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MeadWestvaco (NYSE:MWV)

Q4 2011 Earnings Call

January 25, 2012 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

James Armstrong - Vertical Research Partners Inc.

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

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

Mark Wilde - Deutsche Bank AG, Research Division

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

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

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MWV Fourth Quarter and Year-End Results Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. Starting off today, we have Director, Investor Relations, Jason Thompson. Please go ahead, sir.

Jason Thompson

Thanks, Kevin, 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, and 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 share this morning are presented on a continuing operations basis. For the fourth quarter, the company's loss from continuing operations was $9 million. Excluding special items, adjusted net income from continuing operations was $44 million or $0.26 per share.

Now here to tell you more about the results for the fourth 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

Jason, thanks very much and good morning. MWV delivered another strong performance in 2011 even with the weaker fourth quarter due to the economic challenges primarily in North America and Europe. We had record adjusted income from continuing operations in 2011 of $335 million or $1.92 per share as we benefited from our market focus strategies and improved business model.

We strengthened our growth profile, implementing plans in each of our global markets to win new business with our most strategic customers, with our most innovative solutions and in the world's fastest-growing geographies. And we generated significant cash flow that we used to make growth investments and provide a strong return to our shareholders.

I'd also mention that we announced the spinoff of our Consumer & Office Products division, which will also create significant value for our shareholders when the transaction is closed in the first half of this year. These financial results during the past year came directly from the plans we're pursuing for profitable growth and value creation.

Across our packaging markets, we are focused on commercial excellence, innovation, growth in emerging markets and expanded participation with new materials and capabilities. As we discussed at our December Investor Meeting, we aim to generate $1 billion in profitable revenue from this plan over the next 3 to 5 years.

In Specialty Chemicals, we are aligning our capabilities and value proposition with global mega trends including emissions reductions, infrastructure investment and energy exploration. We'll look to extend the record earnings we generated in this business in 2011.

In Land Management, we're implementing a strategy to generate additional value from our landholdings by improving and selling small rural tracts and making infrastructure improvements on select properties to enhance development potential, especially in the Charleston, South Carolina region. We made great progress putting these strategies into action throughout the year, including during the fourth quarter. You'll hear more detail from Jim and Mark in just a moment, but the following are just a few highlights that demonstrate our momentum.

We won new beverage packaging business from Dr. Pepper Snapple during the fourth quarter after demonstrating a new set of innovation capabilities that will help enhance their brands in the marketplace.

In the food market, similar commercial excellence efforts led to share gains for our MWare paperboard for coffee cups in 2 of the largest quick serve and convenience store chains in the country. We had market share gains in beverage multipack and skin care dispensers in Asia, which helped pace 10% growth in emerging markets during 2011.

Lastly, at the end of the fourth quarter, we acquired Polytop, a highly respected and innovative maker of caps and closures, that will significantly extend our presence in the food, beauty and personal care, and home and garden markets. This is an example of expanded participation into the most technologically advanced closure systems in the packaging industry, and we expect the addition of Polytop to have a modest positive contribution to our earnings this year.

Despite these highlights and others, the fourth quarter was weaker than we had anticipated due to the economic factors we've already cited. Against that backdrop, we continued to implement our strategies, generating profitable growth that not only contributed meaningfully to our results, but also strengthened our market position compared to the competition. But like the competition, we were not immune to the impact of macroeconomic developments. Despite the present softness mostly attributable to the crisis in Europe and economic challenges in North America, the packaging markets that we have targeted still have very attractive long-term growth rates.

We remain very confident in our market-based strategies and focused on the priorities that will make us successful over the longer term. They include growing our business through the 4 elements of commercial excellence, innovation, focus on emerging markets and expanded participation; improving our business model and productivity to increase profitability; and driving cash flow to invest in our business and return value to shareholders. Our execution in these areas will help ensure that we deliver performance that meets or exceeds the targets we've laid out for the next several years.

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

James A. Buzzard

Thank you, John. In a tough demand environment like that one we faced during the fourth quarter, we did well to execute on the things we can control to preserve or strengthen our market position and improve the productivity of our operations. We executed on the commercial side with strong pricing and product mix gains that more than offset input cost inflation in each of our businesses, as well as some market share gains that I will describe in just a moment.

We also increased the productivity of our manufacturing facilities through our operating excellence initiative. Much of our improvement, however, was offset by the planned outage at our Covington paperboard mill for both maintenance and upgrades, as well as unabsorbed fixed cost across our manufacturing system, as we lowered output to meet reduced demand.

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 during the fourth quarter as we continued to drive strong pricing and product mix improvement and earned share gains in our highest value markets. We had a very good performance in global markets for food and beverage packaging with our Coated Natural Kraft product lines. In particular, new wins with some of our global food brand owners helped increase volume in these markets during the fourth quarter. However, overall paperboard shipments were down due to the impact of weaker demand in some of our more economically sensitive markets for bleached paperboard including commercial print, general packaging and office products.

We also had lower shipments for tobacco packaging due to the outage at Covington and lower volume of corrugated packaging in Brazil due to the continued slowdown in economic growth. GDP growth is expected to be in the range of 3% to 4% in Brazil this year, and we expect to grow not only through ongoing economic improvement but also through the implementation of our aggressive plans supported by the new box plant in Aracatuba and the paper machine investment in Tres Barras that will contribute meaningfully in 2013.

Fourth quarter earnings in Packaging Resources were well below last year's level, but the segment earned $322 million in 2011, which is a 25% increase over the record level set in 2010. Lower earnings in the fourth quarter this year were due to the balancing of production to meet demand, as well as the impact of the major Covington outage.

In the Consumer Solutions segment, sales in the fourth quarter were the same as last year, with pricing and product mix improvements in most of our markets, as well as additional revenue from the Spray Plast acquisition, getting largely offset by weaker demand for personal care packaging in Europe and home and garden packaging in North America, as well as the effects of the weaker euro.

As John mentioned a moment ago, we won some new business in beverage with Dr. Pepper Snapple in North America based on our brand engagement works and high quality solutions, and we also continue to win business converting multipacks of large glass bottles from corrugated to our paperboard solutions. In addition to gaining share in developed soft drink and beer markets, we're also growing aggressively in emerging markets, especially China where cans are becoming the preferred format and where suppliers and customers are making large investments in canned production and fulfillment. This trend favors our multipack solutions and is part of the reason our machine replacement are up strongly around the world, including China and other emerging markets.

More than half of our beauty and personal care business is in Europe where the economic crisis had an impact on consumer demand and resulted in more aggressive inventory management by customers, particularly in November and December. We have grown our market share position in fragrance and continued to win market share in the skin category in Asia. Some of our customers are talking about new project launches and the potential for growth in 2012, and we are positioned to win more than our share of this business through commercial excellence initiatives and a strong pipeline of innovative products.

In home and garden, we continue to be impacted as key customers balance their supply chains following the weeklong garden season last year. We've replaced some of this volume by expanding our Spray Plast trigger business in Eastern Europe and parts of the Middle East and Asia. This kind of opportunity to leverage Spray Plast's capabilities across our global platform is an important basis for growing this business. We'll continue with this effort and will do the same as we integrate Polytop’s caps and closures into our existing global platform, not only for home and garden, but also for food and personal care markets.

Lastly in healthcare, Shellpak sales peaked for the year during the fourth quarter as our biggest retail customers extended their commitment to adherence packaging for their prescription drug programs. The market for adherence packaging and healthcare continues to develop around the world. The U.S. Surgeon General highlighted the need for better medication adherence in a recent campaign, and the use of packaging to deliver improved adherence remains the most cost-effective solution.

Overall, earnings in the Consumer Solutions segment were lower than the prior year. We continue to recoup pricing to offset the impact of resin cost inflation, but our earnings were negatively impacted by lower unit volume in some markets and rising input costs -- rising costs for other inputs.

In the Consumer & Office Products segment, we had a strong performance this year punctuated by the announcement that we will spinoff this business and merge it with ACCO Brands. The transaction is expected to generate significant value for MWV shareholders and will create a leader in the school and office products market. We are on track to close this deal in the first half of 2012.

In the fourth quarter, sales of dated and time management products were better than expected and improved compared to last year, while volumes were down slightly and improved mix of higher value products contributed to the sales increase.

Our Brazilian business had a strong year, with growth in both sales and earnings despite lower volumes in the fourth quarter due to weaker sales at retail and fewer replenishment orders. We expect the remainder of the back-to-school season in Brazil, which continues into the first quarter, to be challenged by this slower economic conditions.

In the Specialty Chemicals segment, we had an outstanding year with strong performance in the auto carbon, asphalt paving, oilfield and adhesives markets. Across the board, we have shifted our product mix significantly toward more innovative and value-added formulations for these markets, leading to the earnings profile we've seen over the past several quarters. Though the comparisons will certainly be more difficult in this business going forward, we can expect continued performance in line with the earnings model we've laid out.

In the fourth quarter, higher sales of auto carbon were driven by the steady increase in production of hybrids and the return to full production in Japan following the disruptions earlier this year. Our honeycomb carbon technologies were up more than 50% in the period, and we expect these innovative solutions to continue to grow as the market moves towards more fuel-efficient, low-emission vehicles.

Our asphalt paving business had its best year on record in the United States. As many localities shift to spending available transportation dollars on maintenance projects, our new products for this segment are performing well. In addition, Evotherm sales were higher around the world. However, the asphalt paving market continues to be affected by lower spending on infrastructure in China.

Finally, our sales in the oilfield market are still very strong as we're gaining market share and expanding margins by responding to specific customer needs with exact formulations designed to maximize the performance of their drilling operations.

In Community Development and Land Management, the pace of rural land sales continued to meet our expectations in the fourth quarter with 21 transactions closing for gross proceeds of $11 million. Overall, we are very pleased with the price per acre given the difficult conditions that persist in the real estate market. Our average price per acre in 2011 was more than $2,400, which demonstrates our ability to continue to deliver value to shareholders from this strategic and selective approach.

We've also had a number of positive signs in the development side of the business, where we are focused on taking advantage of the opportunities in South Carolina. That includes the significant economic activity being generated from the Boeing plant, which is set to produce the first streamliner in the first half of this year, as well as the proposed deepening of the Charleston port and the success of high-technology military suppliers to this major project. These trends, along with a very low availability of suitable existing buildings across the region, have led to a number of new opportunities for our Development business.

At our Parks of Berkeley development site in the Charleston suburb of Summerville, we completed the Phase 1 entitlements and permitting and expect to start construction very soon on the infrastructure that will support hotels, office space, local retailers and apartments, all consistent with the absorption rate we expect for the land in this area. We are working on a number of initiatives for this phase of the project.

And lastly, as a follow-up to the information we shared during our investor event in Charleston last year, we continue to monitor closely the potential for natural gas extraction on our land in the Marcellus Shale area of West Virginia. We have leased the land to Bluescape, and they have begun a number of test wells to determine the extent of the reserves. Initial results are very positive, and Bluescape has announced a $100 million investment in the new pipeline to service the wells on our land, as well as other sites in the area. We will continue to share updates on the evaluation and development of these potentially valuable resources.

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

E. Mark Rajkowski

Thanks, Jim. Despite the softening in demand we saw during the fourth quarter, we delivered another year of record operating results through the powerful combination of our profitable growth strategies and stronger business model. Some financial highlights from the year include a 20% improvement in adjusted EBIT, which at $635 million is a new annual record for the company; 10.5% EBIT margins, a 120 basis point improvement compared to last year; strong cash flow from operations of approximately $560 million; and of course, the significant value creating transaction with our Consumer & Office Products business that has a current total value to MWV shareholders of more than $1 billion.

We achieved these strong results against the backdrop of another difficult year for the global economy. Our continued progress clearly demonstrates that we have established a solid foundation, and that we can continue to build on this foundation to reach the revenue and earnings targets that we've set for the next 3 to 5 years. However, as we saw in the fourth quarter, our revenue and earnings growth will not be linear. And we expect the global demand environment to remain challenging in 2012, particularly across North America and Europe. That's why we are intensely focused on the execution of our profitable growth initiatives.

John and Jim touched on just a few examples of where we've won new business, introduced new products and continued to leverage our leading positions in emerging markets. So despite the challenging market environment, there are compelling signs that we can strengthen our competitive position and outperform in terms of total returns for our shareholders over the years ahead.

I'll now review our fourth quarter performance, detail our 2012 capital plans and then provide an outlook for the first quarter. During the quarter, we experienced weaker demand for packaging in North America and Europe, primarily in some of our more economically sensitive markets for bleach board, as well as in personal care in the home and garden markets. We discussed these demand trends on our call last quarter, but the decline worsened in November and December as customers reduced orders to lower their inventories heading into 2012. These developments, as well as a weaker euro and real negatively impacted our revenue for the fourth quarter, which was essentially unchanged compared to the prior year.

We continued to drive gains in price and mix, reflecting our commercial excellence efforts to price for value and to drive higher margin business with our customers. And we gained some market share by working with major brand owners in several targeted packaging markets including beverage, food and personal care. Our share gains included adding new customers such as Dr Pepper Snapple and extending our positions by growing sales of new products to existing customers.

Overall sales in emerging markets declined modestly in the fourth quarter, but our emerging markets growth was still 10% for the year, representing 28% of total company sales. China growth remained strong in the quarter, but our Brazilian businesses felt the impact of lower consumer spending and tighter inventory management by some of our customers, as well as weakness in demand for agricultural exports. Despite a slow fourth quarter in Brazil, the long-term growth trends remained very positive given its demographics and growing consumer class.

Adjusted EBIT in the quarter was $93 million versus $140 million last year. The biggest driver in the quarter was our reduced operating leverage due to lower production volumes. These unabsorbed fixed costs were the primary reason for our 270 basis point reduction in adjusted gross margin, as well as the comparison to last year's fourth quarter that included a large high margin land sale. As we saw weakening demand trends developing through the quarter, we took aggressive actions to manage our supply chain and further reduce our inventory levels heading into this year.

Adjusted SG&A in the quarter increased year-over-year due to some modest inflation and investments in new product development and commercial capabilities. We generated about $560 million of cash flow from operations and about $60 million of free cash flow during 2011, excluding the capital investments for our expansion in Brazil and the new Covington boiler.

Total CapEx for the year was $670 million, including $208 million for the Brazil expansion and $50 million for the Covington boiler. In 2012, we expect CapEx to be relatively flat with 2011 spend and then return to more normal levels as we complete these 2 major projects. We ended the year with $565 million of cash on hand. The decrease in cash from the previous year is driven by the funding of our growth investments for Rigesa, Covington and the Polytop acquisition in 2011. Our financial position and liquidity remain strong with our total debt to capital at 40% and net debt to capital at 32%.

Now turning to the outlook for the first quarter. As I mentioned at the outset, we expect demand to remain weak in several of our markets, at least through the first half of the year due to ongoing global macroeconomic developments, with the greatest risk and uncertainty in Europe. We also expect continued upward pressure on input costs and a negative impact from the stronger dollar. As a result, we expect earnings to decline in the first quarter compared to our very strong results last year.

That said, we remain confident that our continued execution of our profitable growth strategy and ongoing improvements to our business model will provide us with a competitive advantage during the current difficult demand environment, as well as enable us to achieve our stated revenue growth and earnings goals over the next 3 to 5 years.

Now turning to the business segments. As you know, we will begin reporting our Packaging business under a new segment structure in the first quarter. However, for ease of comparison, we will provide an outlook for our Packaging business in the first quarter under the current format.

Starting with the Packaging Resources segment. We expect segment earnings to be below last year, principally driven by continued weak demand in certain end markets, unfavorable euro and real translations, higher planned expenses related to our Rigesa expansion and a planned outage at our Mahrt Coated Natural Kraft mill. While we are seeing continued strong demand in CNK for food beverage markets and reasonable demand in SBS for tobacco and liquid packaging grades, we are continuing to see weaker demand in our more economically sensitive product lines, including commercial print and office products. We expect SBS volume to be down low to mid-single digits and expect to take some downtime to tightly manage inventories.

We are executing well on our commercial excellence initiatives and do expect to benefit from improved product pricing and mix, as well as continued strong manufacturing productivity. These benefits will be partially offset by cost increases for raw materials and freight.

In Consumer Solutions, we expect segment earnings to be below last year. While we will benefit from improved pricing and mix, as well as productivity, demand will remain weak across key packaging markets in developed geographies including beverage, home and garden, and beauty and personal care.

In Specialty Chemicals, we expect modest segment earnings growth above the very strong performance we saw in 2011. Continued growth in higher value markets will be the principal driver of earnings in this segment, with some of these benefits offset by input cost inflation for raw materials.

In Consumer & Office Products, profit in the first quarter, a seasonally slower one for this business, will be down modestly from a year ago as we expect weaker retail sales in Brazil to impact the remainder of their back-to-school season. Regarding the spin merge transaction, ACCO recently received financing and we remain confident that it will close in the first half of this year. We will report C&OP as a discontinued operation when the transaction closes.

In our Land business, we expect the level of land sales to soften in the first quarter before improving in the second quarter. You may recall that last year, we benefited from the sale of our port servicing warehouse, as well as a large rural tract sale in South Carolina that together generated $27 million in segment earnings during the first quarter.

So with that, John, I'll turn it back to you.

John A. Luke

Mark, thanks very much. To summarize, we had a very good year in 2011, and we will build on the strong foundation we've laid as we implement our profitable growth plans for the next several years. We're already making progress by winning new business through commercial excellence efforts; developing and commercializing new products and innovative solutions; growing in emerging markets such as China, Brazil and India; expanding our participation with new capabilities and technologies; and improving the productivity of our operations through an ongoing operational excellence initiative.

Despite the continued weakness in the global economy due principally to ongoing developments in Europe, our continued execution in each of these areas reflects our commitment to achieving our long-term growth and earnings targets.

With this, we'll conclude our prepared remarks, and we'd now be happy to turn to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from the line of Phil Gresh, JPMorgan.

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

Just a couple of questions on the guidance. On Packaging Resources, you talked about the Mahrt outage, some potential volume downtimes. Any way you could quantify roughly how much do you expect that to be on a net basis?

E. Mark Rajkowski

Yes, the Mahrt outage is going to cost us around $10 million. Downtime, it's really going to be a function of where those SBS volumes shake out. And right now, as I mentioned, we expect them to be down somewhere between low to mid-single digits. So I don't have a firm number on that, Phil.

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

And then just on the volume side, obviously, the fourth quarter volumes were down roughly 10%-ish year-over-year. Now it's -- your outlook in the first quarter is down low to mid-single. Would you characterize kind of the difference between those 2 as the inventory adjustment that happened? And is this kind of the run rate you're actually seeing right now in January, kind of that low to mid-single or just kind of what are you seeing out there?

E. Mark Rajkowski

Phil, I'll start off and then Jim can chime in. But I do think that, certainly, our customers managing their supply chains and getting their inventories down exacerbated what we saw as weaker demand in the fourth quarter. We believe a lot of that, or most of that, is behind us and that certainly is part of what's driving that change in trajectory, if you will.

James A. Buzzard

I think the only thing that I would to add to that is, Phil, now there's point -- there's a series of data points but they're only date points, and there's not a lot of transparency with -- through our customers to their business. So I think we'll obviously be on top of it as the quarter unfolds, and we'll make sure that we're matching our output to our demand.

John A. Luke

I think that's right. Phil, it's John. I would just add to what Mark and Jim have said by saying that recognizing, as Jim reinforced, these are single-point data points based upon January's look at the marketplace to date against a cautious economic backdrop. But we're seeing modest upticks in most of the businesses at this stage. And by modest, again, I would go back to your single-digit range but at least coming back from Q4. And that's one not unsurprising, but it certainly is a positive data point.

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

Okay. And then just the last question. One of your peers this morning was talking about price declines in SBS. Obviously, it was reported by Reese [ph]. But maybe could you talk about your mix there because it sounds like you're still thinking of positive price mix for this business? So maybe just talk about what you're seeing and how you expect that to play out?

John A. Luke

Phil, it's John. I think that's a perfect question and it lets us, as Jim will address, point to our strategy and our approach toward managing the SBS business.

James A. Buzzard

Yes, Phil, obviously, we are aware of some reports to some lower prices around the margin. And it's not inconsistent with both the seasonality in the business, as well as some of the economically sensitive areas. But candidly, in the markets that we're playing in and the kind of products we sell, our broad pricing structure remains in place. And we have, I think, pushed to make sure we would cover inflation through price mix. We will continue to do that. And as I said, if there's any fall off in demand, we will continue to match our production to our demand signals.

Operator

Our next question is from the line of Gee Panjabi, Robert W. Baird.

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

On volume trends in Brazil, I'm sorry if I missed this, but did you quantify what volumes for Rigesa did and also office products in Brazil during the quarter?

James A. Buzzard

I would say, on the Rigesa side, the corrugated box business for the quarter was down very slightly but down a little bit. And on the back-to-school side, we're still waiting to see our the way through the end of the back-to-school season. So we were down certainly year-on-year there.

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

Okay. All right. And just moving onto the paperboard side. You mentioned share gains in CNK. Obviously, the beverage category is still weak overall. Was there any share loss in SBS that was noteworthy? And the 10% volume decline during the quarter that you referenced, how did that progress during the quarter?

E. Mark Rajkowski

Yes. Ghansham, in terms of SBS, there -- we believe there was some minor share loss in some of the general packaging markets but certainly, nothing in the key end markets that we're focused on.

Operator

Our next question is from the line of Mark Connelly, CLSA.

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

Two things. First, a question about the cap and closure part of the business. Is the mix effect that you're seeing in Europe worse than what you saw in 2008? I guess I'm wondering if there's any offsets or anything like Purell effect like we saw back then? Just trying to get a sense of whether this is looking like the 2008 thing or if it's substantively different. And then second, when you think about paperboard and converting businesses, is this quarter making you think any differently about the actual economic sensitivity of your business or is it really just because it's happened so fast to the businesses that are the most sensitive?

James A. Buzzard

Mark, this is Jim. I think going back to your question on the dispensing business. In Europe, I think it is different. We're seeing -- as you look at the end markets in home and garden, for example, we're actually doing quite well in Europe. The Spray Plast was a very nice acquisition for us with great technology that we're growing well with, and we're taking some share in that arena. In the personal and beauty care, it's a mix. So those places, the high-end, the prestige, fragrance and those sorts of things, those are down dramatically and not unexpectedly given the economy. In some of the more masstige end markets, we're doing quite well. So it really is more around economic sensitivity than anything else in the caps and closure business in Europe from our perspective.

John A. Luke

And we'll -- Mark, we will provide more information as we move through the quarter and we'll have a broader perspective. I think that's a great question. With respect to the second question, let me just offer the following thoughts and ask Mark and Jim to chime in. I think the short answer is no. I mean, we are very comfortable with the trajectory that we have been on, the plans that we have with paperboard, with converting. And our focus, as you've known over time, has been to continue to inquire about distinctive, profitable, attractive growth opportunities and that's what we're doing. And it's at times like these where there's a little bit of a shock in the marketplace. And you're seeing a bit more of a sudden reaction to that across the board in a range of industries the more we understand that it reinforces to us the merits of our strategy and the continued importance of redoubling our efforts to ever more insulate and differentiate our market possessions.

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

Okay, that's helpful. Just one more question. Mark, you usually talk about offsetting input cost inflation with productivity over the medium term. How about over the short term? Over the next couple of quarters, do you have enough high impact projects to feel comfortable about that? I mean obviously, your focus lately has been more on innovation than anything else.

E. Mark Rajkowski

Yes, Mark. When we think about input cost inflation, what we're really looking to do there is make sure that we can price for value and recover it in the marketplace in that fashion. We want to make sure that we continue to be as lean as and as efficient as possible. We have a great program that, under Jim's leadership, we rolled out across the company. And we have consistently targeted and has been pretty consistent in delivering 3% to 4% productivity this year, slightly higher than that. And we do expect to deliver 4% operating productivity again in 2012. So that has been and will remain an important focus for us.

Operator

Our next question is from the line of Mark Wilde, Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Mark, I wonder -- Mark Rajkowski, I wonder if we could start off by an update on the pension situation and what you might be looking at in terms of potentially pension income in 2012 versus '11?

E. Mark Rajkowski

Sure. As I'm sure you're all aware, the interest rate in environment has moved relatively dramatically, and the discount rates for most companies are going to be coming down substantially. And we're in that same boat, so we do expect a 100 basis point drop in the discount rate, which will do a couple of things: one, as you know, increase the size of the liability but also increase interest expense, which will reduce pension income. So pension income, we're forecasting to be down $20 million next year. And as you know, that's a non-cash item. And the plan, despite these changes in discount rate assumptions, is still significantly overfunded, and we have no future call on cash. So while it will impact the accounting in pension income next year, we're still very sound in terms of an overfunded position.

Mark Wilde - Deutsche Bank AG, Research Division

Excellent. All right. The second question, in Consumer Solutions, is it possible to give us just some sense of what Spray Plast did for kind of sales and operating income in the fourth quarter so that we might be able to see what the underlying business did x Spray Plast?

John A. Luke

We're not providing that break out. I think as we move, Mark, into the new segment reports, we can look to provide a bit more descriptive color on that business to try to get at some of the questions that you got.

E. Mark Rajkowski

Yes, it's pretty well-integrated into our home and garden business at this point. The income -- the EBIT effect was modestly accretive to the segment in the fourth quarter.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. All right. And then just stepping over to Packaging Resources, I wondered if you could just help us with the fourth quarter results, kind of unwind the cost of the Covington outage, both in terms of loss to volume and actual expense? And then give us some sense of what your market-related downtime was?

James A. Buzzard

Mark, this is Jim. I think if you think about the loss absorption of about $50 million for the quarter, roughly 1/3 of that was related to the downtime with the outage, and the other 2/3 is related to economic downtime.

Mark Wilde - Deutsche Bank AG, Research Division

You said $50 million?

James A. Buzzard

Yes, that's what we're showing on the slides.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. All right. And then last question, just in terms of the first quarter guidance that you gave us, Mark, and the terms of earnings, what kind of tax rate is embedded in that? Is that the 32%?

E. Mark Rajkowski

32%, Mark.

Operator

Our next question is from the line of Gail Glazerman, UBS.

Gail S. Glazerman - UBS Investment Bank, Research Division

Just kind of reconcile, I guess, the comments and what you seemed to be looking for in 2012 relative to the targets that you set out at the Packaging Day. I mean, are we just to think that probably you clearly missed the targets in 2012 but then have much higher than expected growth -- than targeted growth over the next couple of years?

John A. Luke

Yes, Gail, it's John. I think you've really answered that question. We're very committed to the 3- to 5-year target. As Mark noted in his comments, we certainly aren't expecting linear progress. We've laid the foundation. We expect to build on that foundation and lay an even stronger foundation as we move through 2012 when we feel very positively about those opportunities. I think on top of that subject to what happened and what is still logically a very cautious macro environment, some of that progress may be masked by demand trends in other parts of the business, but that no way diminishes our confidence in the merits of our strategy. As I commented with -- in response to Mark Connelly's question, it just reinforces the urgency and redoubling of efforts that we've put around it because that is going to be the key to the profitable growth ambitions and success that we fully expect to have over time.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And Mark, a quick question on the land guidance for the quarter. When you're talking about down, is that sequentially or is that compared to kind of the underlying normal performance last year x the large sale?

E. Mark Rajkowski

We're going to be relatively lower even -- if you look at our fourth quarter of '11 in terms of land sales, we expect some slowing from that level, a very modest level of land sales in Q1. And this is all a function of timing. We do expect that to pick up somewhat in Q2. So down from Q4 then -- and then back to a more normal range in Q2.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And Mark, there's been a lot of noise lately on fuel tax credits and treatment. I'm just wondering if you could give an update if any of the recent developments would affect MeadWestvaco and if there'd be any cash to come through?

E. Mark Rajkowski

Gail, you broke up a little bit on that one, I'm sorry.

Gail S. Glazerman - UBS Investment Bank, Research Division

Sorry. There's been a lot of new developments and noise on fuel tax credits. I'm just wondering if there's any kind of legacy potential benefits from recent rulings?

E. Mark Rajkowski

Not that we're aware of. That's certainly nothing we've got forecast in our plans, Gail.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just one last question, can you remind us of what your natural gas hedging policy is?

E. Mark Rajkowski

Yes, we hedge on a rolling basis through the course of the year. And at this point, we're more than 50% hedged in nat gas for 2012.

Operator

Our next question is from the line of George Staphos, Bank of America.

George L. Staphos - BofA Merrill Lynch, Research Division

I want to come back a little bit to the inventory reduction commentary and the macro overall. Coming out of the recession, the last one, what we saw in macro data, what we heard from companies was that inventory levels were being kept at very low levels relative to where they were prior to the last recession so that any future demand drop, if one arose, would be relatively modest. And I guess I'm asking, where in the supply chain do you think your customers had excess inventory where they were taking reductions, if you have that line of sight? And I guess the related question is, what do you think -- since so much of your key markets are driven by relatively stable growth consumer markets, what were your customers most reacting to in terms of drawing down inventory and reducing orders to you? And obviously, a lot about -- you have a lot of company in this, other companies in the industry, Europe, any specific factors within the U.S., I'd appreciate the color on that.

James A. Buzzard

Sure, George, this is Jim. Let me take a crack at that and look to Mark and John as well. I think you have to dissect the markets. And so clearly, in places like Europe, demand fell off more in the personal and beauty care markets where spending is more discretionary. And so I think we were reacting both to a falloff in demand, as well as fewer new product launches and things like that. In some of the other markets related to North America that may be more consumer-related, the consumer didn't pull their horns in. And I think it was a difficult environment. In the end of the third quarter, fourth quarter, we began to feel that falloff in demand more in November and December. And I think it really was our customers simply reacting to what they had seen a little bit earlier and tamping down their inventory. So I think you can always -- as things get soft, we've done the same thing to our inventory. You just continue to ratchet down harder and harder on it and make sure you're not coming into the new year with any excess inventory at all, and I think that's just what we're seeing.

John A. Luke

And I think -- I was just going to say and I think, just building on what Jim said, George, I think the fact that as we've punctuated, these are data points as opposed to anything that we'd call a trend. The fact that we're seeing in each of these areas modest upticks in demand speak to that very point.

E. Mark Rajkowski

And this -- while there's certainly some of the supply chain management going on, George, you're right. It's not at the types of levels that we saw back in -- coming out of 2008 going into that recession. So it's -- there are some of it but not nearly as dramatic.

George L. Staphos - BofA Merrill Lynch, Research Division

Yes, what I was getting at is to the extent inventories at the retailer store room as opposed to your customer room, so to speak, or warehouse, there's going to be a longer or shorter tail on whatever remaining inventory reduction is going to take place. But it sounds like -- you hope this is done by the second quarter, and you're seeing some improvement early on in January. I guess the related question I had, you're not going to make drastic reactions based on one quarter's demand trend and you're taking downtime, obviously, for the time being. But how do you feel about the flexibility in your manufacturing footprint, specifically within your bleach board system in the U.S.? Do you have the room if demand doesn't recover to economically further reduce production, or don't you?

James A. Buzzard

Let me take that and -- I mean, as we have in the past, we have the flexibility and we will react to the demand signals. So if our demand falls off, and I think Mark articulated that we would expect a low to mid single-digit decline in the first quarter, still better than what we saw in Q4, then we'll react to that. I think, as John said, at this point in time, again, while it's early and it's still January, we are seeing improvements over Q4. And so we're able to not have to do that.

John A. Luke

Yes, I think that's exactly right. And I think the reason we're cautious, and I'm sure others across a range of the industries are cautious, is that consumer confidence is the big question right now. And how that will influence demand as this quarter plays out, and as we move into the second, is something that we're all going to have to wait and see. And I think our customers obviously are managing their inventories tightly with that in mind as well.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Last 2 questions, I'll turn it over. I'll ask them in sequence. First, can you give us a bit of color on the size of the coffee -- retailer or coffee cup opportunity for MWare that you discussed earlier? And corporate expense, it wasn't up much year-over-year, as I recall. I mean, it's relatively flat. It was up sequentially. There may be some seasonal factors in there. Mark, what opportunity do you have to take corporate expense down over time on a more structural basis?

E. Mark Rajkowski

Let me get that -- the second part of your question, George. We were up quarter sequential. That's not unusual in terms of what we see relative to some of the typical true ups on accruals that we do in the fourth quarter. But also, what we saw in Q4 was an increase in our stock price. And that impacted the non-cash cost at both our equity plans, as well as our deferred comps. So that was $9 million or $10 million of that increase, some true ups in accruals. And we did see some increased investment in terms of both product innovation and our commercial capabilities.

John A. Luke

And George, with respect to your first question on the cup business, these are 2 important customers, and we're very excited about the potential. Let us get those ramped up, and then we can come back and provide good feedback on the progress.

Operator

Our next question is from the line of James Armstrong, Vertical Research Partners.

James Armstrong - Vertical Research Partners Inc.

Two quick questions. First, on -- in the CNK, I guess, segment, historically, you've said that you have about a 50-50 mix selling in the beverage carriers and other products. Is that mix between beverage carriers and other products changing? And if so, what would the new mix look like?

James A. Buzzard

I think it was -- As I said, historically, it's more like 65-35 between the carrier business for the beverage and the non-carrier. Our growth rate is faster in the non-carrier at this point in time, so a slight mix change but not dramatic.

James Armstrong - Vertical Research Partners Inc.

Okay, that helps. And then secondly, on your Analyst Day, you mentioned that mid-cycle Specialty Chemical margins were -- you saw them in the mid- to high-teens. Given the strength in that segment, have you altered your long-term outlook on this -- on that number? And in addition, are there any new products in the division that have come out recently that could have impact on earnings?

E. Mark Rajkowski

On the margins, we had continued to have strong margins in the fourth quarter. We expect to continue that type of trend into 2012. There's nothing on the immediate horizon that would suggest that won't be the case. And a lot of that is exactly at the heart of your question. It's all around innovation and new products and applications for our customers, particularly in oilfield services, adhesives and the asphalt marketplace. So we are expecting to maintain our margins primarily through innovation.

John A. Luke

I think that's right, and I would just add that innovation is really the hallmark of that business. They've done a bang-up job over time supporting specialized applications in each of the principle segments of that business, and that's the key to growth and the key to success as we've defined it.

James A. Buzzard

Yes. And maybe just piling on for a minute, I think, as you look at the pipeline, as John and Mark have both said, that ongoing pipeline, I think some of the nice things we're seeing now on the asphalt business I noted, as budgets are tight and states and countries and province move towards maintenance and repair, we've got new products that are flowing into that, that are doing very, very well. In the carbon arena, I talked about honeycombs that go on the hybrids. And as those markets grow, we've got a lot of opportunity for growth there. And then with the boom in the oilfield markets, we continue to launch new products. So lots and lots of opportunity for innovation and continued good performance in that business.

Operator

And our final question is from the line of Alex Ovshey, Goldman Sachs.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

A couple of questions. On SBS pricing first, as we know, one of the trade publications modestly brought down their price number for January. Can you comment if any of your business is linked to that publication or any publication, whether you expect to see a negative follow through because of that decline in the list price?

James A. Buzzard

No. Unlike, I think, some of the corrugated volumes, we don't participate in the SBS market. We're not linked to a price like that.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Okay, very helpful. And second, as I look out to China, a number of the local paper producers out there are very aggressively committed to expanding coated ivory board capacity. Can you comment on whether you see coated ivory board as a competing product to SBS globally and whether you're concerned about the capacity expansion that's happening out there in China in coated ivory board?

John A. Luke

Alex, let me just comment for a moment and invite Jim and Mark to follow up. I think the expansion certainly reflects the underlying growth trends that are underway in that market. They are substantial. And clearly, given choices customers have, any kind of paperboard can be viewed and must be viewed as a competing product. That said, our positions that have been built up and are very attractive are highly valued in the tobacco and liquid packaging markets. And we were seeing good growth there, and we're working hard to not only maintain those positions but to grow those positions with good service and good quality.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

And just last question, if I may. Just the weakness that you're currently seeing in the commercial print, as well as general packaging and use for SBS, can you just give a little bit more color around where specifically you're seeing that weakness? Because what I struggle with, as I look at corrugated box shipments, they've been pretty resilient through the fourth quarter. And intuitively, it seems that corrugated box should be more economically sensitive than SBS but that's not playing out. So really the question is, in some of those end markets like commercial print, are there secular -- negative secular trends that you're fighting against that may be driving some of the volume weakness?

James A. Buzzard

This is Jim. I think, in terms of breaking them apart, commercial print, clearly, if you look over the last several years, there has been some secular decline in the advertising markets and others as digital advertising takes over. Having said that, we have what we believe is the leading product in the marketplace. We've been taking share. And while we were down a little bit in Q4, we have been growing in that business through the course of the year. In terms of general packaging, again, I think it goes back to what we said earlier, which is certainly some impact from the supply chain as people move to reduce their inventories and balance themselves out as they came at the end of the year. And as John noted, we're seeing some signs of improvements here in January, and so we don't see any secular decline at all in those markets that we serve. We think it's certainly a temporary situation around economy and supply-chain adjustments that are very positive for the long term.

Jason Thompson

All right. Kevin, let's wrap it up. Thanks everyone for joining us today, and I look forward to getting together with you next quarter. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude your conference. You may now disconnect. Have a good day.

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