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MeadWestvaco (NYSE:MWV)

Q3 2011 Earnings Call

October 26, 2011 10:00 am ET

Executives

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

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

James A. Buzzard - President

Jason Thompson - Director of Investor Relations

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

Mark A. Weintraub - Buckingham Research Group, Inc.

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

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Mark Wilde - Deutsche Bank AG, Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

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

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MWV Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Director of Investor Relations, Mr. Jason Thompson. Please go ahead, sir.

Jason Thompson

Thanks, Keeley, and good morning, everyone. This morning, we announced our results before the market opened. The notification of this morning's call was broadly disclosed. And further, this morning's call is being webcast at mwv.com. Slides that accompany this call are available there as well. I'll briefly remind you that certain statements we make are forward-looking and are not guarantees of future performance and are subject to known and unknown risks and uncertainties described in our public filings. Furthermore, contents contain time-sensitive information that, although correct today, may change with the passage of time.

All the results we show this morning are presented on a continuing operations basis. For the third quarter, we reported income from continuing operations of $117 million or $0.67 per share. Excluding special items, adjusted income from continuing operations was $121 million or $0.70 per share.

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

John A. Luke

Thanks very much, Jason, and good morning. For more than 2 years, MWV has delivered consistently higher earnings each and every quarter, reflecting the positive impact of our market-focus strategies in each business. We continued on this trajectory with another very strong performance in the third quarter. Our consistent financial improvement has come against the backdrop of an increasingly challenging economic environment. We have continued to make progress with commercial strategies designed to capture growth in targeted areas and to expand our market share, even in those markets where demand has softened. We have earned new business from customers by helping them attract and retrain -- retain consumers with innovative solutions. And we have capitalized on growth opportunities in emerging markets, such as Brazil and China, where growth is still strongly outpacing developed regions. Overall, we're delivering solid results while dealing with the same economic challenges as our competitors.

Our revenue increased 9%, and we generated record third quarter adjusted income from continuing operations of $121 million or $0.70 per share. Through the first 9 months of 2011, we have already surpassed the record annual earnings we delivered in 2010. Even with 2 uncertain months still ahead of us, this is sure to be another strong year for our company's financial performance. This is largely due to the progress we're making with our market-focus strategies including solid sales performance in our targeted packaging markets for food, beverage, healthcare, personal care, home and garden and tobacco. The dynamics in each of these markets vary, but it's fair to say that all have been impacted in some measure by cost inflation, lower consumer confidence and discretionary spending, especially in developed markets like Europe and North America.

For instance, inflation-driven higher food prices are causing consumers to change some of their buying habits, including choices about where to shop for groceries and which traditional and private label brands to buy. Consumers are also choosing new beverage products and formats over canned beer and soft drinks, and they're purchasing fewer discretionary items in the beauty and personal care categories.

Our participation choices in these markets have been shaped by increasingly deep expertise and diligent work to ensure that we are competing in the most attractive and least volatile categories with innovative products that are vital to our customers' brand identity and growth ambitions. As a result, we're gaining share because of our value proposition and market insights.

We've consistently stated that our performance is not immune to the broader economic trends, and it's not. But we're managing to generate profitable growth in our targeted markets in spite of uncertain and uneven demand. In fact, we have plans to grow our Packaging business even more aggressively in these markets, plans we look forward to showcasing and discussing with investors during the upcoming session we have planned in December in Richmond. During that session, we'll focus on the elements of our growth model, including specific opportunities to improve our partnerships with customers, accelerate our innovation pipeline and expand our leading positions in emerging markets.

Before turning to Jim for more detail about our performance in each business segment, let me summarize by saying that across MWV, we have been executing our strategy and getting results for our shareholders. This strategy has transformed MWV into a global leader in the packaging industry. And our results in the third quarter, building on the success we have had all year, demonstrate not only the return on our strategy, but the confidence we have in our longer-term outlook.

I'll now turn to Jim for a report on our operational and segment performance. Jim?

James A. Buzzard

Thanks, John. The results from our businesses during the quarter were very good. We had combined segment earnings of $257 million, a 14% increase compared to last year and a record for the third quarter. Our 9% sales growth was driven by value-based pricing initiatives across our businesses and by the impact of foreign currency exchange from sales in Europe and Brazil. Our pricing mix improvement reflects strong execution of our market participation strategies and are an important part of our effort to grow the business and stay ahead of input cost inflation which accelerated in the quarter. We also saw solid productivity gains across our businesses from our streamlined asset base and operational excellence initiatives.

I'll now provide some details about the performance in each of our segments. Additional information is available in our press release and the slides that accompany this call. In the Packaging Resources segment, sales were up 7% in the third quarter, as we continue to generate strong pricing for paperboard in each of the packaging markets we serve. Overall shipments were down compared to last year for both bleached paperboard and Coated Natural Kraft. Our mix improved due to our end market strategies.

In Brazil, GDP has moderated from historic levels last year. Our corrugated markets are basically holding steady after dramatic growth in 2010. We recently began operations at our new box plant in Aracatuba, which will play an important role in our Brazil expansion plans as this gives us the ability to better serve the southern portions of the country near São Paulo. And our performance relative to competition in Brazil is very strong as we've been able to preserve our margins and maintain or expand our share in key markets.

Earnings in the Packaging Resources grew for more than $100 million during the third quarter, a continuation of the strong performance this year. And this includes $7 million in higher maintenance expenses and unabsorbed fixed manufacturing costs related to the plant outage in our market facility. The improvement in earnings is primarily due to value-based pricing and strong underlying manufacturing productivity.

In the Consumer Solutions segment, sales increased by 5% during the quarter with the majority of the increase coming from foreign currency exchange and the addition of revenue from our acquisition of Spray Plast late last year. Pricing and product mix improvement in beverage, tobacco and personal care markets also contributed to increased sales.

In beverage, we're outperforming an overall downward trend in our core beer and soft drink markets in North America, and continued to make strong gains in Asia and Latin America. We play a key role as a partner for our customers who want to develop their brands through innovative packaging. And as we've noted previously, our machine replacements are up significantly in emerging markets where modernization in retail environment, increases in middle-class consumption and a focus on premium brands are driving demand for multi-pack beverage packaging.

The major driver of personal care performance was lower volumes of standardized pumps and dispensers in North America. There's also been a slowdown in luxury application in Europe due to the economic challenges which shifted our product mix slightly to the negative. In home and garden, the weather during the summer and fall lawn and garden season had a negative impact on our customers in North America. Both of these businesses continue to be impacted by the high price of resin, so our contractual agreements have begun to bring pricing in line with inflation of this important raw material.

Lastly in healthcare, volumes for our adherence packaging and medical dispensers were higher during the quarter as more customers recognize the value of our Shellpak adherent solution and qualify our pumps for preservative-free medical applications.

Overall, earnings in the Consumer Solutions segment were lower than the prior year, as we continue to deal with the temporary impact of economic-driven volume declines in some markets and the impact of the input cost inflation.

In the Consumer & Office Products segment, the recently completed back-to-school season in North America was a bit slower than last year but in line with our expectations. Our proprietary branded products performed well with retailers throughout the season, and we continue to grow our early learning products for students in preschool through second grade.

In our Office Products business, the timing of some shipments was affected by our effort to support key customers' merchandising strategies, resulting in slightly lower volume in the third quarter. In Brazil, sales are up and backlogs are strong as we prepare for the back-to-school season that begins in January. Solid early shipments to our customers in Brazil have contributed year-over-year growth during the quarter. Productivity improvements, as well as improved mix, drove higher earnings for Consumer & Office Products during the third quarter despite the shift of sales volumes in our Office Products business. We believe we are well-positioned for the busy planning and calendar season over the next few months as well as the back-to-school season in Brazil.

In the Specialty Chemicals segment, we continue to do well in global auto, inks, adhesives and oilfield markets. And as a result, we again have generated record sales and earnings in this business. Pricing was higher across all of our markets, which helped drive sales increases for carbon technologies and pine chemicals.

Auto carbon volumes were down slightly compared to the third quarter last year, as both North American and Japanese manufacturers continue to ramp production back up to levels seen before the earthquake and tsunami. Sales for our Evotherm warm mix asphalt additive were higher as more customers see the value of this innovative solution. And we're also benefiting from a focus on road maintenance and preservation in the United States.

But overall, our asphalt business has been impacted by the constraints on government spending, especially in China. We recently added new marketing capabilities in this area that will enable us to work with transportation agencies and our customers to introduce new and innovative technologies for the asphalt pavement market.

In Community Development and Land Management, we continue to generate sales of rural and recreational land during the quarter, including a large forest land tract in Georgia. Overall, we closed on approximately 15,700 acres, for gross proceeds of more than $30 million. The average price per acre of our small rural tracts was a very healthy $2,700. And the timber property we sold through TIMO was an opportunistic transaction in which we bundled several tracts together to maximize the total value. This strategy returned attractive pricing. Approximately 11,000 acres went for more than $18 million.

Given the real estate market, we're doing very well with the transactions that make sense for this business, especially in South Carolina. We're also completing planning and entitlement phases at each of our major development projects to be ready to take full advantage of the recovery, including activities during the quarter at our industrial park joint venture with The Rockefeller Group, our Master Planned Community in Summerville and East Edisto.

Now I'd like to turn the call over to Mark to discuss some of our financial metrics for the third quarter. Mark?

E. Mark Rajkowski

Thanks, Jim. We delivered another quarter of record operating results by continuing to drive strong improvement across all key financial metrics. Third quarter highlights include a 24% improvement in adjusted operating profit, which, at $213 million, was a record for the third quarter; 13% operating margins; 160-basis point improvement compared to last year; and $250 million of cash flow from operations.

Our results clearly demonstrate that our market-based strategies are working, helping MWV outperform in an increasingly difficult economic environment. We are winning with our most profitable products in the most attractive market segments and efficiently translating our growing earnings into cash. With our strong cash flow, we are reinvesting to profitably grow our business and providing our shareholders with a strong dividend.

I'll highlight a few areas of our improved financial performance and then provide an outlook for the fourth quarter. Starting with the top line, our 9% sales growth was primarily driven by continued strong price and mix gains as well as benefits from foreign currency exchange. Our focus on commercial execution is driving value-based pricing gains and mix enhancement across all of our businesses, with particularly strong gains in Paperboard, Packaging and Specialty Chemicals. However, we did see some weakness in demand, particularly late in the quarter, as our customers responded to increasing uncertainty in the global economy and weakening consumer demand.

That said, our positions in growing, emerging markets and strong relationships with global brand owners helped us gain some share in several key packaging markets including food and beverage. Sales from emerging markets grew 8% in the third quarter and represents 27% of our total revenues. Adjusted EBIT in the third quarter grew 24% to $213 million, and our operating margins improved by 160 basis points year-over-year to 13%. Our improved operating margins reflect the strength of our business model, a powerful combination of higher-margin products, supported by a much lower cost structure and more efficient supply chain.

In addition to the 90 basis points of adjusted gross margin expansion, SG&A efficiency contributed another 80 basis points of improvement in the quarter. Our absolute dollar level of SG&A remained relatively flat year-over-year, as we increased sales and continue to invest in new product development and commercial capabilities that we expect will deliver profitable growth for our company in the quarters ahead.

Third quarter operating cash flow of $250 million was driven by higher earnings and good working capital management. For the full year, we continue to expect to generate strong free cash flow, which we define as cash after CapEx and dividends but before our Brazilian expansion in Covington boiler projects. Total CapEx for the year is expected to be approximately $720 million with roughly $400 million of that spend related to these projects. Our cash on hand increased to approximately $760 million in the third quarter, up nearly $90 million compared to the end of last quarter. In addition, the funded status of our pension plan remained strong at 145% despite volatile credit in equity markets.

Now turning to the outlook. During the fourth quarter, we expect to continue to make progress improving our business model by executing on our market-focus strategies, including pricing for value and optimizing our product mix, building strong positions in faster growing emerging markets and continuing to reinvest in our businesses to strengthen customer relationships and develop new products. This work will build on our strong year-to-date performance and enable us to achieve another year of record earnings in 2011.

With that said, underlying market demand will remain challenging through the fourth quarter and into next year due to ongoing macroeconomic events around the world. We also expect the recent upward pressure on key raw material prices to continue during the fourth quarter. In addition to this difficult environment, our 2011 fourth quarter earnings will be negatively impacted by an extended outage at our Covington paperboard mill and lower rural land sales compared to last year's strong fourth quarter. As a result, we expect MWV's fourth quarter earnings to be modestly below last year.

In the Packaging Resources segment, we are continuing to see uneven demand for paperboard packaging. Coated Natural Kraft order rates remain strong for this time of year, and we are generating solid demand in higher-value food, liquid packaging and beverage markets. However, we are seeing weaker demand in economically sensitive areas such as general packaging. We will continue to benefit from pricing actions taken over the last 12 months and from improved manufacturing productivity, with most of these gains offset by mid to high single-digit increases in cost for raw materials and freight. These factors, along with the negative impact from the outage at our Covington mill, are expected to result in slightly lower segment earnings compared to last year's fourth quarter.

In the Consumer Solutions segment, we expect profits to be modestly higher than year-ago levels, as we improve our pricing and product mix and recover higher resin costs through contractual price escalators. We expect solid demand for beverage packaging, especially in emerging markets and for healthcare packaging, as well as stable demand for personal care products.

In the Specialty Chemicals segment, we expect another strong year-over-year increase in profits. Demand is in line with prior-year levels, and we will benefit from continued price and mix improvements across our markets. However, inflation in certain raw materials and freight costs will partially offset these positive factors.

In the Consumer & Office Products segment, sell-in and sell-through of branded time management products for the planning and calendar season and back-to-school season in Brazil are the key drivers of fourth quarter results. So far, sell-in has been in line with our expectations. And as a result, we are expecting segment profits to be flattish compared to last year's solid performance.

In our Community Development and Land Management business, real estate market conditions make it difficult to forecast sales and earnings. And while we benefited from the timing of a large transaction in the third quarter, conditions remain challenging. As such, we expect land sales to be more in line with the levels we saw in the first and second quarters of this year.

With that, I'll turn it back to John.

John A. Luke

Thanks, Mark. To summarize, we remain confident that our market-focused business strategies will continue to pace MWV's success going forward. We continue to perform well in a difficult economy. And while we have noted that our financial results are not immune to the impact of global economic conditions, we do believe that we can continue to outperform the competition by executing on our profitable growth strategies across global markets, where the ones that we have targeted is the most attractive opportunities for our business.

This concludes our prepared remarks, and we'd now be happy to address whatever questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of George Staphos of Bank of America.

George L. Staphos - BofA Merrill Lynch, Research Division

I jumped on the call a little bit late, so if you answered this already, I apologize, or discussed this already. First of all, as we look out to 2012 for Specialty Chemicals and the runway there, obviously, the management team has done a great job the last number of years improving the performance. But that makes now for tough comparisons in '12 and '13. How do you feel that -- what kind of tailwind do you think you'll have from emerging market infrastructure spending, which obviously has been a big driver for you, as many pulled back in that market? Secondly, there's been some discussion in the financial press about M&A in the energy markets or energy companies, how might that affect, if at all, some of the chemicals that you sell into oilfield drilling?

John A. Luke

It's John. I'll offer a few comments and then turn it over to Jim or Mark to follow up. First of all, as you noted, the team in the chemical business have done an exceptional job. And as a result, the year-over-year quarter-over-quarter comparisons have certainly been remarkable, reflecting the transformation of that business. It also reflects the opportunities that lie ahead. That said, it would not be logical to expect the same degree of year-over-year comparison going forward. But continuing to see outstanding progress given their strong market focus, not only in this country, you mentioned oilfield is an area where, clearly, we are looking to extend our possession. And you mentioned infrastructure spend in emerging markets. These are areas that have contributed, and we expect to continue to contribute to our progress as we move not only through 2012 but in the period beyond. Jim?

James A. Buzzard

And building on, I think the keys to the success of that business and the improvement in performance will continue to drive improved performance going forward. The innovative products that we come out with provide real value to our customers, we continue to invest in further innovation. So we'll see that pipeline continue to deliver benefits to the business. We really have a broad market participation. So while we might see weakness in one market, we can shift to another market and then continue with oilfields and adhesives to broaden in those end markets, and that will be helpful to us going forward. You referenced the emerging market presence, clearly, our presence in China, Brazil, increasingly in India, will help offset any temporary weakness we might see in more developed economies. And really, lastly, it is a team that has strong operating performance, and so they have a real leverage to drive further productivity and cost improvements. So I think all those things will come together to continue to help this business to grow.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay, I appreciate that, Jim. I guess similar vein in trying to figure out -- or at an early stage, what the growth levers are for next year? What was -- what do you think the combined effect of the marked outage in Covington will be for 2011? And how much of that will you ultimately get back for '12? And in aggregate, again, with board prices here leveling off, and let's assume that, that is the case for next year, obviously, you can't comment on future pricing. What other areas might there exist to improve your earnings within PRG?

James A. Buzzard

So George, in terms of the outages, the marked outage is one that, I referenced in my comments, about $7 million of cost. That won't repeat next year but will pick up in '13. That's just a regular outage. The one at Covington is more substantial, and it represents probably about 40,000 tons of lost production in the quarter. We fully will get that back next year and roughly $30 million of unabsorbed cost and maintenance expense. In terms of the opportunities, I think we continue to feel very good about our market participation strategies and so we'll continue to focus our commercial efforts on those markets where we provide real value and where we can expect you to pay for that value. That will just be a continued opportunity for growth in addition to the additional tons we'll get out of some of the improvement we're making at Covington.

John A. Luke

Yes. I would just append to Jim's comments, George, that at both mills, you continue to see enhanced market participation, enabled by a product mix, as well as the redesign of certain products. But in particular, in Covington, coming out of the outage we're taking this fall.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Last one, and I'll turn it over quickly. Consumer Solutions was below our expectations. It's neither here nor there, but it seems like this has been a business that has never really, since Calmar, quite lived up to what you would've expected, you can agree or disagree with that. And do you think the volume shortfalls you saw in the third quarter were unique to you, or do you think everyone experienced that? And what do you do from here to improve the earnings on a more sustainable base so this gets to more of a 10%-plus operating margin, which is typical for Specialty Packaging businesses?

John A. Luke

Let me comment first and then turn to Mark and Jim. I think you've raised a very good question, but one that we can answer very much in the affirmative. We feel very positively about this businesses. Clearly, we are restless with the adverse impact of the incessant cost inflation that we have experienced, as both Jim and Mark noted most particularly in the resin area. But as we look at what we have done to continue to transform those businesses, to reshape them, to get the cost efficiency right and most important, to refocus in recent years the market participation strategies, building the commercial teams and supporting it with ever greater market knowledge and consumer insights, not to mention outstanding innovation efforts. We all feel very, very positively about the longer-term outlook for those businesses. Clearly, the 10% EBIT margin is a target for us. And that is what we're very, very much focused on, and we'll do that by participation. And as in the response to the chemical business, it's important to bear in mind that a lot of our opportunity in this business or in these businesses will come from the opportunities we see in the emerging market space as well. Jim, Mark...

E. Mark Rajkowski

Yes. This quarter, we really did get squeezed, George. As you look at what's happened on input costs, as John mentioned, certainly, resins is a big part of that. We do have a lag in terms of recouping price through escalators in our contracts. And we do expect resin cost to be moderating. We do expect to see some margin expansion as that we catch up on the lag here in the fourth quarter. But longer term, as John said, it's really about our ability to develop new products and solutions in the marketplace around beauty, personal care, healthcare. And we're seeing some really good progress in that regard.

John A. Luke

Yes, and I would just come back and note that those of you who are able to come to Richmond in December for our packaging session will get a first-hand look not only at what we're doing, but most important, to better understand in much greater depth the strategies we have underway, the teams that are leading that work and the opportunities that we see.

Operator

We'll go next to the line of Phil Gresh with JPMorgan.

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

I'm wondering if first, you could just kind of elaborate on which areas you saw the most slowing late in the quarter? Mark, I believe you mentioned something about that. So I was wondering if you could just give a little bit more color?

E. Mark Rajkowski

Yes, I think we saw some slowing in the general packaging grades that are a little more sensitive to softening economic conditions. The -- that was probably the biggest area of accelerated softening in the third quarter, Phil.

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

Okay, so nothing on the Specialty Chemical side?

E. Mark Rajkowski

No. They've been pretty stable throughout. So that was more referenced to that part of our Packaging business.

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

Got it, okay. And then just following up on the inflation question. Outside of resins, are you seeing any easing on any of the other raw materials or perhaps any incremental pressure on any of them? Maybe just give us some color as to whether 3Q would potentially be the peak in inflation, or do you expect this to kind of continue at these levels on a year-over-year basis heading into the fourth quarter?

E. Mark Rajkowski

Yes. Let me hit the highlight on that, and Jim, you can provide a little bit of color as well. But we do think we've hit a peak in terms of year-over-year impact. We were roughly 9% up year-over-year in the third quarter on energy, materials and freight. While still up in the fourth quarter, we do expect that trend to moderate down closer to the mid-single digits. But still, substantial inflation. And -- but there are a number of materials that are continuing to be stubbornly high in terms of their cost profile. And whether that's caustic, latex, titanium dioxide has also been pretty high. Jim, I don't know if anything beyond that. But it's still a pretty intense input cost environment, although we see it moderating slightly from what we saw in the third quarter.

James A. Buzzard

Well, I think you addressed it well, Mark. I think the other thing that we're really focused on is, how do we use these materials in the most efficient manner we can. So while we can't control the price on all of them, what can we do in terms of the amount that we used to produce our products and a lot of effort is going in to help moderate that.

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

Got it, great. Okay. And then last question, just kind of following up on what George was getting at in terms of some of the moving pieces for next year. I guess how are you thinking about productivity versus investing for growth? I know in the second quarter, your productivity was negative because you were investing for growth. Now it's moved back to being positive this quarter, so it seems like you're focused a bit more on the savings. So as you look ahead, I mean, are you thinking about productivity next year again, or you think you'll reinvest most of that for growth?

John A. Luke

I think we'll -- Phil, it's John. I'll start and I'll ask the others to follow again. Clearly, we're always thinking about productivity working to improve the productivity of our operations and our overall organization mix quarter in and quarter out and we take that very, very seriously. We will continue through our organic efforts in the markets we've talked to, to leverage opportunities for growth, which we continue to feel even given the relative softness in the developed markets, most particularly Europe and the United States, that exist for us in places like Brazil, China, increasingly India, among other countries, where even with moderately slower growth, the upside opportunity still exists to be -- it exists quite nicely. We will invest beyond that in support of growth where those real opportunities for profitable participation pursue. But underlying all of that is a relentless focus on productivity.

James A. Buzzard

I don't have much to add to that. I mean, we clearly have developed a rigorous discipline that we carry across all of our operating entities, and we will drive that just as hard in 2012 as we have in 2011. And as John said, we just see so many exciting opportunities for growth that we'll continue to invest in the platform to grow the business going forward.

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

Okay. So I guess the net takeaway there is it should be probably a positive on the year-over-year on productivity, but you're still investing for growth, so some offset?

E. Mark Rajkowski

You've got it, Phil.

Operator

Our next question will come from the line of Mark Connelly with CLSA.

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

A couple of things. First, can you give us an update on the rest of the Brazil project? I know it's hard to parse local economic activity down there versus FX, but I'm wondering how much FX is affecting your customers right now. And with respect to this project, you've got a fairly aggressive time frame. I'm just wondering whether this is already starting to affect both the cost and the benefits you're expecting?

John A. Luke

Mark, let me offer a couple of thoughts on that. First of all, let me just say at a high level, the project is being exceptionally well executed and we couldn't be more pleased with the job that the leadership of our team in Brazil with the help of others across our organization are bringing to the oversight of that. And at the same time, they're continuing to develop and in the early stage, as Jim indicated, execute very robust commercial strategies will -- that will support both growth but profitable participation in the Brazilian market.

James A. Buzzard

Yes. I think just building on that, obviously, this a major long-term investments. As John said, the team is guiding it and managing it extremely well. So we -- while this is a very aggressive time frame, we still feel confident that we will deliver as we have said. And then these markets have moderated a little bit, but we continue to invest for the long term down there, and we remain very positive on Brazil for the long term.

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

And I wonder if I could just ask a similar question on Covington. You talked about the Q4 impact but I wonder if you could just give us a broader sense of that project and how we should expect that to play out?

John A. Luke

Jim?

James A. Buzzard

You'll begin to see that -- really the benefits not accruing until the end of 2013 and then fully into 2014. So we will continue to invest in it. We think it is absolutely the right strategic investment for that mill going forward. But it's going to be several years before we see the benefit.

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

But there's no change to the investment timeline? Sorry, it wasn't clear enough.

James A. Buzzard

No, there's not.

Operator

And our next question will come from the line of Gail Glazerman of UBS.

Gail S. Glazerman - UBS Investment Bank, Research Division

Just going back to the demand comments, you talked about the weakening in the end of September. Is that something that's kind of plateaued at a weaker level? Are you seeing incremental pressure in October? And just generally speaking, any changes in order patterns that you're noting in general? I mean, you mentioned what you're seeing the consumer do, but I'm wondering what your direct customers are just thinking and doing?

John A. Luke

I think at a high level, what we've described is what we have seen. There is some moderation. It's been spotty. But as we look at what our customers are increasingly beginning to report or what we see from competitive announcements, there are indications of broader softness in certain consumer and industrial markets. And those are things that we're girding to be able to respond to. That said, as we've each commented, we have great confidence in the market participation strategies that we put in place that will, even in softer markets, let us continue to focus on those areas that are not immune to, but are less subject to, the volatility that we're beginning to see in the marketplace. Jim?

James A. Buzzard

Right. I think that's right, John. Part of what we're seeing, Gail, is a combination not only of softer demand by the end consumer, but our customer is also rebalancing their supply chains, pulling down their inventories as they experience the same thing we are. So at some point, that will diminish, and we'd expect to see maybe a little bit of moderating in terms of the declines, but as John said, it's very hard to predict what this economy is going to do around the world. There's lots of external events unfolding on almost on a daily basis. And we'll just have to play out. But we feel like we are well-prepared to weather any potential storm.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And looking at wage board, you're showing about 2 weeks of backlog, that strikes me as a bit low. Can you just tell us what you would view as normal for this time of year? And is that weakness mainly domestic, or is it global or exporter or both?

James A. Buzzard

At this time of year, going into November, 2 weeks is not bad. It's -- historically, we would expect between 2 and 3 weeks, so we may be a little light, but not bad from my perspective. And we frankly are seeing it across the board in all end markets right now.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And this was kind of touched on earlier, but I just want to clarify. CSG was dramatically weaker than kind of what you guided to last quarter. Was that surprise that resin cost didn't really come off the way you're expecting, or was it more weighted toward some demand surprise within the segment?

E. Mark Rajkowski

I think it was a little bit of both. I think resin was much, much higher cost than we had expected. And we also saw a little bit weaker demand, as I said, particularly towards the end of the third quarter. So a little bit of a surprise on demand, much, much more stubborn cost profile for resin than we were anticipating at the outset of the quarter as well.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just one quick last question. Are you still producing roll pulp at Evadale, or given the market change, has that become less attractive?

James A. Buzzard

We still are producing, and it's still attractive for us.

Operator

We'll go next to the line of Mark Wilde of Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Could we get a little more color on some of the weakness that you talked about in the dispenser market, particularly kind of personal care? And then you also mentioned some weakness that you were seeing in the European high-end markets?

John A. Luke

Yes. Mark, let me comment at the outset. I think what we're beginning to see is not unexpected, most particularly in Europe, given some of the economic -- growing economic pressures that exist in that region is some of the impact of discretionary consumer choices that are being made. And what we see is in the higher-end fragrance market, the luxury markets, the greatest pressure earliest at a time of inflection like the present. But I think more broadly, we're just seeing a little bit more volatility in these markets where discretionary spending is a factor than we would under more normal economic circumstances.

James A. Buzzard

And clearly, in the pump business, we are seeing both reduced demand, as well as our customers, again, rebalancing their inventories to reflect the current economic reality. So that's impacting that in that business.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And what do you -- Jim do you have a sense in the -- like the personal care side of the business, is that just kind of consumers kind of working through what's in the closets rather than going out to the store and buying a new bottle of -- whether it's body cream or whatever?

John A. Luke

You could be right, Mark. I think that we will probably be much better equipped as we move through another quarter or 2 to provide a more analytical assessment of what is impacting consumer behavior and what it looks like. We're still at the very early stages of some of this -- what could be a softening in overall demand.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And in that business, is there any way kind of going forward you could provide us with a little more visibility into that dispenser business just in terms of sales or profitability, because it's pretty opaque from the outside, and it's, clearly, with Calmar and Spray Plast, it's been a market that you've put a lot of capital in over the last 4 or 5 years.

John A. Luke

Mark, I think that's a very fair question. First of all, we're going to be changing our segment reporting as we move into the new year. And that, hopefully, will give you not only much greater visibility into how and where we're participating, but it should also provide a better backdrop for questions of the sort that you're raising. And we'll look to provide that as appropriate.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. A few other questions. Jim, is the Covington project, is that going to roll into the first quarter as well? Do we need to factor something in our first quarter thinking in terms of outage costs or maintenance expense at Covington?

James A. Buzzard

No, we'll have it wrapped up by the end of this month.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then, John, it seemed like a couple of quarters ago when we met, that you were talking really about investing in some human capital to try to kind of develop business going forward. I just -- I wondered, with the slowdown that we're seeing globally, whether you're recalibrating that investment plan?

John A. Luke

The short answer is no, Mark. We're very optimistic about the longer-term opportunities we see. We recognize that in addition to capital and other investments we've made that continuing to upgrade the capabilities of our organizations, our organization and -- it to enable evermore successful execution in the market, as markets that we've targeted is going to be an important part of what we do. So -- and we have been very disciplined in how we manage costs across the organization to free up reserves to enable us to support those investments.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then the last question is just on mineral rights. I wondered if you could give us a little more color than what was in the release on the energy projects. And also let us know is, if you sell land like these sales to the TIMO in the in the third quarter, are you now routinely retaining mineral rights?

E. Mark Rajkowski

Yes. Yes, we are. And Mark, with respect to the natural gas rights, we're still in the process of having test wells drilled. So there's no update on the progress of that. But they are continuing to drill wells and more to come.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. When would you think, Mark, that we would have some more visibility into kind of that situation, what the potential there might be?

E. Mark Rajkowski

We'll have better information at some point next year, for sure.

Mark Wilde - Deutsche Bank AG, Research Division

I mean, is that first quarter, third quarter, do you have any sense?

E. Mark Rajkowski

Some point, hopefully, by the first half, Mark.

Operator

Next, we'll go to the line of Mark Weintraub of Buckingham Research.

Mark A. Weintraub - Buckingham Research Group, Inc.

Since you guys do have a fairly good global perspective, I just wanted to go back a little deeper into the comments you're talking about, demand weakening a little bit. Are you seeing much difference geographically? Is Europe slowing more than, say, North America, or you're not really picking up that differential?

John A. Luke

We'll have more as we move through the balance of this year, more definitive data to report. I think anecdotally, it would be fair to say that we've seen Europe softened to a greater degree than the United States and North America at this stage of the game. It's all relative, but the amount of noise and financial challenge that has impacted not only the financial markets but consumer confidence and behavior in Europe has necessarily led the way in the current move toward softness in demand.

James A. Buzzard

And as Mark reported in his comments, we continue to see growth in the emerging markets and our participation there is a real help to us. But that has moderated slightly as well.

Mark A. Weintraub - Buckingham Research Group, Inc.

Okay. And just following up on the Rigesa project a little bit. Two questions. One is, given the changing currency, does that affect the expected capital costs in, at least, in dollar terms for that project? And also, the customers that you're selling boxes to, are they largely keeping the products that they're selling within the country, or does a lot of that get exported?

John A. Luke

Yes. Let me get the first part.

E. Mark Rajkowski

Yes, On the currency certainly, as that fluctuates, the dollar amount, the translated dollar amount, will change as well. So if the real strengthens, it's reflected as a higher cap spend, if it comes down, which as recently, it shows lower capital spend. But as you will recall, we also have some real-denominated debt that we're using to finance that project as well as cash. So both sides of the balance sheet will see that impact.

James A. Buzzard

Mark, in reference the second question in terms of where most of our boxes wind up. They actually -- vast majority if it winds up stay within Brazil.

Mark A. Weintraub - Buckingham Research Group, Inc.

Okay. So your customer keeps their product in Brazil?

John A. Luke

Yes. And I think Jim -- while Jim is spot on, we do sell corrugated to some firms that have built large positions in the export marketplace, particularly in the food sector. And we've seen, obviously, with the currency change there, some retrenchment in that activity.

Mark A. Weintraub - Buckingham Research Group, Inc.

Okay. And I think I heard $720 million number for -- that was for 2011 cap spend, is that correct?

E. Mark Rajkowski

That's right, Mark.

Mark A. Weintraub - Buckingham Research Group, Inc.

And do we have a sense of where 2012 is going to be at this juncture?

E. Mark Rajkowski

Yes, it'll be lower. We'd expect that to be lower as the Rigesa project comes to a conclusion in mid-2012, but we'll also see some ramp up in Covington. But all-in, lower total cap spend in '12 than we're expecting for 2011.

Mark A. Weintraub - Buckingham Research Group, Inc.

I think at one point, you had suggested that '11 and '12 combined might be about $1.2 million to $1.3 million? Is that still a good number, or has that changed a bit?

E. Mark Rajkowski

That's in the ballpark, Mark, yes.

Operator

We'll go next to the line of Alex Ovshey at Goldman Sachs.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Can you comment and potentially quantify what your SBS and CNK prices did sequentially from the second quarter of '11 to the third quarter of '11?

James A. Buzzard

I don't have that number directly. We'll get back to you with that.

E. Mark Rajkowski

Jason will follow up with you on that.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Okay. And there was a price increase for September on CNK. Any update on that?

James A. Buzzard

I mean, we continue to work through the marketplace to implement that price increase.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Okay. High level as you guys think about the Packaging business, what part of that business is exposed to the more defensive food and beverage end markets versus the general packaging end markets where you're sighting some weakness?

James A. Buzzard

Well, clearly, in the -- in our CNK business, the Paperboard business, we are well represented in the food and beverage markets. And obviously, we also serve a lot of other markets from those mills. That will be a defensive position for us for sure.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Is it more than 50% of the total Packaging business?

James A. Buzzard

Yes.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

And the -- so the Covington mill has been taken down in October. It's down right now for the CapEx maintenance?

James A. Buzzard

We did not take the entire mill down. So it -- we have our recovery board out that's going through maintenance. And we're rotating the machine down one at a time.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Okay. Do you have a sense what that downtime end up doing to your SBS backlogs over the next 4 to 6 weeks if you hold demand constant at where it is today?

James A. Buzzard

I mean, we would expect that they would increase slightly, but we've obviously been supporting our customers throughout this time frame with inventories as well.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Okay, got it. And just the last question. Really nice cost control on the corporate line. Any incremental guidance that you can provide us on how to think about that corporate line expense for the entire year 2011?

E. Mark Rajkowski

Alex, yes, I think we were a little high in the third quarter. We saw that moderate in the second quarter, saw that moderate here in the third quarter. So I'd expect to be somewhere in between, but closer to where we were in Q3 than Q2.

Operator

We'll go next to the line of Chip Dillon of Vertical Research Partners.

Chip A. Dillon

I know this bounces around a lot, but it seems like the corporate expense, the adjusted numbers on Slide 16 are quite low. And I didn't know if you could just help us understand that and give us some context as to how you see this sort of adjusted corporate number looking in 2012?

E. Mark Rajkowski

Yes. If you will recall, Chip, in the second quarter, as a result of a much higher stock price, we had a number of charges in there for equity -- long-term equity compensation. And they were noncash charges. In the third quarter, as that stock price has gone down, we saw the benefit of some of that. So we're probably looking at a run rate spend that's somewhere in between. So we saw $12 million to $13 million of noncash charges in the second quarter, and we saw somewhere in the neighborhood of $12 million of that reverse in Q3. So somewhere in between is what I would guide you to.

Chip A. Dillon

And while we're sure looking at this area, do you have an early read on your pension line? I mean, as you -- of course, your company has been very different and very positively comported on the pension line with the income. Any reason to expect that $20-ish million per quarter rate to change in 2012?

E. Mark Rajkowski

Not substantially, Chip.

Chip A. Dillon

Got you. Okay. And then the last thing is, as we look at your interest expense, I would imagine as we go quarter-to-quarter, you probably are increasing the capitalized amount especially as you get more progress down in the Rigesa project. Can you give us an idea just sort of how that could -- if it's material, will it continue to move up? And sort of when does, I guess, that in 2013 is when we would expect to see that capitalized number come down. And can you just give us some magnitude on that?

E. Mark Rajkowski

Yes. It was about $4.5 million in the third quarter, $15 million to $18 million over the full year for the Rigesa project.

Chip A. Dillon

And you would think next year, that's probably in 20s, maybe even $30 million?

E. Mark Rajkowski

No, no. I'd say it's still on that $15 million to $18 million range.

Chip A. Dillon

And then comes down, obviously, in '13 as you start up?

E. Mark Rajkowski

Yes.

Operator

And there are no further questions that I show in queue.

Jason Thompson

Thanks, Keeley, and thanks, everyone, for joining us. We look forward to speaking with you next quarter. Keeley, if you could please read the replay information? Thanks.

Operator

Thank you. And ladies and gentlemen, today's conference will be available for replay after 1:00 p.m. Eastern time today through November 26 at midnight. You may access the AT&T executive playback service at any time by dialing 1 (800) 475-6701 and entering the access code of 219064. International participants may dial (320) 365-3844. That does concludes your conference for today. Thank you for your participation. You may now disconnect.

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