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MeadWestvaco Corporation (NYSE:MWV)

Q4 FY07 Earnings Call

February 01, 2008, 10:00 AM ET

Executives

Jason Thompson - Director, IR

John A. Luke, Jr. - Chairman and CEO

James A. Buzzard - President

E. Mark Rajkowski - Sr. VP and CFO

Analysts

Claudia Hueston - JPMorgan

Gail Glazerman - UBS

Mark Weintraub - Buckingham Research

George Staphos - Banc of America Securities

Chip Dillon - Citigroup

Mark Wilde - Deutsche Bank Securities

Peter Ruschmeier - Lehman Brothers

Operator

Ladies and gentlemen, thank you very much for standing by, and good morning. Welcome to MeadWestvaco's Fourth Quarter 2007 Earnings Conference Call. At this point and during management's prepared remarks, we do have all your phone lines in a listen-only mode. However, later there will be opportunities for your questions. [Operator Instructions].

So with that being said, let's go right to the fourth quarter agenda. Here with our opening remarks is MeadWestvaco's Director of Investor Relations, Mr. Jason Thompson. Good morning, sir, and please go ahead.

Jason Thompson - Director, Investor Relations

Thanks, Brent. Good morning, everyone. This morning we announced our results before the market opened. The notification of this morning’s call was broadly disclosed. Further, this morning's call is being webcast at meadwestvaco.com and slides that accompany this call are available there as well.

I'll briefly remind you that certain statements we make may be forward-looking and are not guarantees of future performance and are subject to known and unknown risks and uncertainties described in our public filings. Furthermore, contents contain time-sensitive information that although correct today, may change with the passage of time.

First a brief recap of the results we reported this morning. For the fourth quarter, we reported a net income of $148 million or $0.82 per share. Included in the results are after-tax restructuring and one-time cost of $29 million or $0.16 per share and an after-tax gain of $102 million or $0.56 per share from the forestland sales.

Now, here to tell you more about our results for the fourth quarter and full-year are John Luke, Chairman and CEO; Jim Buzzard, our President; and Mark Rajkowski, our CFO.

I will now turn the call over to John.

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

Jason, thanks very much and good morning. MeadWestvaco delivered another year of sales, earnings, and cash flow growth in 2007. Our continuing progress demonstrates that our global packaging platform is delivering value for our customers and is helping to generate higher returns for shareholders.

At the beginning of last year, we made several commitments to our shareholders and we fulfilled them. We said we would focus on profitable growth and deliver another year of improved earnings. The result, sales in 2007 grew by 6%, including market share gains in some key categories, and profit from our business segments increased by $38 million or 7%. We said we would improve our working capital’s performance and reduce our cost structure. The result, cash flow from operations increased to more than $630 million and we continue to improve our G&A performance.

We said we would develop a sustainable business for our valuable forestland holdings and return value to our shareholders. The result, we announced the formation of our Community Development and Land Management Group and completed phase one of our ongoing strategy by auctioning nearly 400,000 acres of forestlands and returning $400 million of proceeds to shareholders in the form of a share buyback.

We said we would have a relentless focus on execution across our company. The result, we operated well, given many challenges in our businesses and in the broader economy including a steep rise in input costs. In addition to these commitments, we made important promises to our customers and backed them up with actions that enhanced our ability to solve their packaging challenges, serve their needs in key growth markets around the world, and help to shape their brand images for consumers.

We also took a number of decisive strategic actions this year to continue to build a packaging platform that differentiates MeadWestvaco in a global marketplace and deliver long-term value for shareholders. For instance, we opened a new world class packaging facility in Wuxi, China. As this plant ramps up, demand continues to build from customers who are positioning themselves for growth in the Chinese marketplace and across Asia. We acquired Keltec Dispensing Systems and Hayes Products to augment our primary packaging offerings. The integration of these bolt-on acquisitions has been smooth, and their innovative solutions have helped to enhance our relationships with key personal care and home and garden customers. And we signed an agreement with Klabin, Brazil's large paperboard manufacturer, to enhance our industry-leading paperboard line-up. This long-term commercial and marketing partnership with one of Brazil's leading companies gives us an even stronger platform for additional growth in both new and existing global markets. We also signed agreements to license our Natralock security packaging technology, continued to build our growing healthcare adherence packaging business, and doubled our tobacco packaging business in China.

Overall, our revenue growth in emerging markets this year is nearly 15%, and we generated 50% of our packaging revenue from outside of North America. With these strategic actions, we have made significant progress shaping a strong, innovation-based global packaging platform that enables us to compete and win in our targeted markets, managing well in an uncertain economic environment. This is the essence of our profitable growth strategy, one that builds upon our already strong and diverse market positions by focusing on targeted growth through innovation and expansion in emerging markets and through increased productivity. As we continue to differentiate ourselves in the marketplace and build brand value for our customers, we are enhancing MeadWestvaco's ability to deliver higher returns and long-term value for our shareholders. Even in the face of some economic uncertainty, this strategic focus gives us confidence that we can continue to make meaningful progress along the course we have chartered for profitable growth in our business.

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

James A. Buzzard - President

Thank you, John. John underscored our solid performance as a company during the year, and I'm pleased to say that it was largely a result of our actions to build a packaging platform and our focus on execution. We did well to deliver improved profitability and significantly higher cash flow in a challenging environment of rising costs, and more recently an uncertain economic outlook.

The Packaging Resources Group made the largest contribution to our 7% increase in business segment profitability this year, and the Consumer & Office Products segment also delivered solid improvement in an intensely competitive market. On the other hand, our Consumer Solutions and Specialty Chemicals segments did not perform to our expectations.

The fourth quarter story largely mirrors the story for the entire year. Again, the Packaging Resources Group delivered solid profit improvement. However, lower results in our Consumer Packaging business and Specialty Chemicals contributed to an overall $6 million decline in profitability for our business segments compared to last year. Let me discuss these results for the fourth quarter in more detail as well as some of the ways we are applying our profitable growth strategy for each of our businesses. As usual, you'll find detailed information for all of our business segments in the slide presentation that accompanies this call.

The Packaging Resources segment delivered its sixth consecutive quarter of strong profit growth, capping an outstanding year in which this segment improved profitability by $47 million. Segment profit margins also improved to 10.7% in 2007, a major accomplishment considering the input cost environment facing this business. During the fourth quarter, segment profit increased by 19% compared to the prior year. We drove improvement to the bottom line through pricing actions, productivity improvements, and enhanced product mix, which together more than outfaced historically high input costs.

In general, we have been actively managing our paperboard grades to ensure the production and shipments align with most profitable opportunities. This focus on increasing market share for high value grades resulted in slightly lower overall volumes during both the quarter and the full year. During the year, we doubled our volume in China of high-value tobacco packaging by owning market share for premium brands, and we continued to grow share for Coated Natural Kraft in general packaging markets. And entering 2008, backlogs are steady for this time of year. Rigesa, our Brazilian business continues to deliver strong performance. Excellent volume growth driven by strong local markets and improved pricing in the second half of the year contributed to a full year of very positive results.

In our Consumer Solutions segment, we recorded key commercial successes during the quarter, including share gains in some markets we have targeted for global growth, including beverage, healthcare, and personal care. We also further improved our competitive position with the gross investments to expand both our packaging capabilities and our global footprints, including the Wuxi facility and the acquisition of Keltec and Hayes. However, an overall increase in segment sales this quarter did not translate into better profitability.

Much of the fourth quarter decline in the profitability of our Consumer Packaging business was due to steep rises in input costs and competitive pressure in our media business. About one-third of our annual input cost increases hit during the fourth quarter, including increases for critical raw materials such as resin, steel and paperboard. We are benefiting from contractual escalators, but our pricing still lags behind continued steep rises in input costs. We will respond to rising input costs through additional pricing actions and productivity initiatives. This includes measures that will lower our cost base, improve our supply chain, and deliver efficiencies throughout the organization. In addition, earnings were impacted by some one-time costs for Wuxi, Keltec, and Hayes. These one-time costs are behind us and the investments that we have made along with our commercial momentum and disciplined pricing actions will contribute to a rebound in margins in 2008.

Taking a closer look at each of our markets in Consumer Solutions, demand remained solid in our beverage business. We had good growth during the fourth quarter as markets remained strong in Europe and we picked up new business in Asia. We met the strong customer demand by rebalancing our supply chain, which maximized our cash position, but had a negative impact on profitability during the quarter. Moving forward, we expect to improve profitability in our beverage business by accelerating growth in emerging markets and further leveraging new product initiatives. For instance, we continued to make share gains with our Coated Natural Kraft solution as an alternative to corrugated packaging. Global beverage customers such as Anheuser-Busch and Fosters value the operational efficiencies and printability of our solution for glass bottle packaging. Despite a tremendous effort over the past year to optimize and stabilize our media business by reducing costs and regaining shares of specialty packaging, profitability was still lower because of competitive pricing pressure in the marketplace.

Traditional printed packaging for music still in decline, but we gained share in specialty DVD titles and video game releases. We've built valuable partnerships with some of the largest film and gaming companies in the industry. As an example, our designers now work onsite with EA Sports in an arrangement to deliver significant savings and enhance long-term collaboration. But there are still intense cost and price pressures in this business. As such, we will have to continue to win share with new products and distinctive design capabilities along with ongoing productivity actions to drive profit improvement in our global media business.

We serve the healthcare and personal care markets with both our visual packaging and folding cartons solutions, as well as dispensing and sprayer technologies. Fourth Quarter sales in our healthcare business were up double digits compared to last year and we expect this momentum to continue in 2008, especially as we drive revenue through our shell pack supply agreement for Wal-Mart's Prescription Drug Program and as we continue to increase sales of our pharmaceutical pumps for over-the-counter cold medicines.

Personal care is another market we have targeted for growth around the world, including our solutions for cosmetics, hair coloring, fragrances and lotions. We are winning new business with customers such as Procter & Gamble, and we've seen strong sales increases for high value fragrance pumps in Europe. In addition, we've added capacity to serve Chinese markets from our Wuxi facility, and we augmented our product line with Keltec's airless and foaming technologies. We're are just beginning to gain traction from these investments, and we expect further progress as we move through 2008.

In Consumer Solutions, we can clearly do better. Our existing market positions remain strong and we are gaining share by delivering innovative and distinctive packaging solutions for our customers. This year, we expect to build on this momentum in the marketplace and significantly grow our topline by capitalizing on opportunities to leverage our investments in expanded global packaging capabilities in beverage, healthcare, and personal care markets. Specifically, we will look for growth from Keltec's innovative product line as well as Natralock, shell pack, and Calmar solutions for the personal care and healthcare markets. In addition, we have productivity plans in place that will ensure that we capture more of that growth through a competitive overall cost base, including manufacturing, supply chain, and sourcing initiatives as well as G&A reductions. We are still going to see rising input costs overall and some pricing pressure in the media business. But we are confident that we can overcome these challenges with our growth and productivity plans for the Consumer Solutions business.

Turning to our non-packaging businesses, results for the Consumer & Office Products segment were flat during the fourth quarter, but they recorded a strong year of profit growth in a very difficult marketplace. The environment for Consumer & Office products is challenging with retailers reporting slower customer traffic and weaker sales late in 2007. However, we are performing well by continuing to focus on innovative, brand name, proprietary products, and by executing with our retail partners. In addition, our Brazilian business is growing nicely with a strong product line that is selling well to the consumers, and we look for good sell through to consumers in the next two weeks. As a result, profits in the Consumer & Office segment were up 9% for the entire.

The fourth quarter results for Specialty Chemicals were similar to what we've been talking about all year. We delivered pricing and product mix improvements that significantly outpaced cost inflation, even with many raw material prices hitting record highs during the quarter. And while sluggish U.S. auto and housing markets continued to have an impact on sales, we are winning some share in paper chemicals and seeing opportunities to grow our carbon business in non-automotive markets.

Overall, profitability for Specialty Chemicals was down for both the fourth quarter and for the full year. However, we feel good about the trajectory of our operational performance and expect to deliver earnings improvement in the first quarter and beyond. Overall, we have substantial opportunities for profitable growth in our global packaging platform and other businesses. We will achieve our goals by executing on our strategy to deliver innovative products to the marketplace through our business in key end markets and emerging economies and increased productivity to help fund our plans for global growth.

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

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

Thanks, Jim. In 2007, we delivered improved results for shareholders and executed on strategic initiatives that enhanced our competitive position in the global packaging marketplace. In addition to generating better earnings, we returned value directly to shareholders through our strong dividend and substantial share repurchases.

Adjusted earnings per share for 2007 grew 9% to $1.09 per share, which excludes restructuring and one-time items and the large forestland gains. As important, our cash from operations was excellent. At over $630 million for the full year, cash flow from operations showed solid improvement from last year's level of $567 million. We improved our cash performance by delivering better earnings and reducing working capital by almost five days or 7%.

Now, turning to the income statement for the fourth quarter, I will highlight a few key items. Our topline grew at 4% versus the prior year. All of the business segments except Consumer & Office Products, showed increased sales year-over-year, primarily due to price in mix gains and positive foreign exchange. While volumes were slightly lower across all business units, the main volume impact in the quarter was driven by our decision to de-emphasize some commodity paperboard grades in favor of more profitable business and by our ongoing emphasis on proprietary branded products in the Consumer & Office Products business.

Our gross margin in the fourth quarter, adjusted for restructuring charges, was $334 million or 18% of sales, which is 130-basis point decline compared to the year ago quarter. This decline was the result of $40 million of higher input costs across all of our business units, costs associated with starting up our two new lines in Wuxi, China, as well as higher costs primarily associated with reduced manufacturing overhead absorption. Late in the quarter, in response to a slowing U.S. economy, we began to slow production to minimize inventory levels heading into 2008. Partially offsetting these negative impacts were price and mix improvements, primarily in our paperboard products, as well as positive foreign exchange. As you've no doubt heard and read, we are pursuing additional price increases to offset cost inflation, which we expect will continue to be a significant headwind in 2008.

Our SG&A progress continued during the quarter. Adjusted to exclude about $11 million in restructuring and one-time cost, SG&A in the most recent quarter was about $215 million or 11.6% of sales, down 50 basis points from last year. Cost reductions we enacted as part of our G&A transformation more than offset the increases due to acquisitions, inflation, growth investments, and higher foreign exchange.

We had good momentum in the fourth quarter on our cost initiatives, achieving an additional $29 million in run rate savings in bringing our cumulative savings from this program to $190 million. These cost savings are the result of our efforts to continue to expand the scope of our global shared services business model, reduced redundant infrastructure costs in our businesses and corporate departments, and from the additional consolidation of warehouses in our distribution network. With these actions and others, we have eliminated 165 positions in the fourth quarter, bringing the total to about 1200 position since the start of this program.

While we made good progress on G&A cost in the fourth quarter, we know that we've much more to do to achieve our target of 10% SG&A as a percentage of sales. While we will continuing to invest in and grow our topline, we will also continue to reduce G&A cost by implementing our shared services model in Europe and Asia, and continuing to consolidate redundant infrastructure and supply chain cost.

Fourth quarter adjusted earnings before interest and taxes were $134 million, a 7% decline compared to the fourth quarter of 2006. Improved performance in the mill business was more than offset by declines in the Consumer Packaging and Specialty Chemicals businesses. We also had approximately $4 million of lower small-track land sales in the fourth quarter versus last year.

Before turning to the outlook, I want to briefly review the highlights of the forestland transactions. In the fourth quarter, we completed the sale of 323,000 acres of owned and leased forest lands bringing the total gross proceeds from our timberland sales to $493 million in 2007. I'd be remiss if I didn't acknowledge the people who worked directly on these transactions. That team did a tremendous job of executing these deals, monetizing the proceeds in a very timely and tax efficient manner in what can only be described as an extremely challenging capital markets' environment.

With net proceeds of $400 million, we executed an accelerated share repurchase agreement in the fourth quarter, delivering on our promise to return all of the forestland proceeds to shareholders. Through the end of 2007, we received and retired 11 million shares or 6% of our total shares outstanding. By the second half of 2008, we'll see the full benefit of this collared repurchase program under which there's a potential for a total of 14 million shares to be returned and retired.

Now, I'll provide our perspectives on the year ahead and a more detailed look at the first quarter. Entering 2008, the U.S. economic landscape is unclear and we've little visibility beyond the first quarter. However, we do have good confidence in our ability to continue to improve our competitive position in our global packaging markets through this uncertain economic environment as we leverage the investments we've made this year to strengthen our global packaging platform. The acquisitions of Keltec and Hayes and the startup our new operations at Wuxi augment our already strong packaging capabilities and presence outside the U.S., and we also have new products to introduce in some of our targeted markets that will help drive growth and margin improvement. Finally, we are committed to delivering ongoing annual productivity improvement of at least 3% per year.

Now, turning to the first quarter. As many of you know, it is our seasonally weakest quarter and we typically post a breakeven performance. Starting with the mills, backlogs are seasonally solid. We're also continuing to pursue price increases to offset the ongoing negative effects of inflation. However, with a $10 million to $15 million negative impact of scheduled maintenance downtime at our Mahrt and Evadale mills during the first quarter, we expect overall segment profitability to be about even with year-ago levels.

In the Consumer Packaging segment, we are expecting segment profit to improve quarter sequentially, but be flattish compared to year-ago levels. We are monitoring the impact of the slowing U.S. economy on our lines of business. However, we do expect volume growth outside the U.S. where market demand has been strong, particularly for personal care and healthcare packaging solutions. In addition, the ramp-up costs for Wuxi and Keltec are largely behind us, and we are expecting to begin recouping raw material costs including resin and steel through contractual price increases.

In the Consumer & Office Products segment, we expect segment profit to be slightly above year-ago levels. We expect improvements from a strong back-to-school season in Brazil as well as a continued shift of sales from time management products into the first quarter.

For the Specialty Chemicals segment, we expect strong year-over-year improvement. Pricing and productivity improvements will more than offset lower volumes from the weak automotive and housing sectors.

With that, I will turn it back to John.

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

Mark, thanks very much. As we delivered on our commitments to shareholders in 2007, we strengthened the financial position of our company and continued to build a competitive global packaging platform with the right capabilities to serve our customers wherever they do business around the world. As economic uncertainty continues to mount, we believe that the strategy we are pursuing including enhancements to our global business mix will position us well for profitable growth in 2008 and beyond.

Now, we will be happy to address whatever questions you may have. Brent, back to you.

Question and Answer

Operator

Indeed, well thank you very much Mr. Luke and our host panel for that update. We do appreciate that. [Operator Instructions]. Representing JPMorgan, our first question, we go to the line of Claudia Hueston. Please go ahead, ma'am.

Claudia Hueston - JPMorgan

Thanks very much, good morning.

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

Good morning, Claudia.

Claudia Hueston - JPMorgan

Just a couple of questions on the Consumer Solutions Group. First, I was just hoping that you could quantify the impact of a startup and one-time costs that you referenced at Wuxi and Keltec?

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

Yes, Claudia. The combined impact of both of those was roughly $5 million to $6 million.

Claudia Hueston - JPMorgan

And they pretty much go away then in the first quarter?

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

Yes, for the most part. Some of that was purchase accounting and some of it was just the first startup of our manufacturing facility in Wuxi.

Claudia Hueston - JPMorgan

Okay. And then just thinking about sort of margins going forward I guess sort of two questions; one, just how much of the business is on escalators and sort of what are the terms of those pricing escalators with regard to raw materials? And then I think you've talk before about sort of wanting to get like a 5% kind of margin level as sort of your stage one recovery in that business. How should we think about that time frame in terms of getting there as we look to 2008?

Jason Thompson - Director, Investor Relations

Mark or John will take that.

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

Or James.

James A. Buzzard - President

I will address the first one, Claudia, in terms of the escalators of price increases and turn it to Mark on the second half. In the Consumer Solutions business, most... all of our contracts around Calmar have resin escalators in them and there is obviously a lag, so we get the price increase. We are now out implementing those price increases as we speak. We are also looking for more than what those escalators called for to make up for the steel increases as well that we've seen in those product categories.

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

Yes, as far as the margin improvement, Claudia, you are absolutely right. We are still targeting that 5% as the first step. We will see margins improve quite sequentially in this first quarter and certainly we expect to be at that 5% level as we get towards the second half of 2008.

Claudia Hueston - JPMorgan

Thanks. That's really helpful. And then just finally on the tax rate, it’d moved around a lot in 2007. How should we think about it for 2008?

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

2008 we are thinking to be somewhere around 30%... 28% to 30%.

Claudia Hueston - JPMorgan

Okay. Thanks a lot.

Jason Thompson - Director, Investor Relations

Thanks, Claudia.

Operator

And thank you very much. Next representing UBS we go the line of Gail Glazerman. Please go ahead.

Gail Glazerman - UBS

Hi, thank you. Just staying on the Consumer Solution business for a minute, it was obviously a huge swing from your forecast. You talked about the different issues. I am just wondering if you could say what your biggest surprise was? Was it the $5 million to $6 million in startup cost relative to your outlook last quarter or was it the inflation?

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

Yes, let me start off. I think, previous... probably one of the biggest parts of that was input cost. We thought it would be higher… it was even higher than we expected. The other part is we did… as we looked out into 2008 we wanted to make sure we cleaned our inventories as much as we could, particularly in our beverage business. We sold a lot out of inventory and we took some downtime in our converging facilities and that also impacted our profitability. So those were probably two of the biggest effects. We also saw a little bit more softness in the home and garden market, particularly around one of our largest customers that we expected to see a little bit more of a bounce-back and it just didn't happen.

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

Thank you. If I could just punctuate a point that both Mark and Jim have made, I think the input cost question given the inflationary pressures we are seeing here and across the board are substantial and even where we do have opportunities for immediate pass-through of these costs, there is an inherent lag effect associated with that. In some cases there is negotiation, but even where we have a contractual agreement to pass it right on through, there is just a bit of a lag. And so I think as you look at all of that understanding that we are restless with... and we are driving across the board to ensure we pass these increase through ever where we don't have immediate pass-through right, but there is inherently a lag associated with that.

Gail Glazerman - UBS

Okay. And I guess staying on that business, it looks like we are starting this year winner in the HD, like DVD versus BluRay battle. At this point do you think it's just too late to make a difference or are you seeing any signs of that in your orders?

James A. Buzzard - President

Gail, this is Jim. I think clearly we are well positioned with BluRay with the package of choice with them. So we are obviously very excited about that. We think that there will be growth as result of that, but it's still pretty early in the process and so I think we will see that… as we go to 2008, we will see some positive benefit, but it's awful early right now.

Gail Glazerman - UBS

Okay, and just one final question. In terms of Consumer & Office, you’ve had a lots of pressure from imports over the last few years. I am just wondering if you are seeing any changes in the market, for instance, I think the Chinese markets are starting to tighten up a little bit, are you seeing any of that flowing into your business?

James A. Buzzard - President

It's a little early for us to see that here. We'll get that in our back-to-school business is when we will really get a clear indication of that and that's probably early Q1, early Q2. But I think to your point we've seen pressures over the years in the commodity part of the business. The branded proprietary products continue to do very well in the marketplace and we’ve invested in those, but we are seeing and hearing of some cost increases coming out of China and we think that will... that may benefit us going forward.

Gail Glazerman - UBS

Okay. Thank you.

Operator

And thank you very much. Next, representing Buckingham Research we’ll go to the line of Mark Weintraub. Please go ahead, sir.

Mark Weintraub - Buckingham Research

Thank you. Now that you’ve had Calmar under your belt for a full calendar year, can you share with us how that performed relative to your expectations and where that's going at this juncture?

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

Mark, let me start it off and then Jim can add any points I've missed. But I think... fourth quarter, obviously there... we made some investments in… for Keltec and in Wuxi that had an impact on our profitability, high raw material cost, but as we look at the fundamentals of this business going forward, we continue to be very bullish. That business grew in the fourth quarter 12% year-over-year on the topline. We have made investments to continue to grow in some key end-markets like personal care. And we've also taken some share in a couple of key markets including fragrance. And in the fourth quarter, our fragrance business was up 17% year-over-year, our pharma business was up 40%. So we feel very good about the fundamentals and really the reason we acquired Calmar, which was to drive growth in our Packaging business at very good margins.

James A. Buzzard - President

Maybe just building on that a little bit, as Mark said we like the markets, we like the opportunity to create unique and distinctive products, and that's really what is fueling the growth that we are seeing. We're very excited about the new product pipeline that exist today, and things we’ll be rolling out in 2008, and the addition of Keltec and Hayes gives us new technologies to enter adjacent markets as well. So in many respects, as Mark said, a tough year, but the fundamentals of the business and fundamentals of the markets keep us very excited about the opportunities for this business going forward.

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

Yes. And Mark, it's John. I might just add briefly to what Mark and Jim have said and say that strategically this business remains spot on in terms of our commitment, our sense of the opportunities here. Quarter does not in any way make a trend and we understand what drove some of the issues in that business, but as we look out at the global opportunities, as we look at the opportunities we see not only here, but the opportunities for [inaudible] for growth in the personal care and healthcare markets around the world, and we look at the quality of the underlying team leading Calmar, we're very bullish on the future.

Mark Weintraub - Buckingham Research

Were the biggest issues just that you have the import cost pressure and that there is a lag in your ability to get that through to pricing for the Calmar business specifically or were there other things as well that have to be rectified?

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

That's the principal issue that has impacted results, Mark.

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

That was the biggest issue, and we ramped-up Wuxi in the fourth quarter as well.

Mark Weintraub - Buckingham Research

And so, do you have visibility on getting that pricing that will offset the input cost, or is that something that is a give-and-take battle and you hope to get there, but you don't really have visibility on it?

James A. Buzzard - President

We've got… Mark, we've got good visibility on it. We track it account by account. We talk about it on a very regular basis, and we're out in the marketplace pushing that right now and we feel confident that we will see increased pricing as a result.

Mark Weintraub - Buckingham Research

Two other quick questions, one, East Edisto, I know you'd hoped to originally have the plan in place by year-end. Obviously, conditions have been difficult and there is always process involved. Where does that stand right now?

And second, just in curiosity, when you say that you had 11 million shares have been... I can't remember the specific language you used, but have they actually been purchased in the marketplace by… I guess it is Goldman who's doing the buying for you, have those shares actually been purchased from the marketplace yet?

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

Mark, let me answer the first and then I'll turn it to Mark Rajkowski for the share purchase question. I think the East Edisto progress continues to be good. We're working hard to develop the preliminary master plan and putting the finishing touching on that. Lag maybe the operative word of the day. We've got roughly about a quarter lag in terms of the timing. We would expect to have the next round of public presentations on that later this winter and no later than the early part of the spring. Mark?

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

Yes, and as far as the stock buyback to this accelerated share repurchase program, what happens is we go out with the bank and they borrow the shares and then take them out of the market, but then buy… physically buy shares over the next number of months, which will probably take us through May or June of 2008. And we've got this transaction collared. We have an immediate 11 million shares that are in essence off our books for accounting purposes. And we expect that as we close out this program that the full benefit could be up to 14 million shares.

Mark Weintraub - Buckingham Research

So have those 11 million shares has been physically repurchased at this point or not necessarily?

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

They are in the process of being repurchased.

Mark Weintraub - Buckingham Research

Okay. Thank you.

Operator

And next we’ll go to the line of George Staphos representing Banc of America. Please go ahead.

George Staphos - Banc of America Securities

Thanks. Hi, everyone. Good morning.

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

Hi, George.

George Staphos - Banc of America Securities

The first question I had just with tax resources going from the fourth quarter to the first quarter, you'd mentioned I think $10 million to $15 million of downtime with an EBIT of negative variance sequentially. Are there any other factors that you mentioned and can quantify, that take us from 4Q to 1Q as you see it?

James A. Buzzard - President

George, no. It is related to a maintenance outrage that we did not take last year in the first quarter, but we'll take this year in the first quarter, and that comprises the number that Mark referenced in terms of our holding of price, volumes, other thing we feel very good about the business as we go forward.

George Staphos - Banc of America Securities

Yes. Well, I guess the question I have, if you did about 80 million this quarter, and last quarter if I'm not mistaken you did about… last year's first quarter you did about 55 million, we’d accounted for about half of that drop off. What else is there? Is it just seasonal volume, although I thought that would be incorporated in the downtime? Is there anything else that could be a driver of the variance in the EBIT?

James A. Buzzard - President

No. I think Mark's reference was Q1 of last year to Q1 of this year in terms of the $15 million variance. Normally, the first quarter tends to be a little bit slower for us and we would expect to see that this year. But fundamentally, nothing different from year-on-year comparisons to quarter one.

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

Yes, George. And I guess I would just punctuate the fact by saying that here and around the world the business tone is positive and the pricing trends are positive as well.

George Staphos - Banc of America Securities

Okay, I appreciate that. If we go back to consumer solutions, are there any points in your key attributes for the businesses that you aspire to that you think you are may be behind the curve on? Said differently, how would you rate Consumer Solutions total on R&D design, [inaudible] average on commercializing the technology? How do you think you stand relative to some of your peers within the Specialty Packaging industry [inaudible] as you have?

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

George, it's John. Let me offer the following comments. I think we are very bullish on the opportunities we see, particularly in the targeted areas of personal care and healthcare. As we look at ourselves and understand what has influenced our performance both on the primary and on the secondary packing side during the past few months, notably in the fourth quarter, stripping all of that away, I think that while we've made progress we had not made as much progress in those segments I referenced, most notably personal care and healthcare, and we have not leveraged the design and innovation potential that we have in our pipeline successfully as we might. That said, those are always areas that in this business one has to do better and better to achieve the levels of performance that really winning is all about and that's going to be the area of concerted focus in this organization as we move through the coming 12 months.

George Staphos - Bank of America

Okay. Do you think the value that you provide for the terms of pricing, whether contractual or just your general business within those specific segments of businesses, is similar to what again your competition sees and provides to the market or do you think that you maybe somewhat at a disadvantage at this juncture either on contracts or some other way that you go about going to market?

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

It's hard to get total visibility in all of those issues, George. Let me answer it this way. I think value that we bring and certainly are capable of bringing if we leverage our design and innovation platform as rigorously as we might gives us an opportunity to improve that value equation, given what we will be bringing to the customers. And consistent with our drive to leverage more innovation is the desire to... the imperative to get paid requisite value for that pricing structure.

George Staphos - Bank of America

I mean the reason I obviously asked the question is, of the other Specialty Packaging companies that I cover, they all have gone through input cost pressures, they are all in various stages of expanding their business from time to time and candidly I don't have one that is at a 2% margin or 5% margin for that matter at the present time. So I would argue that either there are some issues that you are working through on the marketing side and contract side or there are some issues more structurally within your business, either there is some piece of your portfolio that perhaps shouldn't be there given the other strength that you have. How do you see it at this juncture?

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

Well, let me answer at this way. I think you’ve hit on some key issues, which reinforced us as we look at ourselves and look at what others are doing in other parts of the Specialty Packaging business. There is upside that we are not adequately leveraging by doing all of the innovation work that we can. If we look at things that have influenced the margin, again I will go back as well and point to a couple of the other key issues that are influencing thing, one, media as Mark mentioned and Jim mentioned, a significant portion of that overall equation is what we have seen during the year even though revenues come along [inaudible], revenues relative to historic norms has not been as attractive and there has been margin squeeze there, which has taken the overall down. And then you layer in some of the issues that we've talked about, most particularly influencing Calmar [inaudible] impact as well. I think that the fundamental though is building a higher quality position premise on innovation and in the healthcare and personal care markets that we've targeted and leveraging the growth that exist and is reinforced even in the most recent year-end results published by important customers like Estée Lauder, Procter & Gamble and others. Their international growth potential is what they site as the most significant and we've got to be right there with them.

James A. Buzzard - President

And George, I'd also say that we're not happy with our… certainly where our operating margins are today. As we move through this past year up through the third quarter, we had made steady improvement heading little bit north of 4% in the third quarter. We took some hits in Q4, whether it was high raw materials, but also some investments we made in Wuxi, in Keltec, and I think what we feel very good about is that those investments that we did take a hit for in the fourth quarter position us very well for the type of profitable growth that we see to get us to that 5% and beyond in terms of our operating margins.

George Staphos - Bank of America

Okay. I appreciate that. We will pick it up with some other point, but good luck in the quarter guys.

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

Thanks, George.

Operator

And thank you very much, Mr. Staphos. Next in queue we've got up a line of Chip Dillon with Citigroup. Please go ahead sir.

Chip Dillon - Citigroup

Yes, good morning. Just a couple of house keeping things, where did your share count at the end of the year and where do you see CapEx being in 2008?

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

In terms of our share count… I'll get one of the guys to get the exact number, but in terms of CapEx, we directionally are going to be spending lower in 2008 versus 2007. And we'll get back to you with the exact share count in just a second here.

Chip Dillon - Citigroup

Okay. And as you're getting that, when I look at the consumer solution slide, slide 26, it’s hard to see in there the startup costs. Maybe you could help us, where would that part be? We can see volume and price and I guess the cost, but I don't see necessary an usually or separated number for the startup costs at Keltec and Wuxi. Can you give us some idea as to what kind of that… how much that was and… or at least what would be considered unusual?

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

Yes. It’s roughly $6 million.

Chip Dillon - Citigroup

Okay, got you. And then, as you look at 2008 and you look at the... I guess the beverage carrier market, what do you see for that? I mean are you tapped out… I believe the Mahrt Mill is tapped out, but you still have the ability to convert more or sell two converters of beverage carriers. Is that right, in other words you can upgrade your mix there a little bit in terms of converting?

James A. Buzzard - President

Chip, that's right, we can. We see some… we see growth opportunities. I referenced the replacement of some corrugated packaging with CNK based packaging and we see continued opportunities there. And at Mahrt, we are obviously selling everything we produce there, but my expectation is that the team down there will produce more in 2008 than they did in 2007.

Chip Dillon - Citigroup

Okay. And then the last question is, I've taken some numbers from the slides and from the... in particular, the one that gives a breakdown of where corporate expense is going, and it seems like to sort of make the other income line that's on the main income statement foot that you have a pretty large other income. Now, I know you do break out, that interest did go up a nice amount, $5 million from the third to the fourth, but… and maybe you could... I’ve just two questions. Is $9 million for quarter or anything closer that sustainable, number one, I guess not with rates coming down. And number two, were there other things in that sort of other line that would have accounted for that increase?

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

Chip, it's Mark. I think part of that was we had some interest on the... our installment note that accounts for part of that increase. But when you cut through it all, as we look our corporate another line, we still believe that on a run rate basis we're in that $50 million range.

Chip Dillon - Citigroup

And do you see a material change in the pension income number for next year?

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

No. It's within $1 million or $2 million. We'll be adjusting our assumptions around our discount rate, but that shouldn't have a material impact on pension income.

Chip Dillon - Citigroup

Okay. Thank you.

Operator

And next we go to the line of Mark Wilde representing Deutsche Bank. Please go ahead, sir.

Mark Wilde - Deutsche Bank Securities

Good morning.

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

Hi, Mark.

Mark Wilde - Deutsche Bank Securities

I wanted to just go back to Consumer Solutions and just follow-up on a comment that you made in your commentary. You mentioned that I think throttling back on production a bit late in the fourth quarter as you saw some signs of a slowdown in the U.S. Can you talk about that a little bit further, what exactly you are seeing and sort of how you bake that into your outlook for '08?

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

So let me start off, Mark. Really, I think what we were concerned about was that given the levels of inventory that we had as we entered the fourth quarter and at least signals that we had been seeing relative to volumes and demand, we felt that it was important that instead of continuing to run production at 100% that we really needed to work down those inventory. So we took some shutdowns, and we think that as we head into 2008, we’ve got our inventory levels roughly in line with what market demand is going to be.

James A. Buzzard - President

Mark, this is Jim. A big part of that actually was in Europe. And as we all recall very warm weather in Europe this year, so our beverage customers really came in with heavy orders. Final sell through wasn't as strong and so part of that was correcting for that imbalance in the fourth quarter. So sold it through, got back to normal levels of inventory as Mark said, but it was more of a seasonal issue than anything else.

Mark Wilde - Deutsche Bank Securities

Did you… actually, Jim, in the businesses domestically or offshore, did you see any signs of an economy slowing down and kind of rippling through the year businesses?

James A. Buzzard - President

No. We have not seen any indication of that at this point. As I referenced, our backlogs, our mills are where we would expect them to be this of year and order flows through the other businesses are holding up well.

Mark Wilde - Deutsche Bank Securities

Okay. And then, just a kind of… in Consumer Solutions also just to kind of follow on what George Staphos was mentioning. It seems like since we started on the strategy, which I think all of us understand, in focusing on downstream packaging converting businesses, for the last seven or eight years, it just seems like this has been a pretty bumpy path for the company, and I just wonder about pulling back from kind of more acquisitions activity for a couple of years and really trying to get the margins and the returns up in the business rather than jump even further into the strategy, any thoughts on that?

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

Mark, let me offer a few comments here. I think that what you would have just described in the form of a question is very much in keeping with the big influence we have in place. It is all about execution. If you go back to what I was saying in response to George's comments, it is continuing to focus on those areas of opportunity we have targeted for growth, personnel care and health care, and fundamentally limiting our acquisition strategy to one that provides bolt-ons of the sort that we pursued in support of Calmar during 2007, acquisitions that provide unique technologies that enhance the overall capabilities we bring to a marketplace, and that is the area focus. But it is all about execution, it is about innovations, and as with the full measure of our business about insuring is part of that execution that productivity is key.

Mark Wilde - Deutsche Bank Securities

Okay, a couple of other questions. Is it possible in the quarter and for the year for you to quantify for us how much FX may have affected your numbers both in terms of topline and then the earnings?

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

Yes, Mark. In terms of the quarter, the FX impact was around 3% or 4% and the dollar impact in terms of FX was slightly north of $10 million.

Mark Wilde - Deutsche Bank Securities

And any earnings impact, Mark?

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

That was the earnings impact, a little bit north of $10 million.

Mark Wilde - Deutsche Bank Securities

Okay. All right.

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

And the topline was 3%.

Mark Wilde - Deutsche Bank Securities

Okay, all right. And how much impact specifically in the Consumer & Office business, because a lot of that business I think is down in Brazil with Tilibra now?

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

It was relatively modest, it was a few million dollars, two maybe. Not much.

Mark Wilde - Deutsche Bank Securities

Okay. Last question I had really I guess for Jim Buzzard. It just seems, Jim, that we are not getting quite as much earnings leverage out of the mills as I would have expected, given kind of the strength in virtually all of the paper board markets, whether it's the SBS market or the containerboard market, which you have in Brazil and down at Charlestown or CNK market, any thoughts?

James A. Buzzard - President

Mark, I think that we had… as I referenced we had a good year. I think we were pleased with the improvements we saw year-over-year in the business. As I referenced in my comments our volumes were down, but we did that intentionally. We are making a concerted effort to improve the product mix out of those operations, and so we have backed off in some of the heavier weight commoditized grades and are filling back with other more profitable grades. So we continue to expect the business to improve year-on-year and we continue to expect that the high inflationary pressures that we have been feeling will continue to offset those price increases as well.

Mark Wilde - Deutsche Bank Securities

Would you anticipate that we see incrementally volume gains year-on-year in ’08, Jim, out of the mills?

James A. Buzzard - President

That would my expectation, yes.

Mark Wilde - Deutsche Bank Securities

Any idea how big?

James A. Buzzard - President

Not at this point, no.

Mark Wilde - Deutsche Bank Securities

Okay, all right. Thanks a lot, guys.

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

Thanks, Mark.

Operator

And thank you very much, Mr. Wilde. Representing Lehman Brothers let's go to the line of Peter Ruschmeier now. Please go ahead.

Peter Ruschmeier - Lehman Brothers

Thanks, good morning.

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

Hi, Pete.

Peter Ruschmeier - Lehman Brothers

Couple of questions, I was curious, maybe from Mark, if you have enough an update on your over-funded pension balance at the end of the year, or just directionally did it go up or down?

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

It went up by over $200 million. So we are very well over-funded.

Peter Ruschmeier - Lehman Brothers

Okay, any comments on your plan asset performance last year?

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

It was excellent and it was in the... around the low to mid-teens.

Peter Ruschmeier - Lehman Brothers

Well, that's good. Okay, thanks. Another question, I guess on the balance sheet, I'm curious of your... if you look at your working capital, it seems like a dollar amount, it is just a fairly high number. I'm curious if you have ever thought about securitizing, freeing up some of the working capital, and how you think about that?

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

Yes, we agree with you, Peter. It is high. We’ve made good progress in taking that down. We… as I said, we improved our cash-to-cash or total working capital by five days or 7% during the course of this past year, but we have more work to do and there is operational improvements we need to make. We have certainly looked at the option around securitization, but in this recent period of rough and tumble credit markets, some of the terms just weren’t all that attractive, but it is something that we look at and we’ll continue to look at as a potential opportunity.

Peter Ruschmeier - Lehman Brothers

Right, maybe also a financial question if I could on your debt. Can you remind us… update us on fixed versus floating? I was a little surprised to see the interest expense go up sequentially with net debt trends down.

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

Yes, it's roughly 24% floating at this point, and the part of the reason for that tick-up was again this… the monetization that we did in the installment note and the related debt associated with that timberlands transaction. So that was... most of that pop up in interest expenses.

Peter Ruschmeier - Lehman Brothers

Okay, and would you expect over time that floating will come back down again and fixed go up?

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

We manage that as a function of what our debt to cap is and also the strength of our balance sheet. So that varies from time to time, but right now we are about in our sweet spot. I wouldn't expect it to move too much.

Peter Ruschmeier - Lehman Brothers

How about on tax rate, I don't believe you commented, I know it is hard to pin you down a single estimate, but what do you think is reasonable at this point if you’re thinking about for all of '08 in terms of a general tax rate?

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

Somewhere between 28% and 30%.

Peter Ruschmeier - Lehman Brothers

Okay. And then lastly, maybe a question for Jim Buzzard, if I could. On bleachboard markets, I'm just curious if you can talk a little bit more about the tones there, the puts and takes in the tobacco markets both positive and negative around the world, it seems like there is something different, movements and different customers, and also on pricing, which has generally been an upward trend. I am curious what percent of your business in the first quarter might be slated to trying to be raise prices on customers at this point?

James A. Buzzard - President

Sure, Peter. In terms of the bleachboard markets as I have said, our backlogs are where we would expect them to be. The tone of the markets remains positive in the... you referenced tobacco, clearly we are seeing growth opportunities with the quality of our board in markets like China where we are capturing share. But there is also growth in those markets as well and we are able to take advantage of that. So we continue to feel about the bleachboard market and the end-markets that we serve.

In terms of price increases, I wouldn't give a percentage of the volume going up, but as you know we have announced price increases in the general folding carton markets for SBS. We are out with the food service and office products as well and the beverage markets and we have some selected increases in other regions of the world on specific end markets also.

Peter Ruschmeier - Lehman Brothers

Okay. And again we were talking $40 a ton in mid Feb?

James A. Buzzard - President

Yes, that's right.

Peter Ruschmeier - Lehman Brothers

Okay. And just lastly back on the tobacco, growth in China… does the growth in China… is that market large enough to offset every kind of declines in volumes in other markets? In other words, can you comment on your overall tobacco volumes as a company?

James A. Buzzard - President

Sure, our tobacco volumes in '07 were up very nicely year-on-year. The China market is a huge market, and what we are seeing in that market and others is really a fundamental shift to higher quality packaging and that goes right into bleachboard and right into our product line. So as these markets continue to develop, the demand for packaging and high-quality packaging continues to go up and it fits right with our... both our bleachboard and our converting operations as well.

Peter Ruschmeier - Lehman Brothers

Okay. Maybe lastly, John, I wanted to ask you a question as well. Is it possible just to... a real high level... what two or three things do you think keeps you up at night the most thinking about MeadWestvaco's opportunities for '08 just from a strategic perspective? I am hearing a lot of details on different businesses, but if you could maybe jell it down to one or two or three items that, John, you really think you need to spend your time on in '08? I am kind of curious on what you think that is.

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

Pete, thanks very much. I will go back to some of the themes we have been echoing throughout this call in and around the detail, and I was just leveraging on the point Jim made about tobacco in China, say that in China not only with tobacco product materials but also other products, its growth in emerging markets China, India, other such markets around the world is going to be very, very important for us to continue to focus on. Second, doing so not just with volume, but with... volume represents profitable growth, and doing that as I have commented earlier in the call on where execution in and around the high-potential we have to contribute to our customer's business through elevation and other forms of design, and lastly productivity. We need to be continuing to drive as we grow around the world productivity across the board. Productivity in emerging markets we made important progress during 2007. We did not make the progress in innovation in terms of commercialization of that innovation that we can and must as we move into 2007. So those are three areas that I focus on, that the team focuses on, and I would tell you we are making priority in our communications and actions and plans across the company.

Peter Ruschmeier - Lehman Brothers

Okay. If you could just comment and I'll turn over... the 3% productivity goals seems like a good one. I think if you could maybe help us to better understand what goes into that and how we measure you on that from quarter-to-quarter I think that'd be very helpful.

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

Thanks, we will do it.

Peter Ruschmeier - Lehman Brothers

Thanks very much.

Operator

And thank you, Mr. Ruschmeier. Well, that does bring us to the top of the hour. So ladies and gentlemen, on behalf of Mr. Luke, Mr. Rajkowski, and the team at MeadWestvaco I would like to thank you very much for your interest in today's call.

And Mr. Luke is also making today's conference available for digitized replay. It's for one full month starting at 1:30 PM. Eastern Standard Time, February 1, all the way through 11:59 PM, March 1. To access AT&T's Executive Replay Service, please dial toll-free 800-475-6701, and at the voice prompt enter today's conference ID, 891607. Internationally, please dial 320-365-3844, again with the conference ID 891607.

And that does conclude our call for today. Thank you very much for your participation as well as for using AT&T's Executive Teleconference Service. You may now disconnect.

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Source: MeadWestvaco Corp. Q4 2007 Earnings Call Transcript
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