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MeadWestvaco (NYSE:MWV)

Q2 2012 Earnings Call

July 25, 2012 10:00 am ET

Executives

Jason Thompson - Director of Investor Relations

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

James A. Buzzard - President

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

Analysts

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

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

Gail S. Glazerman - UBS Investment Bank, Research Division

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

George L. Staphos - BofA Merrill Lynch, Research Division

Mark Wilde - Deutsche Bank AG, Research Division

Mark A. Weintraub - The Buckingham Research Group Incorporated

Chip A. Dillon - Vertical Research Partners Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to MeadWestvaco's Second Quarter Results Conference. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Mr. Jason Thompson, Director, Investor Relations. Please go ahead.

Jason Thompson

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

I'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 second quarter, the company's income from continuing operations was $78 million or $0.44 per share. Excluding special items, adjusted net income from continuing operations was $82 million or $0.46 per share.

Now here to tell you more about our results for the second 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, and good morning, everyone. MWV delivered good results in the second quarter given both the increasingly challenging conditions in the global economy and the significant top and bottom line impact from foreign exchange during the period. Overall, we increased revenue by 3.5%, including nearly $50 million of increased volume and better pricing compared to last year, and earnings were up more than 13%. This solid performance includes profitable growth in our targeted packaging markets, another record performance in Specialty Chemicals and good execution on our productivity initiatives across our manufacturing system, as well as a larger-than-normal amount of land sales.

This morning, I'll put this performance in the context of what is happening in the global economy and comment on the momentum we're building towards the profitable growth target we've laid out for the next 3 to 5 years. Jim and Mark will then provide more detail about our second quarter segment and financial results, and then we'll get to your questions following their comments.

First, slower growth around the world, especially in Europe, was a headwind for the business in the second quarter. We not only had lower demand in some markets, including food and personal care, but we also had nearly $55 million of negative impact on the top line from the depreciation of the real and euro compared to this period last year. This development masked some good volume improvement in our targeted markets, including share gains in beverage, health care, home and garden, corrugated packaging in Brazil and Specialty Chemicals.

These volume in market share gains during the quarter were a good reminder that while growth is slower, it is still growth, and we're working hard to capitalize on it. In fact, we're seeing positive momentum well above GDP levels in several of the markets we've targeted, especially in emerging markets. For instance, growth was slower in China during the period but still generally in line with the roughly 7% annualized GDP. There, beauty and personal care, home and garden and beverage categories are growing in at least that fast while liquid packaging is growing on the order of twice that rate. And in each of these cases, our year-over-year unit volume growth during the second quarter was notably higher than the market levels.

The story was similar in Brazil, where the consumer economy is relatively stronger than the 2% to 3% annualized GDP rate. It is principally driven -- being driven by lower industrial production and commodity prices. Our corrugated packaging business in Brazil significantly outpaced the volume performance in the broader market.

With our market participation strategies, we're demonstrating that MWV can generate profitable growth. We're only 6 months into a 3- to 5-year effort to add $1 billion of profitable new revenue. In this short time, we've already put some points on the board that are reflected in our positive results in the last 2 quarters. For example, we've used our improved commercial excellence capabilities to increase our share of wallet and extend our price for value initiatives with many top customers. A great example is the revenue gains we've earned through brand engagements and packaging design work with AB InBev. As I've noted, we increased our corrugated volume in Brazil faster than the market, in part by serving new customers in the region of our fifth box plant in Araçatuba.

We've moved a number of prescription drug SKUs into our new Shellpak Renew package, and we continue to benefit from other innovations launched in the last few years, including a NoC fragrance dispenser, for which we recently won a patent infringement too. And we've outperformed our business plans for the recent acquisitions of Spray Plast trigger capabilities and Polytop’s cap and closure technologies, both of which have enabled us to increase our revenue with targeted packaging customers, as well as expand into new products and geographies.

While these wins have helped buoy our recent performance, we've also made progress on several growth initiatives that have yet to hit the bottom line but will power us toward the $1 billion goal in future. As examples, we continue to get very positive results from the market test for our shopper ready packaging system, Captivate, and see an opportunity to expand this solution in a variety of markets, including Food & Beverage.

We're about to start up the new paperboard machine in Brazil, and we expect to complete the final phases of the project by the first quarter of next year when we will see substantial earning contribution from this important investment. We've acquired new technology such as the smart packaging capabilities we picked up with ARDEX that will enable us to provide customers with electronic monitoring and data analysis as part of adherence packaging for clinical trials.

Retailers and branded pharma providers continue to acknowledge the important role that packaging can play in prescription adherence, and this was strongly punctuated in a scientific article that Novartis published last week based on data from our Shellpak program with Wal-Mart. And we are close to launching new extensions of our airless dispensing solutions that have been specially designed for emerging markets.

Each of these examples is part of our profitable growth strategy that includes commercial excellence, innovation, emerging markets and expanded participation. Our success in each of these areas gives us confidence that we can achieve our ambitions and deliver top quartile returns for our shareholders.

I'll now turn to Jim for some additional detail about our performance in each segment for the second quarter. Jim?

James A. Buzzard

Thank you, John. It was a good quarter for our business overall, especially given the economic backdrop. As you would expect, the impact of slower global growth varied by business and geography. And each of our segments, except for Community Development and Land Management, were negatively impacted by foreign exchange. I'll provide some detail about each, starting with the packaging segments.

In our Food & Beverage segment, sales were up 1% during the second quarter. Generally speaking, we gained a market share in the beverage and tobacco markets but felt the impact of lower demand for packaging from retail food brands. Overall, our pricing remains strong as we continue to deliver measurable value to our customers. Earnings in this business were 5% lower than last year, largely due to lower volume in food markets and the negative impact of foreign exchange.

In beverage, the trends we've seen for several quarters continued. The overall beer and carbonated soft drink market for multipack formats in North America and Europe has been flat or down slightly while growth in Asia remains robust. We continue to outperform these trends through our commercial excellence efforts with key brand owners. For example, we increased our revenue of AB InBev by helping them enhance the shelf appeal of their brands by applying new design features to their multipacks. AB I sees their packaging as a brand investment, and we expect continued investments and promotional work in the third quarter.

Our growth in Asia reflects the volume increases we achieved after placing new machinery with our customers. Carton volume in this region was up 9% during the quarter, and we can expect this trend to continue as we've placed an additional 15 machines in China and throughout Asia so far this year and have about the same number on order for the coming months.

In food, the market has been experiencing unit volume declines as manufacturers push through higher prices to recoup costs and consumers trade down or purchase smaller quantities. Our overall food volume in the second quarter was roughly in line with the market, but we continue to have success growing our liquid packaging business in Asia. Our volume in this targeted market was in line with the double-digit growth for liquid packaging formats in China.

Overall, our long-term outlook for Food & Beverage remains very positive, especially for growth in areas such as liquid packaging in China, multipacks in emerging markets and a wide variety of food packaging that will trend upward with expanding middle-class in places like India. Further, we have a strong innovation pipeline, which will drive profitable growth in this segment as well.

In the third quarter, however, we expect earnings in the Food & Beverage segment to be modestly lower than last year. We expect to benefit from higher prices, as well as improved productivity in our mills and converting plants. However, we expect lower demand than last year, especially in standard packaging for food markets. And similar to this quarter, foreign exchange will have a negative impact on sales and earnings in this segment.

In the Home, Health & Beauty segment, sales increased 2% during the quarter and earnings were up nearly 40% to $11 million. We increased sales volume in health care and home and garden markets and continue to benefit from the integration of Spray Plast triggers and Polytop dispensing caps and closures into our packaging offerings for global customers. However, during the quarter, we continued to be negatively impacted by lower demand for folding cartons for personal care markets in Europe.

In health care, volumes of our innovative medical pumps for OTC drugs were up during the second quarter. Health care is one of the markets that has held up well around the world with growth rates in high-single digits, including Europe where our medical pump sales are concentrated.

Sales of our adherence enhancing packages for prescription drugs, however, were down slightly compared to a very strong quarter last year. Year-to-date sales in adherence category were up 6%. And looking ahead, we expect this portion of the health care business to continue to grow along with greater acceptance of adherence packaging solutions, both here and in markets like India.

There are a growing number of retail and branded customers attracted by the data supporting the value of adherence packaging, including Novartis, which recently published the article John referenced. And Novartis has just launched their most popular hypertension treatment, Diovan, in Shellpak.

In home and garden, the business is gaining share from competitors and benefiting from some positive trends in the market. The high season for lawn maintenance in the U.S. was unusually warm, which meant consumers focused on liquid-based treatments for weed and pest control that are dispensed through our hose and in trigger sprayers. This part of the market was a bright spot for some of our bigger customers in the lawn and garden category.

We're also continuing to do well in home care, where our triggers and innovative aerosol accelerators are the preferred solution among the leading brands. In fact, we've already sold out the recent capacity expansion in Europe for our new customizable all-plastic trigger technology for home cleaning products.

Looking at personal care, our business is somewhat better than might be expected, given the dynamics in the market. We have increased volume of beauty and skincare dispensers during the second quarter with especially strong performance in Brazil and China. These gains, however, were not enough to offset declines in standard folding carton solutions and fragrance dispensers in Europe.

We have a good pipeline of opportunities to drive further growth of our higher-value dispensing solutions in the near term with the positive ruling in our NoC patent, cross-selling our new dispensing cap and closure solutions to existing customers, expansion in emerging markets and new extensions of our airless dispensing solutions that will be launched soon.

In the third quarter, we expect earnings in the Home, Health & Beauty segment to be well above the level from a year ago. We expect profitable growth in targeted segments, including volume increases, higher pricing and product mix improvements. This growth and ongoing productivity benefits will be the principal drivers of improved performance next quarter.

In our Industrial segment, sales and earnings were down during the second quarter with much of the decline due to the negative impact of foreign exchange. The dollar has appreciated over 20% against the real since this time last year, and the impact on top and bottom line results in this segment were significant. In addition to foreign exchange, startup expenses related to our new paperboard machine and a less attractive product mix weighed on earnings in the quarter.

We continue to increase volume of corrugated packaging in our existing regions at a rate that exceeds broader trends for the industry in Brazil. We are doing well in our markets by understanding, quantifying and solving unmet needs for high-quality, high-performance corrugated packaging in the fastest-growing regions of Brazil. We're also growing volumes in new regions through our investment in the box plant in Araçatuba, though our initial volumes for these customers tends to be more standard boxes. This accounts for the product mix decline in the quarter. We will grow this part of the business the same way we have in other regions, by moving customers up the value chain over time.

I'm also pleased to report that we're close to starting up the new machine in Tres Barras, another milestone for the project that the team has reached on time and on budget. This was only the initial phase of startup, and we expect to begin ramping up production following the rebuild of the existing paper machine in the fourth quarter.

In the third quarter, we expect earnings in the Industrial segment to be lower than last year despite continued strength in our corrugated end markets and new business in the region of our Araçatuba plant. Many of the same negative impacts from the second quarter will continue into the third, including the mix impact from new growth in entry-level solutions, wage and other input cost inflation, startup expenses related to the expansion of Tres Barras and a stronger dollar compared to last year.

In the Specialty Chemicals segment, sales and earnings increased again in the second quarter with continued gains from our highest value solutions to the automotive, asphalt paving, oil field and adhesive markets. Demand for auto carbon solutions was strong year-over-year while in supply chain issues and the lingering effects of the tsunami in Japan.

The road paving season also began with a solid start, which lead to especially strong volume for asphalt products, including our warm mix solution, Evotherm. Volumes were also higher for oil field drilling applications and chemicals for adhesives, both areas where we are gaining market share and benefiting from investments in new product development and positive long-term demand trends.

In the third quarter, we expect earnings in the Specialty Chemicals segment to increase modestly compared to a very strong third quarter last year. We expect that higher sales volumes of pine chemicals and carbon technology solutions will continue to be the source of profit improvement in this segment.

In Community Development and Land Management, we had 2 large land sales during the quarter in addition to our regular pace of transactions for smaller rural properties. The larger sales totaled 12,500 acres and returned very strong values. Early this year, we noted that TIMO activity was picking up, so we marketed properties and packages tailored to known buyers and we received excellent value as a result. While there's been some tempering of sentiment recently, buyers remained to recognize the need to pay for quality and the relative attractiveness of our land base.

The team has also continued to move with good pace on the development projects in South Carolina, especially the mixed-use development property in Summerville that has recently been named Nexton. We'll have more to announce on this project in the coming weeks as we finalize plans for the first phase of activity on this important initiative.

In spite of continuing weakness in national real estate markets, our business has been supported by growth in South Carolina and specifically in the Charleston market. The legislature in South Carolina for instance recently approved $300 million in funding for deepwater expansion of the port in Charleston, which along with the buoying investments in the area has driven development for the manufacturing and distribution sectors, as well as interest in our properties in the region. Based on the current pipeline of deals we expect to close during the third quarter, we expect earnings in this segment to be lower than last year, primarily due to the timing of land sales transactions.

Now I'd like to turn the call over to Mark. Mark?

E. Mark Rajkowski

Thanks, Jim. In the second quarter, we continued to make good progress with our profitable growth strategy and execute well against the controllables. As a result, we improved our business model and delivered solid top and bottom line growth in what remains a very challenging environment. During the quarter, we also strengthened our financial position while creating significant value for our shareholders with the closing of the spin merge of our Consumer & Office Products business.

Now turning to the results. Our operating margin in the second quarter was almost 11% on an adjusted basis, a 40-basis point improvement year-over-year. Another strong showing here is further evidence that our strategies are working and beginning to take hold across our businesses. Share gains and sales of higher-margin new products in a number of our businesses resulted in volume growth in price and mix improvements of almost 4% year-over-year.

Our margins also benefited from productivity gains in our manufacturing and supply chain operations, as well as higher land sales year-over-year. However, the improvement in our revenue growth and operating margins were partially masked by the impact of significant depreciation of the real and euro compared to last year. Foreign exchange reduced sales growth by 4% and operating margins by 140 basis points year-over-year in the quarter. Despite the impact from currency, gross margins on an adjusted basis improved by 30 basis points to 23.3% as price and mix improvement, again, more than offset input cost inflation as we are seeing some moderation in energy and raw material costs.

Adjusted SG&A was up $10 million to 12.6% of sales, primarily due to the acquisition of Polytop, as well as planned strategic decisions to grow the business, principally investments related to emerging markets and new product commercialization. Our cash position at the end of the quarter was approximately $530 million and reflects significant activity during the first half of 2012. In addition to cash flow from operations of $114 million, we received approximately $400 million in net cash distributions from the spin merge of our Consumer & Office Products business.

In terms of first half cash usage, we repaid the remaining $221 million of our 2012 notes that came due in April. And we spent approximately $320 million on capital, which includes our expansion in Brazil and the new biomass boiler at Covington. We also paid out $86 million in dividends to our shareholders in the first half of 2012. In addition to our substantial cash position, our debt-to-cap ratio was reduced to 37%. Our very strong financial position, including our overfunded pension plan, gives us significant flexibility to opportunistically invest in the business for profitable growth while also returning value to shareholders through a strong dividend.

In terms of our outlook, we expect weakening underlying demand as we move into the second half of the year due to the ongoing effects of the European crisis, elevated unemployment and lower consumer confidence in the U.S. and other developed markets, as well as slower growth in places like Brazil and China. In addition, foreign exchange translation will continue to negatively impact our earnings, and we will see increased startup expenses related to the new machine in Brazil, as well as lower land sales year-over-year.

As a result, we expect earnings from continuing operations in the third quarter of 2012 to be lower than the year-ago quarter. However, we are continuing to manage well through the current challenging environment and looking beyond this period, remain confident that the momentum that we've built with our profitable growth strategy and continued execution against the controllables will enable us to deliver on our long-term performance goals.

Now back to John.

John A. Luke

Mark, thanks very much. To summarize, we're generating solid performance in our targeted markets, especially given the difficult economic conditions we're facing. We expect and have prepared for additional external challenges during the second half of the year when we'll be -- also be comparing our results against last year's strong performance. And while there may well be an extended slowdown in global economic activity, we're confident that determined execution of our profitable growth strategies along with disciplined management of the controllable elements of our business will enable us to make steady and continuing progress in our markets around the world.

This concludes the remarks we've prepared for this call this morning, and we'd now be happy to address whatever questions are on your mind.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Phil Gresh, JPMorgan.

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

Just the first question on the Industrial segment. You talked about the startup costs. Any way you could quantify that piece of it for us and whether it's just in the third quarter or if it kind of continues through the fourth as well?

E. Mark Rajkowski

Phil, it's Mark. We are expecting to incur somewhere between $8 million to $10 million of cost to get the machine up and running. There's depreciation. There's costs related to demolishing buildings, moving equipment, double crewing. And we'd expect similar levels, both in the third and the fourth quarter.

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

Got it. Okay, that's helpful.

E. Mark Rajkowski

Those are one-time costs, Phil, as you know, and are costs that were not -- we can't capitalize under the accounting rules.

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

Understood. So those then recur in 2013, and then you have the saves that come in. Any sense of just roughly, as you look at it today, how much you think you can get from a cost-save standpoint in 2013?

E. Mark Rajkowski

Well, it's going to be substantial. And as we get through the rest of the third and the fourth quarter, as we start up the machine and make good product, then we'll be in a position to give you a better perspective in terms of the order of magnitude of substantial improvements to both our cash flow and earnings. But it will be significant.

James A. Buzzard

And maybe just building on that, Phil, a reminder there, there are really 4 categories of benefit from the project. One of them is the reintegration or the -- our ability not to have to purchase board in the outside market. The second one is lightweight-ing with new technology we've talked about where we can provide equal strength at a lighter weight basis weight. The third is built in and around the -- our ability to shut down the Valinhos mill and significant savings from that. Then the last one is growing the business. But building on Mark's points again, those first 3 are under our control, and so we'll execute on those beginning early in 2013. And those represent roughly 2/3 of we'll see from this project.

John A. Luke

I would just follow on that, Phil, by reinforcing that those elements together that Jim and Mark have talked about are what drove our decision to make this investment, and we're very enthusiastic about what results they will generate again beginning in 2013 even if Brazil continues to operate in a somewhat slower rate.

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

Okay, that's helpful. And then just my follow-up question on Specialty Chemicals. You continue to execute very well here, several quarters in a row in the mid-20% range on the margin. So just wondering how you're thinking about this long-term margin target you gave us a year ago and whether -- is there a recalibration here to a higher level that we need to think about or are there risks here that you still think that, that's the appropriate bet?

John A. Luke

Let me comment on that, Phil, and I'll invite Jim and Mark to supplement with any observations. I think it's fair to say that while we're very bullish on the prospects for this business and continue to support and encourage investment in growth around the world, leveraging the capabilities and the opportunities we see, that the range that we laid out for you is the right range to think about, I think, particularly given the uncertainties in the marketplace.

Operator

The next question from the line of Mark Connelly of CLSA.

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

Couple of things. When we think about Specialty Chemicals, we tend to think of it as pretty economically sensitive but your results are not really turning out that way. Have you reset your own target band for profitability? And do you think that this business is really as cyclical as we thought?

John A. Luke

Let me offer again a couple of comments at the outset. I think that we have worked very hard through diligent efforts in that business over several years to remarkably improve the overall capability, quality of the mix and to enhance our participation in markets that are relatively more resilient, Mark, and where our products are bringing very, very good value with solutions to our customers' needs. So the short -- that's a way of saying it is in our view much less cyclical than it has been historically. I think that said, so much depends on what happens in each of the end markets in which we participate because that is the wildcard that is beyond our control, but we are positioned exceptionally well in each of the areas we're participating. Jim?

James A. Buzzard

Yes, let me just add to that, John. The things that we've done over the last 4 to 5 years have been to continue to drive innovative products with strong value propositions that our customers value and recognize, and we get paid for those. We've broadened our market participation, so we've moved into things like adhesives, oil field, chemicals where we didn't participate historically. So we have more outlets for our products. We've really improved our emerging market participation, particularly Brazil and China, but also beginning to move into India. And lastly, the team has really performed very well on an operating basis, taking cost out and become much more efficient. So having said that, all those have helped to drive the performance. But as John referenced, we're not immune to what's going on around the world and certainly could see some impact as these things change over time.

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

That's helpful. And just one more question, John, again, sort of a big picture question. When you think about internally generated sales from legacy MeadWestvaco versus the impact of acquisitions, how do you think the balance of those 2 are doing right now? You've got a lot of new product introductions, but you've also got acquisitions like Polytop. So how do you think about where the growth is coming from?

John A. Luke

I think the -- I would say, Mark, that it is all very symbiotic. I think that the new technologies that are coming with small but very meaningful acquisitions like Polytop or Spray Plast are enhancing our market position consistent with the targeted end market strategies that we have. And we are seeing as well a tremendous amount of very beneficial innovation coming from our additional businesses that's enabling us to serve those markets as well. So I think the 2 are going nice -- very nicely hand-in-hand.

Operator

Your next question from the line of Gail Glazerman of UBS.

Gail S. Glazerman - UBS Investment Bank, Research Division

Just to start off, can you give a little bit more color on the demand side? You had some weakness, I think, in the first quarter when you're talking of personal care in Europe. And I'm just wondering as you moved through the second quarter, did you see material changes as the headlines started to accumulate? Or are things kind of steady as they're getting better or worse than during the second -- the third quarter?

James A. Buzzard

This is Jim. I would say that things are fairly steady. We didn't see any material improvements or decline in our backlogs, and our big paperboard mills remained in the 2- to 3-week range. And our performance in the primary plastics business has been fairly steady. I did reference in my comments a pressure in the folding carton markets in Europe, and that continues going into the third quarter as well but fairly steady in the third quarter relative to what we saw in Q2.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay, that 2Q has more pressure than what you saw in Q1 in that area?

James A. Buzzard

Yes, that's correct.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And is this creating any opportunities on the M&A side as stress kind of continues and you see weakness? Are there -- are you seeing incremental bolt-on opportunities relevant to what you might have seen this time last year or 6 months ago?

E. Mark Rajkowski

Gail, it's Mark. There really hasn't been any significant change relative to the opportunities that are out there in the marketplace. And as we've talked about in the past, we -- as we look at opportunities for expanded participation, we're not waiting for things to cross the wire. We're really spending time to go out there in the marketplace and look for opportunities, capabilities that will add value and provide additional capabilities to provide solutions to meet our customers' unmet needs. So I'd say overall, no real change in that environment but we continue to look for opportunities to grow in that fashion.

John A. Luke

Yes. And I think I would just build on that, Gail, by saying that Mark has characterized that situation well but the appeal of the strategy -- the measured strategy we've been pursuing with respect to looking at bolt-on size transactions, particularly where there's a market niche or a technology that enhances our overall strategy, that we'll be in a position to take advantage of those, if they do come along. And the altered economic environment may create some relatively more attractive values.

E. Mark Rajkowski

I think if you look at the last couple of bolt-on deals that we did, both Polytop and Spray Plast, those were companies that we were looking at for some time. And as John said, the -- we were prepared and ready to act as those came to market.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay, great. Just one last question on inflation. Can you just give maybe a little bit more color on what you're seeing? You still had a reasonable amount of year-over-year inflation. I'm just wondering, based on kind of where inputs are and where they're moving, if you'd foresee at some point during the second half where that would might level out or turn a little bit positive.

E. Mark Rajkowski

Well, Gail, it clearly is moderating. And you can see that in some of the waterfalls that we've provided in the slides. This quarter, our input cost inflation around energy materials and freight was only 2%. Last year, it had spiked up to 5 percentage. If you remember, third quarter of last year was the high watermark where it hit almost 9%, and it was almost a $70 million year-over-year impact. We've seen moderation in the first 2 quarters, and we expect that to continue in the third quarter. So while we do expect continued inflation, it will be at a much, much lower rate.

Operator

Next question from the line of Ghansham Panjabi of Robert W. Baird.

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

Going back to the Specialty Chemicals business, John, you gave us some great perspective on cyclicality longer term. But just kind of focusing on the next few months, it looks like auto production globally probably will decline quite a bit. Maybe the pullback of energy forces that we think of, at least temporarily, we have horizontal drilling. Is that a risk, I mean, as you look out into the back half of the year? And I guess I'm wondering because curious as to what kind of visibility you have as it relates to your customers' demand patterns there.

John A. Luke

Ghansham, let me answer by saying that this gets at the heart of the points Jim and I were making a moment ago, clearly developments could occur. I think our visibility right now would suggest that there is activity that is still quite positive in each of those markets. And as we look at auto production broadly, we've got to focus heavily on what's happening in China where we're seeing a huge and steady ramp-up in auto production around the globe, and we participate in that market.

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

But that's nearer term. So when you look out over the next quarter or 2, that's clearly the case.

John A. Luke

But I think if you look beyond that, it really depends on what tone and tenor those end markets take in responding to the slowing rate of economic activity we're seeing around the globe.

James A. Buzzard

And it speaks to that participation strategy I referenced. So as we broadened into adhesives, broadened into oil field, we can take some weakness like what's going on in the ink markets today and balance that capacity into another growing market over time. So that's really been key part of the business' strategy.

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

Okay. And then just switching to land. The amount you sold this year versus last year, the huge improvement there. Can you just give us some more color on this dynamic? I know you touched on it briefly, but is this a function of higher interest from buyers on the real -- as the real estate market in the U.S. recovers or is it just you being more opportunistic?

John A. Luke

We're always opportunistic, but we're not going to sell at unreasonable values. And I think we're seeing clearly, and it's hardly a trend at this stage. But I think some data points that would suggest that given where values are and the attitudes of prospective buyers that some of this high-value land that we have fits their investment pieces, and that is positive. How and where that's going to go over the next several quarters, I think, remains a question. One thing that -- while I'm on the topic though that I would punctuate is that the economic trends in the greater Charleston, South Carolina area, while not immune to what's happening across the rest of the country, are very positive, reflecting, as Jim noted, the expansion of the deepwater port in Charleston and clearly, the strong activity underway being driven by Boeing. And so that's providing good and continuing opportunity for us. And we -- although we can't predict what rate that, that will take, given what's happening in the broader world around us, there are as we see in the near term, certainly, what I would call unstoppable forces that have been unleashed and that are underway, and that's good for our Land business.

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

Okay. And just one cleanup question, if I could, for Mark. On the corporate expense side, it looks like it picked up versus 1Q. How should we think about the run rate for the back half of the year?

E. Mark Rajkowski

Yes, Ghansham, just as a reminder, there's a fair amount of volatility in the Corporate and Other due to the timing of accruals, particularly on stock, incentive comp, legal and environmental accruals, et cetera. Overall, as we look at Corporate and Other spend for 2012, it will be in line or slightly better in '12 than it was in 2011. So as we look at Q3 and Q4, we'd expect spending more in line with the $60 million to $65 million range.

Operator

And next question from the line of George Staphos of Bank of America.

George L. Staphos - BofA Merrill Lynch, Research Division

I wanted to get back to volumes within the packaging businesses. I remember last year in the old consumer segment, you had I think a down 3% volume comp, so this quarter was fairly easy. I think the old board businesses were flat or so. Do you have a year-on-year volume comp by your major end markets? If you provided that, I missed it earlier, so if you have beverage and food and so on year-on-year versus last year for 2Q?

E. Mark Rajkowski

Yes. Beverage, we were -- volumes were flattish year-over-year. Tobacco, volumes were up in the mid-single digits year-over-year. Our -- as Jim pointed out, our food was down. Food volumes were down, food retail, liquid packaging volumes...

George L. Staphos - BofA Merrill Lynch, Research Division

How much was food down, Mark?

E. Mark Rajkowski

It was a little over 5%, a little over 5%. The -- as Jim mentioned, home and garden volumes were up year-over-year in the quarter. Health care volumes were up year-over-year. In beauty and personal care, volumes were about flat, but there's a lot of movement underneath that as we had pretty good performance in terms of our pumps and dispensers business. That was brought down by weak folding carton performance in Europe.

John A. Luke

Jim might want to add to that.

James A. Buzzard

No, I think Mark captured it all pretty well. As Mark said, there's lots of moving pieces underneath each of these segments, and we will continue to manage, especially in emerging markets where we did see some solid growth to push that forward.

George L. Staphos - BofA Merrill Lynch, Research Division

Sure. The reason I ask, obviously, you have a multi-year, multifaceted packaging strategy that you've been working the last couple years and will go into the middle of the decade. And one of the things that you said in the past is that we could judge your success with this strategy, your relative progress with the type of volume growth and the type of margin improvement you're seeing in your packaging businesses. Now clearly, the impact of the global economy and certainly, the fact that many of your customers have been raising prices had an effect on your business, but that's the reason behind the question. Meantime, your margin comparisons are also down year-on-year. I assume most of that is currency and also the operating leverage effect in food. Were there any other factors driving those, the negative margin comparison? Are you happy with the margin you're getting out of your incremental business?

E. Mark Rajkowski

Yes, George, you summarized it pretty well. I think we saw some weakening volume on the food side, in particular, which hurts margins because of some of the absorption impacts, and currency hurt us substantially in the quarter year-over-year. I mentioned 140 basis point impact on margins. A big chunk of that was in Food & Beverage. We are -- as both Jim and John pointed out in their commentary, we are gaining share in really the targeted markets that we're looking to penetrate. We are gaining price and getting paid for value in those products. So in terms of the fundamental model, we feel pretty positive in terms of that performance, some of that being masked by weak underlying demand in food and in currency.

John A. Luke

Yes. And I would just follow on, George, if I may, to emphasize that this is why in outlining the strategy for you with the real focus on the combination of commercial excellence, innovation, expansion in emerging markets and expanded participation with new technologies, that we laid out a multi-year effort with a clear caveat that while you could indeed, as you remember, measure our growth in volume and margins that not everything would be coming along immediately or at the same steady rate. And I don't think that any of us could have predicted the full measure of what is emerging before us right now in the global marketplace. But having said all of that, I would reinforce what Mark has said and that is we feel very good about how our strategy is working. We have good confidence, as I reinforced in my summary comments, and we will continue, we have confidence, to post steady and important gains as we go forward.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Two quick ones and I'll turn it over. One, are you seeing any real signs from your Food & Beverage customers pursuing much more of a volume versus price strategy? Obviously, it's been priced the last year or so. Obviously, if that's the case, if they are pursuing volumes, it would helpful to you. And then given some of the slowdowns that we've seen in the various markets that you have been investing in, not quarreling with your strategy earlier, but do you think perhaps it gives you a reason to hold back on future capital spending the next 2 years and perhaps generating more cash and for that matter, returning a bit more to shareholders?

James A. Buzzard

George, in terms of your first question, clearly, we are, as I referenced in my comments, seeing our customers continue to invest in their brands, and one of those investment is through packaging. So we have seen some increased promotions, especially in the beverage markets. We will see some in the third quarter as well, and so we feel good about that. In terms of the investment thesis, we still will finish up the project in Covington, so our 2 big projects are Covington and Brazil. And then our capital should go back to a more normal level following the completion of those 2.

John A. Luke

And I would emphasize with that, that you'll recall from what we reviewed back in December that a significant fraction of the gains that we're looking to post over the next 3 to 5 years will come from improved positioning in the marketplace, leveraging not only our firmer relationships with customers but importantly, a lot of very solid innovation initiatives we have underway, and those will continue to be strongly pursued. And as Jim indicated, we'll manage the capital prudently as we go forward depending on where the best opportunities for possible growth are in the market relative to the economic backdrop.

Operator

And the next question from the line of Mark Wilde of Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Mark Rajkowski, just a quick one for you to start. Is there any sense you can give us of how much Polytop and Spray Plast added to that home and beauty EBIT in the quarter?

E. Mark Rajkowski

It was relatively modest. It was -- maybe it was $1 million or so, $1.5 million. It was on a -- in terms of the EBIT, they had nice growth. I think our products in Polytop grew high-single digits. EBITDA margins were around 20%, but it's a relatively small business, so in the quarter, $1 million, $1.5 million positive impact.

Mark Wilde - Deutsche Bank AG, Research Division

That's helpful. That gives us a sense of what those added versus the kind of preexisting business set. Second question, just as we think about 2013 and we think about both the ramp up at Rigesa but also the completion of that Covington boiler project, can you give us a sense of just how that's going to roll in as we move through next year? I mean it's not going to be as if all of a sudden, we hit a switch on January 1 and Rigesa just immediately steps up to a whole new level.

E. Mark Rajkowski

Mark, you're right. I think there are a couple of phases of that ramp-up and startup that we need to work through. As Jim said, first we got to get the machine up and running. We've got work to transition volume from Valinhos into Tres Barras, and then we've got to bring the benefits of our lightweight-ing into the marketplace. So that will happen throughout 2013, but the earlier part of the year. So we do expect to see substantial improvement in earnings and cash flow from that. Covington is not going to be complete until the end of 2013, so we won't see any benefits from that until 2014.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. Another question. I know you've been investing a lot in sort of SG&A and kind of support infrastructure for some of these new business initiatives. Is the current climate prompting you to kind of back off at all on any of that?

E. Mark Rajkowski

Yes, I think this is -- it's a difficult balancing act, and we are very conscious in terms of the economic climate. We have made and continued even in the second quarter to make some investments to build out our commercial organization, continue to develop new products and make investments across a number of our businesses in emerging markets, where we see it adds some real confidence that there is profitable growth just because of the market -- the individual market dynamics. But each time we look to make an investment, whether it's in a commercial organization, our product development innovation in emerging markets or if it's capital, we ask ourselves the tough questions and make sure that we're not getting ahead of our SKUs on those types of investments.

Mark Wilde - Deutsche Bank AG, Research Division

Yes. And are you actually pulling back a little bit now, last quarter or so?

E. Mark Rajkowski

I would say we've been pretty consistent with the level of investment that we've been making over the last 12 months. It hasn't increased, but it hasn't substantially decreased.

John A. Luke

But I think we're going to be managing that, to your question, Mark, evermore tightly. But we -- in order to ensure that we continue to put the points on the board that we've committed to and have been talking about today, we're not going to cut things back in a way that are going to be sacrificing the future.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. It sounded like we're going to get some news around East Edisto and kind of the South Carolina development projects before the next earnings report. Can you give us just a sense of what you're expensing right now or capitalizing in terms of both entitlement and planning costs down there? Because it is -- you're in an investment phase down there right now.

E. Mark Rajkowski

Hey, Mark, we -- I don't have that at the tip of my fingers. We'll get back to you. What I will tell you is that, that business is all self-funding. Okay? So the capital that we need relative to cost to entitle properties, surveys, legal fees and some minor capital for infrastructure is all being self-funded by land sales and forestry revenue.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then the last question I had. John, is it possible that you could just give us some sense of kind of how the succession planning process is working at MeadWestvaco?

John A. Luke

I think it's -- I've commented before, Mark, and in response to your earlier questions. Our board takes its role very, very seriously. And that is one of its prime responsibilities and that is actively being managed by the appropriate committee, as well as the board as a whole.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And would you expect we'll have any kind of clarity on sort of how this might work before the end of the year?

John A. Luke

I wouldn't hold your breath on that.

Operator

And next question from the line of Mark Weintraub of Buckingham.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Could you walk through a little bit, perhaps your key European exposures and kind of the pressure points and what you're seeing right now?

E. Mark Rajkowski

Hey, Mark. Let me take a crack at it and then Jim or John can follow up. I think the -- certainly, there's a couple of aspects to it. One is underlying demand in volumes, and then the second piece is the impacts related to currency. So as it relates to underlying demand, we have seen some continued weakness in the area of our more commoditized folding carton business, particularly around beauty and personal care. That has been reflected in our first half results. We don't expect that to get significantly better. We are looking at taking actions to shore up our costs there. And if we need to skinny down capacity, we'll make the right calls on that as well. The volume in our home and garden and beauty and personal care in terms of our plastic pumps and dispensers has been reasonably stable. We do get concerned about fragrance a little bit because it is a discretionary item. So that would -- and it's a very profitable product line for us, so that would be one area that we're watching and looking to manage closely. The other is just the impact on the currency and where we are most at risk, if you will, is where we do sell board into Europe. We do manage that risk through hedging strategies because we get paid in euros. And as we look at the second half of 2012, we've got roughly 75-plus percent of that exposure -- that FX exposure hedged, so we should be in reasonably good shape there. But as John and Jim both pointed out, there still is a lot of uncertainty in that marketplace. And should there be a big shock, it's difficult to predict how that might impact demands across all of our product lines.

Mark A. Weintraub - The Buckingham Research Group Incorporated

That's very helpful. And do you know order of magnitude, what -- and you may have this in publications, so I apologize if it is. But what percentage of your operating profits roughly are coming from Europe at this point?

E. Mark Rajkowski

Oh boy, we'll get back to you on that. I don't have that off of the top of my head.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Sure, sure. Okay. And then one other quick one. On Brazil, I understand you got the $8 million to $10 million in startup-type costs, both this coming quarter and the next. Are they not offsetting revenues either related to the startup of the new machine or what have you that -- so that on a net basis kind of for modeling purposes, I mean, should we just be just docking $8 million to $10 million or is that not the right way to do it again because of offsetting revenues and profits?

James A. Buzzard

Mark, just given the timing of the moves we're going to make on it because, as you recall, we have to shut down and rebuild #3 paper machine, as well as Tres Barras and then go through the closure. It's going to really be for the remainder of this year, the $8 million to $10 million of additional cost, which are, as we referenced here, one-time relative to the expansion. And then we will begin to see the benefits as we get the machine ramped up, which would take some time and as we move into 2013.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Okay. I know it's small and technical. So are those going to be highlighted as nonrecurring and not included in your ongoing earnings as you report it?

E. Mark Rajkowski

Yes, we're going to -- we'll reflect that in our reported earnings, so those will be in our results for the third and fourth quarter.

Operator

And our final question comes from the line of Chip Dillon of Vertical Research.

Chip A. Dillon - Vertical Research Partners Inc.

Yes, just a quick clarification, first of all, is on the Rigesa startup cost. Is that $8 million to $10 million, is that per quarter in the third and fourth or is that sort of spread evenly among the 2 quarters, say, $3 million to $4 million per quarter?

E. Mark Rajkowski

Per quarter.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. Okay. And then secondly, as we look at your capital spending, I don't think you gave us updated numbers as you look both this year and next year. Could you tell us how that looks like it's going to unfold? Is it going to really change much from the last time we checked in?

E. Mark Rajkowski

Not much, Chip. We're looking somewhere around $700 million this year and with a substantial portion of that relating to Rigesa and Covington. As we complete the Rigesa expansion, that we expect spending next year to be around $400 million. And then as we compete the Covington biomass boiler in 2013, we'd expect CapEx spending to be in the $325 million range.

Chip A. Dillon - Vertical Research Partners Inc.

And just starting in 2014?

E. Mark Rajkowski

2014, that's right. So $700 million, $400 million and $325 million.

Chip A. Dillon - Vertical Research Partners Inc.

And look, I know this is a big time-moving target but next year you will, as the year unfolds and let's Rigesa kicks up, I would imagine -- and if the rest of the world continues to grow as you've been seeing in China, et cetera, would you expect your tax rate to tick down a couple points next year or at least between this year and 2014 as your mix continues to shift to offshore?

E. Mark Rajkowski

Well, it depends where it shifts, right, and Brazil's got a reasonably high tax rate. And Europe, for us, has a reasonably low tax rate. So those won't necessarily bode well for reducing our overall rate. So for now, I would assume our rate stays reasonably constant.

Operator

And back to you, gentlemen.

John A. Luke

Thanks, Rochelle, and thanks, everyone, for joining us. We look forward to catching up with you next quarter.

Operator

Okay, thank you. And ladies and gentlemen, this conference will be made available for replay after 12 p.m. today through August 25 at midnight. You may access AT&T executive replay system at any time by dialing 1 (800) 475-6701, entering access code 253381. International participants, dial (320) 365-3844 and again, that access is 253381.

And that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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