-year.

We also expect our results in the first quarter to benefit from the full run rate of the overhead in fixed manufacturing cost savings we achieved in 2009, as well as some moderation of input costs compared to last year's first quarter.

Taking into account all of these factors, we expect higher year-over-year earnings in each of our business segments, with the exception of our community development and land management business which benefited last year from a single large land sale. With that, John, I will turn it back to you.

John Luke

Mark, thanks very much. In summary, MWV ended the year with solid performance in the fourth quarter. We set a course at the beginning of 2009 to strengthen our competitiveness, even in a difficult and uncertain economic environment. We followed that course executing on plans to reduce costs, refine market price participation and build financial strength. These actions helped improve our earnings results, increase shareholder value and generate considerable momentum to our operations as we head further into 2010.

This concludes our prepared comments this morning and we would now be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Claudia Hueston with JP Morgan.

Claudia Hueston – JP Morgan

Thanks very much. Good morning.

Jim Buzzard

Good morning, Claudia.

Claudia Hueston – JP Morgan

Jim, I think you said that some of your customers in the consumer solutions business were beginning to sound more optimistic. Just hoping you could elaborate on that and maybe characterize if there is any similarities, any particular businesses or regions there where you're seeing that optimism?

Jim Buzzard

Sure, Claudia. As I think I noted, we are beginning to hear customers, at least sounded a little more positive tone. We're seeing that certainly as they are restocking some of their inventories, the destocking we saw last year has stopped and they're actually beginning to move back into the supply chain. In areas like the fragrance business, we have seen an uptick in orders and we're hearing customers talk about the fact that they're looking at new launches, nothing definitive yet but they're beginning to see opportunities to grow their business.

Other areas within personal care continue to be positive year-over-year. And we're also seeing obviously the benefit I think of some of our innovative packaging solutions in the healthcare markets, we're seeing good opportunities there. I think our strength in emerging markets, China, Brazil, Eastern Europe, India are all helping leverage things as well. And then we have made some moves with our CNK products into the food markets, where we bring some real values, especially in the frozen food areas as well, so really across the board we're seeing better tone and tenor. We're not here to declare victory and say that we're seeing real strength in the markets, but certainly feeling better than we did this time last year.

Claudia Hueston – JP Morgan

That's helpful color. And then just with respect to some of these emerging markets and opportunities for growth, can you talk a little bit more about the strategy as you think about emerging markets and what sort of your criteria is as you're thinking about growth in those regions?

Jim Buzzard

I think that clearly our focus has been on Brazil, China, India and Eastern Europe, so we put capital into those regions, so we have manufacturing capabilities in each of those areas. And I think it is the same philosophy we have taken in North America and Western Europe. It is, with what sort of packaging solutions can we provide to leading global brand owners to bring value to them and help them succeed in their markets.

And so whether it's growth in multi-pack packaging in China, where we're seeing certainly the large beverage companies make significant investments, whether it is in the personal care markets and whether it is in specialty chemicals, all of those areas we continue to participate and bring value to our customers. I think one of the things that sets us apart is that we can supply the global brand owners anywhere in the world, that they choose to participate and we're doing that.

John Luke

Claudia, good morning, this is John. I would just supplement what Jim is saying because I think that implicit in everything we're saying is a very disciplined focus towards managing investment marketplace participation, all with a view towards participating in areas where there are decided opportunities for to us bring value and get rewarded as we grow profitably in those markets and let that guide the discipline in and around the investments we make. I think we are, as Jim reinforced uniquely well-positioned but it is a very carefully thought out approach toward building markets.

Claudia Hueston – JP Morgan

Thank you. That's very helpful and then just two little ones. Could you provide some CapEx and tax rate guidance for 2010?

John Luke

Mark, you're on.

Mark Rajkowski

Yeah, Claudia, in terms of CapEx as you know 2009 we were very much focused on preserving capital and maintaining liquidity. So as we look at this year's spend, certainly some delays and deferrals of projects to preserve cash, so we would expect to see some tick up in our CapEx in 2010. The other thing that certainly we want to do is to take advantage of some of the strength that we have in key end markets and some of the emerging geographies as Jim was talking about earlier and we're not going to get ahead of the recovery, but where we see opportunities to profitably grow our business we'll take advantage of that as well, so certainly some modest increases over the level of spend that we had this year.

Claudia Hueston – JP Morgan

Okay. And the tax rate?

Mark Rajkowski

Tax rate, this is, to pinpoint that is a difficult thing but I think a range to think about is somewhere in the 25 to 30% range.

Claudia Hueston – JP Morgan

Perfect. Thanks a lot.

Mark Rajkowski

Thank you, Claudia.

Operator

Our next question comes from Mark Connelly with Sterne, Agee. Your line is open.

Mark Connelly – Sterne, Agee & Leach

Thank you, John. Wonder, if we could talk about consumer solutions in terms of the Calmar business and I am wondering as we move into the spring whether you see enough signs of recovery in the higher end spray pump business to offset potential seasonal losses, Purell has helped you a lot through this period and I am curious whether you're seeing any signs the rest of that market is coming back or whether you think that the Purell business might continue to hold you through?

John Luke

Mark, I will start and I will turn to Jim to provide a little bit more color. I think we continue to see good focus on the Purell type business in response to all of the concerns and market development as a result that it's come from that. I think the nature of our participation in the pumps and dispensers marketplace and the innovation that we bring to bear has helped us to be nicely positioned to play in every day as well as higher end markets. Jim, as I said will elaborate a little bit more definitively but I think that we are seeing opportunities for recovery to be more manifest. Because I think as we reinforced across the board, we are cautious. Our customers are cautious. They feel a little better than they did a year ago, but this remains an uncertain time and it would be difficult to predict what the marketplace and economic environment would really look like beyond I guess beyond the next several weeks, no less what would it look like six months from now but Jim can provide a little bit more color on what we're seeing.

Jim Buzzard

Sure, Mark. As we sit here today and look forward again with caveat as John said that it's a visibility not all that transparent to our customers, a couple things going on. We certainly were supported in 2009 by the Purell, short of soap dispensing and antibacterial products, but we also believe there has been a permanent change in consumer habits. And so while it will certainly come back from the levels, we saw in 2009, we do believe that it will be a permanent uptick, for what it has been in prior years just as consumer behaviors have changed. We are seeing as we enter the lawn and garden season for the high-end tools applicators which are good products for us, strong order patterns there and then as I referenced in personal care markets particularly fragrance, we are seeing improved tenor from our customers and that is being reflected in stronger order patterns as we enter 2010.

Mark Connelly – Sterne, Agee & Leach

Well, the market doesn't seem to see the strength that we see in these numbers today. Question for Mark Rajkowski perhaps, you talk about the cash build and I look and say, you've now got more than 50% of a quarter's cash sitting there, probably earning not a whole lot of money. I am starting to wonder, how much of a cash cushion do you really need? Obviously you have talked about incremental investment requirements, but what are you going to do with that lump of cash because ultimately it is a significant drag on earnings right now?

Mark Rajkowski

I would say that first of all, I am not sure we're completely out of the woods yet. While trends are improving, some of the factors I cited earlier in my comments are factors that get us a little bit cautious about the U.S. economic recovery.

Secondly, I think just as we did in 2009 we're going to continue to be balanced while maintaining flexibility. So, we certainly think maintaining a strong payout to our shareholders is important. We're going to look at opportunistically and economically taking down some debt where that makes sense. And as I said earlier, we really while not getting ahead of the recovery, want to put some of that capital to work to profitably grow our business and take advantage of the market strength that we have in a number of our end markets and geographies.

John Luke

Yeah. I would just dovetail on that, Mark and say that what Mark has characterized as a situation that is the very beneficial outcome of uncertainty and a real priority on liquidity that we established at the outset of 2009. We have worked hard. We have improved these levels of cash all while maintaining the dividend and managing the debt appropriately. And we're actively looking, as Mark indicated, at plans. But I think really before too many triggers are pulled, it's very, very important to understand the nature and sustainability of any economic recovery as we move through the coming, hopefully the coming weeks and the next few months.

Mark Connelly – Sterne, Agee & Leach

I think that's obviously fair. My point was more that your internal performance has improved so dramatically that if you're confident in this performance level that you're starting to get to a point where you're just not going to need a cushion this big, anyway.

John Luke

And you can be sure, we're thinking about those things. We're not declaring victory either with internal performance, as Mark said, we're gratified but as we look forward and we raise the bar, we're not satisfied. We've got more to do as well. But the momentum exists.

Mark Connelly – Sterne, Agee & Leach

Very helpful. Thank you.

John Luke

Thank you.

Operator

Our next question comes from Gail Glazerman with UBS.

Gail Glazerman – UBS

Hi. Good morning. Can you please talk a little bit about how you see inflation moving into 2010, compared to the second half of 2009 and any particular area that you're concerned about?

Mark Rajkowski

We certainly have seen continued benefits from moderating inflation throughout the course of 2009. I think we were about break even year-over-year. In the first quarter, that ramped up to 4%. In the second quarter and I think we were at around 9%, in the fourth quarter of this year as we had some easier compares. We do expect to continue to see moderating inflation costs year-over-year in the first quarter, but as we move throughout the course of the year, those compares get a little bit tougher. And certainly one of the areas that we've got our eye on is freight costs. We expect them to pick up over the course of the year. But all in for 2010, we're expecting a relatively moderate inflation climate, so not a significant increase year-over-year.

John Luke

Again, I think Mark has characterized the look, Gail, towards 2010. We're not economists, so as we look out and plan I think the actions that have been taken in Washington do give us concern about the prospects for inflation to pick up at some point. And so, looking at the model that Mark has outlined, you can be sure that we're going to be very guarded about what could potentially come in the period.

Gail Glazerman – UBS

Okay. Thank you. And just coming back to the idea of growth, are we supposed to think of it as kind of more of what you have been doing in terms of the acquisition in Brazil and things like that? Or would we expect something maybe a little bigger and more dramatic in 2010?

John Luke

I think the others can comment more of what we have been doing, they sense for the pedestrian. I think we got a lot going on and it has been very positive. But I don't think you should expect any dramatic moves, any major moves. What we want to do is, we would continue to build the momentum in the refinement and the execution of our strategy agenda. Again, all geared to generate sustained levels of profitable growth. And that, as you heard Jim describe more fully, is the consumer and office product position in Brazil could be replicated whether it is in Brazil or in other areas. We do not have on our screen and therefore don't anticipate any major moves.

Gail Glazerman – UBS

Okay. Thank you. And just one last question, Mark, you made a comment about higher performance-based compensation in the fourth quarter. Can you quantify that at all or if you did, I am sorry I missed it.

Mark Rajkowski

I didn't quantify that. But, I think we've got a waterfall chart in there somewhere that gives you relative order of magnitude for the year. And a sizable portion of that was year-over-year impact in the fourth quarter.

Gail Glazerman – UBS

Okay. Thank you.

John Luke

Thanks, Gail.

Operator

Our next question comes from the line of Mark Weintraub with Buckingham Research.

Mark Weintraub – Buckingham Research

Thank you. Two questions. First, in the past we talked about the media business as being a top priority in terms of improving. Can you give us an update of where things stand with that and if there is still more actions, et cetera, you think you can or should be taking there? Let's start with that, please.

Mark Rajkowski

Let me, I'll take the lead and Jim can add some more color. We made significant changes in that businesses cost structure during the past year. Our overhead costs reductions were upwards of 25% plus year-over-year which were ahead of volume declines. And as Jim said earlier, we have been really focused on generating cash from that business, so we stripped out a lot of costs. We've taken out a lot of capacity. And, year-over-year it has actually been a positive cash generator. I think we have made outstanding progress in restructuring that business this year.

Jim Buzzard

I think Mark, as I noted in my comments on the plastic side of the business, we have seen a competitor or two exit and so we are in a much stronger position there. The print side remains very competitive. And if we continue to see further volume declines, we will continue to take the actions necessary to match our capacity with the demand.

Mark Weintraub – Buckingham Research

Great. And then in the past, you had talked about setting the real estate business up into a position where market conditions being appropriate, you could potentially spin it or do something whereby it would become a stand-alone entity. I recognize that market conditions may not be appropriate yet for such an action, but have you put in place the capabilities? And have you been putting in place the capabilities so that when the market timing is appropriate, you could be quickly responsive to it?

John Luke

Let me answer it this way. I think we've put in place great capabilities and we have built strong plans that we're executing on. That should not as an answer suggest that we determine what the future structure should be. But we have really built a very good business that is not only generating revenues, as we reported today from land sales and is positioned to do so with joint ventures like the Rockefeller Group who is well-positioned, building on those kinds of joint ventures to capitalize on the commercial industrial development that may, it is under way in the low country of South Carolina and maybe spurred further by the moves associated with Boeing move that Jim talked about.

And then we're broadly, we have a series of initiatives underway, not limited to the East Edisto project which is substantial in its own right to develop similar master plans around which we can build understanding through community engagement and support. And all of this is adding value to that business for MWV shareholders at a time when, as you noted in your question, market conditions more broadly in the United States for real estate are pretty peeked.

Mark Weintraub – Buckingham Research

That's helpful and I understand that no decisions have been made. Maybe it belongs as part of MeadWestvaco over the long haul. At the same time, I do think at one point, you had talked about creating standalone capabilities so that you would have optionality. And I guess it's just the question, would you say at this juncture that the real estate business is a standalone business? Or is it still integrated pretty significantly into the MeadWestvaco as a whole?

John Luke

Without implying that it would have a separate structure, at least from entity standpoint, it is increasingly a stand alone business as it grows and develops these huge capabilities. Where the integration comes is that we have our forestry business as a portion of that, so there is a linkage to our land ownership for those purposes and certainly the fiber supply to our Mills. If you were to look at this from a purely clinical standpoint, the capability that's being built, the business model that is being shaped and strategy agenda that is being set are arguably would have it to be a separate structure that can stand on its own.

Jim Buzzard

We've got full capability in that business in terms of management. And they've got their own systems, so the answer is yes. I mean, they are very much in a position where we could have that optionality.

Mark Weintraub – Buckingham Research

Okay. Thank you.

Jim Buzzard

Thank you, Mark.

Operator

Our next question comes from the line of Mark Wilde with Deutsche Bank.

Mark Wilde – Deutsche Bank

Good morning.

Jim Buzzard

Hello, Mark.

Mark Wilde – Deutsche Bank

First question I had, can you just help us understand kind of the impact with resin prices falling and now it looks like resin prices rising. It seems like maybe Calmar and then that media business might be the places that would have the greatest impact?

Jim Buzzard

Good morning, Mark. Yes, those will be the two businesses. We have, following some of the rapid rises of 2008 and have worked to develop contracts that allow us to recover moves in resin prices. Sometimes we may lag a month or two but clearly as prices move, we are out in the marketplace moving prices to make that recovery.

Mark Wilde – Deutsche Bank

Okay. Jim, by that should we assume that over the next couple of quarters here, if resin prices are rebounding, it shouldn't create a lot of incremental headwind for you?

Jim Buzzard

I think that's right. Yes.

Mark Wilde – Deutsche Bank

Okay. Second question, the CNK business, it looks like market only ran at above 75% in the fourth quarter. Can you just – is that in fact right and can you talk about that a little bit?

Jim Buzzard

Sure. That – in-directionally, that's right. A couple things going on, as I mentioned in my comments, we had some customers who were pushing beverage orders out so that they could manage their inventories at year end. We elected to move up a maintenance outage that was scheduled for February of this year into December. And clearly, we were across all of our mills, working very hard on general inventories and collectively our paperwork mills we dropped inventories about 30,000 tons year-over-year.

Mark Wilde – Deutsche Bank

Okay. So that operating rate should start to return in the first quarter?

Jim Buzzard

That's correct. As I may have mentioned, we're seeing across the board our backlogs up about a week to a week and-a-half ahead of where they were this time last year and starting to approach more normal levels to this time of year.

Mark Wilde – Deutsche Bank

Okay. And then, finally, I wanted to turn back down to Brazil and I really had three small questions on that. First, are you continuing to acquire land down there?

Jim Buzzard

No. We didn't make any significant acquisitions on land in 2009 and don't have anything on the table at this point.

Mark Wilde – Deutsche Bank

Okay. Second question around the land is up here it seems like you're moving away from forestry ownership. And I note that the most are starting to move down into Latin America. You guys have a great forestry business down there. Is that a business you want to hold onto or would you potentially look at freeing up some of the value in the forestry business in Brazil?

Jim Buzzard

As you reference, it has been a very good business for us down there. We have been able to take technologies that were developed in the United States. We have improved them down there around pine [ph] and so we've got this also very, very productive lands. We would want to make sure that whatever ownership structure we have that we can take advantage of that productivity because we believe we are competitively advantaged as a result of it.

John Luke

Yeah. I think from that standpoint, we have no near-term plans or considerations being given to an alternative structure. In fact, for all the reasons that Jim reinforced, we see opportunities for ever greater productivity and are aggressively pursuing that right now which gives us lots to think about as we look ahead in Brazil.

Mark Wilde – Deutsche Bank

Is there any way, John, to actually leverage all of that know-how and expertise that you have over us – in a bigger fashion down there? I think those are some of the most productive forest lands in the world.

John Luke

I think you're absolutely right. We look at and in fact, we have sold seedlings overtime and that's been a nice source of income. There may be an opportunity for us to do more of that. And of course, some of the technology that we're employing down there is part of ArborGen that we and IP are partners in as well. You're onto something. It may not in the near term look to be a huge business, but there is opportunity to leverage that technology to our shareholders benefit.

Mark Wilde – Deutsche Bank

Okay. And then the last question is, it seems to me on the mill level down there that over the last three or four years, you have been doing a lot around the mill infrastructure that would eventually position you to say put a new machine in or really take a step up in the scale of the business down there. Can you just talk about the track you might be on there?

John Luke

I think it would be premature to go beyond that inquiry and speculation, Mark. But I think clearly as we looked and talked in the past, one would never rule out the consideration. That has been a great business for us for a long period of time and the future is wide and expansive. But all of the questions about infrastructure, fiber, whole series of things, not to mention the market planning and global economy would need to be much better aligned for us to offer a more definitive response than that. I think you're raising the right questions.

Mark Wilde – Deutsche Bank

Just seems to me, John, it's a very globally competitive, good return region. It seems like that's an area where you ought to be deploying more capital.

John Luke

We appreciate that and we agree. And it is all in the planning and the right external environment for to us think about those kinds of things in a more determined fashion.

Mark Wilde – Deutsche Bank

Fair enough.

John Luke

And appropriate line of question and we're with you.

Mark Wilde – Deutsche Bank

All right. Thanks.

Operator

Speakers, do we have time for one last question?

Jason Thompson

Yes. One last question, please.

Operator

Thank you. Our final question will probably come from George Staphos with Banc of America.

George Staphos – Banc of America/Merrill Lynch

Thanks. Hi, guys. I will try to make it quick since we're late. I will ask them in sequence here. We talk about – you often talk about reducing capacity in your converting business. And a lot of the discussion tends to revolve around folding cartons and media. But do you have anything left and if you will the old Calmar businesses that are in need of being maybe further right sized, older technologies, et cetera, that we should expect in the next couple of years?

Secondly, performance based comp. Like a lot of companies, it was a headwind in the fourth quarter. What should we pencil in for 2010, in terms of incremental expense relative to 2009?

Then lastly, I am just having a little bit of difficulty. On the one hand, CNK volumes were down because of trends in beverage. Yet I thought you said, overall your beverage business and customers were flat to up, depending on the region. So trying to reconcile that with the de-stocking they were doing. Thanks. Good luck in the quarter.

Jim Buzzard

Mark and I will tag team on this one. In terms of Calmar and reducing capacity, as we reported in previous calls, we did a lot of work this year in terms of improving our supply chain there, both closing facilities and also bringing on additional manufacturing capacity in low cost country regions, as well as some outsourcing that we have been doing.

George Staphos – Banc of America/Merrill Lynch

Right.

Jim Buzzard

So we will feel very good about that platform as it exists today, but it is – in all of our businesses, we'll continue to keep a real tight watch on it and make sure that we are the most efficient cost effective that we can be. Mark, maybe turn to you on the performance-based comp question.

Mark Rajkowski

Yeah. Our performance-based comp was higher this year as we exceeded our targets. We had a very strong year. As we look at 2010, while we always hope to exceed targets and expectations, realistically we put stretch into our plans. As a result, the performance based comp next year we expect that to be substantially lower.

Jim Buzzard

Then lastly, George, in terms of the beverage markets, our European beer business continues to be down year-over-year. For our customers, both in the carbonated soft drinks as I referenced, up a little bit, beer markets North America down a little bit. For our consumers, it is flat to maybe down in Europe. For us, however, some of them did delay taking orders at year end to manage their inventories and so that just flowed back to the system.

George Staphos – Banc of America/Merrill Lynch

Mark, back to comp, you said substantially down. Is that a $10 million benefit, $5 million benefit, best you can approximate?

Mark Rajkowski

No. It would be multiple times.

George Staphos – Banc of America/Merrill Lynch

Okay. All right, guys, thanks again.

Jim Buzzard

Thank you, George.

Operator

And at this time, Mr. Thompson, do you have any closing remarks?

Jason Thompson

Thanks, everyone, for joining us this morning. The replay information is contained in our press release. We will speak with you next quarter. Take care.

Operator

Thank you, ladies and gentlemen. That does conclude our conference for today. You may now disconnect.

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