Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

MeadWestvaco Corp. (NYSE:MWV)

Q1 2010 Earnings Call

April 28, 2010 10:00 am ET

Executives

Jason Thompson - Director of IR

John Luke - Chairman and CEO

Jim Buzzard - President

Mark Rajkowski - CFO

Analysts

George Staphos - Bank of America

Claudia Hueston - JP Morgan

Gail Glazerman - UBS

Mark Wilde - Deutsche Bank

Mark Weintraub - Buckingham Research

Mark Connelly - CLSA

Richard Skidmore - Goldman Sachs

Peter Ruschmeier - Barclays

Operator

Ladies and gentlemen, thank you for standing by and welcome to MWV first quarter results conference call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) And as a reminder, today's conference is being recorded.

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

Jason Thompson

Thanks Kelly and good morning, everyone. 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 web cast 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 first quarter, we’ve reported net income of 24 million or $0.14 per share. This includes net favorable after tax items totaling 5 million or $0.03 per share. Now here to tell you more about our results for the first quarter are John Luke, Chairman and CEO, Jim Buzzard, our President, and Mark Rajkowski, CFO. I will now turn the call over to John.

John Luke

Thanks Jason and good morning. MWV had another solid performance in the first quarter. Our positive earnings performance outpaced not only last year’s first quarter but also the same pre-recession period in 2008 and 2007. It represents a fourth consecutive quarter of earnings growth directly attributable to our market participation and business model improvement strategies demonstrating that we are on the right track and are continuing to create a fundamentally more profitable company capable of generating consistent higher returns for shareholders.

It is these areas of strategic focus that will position us for greater profitability in the near term, well in advance of any full economics recoveries. With these strategies and some modest improvement and demand in the first quarter we increased volume compared to last year including both share gains and increased orders in many of our targeted markets. We increased sales for our higher value solutions for personal care, health care and home and garden packaging and we captured share gains with paper board in the food service tobacco and commercial print markets. We are also making significant gains in many of our specialty chemicals and consumer and office products markets. And Jim will provide more details in just a moment about these and other highlights across the company.

With the operating leverage we’ve created over the past year, having eliminated more than $185 million of structural cost, this improvement in volume had a beneficial impact on earnings performance during the quarter. The progress we have driven is gratifying and the underlying signs of market improvement compared to a year ago are welcome. That said, general market demand still remains well below peak 2007 levels and it remains uncertain whether the present improvement trend is durable or just temporary. While we hope that the current trajectory continues, we are continuing to plan for sustained softness. In either of that, we will continue to execute the strategy that has helped us deliver successful results throughout this challenging economic environment.

Specifically, we will continue to shape and execute our market participation strategies to ensure that we are driving our own destiny, creating opportunities for profitable growth with innovative products like MWare, Promina and Shell pack with investment in enhanced strategies in emerging markets like Brazil and China and with continued emphasis on overhead cost reductions and manufacturing productivity.

With still limited visibility into what economic and market conditions maybe in the second half of this year, these areas of emphasis will continue to be the biggest contributors to our success. Across MWV today, we have significant positive momentum and are moving forward with pace and purpose. We’re more profitable due to our discipline strategies to improve our revenue mix, exit low return business and close on profitable facilities. We are more competitive in targeted markets having launched innovative new products and expanded in the right geographies. We are more efficient and effective having reduced cost, significantly improve manufacturing productivity and augmented our organization with new talent and capabilities.

And our financial strength is both sound and continues to build. We remain on the right path to make MWV a fundamentally more profitable company and a more valuable investment, both in today’s still soft and uncertain economy and in more prosperous times ahead.

I’d now like to turn the call over to Jim Buzzard to talk about our business results in the first quarter before Mark discusses our financial metrics and provides more detailed outlook for the second quarter. Jim?

Jim Buzzard

Thanks John. This was one of our strongest quarters to start the year in recent memory as we often report a small loss in the seasonally slow period. Compared to the first quarter last year, we’ve extended our positive earnings momentum with a significantly improved cost structure from ongoing actions, increased operating productivity to their facilities, share gains with targeted products and some increase in demand in key markets. These are things we’ve been focused on each of businesses for more than a year and the impact continues to show in our overall results. During the quarter, we generated important commercial momentum for our participations strategies, gaining shares with targeted products and growing our positions in emerging markets. And for the first time since economic crisis began, demand trends turned upward in certain of our markets. I'll highlight some of the specific trends in each of our businesses in just a moment.

But overall, the result was a 5% increase in volume across the company. Along with the impact of our ongoing cost reduction and productivity actions, this top line growth helped derive adjusted EBIT up 97% for the first quarter. We edit more than $30 million of additional cost savings during the first quarter to the $154 million we completed to the end of 2009. With this leverage and a sequential growth trends we experienced in the first quarter, we believe our earning progress can continue in the second quarter and the positive impact should be even greater as demand grows.

Let me share some detail about the commercial trends and operating highlights in each of our businesses and consumer packaging markets. As always, you’ll find additional information in the slide presentation that accompanies this call. In the packaging resources business, segment profitable is higher than last year as volume recovered and pricing gains and productivity actions at our mills drove an increase in earnings.

This came during the difficult quarter for our operations due to adverse weather conditions, unseasonably cold and wet weather reduced fiber availability across the industry which resulted in significantly higher input costs and lost productivity. Despite these challenges which head about a $25 million negative impact in our results, the segment earned $30 million during the quarter. This was almost 60% higher than last year and nearly as much as the first quarter of 2008.

Compared to the first quarter of last year, shipments of SBS were up 3%. We outperformed the broader market in key segments including commercial prints, tobacco and food service grades. Our Mware line of paper board for recyclable and compostable food service applications such as cups and plates has been particularly strong. CNK’s volumes were up 5% compared to last year as demand began to recover for both beverage and food packaging around the world and as we continue to make gains with recently added food customers.

Volumes are also up in Brazil as the economy there has shown a solid recovery. As a result, Rigesa generated a strong profit growth with higher sales and improved productivity. Overall paperboard demands and packaging resources remain strong as we began the second quarter with backlogs currently between five and six weeks. The consumer solution segment had another strong quarter, its fifth straight period of year-over-year earnings growth.

Profits rose to $21 million during the quarter, more than a 50% increase compared to last year due to productivity improvements, a stronger mix of high return products and gains in targeted packaging markets. The actions we took to eliminate some low return business from our portfolio brought overall sales down slightly compared to last year.

Let me go through each of the consumer packaging markets we serve in this business to give you a sense of the performance in the quarter. In our global beverage business, sales and earnings were modestly lower with an unfavorable impact related to further realignments of our manufacturing footprint in Western Europe and North America. As these initiatives come to a close, we expect to see added productivity benefits as we move through 2010. Lower beverage volumes in the first quarter were primarily due to unseasonably cool weather in North America in January and February. We partially offset this impact with double digit growth in the Asia Pacific region led by our major customers by increased volumes in Australia and New Zealand. More recent sales to Rigesa improved notably.

Seasonally stronger volumes are running above a year ago levels at major beer and carbonated soft drink customers in the United States and Europe, part of what we are seeing is pipeline billing from very low year ago levels. We are also seeing more regular and larger orders suggesting some demand stabilization for the near term. We also continue to see good volume trajectory in Asia with major customers and will begin the benefit from new winds with yoghurt customers in China. This is an area we’ve recently targeted for portfolio growth and are expecting increasing contributions to our business as we move through the year. In our health care business, earnings increased during the first quarter primarily because of the choices we’ve made to emphasize Shell pack and other herein solutions and from strong productivity improvement.

In the first quarter last year, we produced about 13 million units for Wal-Mart’s prescription drug program. This year that number is up to almost 25 million. They are currently 12 drugs being sold in shell pack at Wal-Mart’s pharmacy counters and we expect that to grow this year as well. Sales are also steady for our oral and nasal pumps in the health care market with growth in the over the counter market as well as our for our specialty preservative free pumps that address a specific regulatory need in Europe.

The personal care markets continue to improve and as a result, our business increase sales and earnings substantially configure particularly week first quarter last year when our customers aggressively de-stocked inventory. Our customers are now sounding more confident and that has translated into stronger orders for higher value fragrance dispensers, skincare airless products and luxury secondary packaging in Europe. We are gaining share in each of these categories by adding new customers as well as by adding to our business with existing customers line P&G, Unilever, L’Oreal and J&J. With these improving demand trends we expect to continue our positive trajectory through the current quarter as this market rebound from historic lows last year.

Volumes are good for our targeted products in the home and garden market primarily in United States especially the more profitable custom applicators for a long and garden maintenance and trigger sprayers for surface cleansers. The important spring garden season is off to a strong start with retailers reporting increased traffic and good sell through to the higher promotional activity by the branded industry leaders. And we are seeing solid growth for our next generation aerosol trigger with a new and existing customers.

Overall, sales and earnings were down slightly despite this market progress in home and garden. As we get eliminated some of our offerings to focus on profitable products and were impacted by higher resin costs that we expect to recoup through contractual pass through over the next quarter or two.

In the media business, sales earnings were lower than last year, we are managing to generate as much cash we possibly can from this business and doing so successfully by continue to drive productivity improvements and aggressively targeting categories and customers that are still profitable.

Turning to our non packaging businesses, our positive earnings momentum continued in the first quarter for both consumer office products and specialty chemicals segments. The consumer office product segments had one of its best first quarter performances, earning $6 million in a quarter that traditionally loses money as we build through the North American back to school season later in the year. Sales of time management and other consumer products were hired to a retail and commercial partners and good so through for school supplies in Brazil where led the stronger replenishment order linked to in the first quarter. Sales in the quarter were up 7% and it could benefits from last year’s acquisition of Grapohs.

Productivity across all this segments business especially in the United States coupled with a stronger volumes led the solid year-over-over earnings improvement. Sales increased significantly in a specialty chemical segment compared to a very weak quarter last year. And the business posted strong earnings of $25 million for the first quarter. This segment saw volumes recover strongly across key product lines in both pine chemicals and activated carbon.

We had strong performances in adhesives and oil field services continue to grow the asphalt additives business especially in China and Brazil. And so our rebound and carbon volume due to an increase in auto production in North America. These volumes increase help to improve asset utilization rates and along with that, overall segment earnings. The community development and land management segment earned $23 million in the first quarter including $17 million from 21 real estate transactions that closed during the first three months of the year. And with volume and pricing entire for pulp wood and saw timber, during the quarter, our four tree operations earned an additional $6 million.

While conditions in the real estate sector are still very difficult, we had some positive trends for both our rural land tracks and industrial and development sites. We completed a number of rural land transactions in the Charleston and South Carolina area and this mix of properties contributed to a higher per acre value during the quarter of about $4300.

In addition, to an uptake in the number of sales during the quarter, the volume and quality of enquiries for these rural tracks was higher on a retail land website. And having recently unveiled the master plan for East Edisto, we are in negotiation with two potentials tenants for the commerce park that is part of the first phase of development.

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

Mark Rajkowski

Thank Jim. The momentum on our market participation in business model strategies that john and Jim are helping us a fundamentally more profitable company that we believe can continue to generate sustainable performance improvement over the long term. In the first quarter, our progress was clearly reflected in many of our financial metrics including the following highlights.

Overall sales grew 4% with volume increases driven by our new products, share gains in targeted markets and continued strong growth in emerging markets. Our operating profit essentially doubled due to the combination of our improved cost structure and successful growth strategies. And we have a strong balance sheet with the total debt to capital ratio below 40% and substantial cash reserves that enable us to continue to profitably grow our business and provide strong returns to our shareholders.

Let me provide a bit more detail on each of these measures of our progress during the first quarter. On the top-line, our over sales growth was 4%. Excluding the large land sale last year and product line exits related to our market participation strategies, comparable first quarter sales increased to approximately 10% consisting of about 5% of volume improvement and 5% of FX benefits and other items. Our overall volume benefited modestly from the demand improvement we experienced in the quarter well more than half the increase came from the success we are seeing with our growth strategies.

New products in the quarter accounted for over 16% of total first quarter revenue including a strong rebound in demand for recently launched fragrance and airless dispensing products as well as continued strength in our shell pack product for prescription drugs. We also saw share gains in higher value paper board grades like commercial print and in our specialty chemicals markets. In the 22% sales increase from emerging markets we saw in the quarter was driven by recovering volumes in Brazil and continued strong growth for beverage packaging and asphalt additives in China.

Increased sales in the continued benefit of our productivity and overhead cost actions resulted in year-over-year improvement of 250 basis points in our operating profit. First quarter adjusted earnings before interest and taxes almost doubled versus last year to $73 million. Our strong performance is being driven by the ongoing execution of strategies to fundamentally improve the company’s underlying profitability. Importantly we expect to further leverage our improved cost base and expand margins as we continue to profitability grow our business.

Taking a closer look at the key performance drivers, both adjusted gross margin and SG&A saw continued solid year-over-year improvement.

First quarter adjusted gross margin improved by almost 100 basis points versus the first quarter of 2009 to 17.5%. This includes absorbing approximately 190 basis points of negative weather related impacts at the mills during the quarter. Adjusted SG&A decreased 9% on an absolute basis versus the prior year and was 12.5% of sales, an improvement of a 170 basis points versus the year ago quarter.

Moving to the balance sheet, our financial position and flexibility remain excellent. At the end of the quarter, total cash was $731 million. Our net debt to capital ratio was 30% and our pension plan was more than 140% funded. Cash flow used by operations was approximately $8 million in the quarter. Significant cash earnings in a 2.5 day improvement in our cash-to-cash cycle were more than offset by incentive compensation payments.

As we move through the year, we expect cash flow from operations to significantly improve. And for the full year, we expect to achieve another year of positive free cash flow which we define as cash flow from operations after CapEx and dividends. With respect to deploying our cash recourses, we will continue to remain our balanced approach. Over the past three years, we’ve generated about $3 billion of discretionary cash flow from operation and assets sales. Over this period, we have reinvested about a third of this cash back into the business. We’ve returned about a third to shareholders through a strong dividend and periodic share re-purchases and we have used the third to repay debt and build up our cash resources during the economic crisis.

These priorities remain the same as we move forward. Now turning to our outlook for the second quarter. We saw improving demand trends during the first quarter and given current order rates and back logs, we expect these trends to continue through the second quarter. Beyond that however, there is less certainty as order pattern into the second half of the year will depend on retail, sell through levels which are subject to risks related to continued high levels of unemployment and shifts in consumer confidents. That said, we are continuing to position all businesses to capture growth and bring more of it to the bottom line.

Our commercial strategies are working, we have good confidence in our more competitive business model and we are continuing to selectively re-invest in profitable growth opportunities across our businesses. We will however be watching commodity inflation which we expect will pick up through the year and could accelerate if demand trends mover higher than the current trajectory. But we will off course continue to seek pricing to offset these impacts. With that as context, I'll now provide some segment specific comments for the second quarter, starting with package and resources. We’re expecting segment profit to be solidly above last year.

Backlogs at the mills are currently running well above year ago levels and the combination of better demand with an improved product mix and higher productivity levels are the main drivers of our positive outlook. In addition, we expect continued profit growth at Rigesa. Rising input cost will partially offset these positive factors in the near term including lingering fiber inflation trends from the weather related issues in the first quarter as well as inflation for some commodity chemicals in outbound freight.

We are however continuing to implement pricing actions to offset the negative impacts from cost inflation. In the consumer solutions group, segment profit is expected to be solidly above year-ago levels. Improved results will be driven by continue demand recovery through the current quarter for targeted products across our personal care, homing garden and health care packaging businesses as well as seasonal strength in beverage which we started to see in March. We also expect to see higher pricing to recapture resin inflation as well as continued productivity gains.

Turning to the consumer and office product segment, we are expecting another solid overall back to school season. We are however expecting profit to be modestly lower than last years very strong second quarter performance while the business will continue to benefit from strong productivity gains and cost reductions as is the case with this business, the timing of selling and the ultimate sell through to the consumer of the segment’s back-to-school products can significantly impact the level of revenues and profits during the quarter.

In specialty chemicals, we expect another strong quarter with significant year-over-year improvement. Benefits from continued demand recovery across pine chemical can activate carbon markets and higher productivity levels are expected to drive substantially improved earnings. However, inflation in certain raw material and freight costs will partially offset these positive factors in the near term. Finally in the community development and land management segment, the timing of land sales which is the key near term driver of results remains difficult to forecast. However, we do expect modestly improved segment profit versus the year ago quarter.

The level of improvement will continue to depend on the amount, timing and mix of the land we sell in the quarter. In summary, during the second quarter, we expect to extend our record solid year-over-year earnings growth and margin improvement. While demand trends are improving its important to keep in mind that in most cases, our volumes are still well off peak 2007 levels. The improvements were driving are largely the result of continued execution of our strategies to improve our business model. With that, I will turn it back over to John.

John Luke

Thanks Mark. In summary, the first quarter was another strong one for MWV with continued momentum from our market participation and business model improvement strategies. We are benefiting from progress we’ve driven in our targeted markets as well some early stage general market improvement. And we will remain on the path that we’ve established for long term profitable growth continuously refining our participation in the most attractive markets and improving the efficiency and effectiveness of our business model. The impact is already apparent in our improved earning results and we are committed to continuing to deliver higher profitability and additional value to our shareholders. This concludes our prepared remarks this morning and we now be happy address your questions.

Question-And-Answer Session

Operator

Thank you. (Operators Instruction) Our first question comes from the line of George Staphos of Bank of America. Please go ahead.

George Staphos - Bank of America

Thanks, guys. Hi, good morning. Thanks for all the details too on the outlook and on the land business and for that matter congratulations to you on the lower corporate. I guess a couple questions may be on the outlook just to finish up. It sounds like and we heard some comments yesterday from another company that back-to-school season this year as opposed to last year will be more third quarter than second quarter weighted, given what you can know right now and I realize there's variability on this. Is that what you're saying as well?

John Luke

Jim, you want to start with that?

Jim Buzzard

Sure. George, I think that’s exactly what we are saying. For the last several years have continued to see that season get later and later and driven apart by some of the supply chain efficiencies that all those can bring. So, we believe that trend will continue this year as well and so we may see more of it moving to the third quarter.

George Staphos - Bank of America

Okay. And question for you Mark or John? At the end of the release, you say that we should see improved year-over-year performance in the second quarter of 2010. Should we translate that as a better year-on-year increase than what we saw in the first quarter from an earnings per share standpoint?

Mark Rajkowski

George, its Mark. We have a bigger base of income in the second quarter compared to the first quarter. So the comparisons are a little difficult. It’s like apples and oranges. But I, so that the percentage won't be quite as large but we feel very good our year-over-year performance trends for the second quarter.

George Staphos - Bank of America

I wasn’t talking percentage of those, just trying to quit at earnings per share but and see if you’re trying to actually communicate that in line. I'll leave it there for now. I guess two last questions and I'll turn over. And I didn’t calculate this, what were you offering rates in bleached and numerator a of place of where you are growing? Were you seeing the best trend right now in terms of the pick up and bleached demand?

Jim Buzzard

George, this is Jim. Our operating rates continue to decline. We actually because of all the issue that we had around weather and having to slow back because correctly lack of fiber ran reasonably full through out the entire first quarter.

George Staphos - Bank of America

How are you right now?

Jim Buzzard

We are, we’re solid right now and back logs as I said are five to six weeks and those have actually grown over the last month.

George Staphos - Bank of America

Your operating rate would be in low 90’s, mid 90’s high 80’s?

Jim Buzzard

What were in the low 90’s?

George Staphos - Bank of America

Okay. And last question, you had given we saw a pick up in CNK board. Should we then expect a pick up in beverage packaging and in turn, where are you seeing the pickup if from a geographic stand point? Are you seeing an improvement and may be you mentioned it before I missed it in your near trends in North America? Thanks very much.

Jim Buzzard

No George, your conclusion is right. With the pick up in CNK, you can expect to see growth in the beverage markets, I also would note that part of the pickup in CNK is our real effort to begin to grow in non-beverage markets as well so in food and another general packaging applications. But we are anticipating growth in the second quarter in both North America and Asia-Pacific in the beverage markets.

Operator

Thank you. And next we will go to the line of Claudia Hueston with J.P. Morgan. Please go ahead.

Claudia Hueston - JP Morgan

Hi. Thanks very much, good morning.

Jim Buzzard

Morning Claudia.

Claudia Hueston - JP Morgan

You've announced you're doing some feasibility work in Brazil. I was just hoping you could talk a little about the evaluation process there. And then maybe just talk about how you see container board demand developing in that region and any extra color you could give on Rigesa?

John Luke

Why don’t I start as John? We are conducting a wide range of analysis in Brazil because of the strength Brazil represents to us. As you know we have been there for almost 60 years and that’s been a solid growing and very profitable business for us. At the present time as we announced among other things, we are evaluating the potential to add capacity to our mill in Tres Barras that would all be designed to have more adequately and efficiently utilize infrastructure that we largely have in place and in the process, reintegrate our corrugated business which is growing nicely in the local market. The market strength there over the past few years has been particularly good and with the strength that Brazil almost uniquely has in the world today, we are seeing good growth particularly for the profitable differentiated products that we produce now and projected over time.

So we are looking hard at what the future opportunities for us in Brazil can and should be both strategically and opportunistically but at the core of that right now is the evaluation of the capacity addition at the Tres Barras mill. We are in the early stages of that while the work is very, very good. We are on schedule to hopefully meet the target that we have broadly set for completing this analysis at the end of this calendar year.

Claudia Hueston - JP Morgan

Okay. That’s really helpful. I appreciate that. And then just looking, it looks like you bought back some stock in the quarter, can you update me on what’s left under your authorization and how you are prioritizing buy backs with capital investments like the one potentially in Brazil with dividends and acquisitions as well.

Mark Rajkowski

Sure Claudia, this is Mark. We repurchased about $26 million worth of stock in the quarter that was about 1.1 million shares. We have approximately 1 million shares that remain under that current authorization. And as we look at deploying cash, I think we were going to continue to remain balanced. We are going to continue to remain disciplined. I think that approach has served us well and we do see opportunities to profitability grow our business. You referenced Brazil on that. That is one example.

Claudia Hueston - JP Morgan

And when you think about your, you’ve targeted debt levels are you pretty much where you want to be or do you hope to sort of de-lever more or are you feel your under levered?

Mark Rajkowski

We are slightly under 40% debt-to-cap and we are pretty comfortable with that amount of leverage. And as you know, looking at a maturity schedule, we don’t have any significant maturities due for the next two or three years. So, we are in a pretty good spot right now.

Claudia Hueston - JP Morgan

Okay. Great, thank you so much.

Operator

Thank you. And next we’ll go to the line of Gail Glazerman with UBS

Gail Glazerman - UBS

Hi, good morning.

John Luke

Good morning Gail

Gail Glazerman - UBS

I just wanted to get some color that $25 million operating hit in the packaging resource that included actual operations but also input costs associated with the weather?

Jim Buzzard

Gail, this is Jim. That’s right. It’s really a function of several things. One is simply higher input costs where we are heading to reach much further out to get wood. We had several situations were based on the lack of wood, we actually had to slow back operations. And then lastly, with the lack of wood, coping less, you have less internal generated energy from black liquor. So we had to go on and use more fossil fuels to run the operations. The combination of those three elements represented about $25 million in cost to us in the quarter.

Gail Glazerman - UBS

Okay. And it's fair to say the majority of that would disappear in the second quarter with the weather improved or was the kind of wood cost the highest, the biggest component of that?

Jim Buzzard

What have you seen and what we are forecasting, I would say about half of that will disappear but we are staring at probably $12 to $13 million, it is with what we see today for the quarter.

Gail Glazerman - UBS

Okay, that’s perfect. Thank you. Also, just wanted to get some more color on your demand outlook. I appreciate the second half is still a while away but your caution is that just truly based on macro or is there anything you're seeing from your customer order patterns or you're hearing from your customers or seeing in your inventories that makes you particularly cautious about the second half of demand outlook?

John Luke

Gail, I’ll take that up. It’s John. I think across the board, it really is the fact that our customers are telling when that their visibility is limited. I don’t think there are any factors that we’re seeing in our markets that are creating concerns for our customers for indeed for us. Its just that with the macro factors that we’re all facing, visibility remains limited and we’ll probably have to clear it, make sure as we move March but through the middle of May and into the end of May and see what July and there after begins to look like. So it’s just, I think there’s just a good deal of caution and tread lightly added to across all of our markets.

Gail Glazerman - UBS

Okay. Do you have read into what this and doing within inventories? I mean there’s still keeping those quite lean or at this point, with the demand that you’ve seen today, do you think some of that same inventory re-stocking?

John Luke

What I'm seeing and I'll ask Jim to comment more on what I'm hearing is that inventories have been managed reasonably tightly and leanly that there is no major restocking efforts. So the sales that we’re generating or represent real underlying demand.

Gail Glazerman - UBS

Okay. And Jim in, can timber solution, I just want to confirm that you were pretty confident last quarter talking about the past through and being much more secure than I guess in 2008, is that still the case? Has anything changed given the inflation we’ve seen this year?

Jim Buzzard

Yeah, I'm sure there’s a little bit of, I missed a part. Was that resin costs?

Gail Glazerman - UBS

Is the past using consumer solutions?

Jim Buzzard

Okay. We clearly through the quarter and into the second quarter are seeing significant increases in our resin costs. And so that’s impacting our inflation picture. A large majority of that business does have contractual pass throughs but they are delaying either a quarter or two. So the increases that we saw in Q1, we will begin, we will begin to recover those in Q2. Having said that, we have seen some increases in Q2 that will begin to recover in Q3 as well.

Gail Glazerman - UBS

Okay. But are you still comfortable that you're better positioned to cope with that than you were back in 2008?

Jim Buzzard

I'm sorry. Absolutely. We’ve done a lot of work over the course of the last 12 to 18 months to restructure our customer contracts and protect ourselves. And we already much better position to move in 2008.

Operator

Thank you. And next we go to the line of Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank

Good morning. I wondered if we could talk a little above the SBS market right now. There were some price increases that were realized in the trade papers this weekend and I just wonder how that rolls through for you guys across your bleached board portfolio in the second quarter and beyond?

Mark Rajkowski

Jim, you want to take that up?

Jim Buzzard

Sure Mark. If you note on our slides, our pricing moved up about $30 a ton in Q1 with year-over-year. As you know, we are moving pricing at the end of this month and aren’t actively doing that right now. We have confidence that prices will begin, we will move even further as a result of these announcements. But at this point, it’s still early in the process so I would want to predict what that’s going to be.

Mark Wilde - Deutsche Bank

There's enough of your business if I recall Jim that's on longer-term contracts that we really wouldn't want to take that $40 and just slap that onto our second quarter realization. Is that correct?

Jim Buzzard

That’s correct and most of that business all moved in the first quarter and so you wouldn’t apply all that across the board for sure.

Mark Wilde - Deutsche Bank

And also in the SBS market, it sounds like some of the other players are reporting long backlogs and very tight supplies. I just wondered, whether there's any potential for you, if the market remains tight to bring up any of the idle machines either at Evadale or Covington.

Jim Buzzard

No. There’s no potential we would do that.

Mark Wilde - Deutsche Bank

And then turning to Brazil just to kind of follow on, I know that you trying to kind of leverage some of the capital that you spend around the mill down there over the last several years. Just to take advantage of that without adding anymore beyond a machine, what kind of scale would that put us on.

Jim Buzzard

We have already designed exactly what the machine is going to do Mark. We will not, we will not add significant infrastructure capital. We will have to do a little bit down there but to your point whether it’s around power generation, the pot mill, we are pretty well set. And so we will design the machine to take full advantage of that but not spend significant capital beyond what we’ve already done on the back end infrastructure.

Mark Wilde - Deutsche Bank

Like how much Jim, how much extra hoping capacity is there at the mill right now?

Jim Buzzard

Mark, we would, we could design probably somewhere around the 300,000 ton machine. It all depends on basis weights and other things that we could support that with the pulping capacity we have today, some OCC and other things. And that initial box what we are thinking about.

Mark Wilde - Deutsche Bank

And are you also down there Jim? Are you investing in Brazil or beyond in the corrugated business? This market is growing.

Jim Buzzard

It is and that’s clearly something we are looking at. We’ve been growing with that markets, we’ve put a new box plant up in the northeast a couple of years ago. We really like the integrated model we have down there from forestry through the corrugated boxes. And so as part of this, we certainly will be evaluating how and where we might grow the corrugated business as well.

John Luke

Yeah and I will just jump on there Mark and say as you know in only South America as well as you do that Brazil is we are seeing good consumer growth and we are seeing with all the foreign investment going in good industrial growth and all of that is translating to a very strong outlook for continued growth in the corrugated market.

Mark Wilde - Deutsche Bank

Yeah if you just look at what's happening in other packaging markets down there really is pretty dramatic. Last question I have. Charleston, are you guys feeling any impact yet from the announcement by Boeing to move Dreamliner production down there? Is that bringing in sort of other suppliers for secondary and tertiary suppliers that might be interested in spreading on some of your property?

John Luke

I think the broad answer to that question Mark is yes. I think the work that it was underway to encourage the Boeing expansion as well as broad based work by the South Carolina ports, not to mention other good economic development look down there. As in what is across the country been a very weak real estate market and I would underscore the Charleston area is not immune. But the Charleston area has benefited by all of these actions and directly or indirectly, we felt little bit of lift in the time.

Mark Wilde - Deutsche Bank

Okay. All right. Any sense John on when will is analysts and investors be able to like perhaps look at what you're doing down there? Get a little more color on that?

John Luke

Great question and I think the story is developing very nicely and we would look for the opportunity to provide that opportunity. I won’t want to pick a date right now but thanks for the prompt and will take that into our plans.

Mark Wilde - Deutsche Bank

Okay, thanks.

Operator

Thank you. We’ll go next to the line of Mark Weintraub of Buckingham Research.

Mark Weintraub - Buckingham Research

Thank you. First is a small question on the tax rate. Mark, what should we be thinking for the balance of the year?

Mark Rajkowski

We’re looking at the 25 to 27% effective tax rate Mark.

Mark Weintraub - Buckingham Research

And then, I was hoping, can we get a little bit more break down on the 82 million on productivity gains that you showed year-over-year, is there a way that to categories them and also, how much is yet to come from actions that you’ve already taken?

Jim Buzzard

Mark, maybe I'll take that. Really within late 2008, we started on a four prong approach to go after productivity. And as you know, we made a significant effort to drive our overhead structure and reduce fix cost. We worked very hard on a sourcing initiative to drive down input costs. We consolidated or closed 16 facilities around the globe to get our infrastructure where we needed it to be. And we’ve had a very strong operating excellence program out a mill based businesses that we’ve taken and driven that through all this is now and beginning to take it around the globe. So all elements of that were components of what helped drive the performance in Q1. You can think about it that it probably 30 million of the 82 was flow though from last year and the remaining 50 or so are actions that we’ve taken this year and we’ll continue to build on this program as we go throughout the rest of this year.

Mark Weintraub - Buckingham Research

And so from actions that you have taken recently, how much would you say is, how much would you be targeting to improve relative to what we already saw in first quarter? I think that's a fair way to look at it?

Mark Rajkowski

Well let me take that, the piece of it that relates to the actions that we took last year related to overhead and capacity rationalization. As last year we delivered over a $150 million of bottom line cost reduction. As Jim said in the first quarter this year, we saw a more than $30 million of additional cost take out related to those programs. And as we said last year, we continue to expect the full run rate benefit of those programs to beat the $250 million cost reduction. So we are a $185 million into that 250.

Mark Weintraub - Buckingham Research

Okay. And how did you get that 185? So I can't just take the $82 in times by four and be it at $320 million?

Mark Rajkowski

No Mark because as Jim was saying in that $80 million, you have a combination of sources of productivity. You have productivity driven from cost actions related to overhead, manufacturing capacity rationalization as well as tremendous amount of work that Jim and the team are doing around, driving sourcing benefits and operating productivity in the plans.

Mark Weintraub - Buckingham Research

Okay. So the 250 is just some of that? Okay, I think I understand.

Mark Rajkowski

The 250 gets back to the program that we start at last year around overhead reduction and manufacturing capacity rationalization.

Mark Weintraub - Buckingham Research

Okay. And then just a add-on too much on the net but if the weather is better and at first quarter $25 million hit was a function of bad weather, I'm not quite sure why you don't get the full $25 million back in the second quarter.

Jim Buzzard

A point of that was related to we still have some tough weather in April especially down in Evadale, Texas. We’re having to rebuild inventory with more expensive wood just to get back to where we can continue to operate. So that’s about what the impact is going to be and we feel pretty confident.

John Luke

Yeah. I think fundamentally the way I look at it Mark is you’ve got little bit weather hang over and you’ve got some catch up that’s required just to get things back to normal.

Mark Weintraub - Buckingham Research

Okay. And then by the third quarter, you so basically you’ve got half of it back in the second quarter in the balance and the third quarter assuming the weather behaves itself.

John Luke

Right.

Operator

Thank you. Next we go to the line of Mark Connelly of CLFA.

Mark Connelly - CLSA

I just have two questions. When I look at your consumer solutions business and the gives and takes this quarter, clearly some of the businesses you’ve invested in more recently that are hopefully higher growth and certainly higher margin are kicking in and you are throwing out some of the lower stuff, should we expect that to sort of be an ongoing cleansing process where the top line isn’t growing as much as the margins are or are you going to take more discreet steps to rebalance that portfolio towards the higher end.

John Luke

Let me start with that and Jim and Mark can chime in Mark. I think that there will always be a weeding out process as markets change and some become more attractive and others become less so. But I think as you look at this which I think is the essence of your question, you can look at it with the view that we’ve taken a pretty aggressive approach over the course of the past twelve months. So the major weeding has been done and the focus now is on pursuing strategic initiatives in those areas we see as representing significant opportunity for profitable growth.

Mark Connelly - CLSA

That's very helpful. That's exactly what I was looking for. And my second question is, how with all the gains you've gotten in cost in productivity, how do you get comfortable that you're going to be able to hold on to all of that as business starts to come back in the pressure for reinvestment starts to kick back in?

John Luke

Again, let me offer a couple of comments here at a high level. That is all part of the new operating discipline that is we are committed to maintaining, We view growth investment, it is something that is going to be important to our future both to support the strategic agenda referred to in your first question and we are looking to fund that by continuing to ensure that we are disciplined in taking all our necessary cost out of the system while continuing to improve overall productivity.

Of course, there will be investments in SG&A and product particularly related to market development activity and there will be capital requirements that we’ve talked about at a high level earlier in this call. But we would look to ensure that the productivity benefit, the leanness that we are building into our system at all levels is looked to be maintained.

Mark Rajkowski

And then I’d just add to that, I think while we are pleased with the progress that we have been able to make till date, we are certainly not satisfied. We see continued opportunities as John said to drive further productivity improvements and that really is what we are about. So, we see further opportunities for improving our cost structure.

Mark Connelly - CLSA

Mark, I assume you're going to hold him to that. Thanks very much. I appreciate your help.

Operator

Thank you. Our final question will come from the line of Richard Skidmore at Goldman Sachs. Please go ahead.

Richard Skidmore - Goldman Sachs

Good morning. I just had two questions really following up on a couple of others. First on a consumer solutions business, is there a step change coming in the margin that we should anticipate given the strategic you’ve done and the productivity efforts that you’ve made or is this kind of a long term mid single digit kind of margin business?

John Luke

We certainly will look to continue with the initiatives we have in improving our market positions, the areas that we’ve targeted as wells as continuing to look to lean out the cost wherever we can to improve the margins but I wouldn’t expect a huge step change but I would certainly look to see continuing improvement as we move forward.

Jim Buzzard

Yeah John, I'd say that certainly that’s our expectation through the course of this year. And the other part of this is what John and Jim were talking about before which is really capitalizing on the investments we have made in innovation and in the commercial side to bring new profitable products to the market place. So this is not just a cross play. And we do have more room in terms of margin expansion on the cost side but we also expect to continue to grow profitability with new products and entering new markets.

Richard Skidmore - Goldman Sachs

And then just maybe shifting to the financial side of the question, Mark is there any reason that the cash balance continuous to kind of hang at the kind of $500 million more than what you’ve historically run at. And I know you talked about a disciplined approach to deploying capital and maintaining a balanced approach but is there any reason that you wouldn’t be more aggressive in deploying that capital over the next twelve to eighteen months?

Jim Buzzard

Well, I think that as I said, we’re going to be balanced and disciplined. And certainly, we are looking for opportunities to profitably grow our business and where we see those and one example as I mentioned before and we have talked about it certainly is Brazil. And we certainly will look to continue to provide a good strong return to our shareholder. So I think that there is nothing that’s going to eminent that’s going to suck up all that cash. We are going to continue to play it as we have and expect to be very balanced and disciplined in deploying that capital.

John Luke

And I will just add towards Mark by saying as we have emphasized this morning we are very encouraged by the progress we are making. We are encouraged by the opportunities for profitable growth we see in our market and particularly those that with our focus on those markets and the innovations and the initiatives we have underway across the board to create opportunities for us though despite what is happening in the broader macro environment. But again considering Mark’s response which I think reflects where we are, visibility is limited and we access opportunities and we have greater visibility, we will be in a position to make more clearer decisions with respect to timing and use of resources that’s logical to deploy.

Operator

Thank you. And we do have time for one more question that will come from Peter Ruschmeier of Barclays

Peter Ruschmeier - Barclays

Thanks, good morning and thank you very much for taking my questions. I thought the chemical results were terrific. I was hoping you could help us to better understand the trends there. 47% increase in revenues year-over-year, if we were to break that down by some of your sub segments, pine chemicals, activated carbon etc. can you help us to understand which were the main contributors?

Jim Buzzard

We really had strong improvement across the board. Last quarter, the last year’s first quarter was really, really weak especially automotive side and some of the key pine chemical markets. So we saw a good solid growth across the board. Automotive carbon was up nicely and as is our absorption technology business but really the ink markets, the adhesive markets are new places we played everybody was up very, very nicely year on year.

Peter Ruschmeier - Barclays

Okay. And the margins there look to be at or near the highest levels you’ve seen at least the decade. I'm curious how much of that was simply the contribution margin from the volumes being better or is there something unusual about the price cost mix that’s going on. In other words, should we be expecting a step change, a new higher level of margins or is it really the confluence of a number of things that led to an unusually high margin.

John Luke

I think if you go back and look at last year, we’ve had a steady March and improved margins in this business and that continued through Q1. And so, I think that you can expect to see good strong margin potential going forward. Obviously, a big part of it is the capacity utilization where we were able to put a lot more volume through our existing facilities. We are able to take advantage of some of the focused investments we’ve made over the last couple of years. So a lot of things came together to drive the improvement.

Peter Ruschmeier - Barclays

Okay. And Jim do you care to share with us your thoughts on growth for this business and given what you are seeing in Asia, given some of the infrastructure spending in the U.S. road paving etc. what kind of range might you expect going forward for top line growth do you think is reasonable? Is it GDP, the GDP plus?

Jim Buzzard

I think on a go forward basis, you can expect to see this GDP plus sort of growth. I think the business is well positioned in the emerging markets into your point we are seeing really good growth in China and Brazil as they invest in infrastructure. So, I would say certainly GDP plus going forward.

Peter Ruschmeier - Barclays Capital

Okay, that's helpful. You mentioned CNK picking up your outlook for this year in North America. How about in Europe given some of the weakness there, what is your outlook for the beverage packaging season looking out into Q2, Q3?

Jim Buzzard

Our focus is on the higher end of the beer markets over there and given the economic situation we think that still going to be a pretty tough market in throughout this year, some flattish sort of a perspective.

Peter Ruschmeier - Barclays Capital

Okay. That's helpful. And last question I'll turn it over. In the SBS business, remind us if you could, roughly what percent of your volume or how many tons goes into a septic packaging and what are you seeing in that segment in terms of its competitive positioning versus other substrates? Are you seeing more growth opportunities there?

Jim Buzzard

Not going to break out the tonnage that we put into a separate but suffice to say we are seeing continued growth in that business, primarily out of the emerging markets and particularly China. So in applications for milk and other things, we are seeing positive momentum.

Peter Ruschmeier - Barclays Capital

And are the margins materially better in that business versus your normal mix just given the nature of the product?

Jim Buzzard

It’s a good margin business for us and we are committed to making it better.

Peter Ruschmeier - Barclays Capital

Very good. Guys, thanks very much and congratulations on the quarter.

Operator

Thank you. And gentlemen, I'll turn it back to you for closing remarks.

John Luke

Thanks everyone for joining us. We look forward to following up with you. And Kelly, if you can give the replay information out, that’d be great.

Operator

Thank you. And ladies and gentlemen, today’s conference will be available for replay. After twelve noon, Eastern Time today until May 28th at midnight. You may access any server at any time by dialing 1- 800-475-670-1 and entering the access code of 152076. International participants may dial 13203653844. That does conclude the your conference for today, thank you for your participation and for using the executive teleconference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: MeadWestvaco Corp. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts