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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 - J.P. Morgan

Mark Connelly - Credit Suisse

Gail Glazerman - UBS

George L. Staphos - Bank of America

Mark Weintraub - Buckingham Research

Mark Wilde - Deutsche Bank Securities

Peter Ruschmeier - Lehman Brothers

MeadWestvaco Corp. (MWV) Q1 FY08 Earnings call April 30, 2008 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the MeadWestvaco First Quarter 2008 Earnings Conference. At this time all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

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

Jason Thompson - Director, Investor Relations

Thanks Rich and good morning everyone. This morning we announced our results before the market opened. The notification of this morning's call was broadly disclosed. Further, this morning's call is being webcast at mwv.com. 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 subjected to known and unknown risks and uncertainties described in our public filings. Furthermore, contents containing time sensitive information that although correct today, may change with the passage of time.

First, a brief recap of the results we reported this morning. For the first quarter we reported a net loss from continuing operations of $8 million or $0.04 per share, included in the results are after-tax charges totaling $10 million or $0.06 per share, for restructuring and bad debt and an after-tax gain of $6 million or $0.04 per share related to the company's U.S. pension plan.

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

I'll now turn the call over to John.

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

Thanks, Jason and good morning. During the first quarter, we made progress in our profitable growth strategy and generated strong sales momentum across targeted markets, especially outside of the United States. That said our overall performance was disappointing. Our profitability was impacted by dramatic cost inflation that was greater than we had anticipated, principally due to the sharp run-up in oil and energy related prices, by unexpected customer bankruptcies and maintenance expenses. These factors along with the normal seasonal weakness of the first quarter in several of our businesses, adversely affected our results.

As we look at the quarter however, there were positive developments and clear evidence that our company is moving in the right direction by focusing on the right markets and the right strategies to win in those markets. First, our commercial performance was solid and we are developing plans to make it even stronger.

Overall sales in our packaging businesses were up 7%, including a 23% increase to emerging markets; markets including China, India, Brazil and importantly Eastern and Central Europe. We increased sales volume for higher value paperboard grades and storing sales growth in global beverage packaging, home and garden solutions and in personal care segment such as fragrance.

In addition, our innovative healthcare packaging solution, Shellpak is beginning to be rolled out as part of Wal-Mart's prescription drug program. This commercial momentum demonstrates that our packaging solutions are generating solid demand in the market place, including the markets that we have targeted for growth around the world. We are now developing additional plans to build upon this success.

As we continue to refine our go-to-market strategy, a logical next step is to align the full breadth of our packaging platform capabilities for each market segment that we serve. Already, we have dedicated teams working across our platform to improve our product development and commercial success in the healthcare and personal care markets. We will soon look to replicate this commercial model with a more deliberate shift to a structure that focuses our sales and marketing efforts on each of our targeted markets and key customers. This along with activities already underway will enhance our commercial success while also generating important operational and execution related efficiencies.

Second, we took specific actions to bolster productivity and profitability in the face of rapid inflation for energy and raw materials. These rising cost impacted results for all of our businesses during the quarter. While are we continued to make real progress and pricing in mix improvement, we are pursuing even more aggressive pricing across all of our businesses. This is a key operating imperative in an economy in which oil is more than $110 per barrel and related costs continue to escalate. Simply off setting pricing... offsetting inflation is not acceptable, so we must continue to drive pricing wherever possible.

Third, we are continuing to sharpen our focus on higher margin packaging opportunities. Three weeks ago, we announced the sale of our kraft mill in North Charleston, South Carolina for $485 million in cash. While this mill has been an important part of our success for many years, the linerboard and saturating kraft capacity of this mill was no longer an optimal fit for our long-term consumer packaging strategy and the proceed will allow us to further strengthen our financial position.

As I am sure all of you can imagine, the sale took some time to complete with challenges over the course of the past year or more, including the recent credit crisis. But we were determined to stay the course in this transaction to obtain full and fair value for our shareholders.

Before I turn to Jim and Mark for a more in-depth look at our operations and financial performance, let me talk briefly about two other important developments since our last call. We have been keeping you updated on our strategy to maximize the value of our land holding. We recently shared a preliminary master plan for our large East Edisto property with the community in South Carolina, and the response has been overwhelmingly positive.

Over the course of several years, the plan provides for towns, workplaces and conservation areas that we believe will address the needs of the community of simultaneously rewarding our shareholders with sustainable cash flow and substantial long-term value. Also, and as you have noticed we have adopted a new MWV logo and are now referring to ourselves as MWV. This new branding is a reflection of the work we have completed over the past several years to transform our business and to redefine our value proposition by providing customers with unique packaging solutions that enhance the performance of their brands. The change has been well received in the marketplace and we expect to continue to see the benefits of our enhanced brand identity as we go forward.

Collectively, these areas of progress and improvement demonstrate that while the economic environment is challenging and frankly may become even more so, we are executing well on the right things, the things that we can directly control. Our sales and pricing performance in the marketplace and the efficiency of our organization.

We are growing revenue and enhancing our product mix by focusing our leading global packaging platform on targeted markets and customers around the world. We continue to take decisive actions to improve our overall profitability through aggressive pricing measures and productivity programs and finally we are continue to hone our focus on higher value consumer packaging businesses to improve our return profile for shareholders.

I'd now like to turn the call over to Jim Buzzard and following Jim, Mark Rajkowski to discuss our performance in greater detail. Jim.

James A. Buzzard - President

Thank you, John. The operating environment for many of our businesses was very difficult during the first quarter. Input cost inflation accelerated during the quarter. We had operating difficulties at two of our packaging plants and we felt the impact of two customer bankruptcies. Our performance reflects these challenging conditions.

Despite these challenges, we made good progress in the global marketplace, especially in markets we have targeted for growth. Our top line... our strong top line performance in the packaging business confirms that our strategy is working and that we can deliver more of this growth to the bottom line through ongoing pricing and productivity actions.

We must continue to take pricing actions to offset the impact of dramatic input cost inflation. Measurable progress in these areas is our priority as we move through the year. I'll now discuss specific segment results for the first quarter in more detail as well as some of the operating highlights in market performance in each business.

You will find additional information for all of our business segments in the slide presentation of the company in this call. The packaging resources segment delivered positive volume growth across most major paperboard grades. Including for beverage multipacks, liquid packaging and commercial print applications, and the segment may progress offsetting historically high input costs with price and mix improvements but more work remains.

Our volume and price gains were not enough to drive profitability higher overall. Input cost inflation was an obvious factor but we also experienced higher cost for the plant maintenance outage of our Mahrt paperboard mill in Alabama which totaled about $15 million. No similar outage occurred last year and as a result, segment earnings were $11 million below last year's level.

We are continuing to gain global market share for high quality paperboard. We had solid gains in emerging markets including the 14% increase in sales to China and double digit sales and earnings improvement for Rigesa. Overall, backlogs in our higher value paperboard grades are solid and we are aggressively pursuing price increases. Productivity was positive for the quarter at the mills other than Mahrt, and while that doesn't show up on our waterfalls for this quarter, we expect productivity to be a positive driver for the mill businesses moving forward.

In our consumer solution segment, sales increased overall but earnings were significantly below last year's level. Input costs were a major factor, and some of our U.S. businesses began to feel the impact of the weaker economy. In addition, our media business incurred a one-time charge of $5 million related to the bankruptcy of a single European customer. These issues obscured our commercial success and productivity improvements during the quarter that we expect will translate in a profitable growth moving forward. Demand in many of our markets is strong and we have made gains in global beverage, home and garden, fragrance and healthcare.

For instance, we won additional business from key CPG customers such as Procter & Gamble, Unilever, SC Johnson and Clorox. And overall productivity improved in CSG. With the footprint decisions we made last year and ongoing productivity programs, including actions in our media business that would have helped to restore year-over-year profit growth in that business, were it not for the bad debts charges.

Let me talk in more detail about what we are seeing in each of the CSG lines of business. First, demand range remains solid for our largest consumer business, global food and beverage. In Europe, we are seeing increased carton volumes in machinery sales, including growing relationship with Scottish Courage. As they take share in the European beer market, we are gaining volume along with them.

In North America, growth is steady, but there are signs of a weaker economy and a slowdown in consumer spending. Nonetheless, we have had continued increases with Anheuser-Busch and recent success with Labatt.

In the media business, we continue to see market related volume declines and unfavorable mix. However, we have a strong pipeline of movies titles in Europe and we have doubled our video game business with Nintendo. We also have the industry accepted packaging format for Blu-Ray DVD and we expect to see increasing orders for this solution as Sony's preferred HD technology won a decisive victory over the rival format.

In healthcare, the big story is the success of Shellpak, our innovative adherence packaging solution. During the quarter, we produced Shellpak for several products in Wal-Mart's prescription drug program in the United States. And we are enthusiastic about the planned expansion by Wal-Mart and the potential for other retailers who are also exploring this unique solution. In addition to the success of Shellpak, sales of our pharmaceutical pumps increased again during the first quarter and we are looking to commercialize two new pump formats in the second half of this year.

Sales on our global personal care business increased compared to last year, led by a strong performance for our cosmetic pumps, fragrance dispensers and foaming and airless technologies in Europe and other international markets. We have launched new products with Colgate and Avon and we are adding capacity with the new press in our Russia facility that will support specialty packaging for these segments of the rapidly growing Russian market.

In our home and garden business, sales increased by almost 20%. We have won market share by participating in Clorox's Green Works product line with our home cleaning trigger sprayers and we saw an increase in business from Scott's Miracle-Gro. You may remember that home and garden business was a negative factor in previous quarters, due to drought conditions last year, but we are now seeing positive signs moving into the busy season for lawn and garden care. We have also seen good growth from our new Wuxi facility in China, serving SC Johnson and high profile local customers with trigger sprayers for home cleaning products.

Overall, the consumer solutions segment exited the quarter with strong momentum. We expect to see improvement moving forward as we align our commercial organization to increase our value proposition to customers, execute pricing and productivity actions and leverage our innovation pipeline for targeted packaging markets.

Turning to our non-packaging businesses, results for the consumer and office product segment were about the same during the traditionally slow first quarter. This segment normally reports a small loss in the first quarter as they built inventory for the important back-to-school season.

Consumer office products had a strong back-to-school season in Brazil and recorded pricing and mix improvements during the quarter as this business continues to focus on value-added proprietary products. However, this segment incurred a $3 million charge for bad debt for one of our Brazilian customers, keeping a small loss in this segment unchanged compared to last year.

This segment continues to perform well, driving productivity gains and product mix enhancements to offset some of the continuing input cost inflation and the risks associated with the current retail environment. The specialty chemical segment achieved solid performance compared to a very week first quarter in 2007. This segment implemented significant pricing actions and productivity projects during the quarter to offset dramatic ongoing input cost inflation. These actions will continue as this business experiences unprecedented increases in key chemical raw materials such as petrochemicals and phosphoric acid.

In our carbon business, growth in sales to non-U.S. auto markets and gains for non-auto purification applications partially offset weakness in the U.S. auto market. In addition, we continue to generate solid momentum for our Evotherm warm paving asphalt technology.

Let me also update you on the acquisition of the pine chemicals product lines for Eastman Chemical Company. The integration of these product lines has been exceptionally smooth and is already having a positive impact on our operating leverage in this business. As the transition continues, we expect this business to be accretive to our earnings in 2008.

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

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

Thanks, Jim. The seasonally slow first quarter for our business was both difficult and disappointing. The impact of input cost inflation was much more severe than we had expected and eroded much of the margin improvement we had planned from our strong pricing and mixed actions. Higher than expected cost related to our Mahrt mill outage and our program to shift production capacity to lower cost locations also impacted margins. We are however, successfully getting price and are beginning to generate good momentum in the market place with new product introductions and by leveraging our emerging markets investments.

Before I review our financial performance in more detail, I would like to touch on the pending sale of our mill North Charleston, South Carolina. The sale of the Charleston kraft mill was a very long and complex deal to negotiate, but it is an important strategic move and we are pleased with the value we will receive from the sale of this asset. It will sharpen our focus on higher value consumer packaging products and will further reduce the volatility of our earnings and cash flows by exceeding the highly cyclical linerboard market.

The after-tax proceeds from the sale are expected to be approximately $400 million and will be used to repay debt, which is in keeping with our balanced approach to deploying excess cash having recently repurchased $400 million of stock, with the forest land proceeds. We believe the timing was right for this transaction, which we expect will result in a modest after-tax gain.

Now, turning to our financial results for the quarter. First, keep in mind that in making year-over-year comparisons, all prior year numbers have been restated to reflective results of our continuing operations on apples-to-apples basis. The results of our Charleston kraft papers business have been excluded and are separately reported as discontinued operations.

Starting with sales, we saw a strengthening in our top-line across all of our businesses, resulting in an overall growth of 6% year-over-year. Our improvement was driven primarily by higher selling prices, mixed improvement in foreign exchange. Top-line growth outside the U.S. and Canada in the packaging platform was 16% reflecting export growth in our major paperboard grades and solid performance in our non-U.S. beverage, personal care, home and garden and tobacco businesses. Especially chemicals business also posted double-digit growth on the strength of its pine chemical business.

Our gross profit in the first quarter adjusted for restructuring charges in one time items was $225 million or 15% of sales, which is 170 bases point decline compared to the year ago quarter. This decline was primarily the result of about $40 million of higher input cost across all business units and lower productivity primarily due to higher than expected cost associated with the Mahrt outage and manufacturing optimization moves in the consumer solutions group.

We are continuing to improve asset efficiency of the consumer solution group by implementing a more global manufacturing strategy that fully leverages both lowest cost locations and our enhanced global capabilities in supply chain and procurement. As part of this on going work, in the quarter we moved high cost Western European tobacco and personal care packaging businesses to our lower cost facilities in Moscow. We also further expand the capacity of our Wuxi China facility to one, take advantage of the strong growth we're experiencing in the regions specifically in Home and garden and personal care markets and two, to supply lower cost product to U.S. and European customers.

These actions will provide us with a lower manufacturing cost base for CSG products going forward but resulted in about $5 million of incremental cost in the quarter. Partially offsetting these negative impacts to gross margin were price improvements as well as positive foreign exchange. We are continuing to aggressively pursue additional price increases to help offset cost inflation, which we expect will continue to be a significant headwind in 2008 as oil remains at historically higher levels. Progress in reducing SG&A cost during the quarter was massed by $8 million of charges due to two customer's bankruptcies. With regard to credit risk in our accounts receivable portfolio certainly the weakening economic climate has increased overall credit risks. However we have thoroughly reviewed the credit and liquidity position of each of our customers and believe that there are no additional material at risk accounts at this time. Adjusted SG&A in the most recent quarter was a $195 million or 12.8% of sales, down more than a full percentage point compared to last year. Cost reductions more than offset the increases due to inflation.

Turning to cash, during the quarter our cash from continuing operations about $35 million, our cash performance reflects the traditional seasonal weakness we experience across many of our businesses in the first quarter which lowers operating earnings. It also reflects higher tax payments we made in the quarter, inventory build for the back-to-school season and a higher level of receivables due to increased sales. However from an overall efficiency perspective, we continue to show improvement with a year-over-year reduction in our cash to cash cycle of four days. Turning to our outlook for the second quarter, there is significant volatility in many key macro-economic factors that limits our visibility.

While a number of our businesses are entering seasonally stronger selling periods like beverage and home and garden, weakening trends and consumer spending and housing market coupled with rapid increases in and key input costs makes it extremely difficult to provide a high degree of confidence around outlook information. With that as context, we are encouraged by the current backlogs in our mill business. They are at or above prior year level. We are continuing to aggressively pursue price increase across all grades; however with oil continuing to reach new records, we may not be able to fully off-set input cost increases with price improvement during the current quarter. Productivity in the quarter will be impacted by a scheduled full outage of the Covington bleached board mill. As a result we expect segment profit to be slightly below year ago levels.

In the consumer solutions segment, we are expecting segment profit to be higher versus the year ago period. We expect volume growth and the global beverage packaging, home and garden business.

In addition we are seeing good momentum in healthcare packaging particularly as Shellpak gets rolled out nation wide with Wal-Mart and in global personal care with continued growth in high end fragrance pump. We should also see lower manufacturing driven by the benefits from our actions to optimize our manufacturing foot print.

In consumer and office products business, segment profit is expected to be below year ago levels. Given weakening consumer spending trends, we are seeing our retail customers tightly manage their inventory levels. This likely will push back-to-school orders into the third quarter closer to the point of sale.

Specialty chemicals, segment profit is expected to be above year ago levels. Increased pricing in pine chemicals and productivity will more than offset expected weakness in automotive and housing markets. With that, I'll turn it back to John.

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

Thanks Mark. While the first quarter certainly brought challenges, we are encouraged by the positive momentum to growth in our key markets, in the pricing improvement we achieved in many of our businesses. And our markets remain strong. And then what is... and likely will remain a challenging environment, we are relentlessly focused on managing the things that we can directly influence driving price and mix improvements to offset still amounting cost inflation and on executing productivity improvements.

All while continuing to invest for growth in our global packaging platform. We are confident that we will continue to succeed by differentiating ourselves in the marketplace and building brand value for our customers. This concludes our prepared remarks, we are pleased to answer any questions that you have.

Question And Answer

Operator

[Operator Instructions]. We will start out with the line of Claudia Hueston with J.P. Morgan. Please go ahead.

Claudia Hueston - J.P. Morgan

Thanks very much, good morning.

James A. Buzzard - President

Good morning Claudia.

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

Good morning Claudia.

Claudia Hueston - J.P. Morgan

Just had, a sort of a broad question first just in terms what you are seeing from the consumer and if you are getting any sense of substitution or changing consumer trends, specifically in the consumer and office product business and then may be on your fragrance business as well, are you seeing any sense that may be the customers is trying to trade down at all?

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

Jim you want to comment there... I mean my sense says that we are continuing to see reasonably firm momentum in all of our markets. Claudia as we have topped and we have not certainly in the packaging and seen any trading down that I'm really sensing at this stage Jim.

James A. Buzzard - President

Oh yeah I think that's right John, I think Claudia the... the area that gives us a little bit of pause right now, because we just don't have visibility is the back to school season, and as you know we played at a very high end of that market place and so you will have to watch how the consumer reacts to all the other things going on. But this point we don't see any impact on it and as John said in the packaging business, things are holding up well.

Claudia Hueston - J.P. Morgan

Okay and then referenced Asian competition, in release around the consumer and office product business. Is that on the high end stuff or is that still pretty much on the low end?

James A. Buzzard - President

Pretty much on the commodity side of things, I would say one of the things we are seeing as you know, we do source from, Asia... is we're impacted by, what our rising cost coming out of Asia for all products at this point of time so that's something that we're having to do with as well.

Claudia Hueston - J.P. Morgan

Okay, and then I'll was hoping to shifting gears a little bit looking at the consumer packaging business, can you just comment on your outlook for resins, in the face of the oil price movements? And then as we look to that business in the second quarter, should we expect some recoup as you pass through the price increase from last quarters as of sort of to get implemented?

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

Claudia let me start and then I'll turn to Jim to provide a bit more definition around us. I think that with what we are seeing in a volatile oil price marketplace and volatile pretty much on the upside that we can only expect to see resin and other oil related or energy related materials continue to increase and price and we have a clear priority to ensure that those cost are off set by pricing improvement in our own market structures. As Mark indicated and I think Jim eluded, it is... there is no sure guarantee with the momentum we've seen in that cost input that we can perfectly offset in any given three months period but you can be sure that our absolute determination to off set those unexpected cost is a firm priority in the company. Jim.

James A. Buzzard - President

It's just don't have it, I think Claudia, we will see a resin increase in the quarter and as John said we are very focused on getting pricing to recover that, most of our business has contract passthroughs that we will get that. There is lag as John referenced it goes with that, and in other case is where we don't... we are going after general price increase to make sure we can recover it so, we will go after and get it, but that may be a little bit of lag as we go forward.

Claudia Hueston - J.P. Morgan

Okay, great. And than, just finally on that business, know I think we topped past quarter about may be getting 2 or 5% operating margin by the end of the year. Is that something your still comfortable with in this cost environment or do you think you may have a little bit more of a difficult time this year and might... given the passthroughs be more of '09 issue?

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

It is just through the first quarter, Claudia, and we are absolutely focused on the same objective we have talked about before, clearly the cost environment makes these things though but it in no that has diminish our focus on that is a key result.

Unidentified Analyst

Okay, great. Thank you very much.

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

Thank you.

Operator

We'll now go to the line of Mark Connelly with Credit Suisse. Please go ahead.

Mark Connelly - Credit Suisse

John, just two questions. One, if we can start with consumer in office, I'm just wondering, where we're headed sort of strategically here. The brand is strong but the customers are shifting their... their buying patterns and I am just curious how you guys keep the upper hand in that relationship as the selling season is contracting. Obviously, it's been an issue you have been dealing, but I am just wondering are they shifting more of the risk to you and how do you fight back?

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

Did you have a second one as well you want to come back to that?

Mark Connelly - Credit Suisse

Yeah, well the second question is actually even picture... with things being weaker out there and your balance sheet being in good shape, are you looking at this and saying this might be a good time to be picking up acquisitions to strengthen the global platform?

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

Let me comment at a high level on both of those and then I'll turn to Jim to speak more definitively about what we are seeing in consumer and office, to give you a bit more color in those relationships. I think one of the key strengths in our position in this consumer and office marketplace over a long period of time other than the super group of individuals who have lead and operated that business is the power of the brand and I think we have been able to have that power brand... power resonate with consumers and that has given us a very firm position in what has been a shifting marketplace. There's no guarantee that there aren't going to be further squeezes as we go forward, but we see go power in that brand and that's enabled us to maintain share and good strong profitability and for us as a parent company good cash flow as well.

With respect to the second question before turning the first back over to Jim, we do have a strong balance sheet and we do see that the times are a little bit soft. We do not however, view this at the time to be unduly opportunistic at least from the standpoint of being profligate. We want to be very sure that we are working prudently, that we are generating and maintaining good liquidity in a period that we frankly don't know where things are going to go, clearly we will, as I concluded my comments this morning, invest prudently for profitable growth in our global markets that will enable us to grow where we to need to grow and it think our balance sheet and our overall business profile enables us to do that but that won't be strategic, it will be select. It would be prudent and you can be sure that it will not be anything other than right sized, that that is we're going to be looking and tuck-in kinds of things and in some cases investments are just in how we do things I suppose looking into to... to make any major acquisitions at this stage.

James A. Buzzard - President

Just building on it Mark in might just going back to consumer office products, want to make sure I clarify that we have not yet seen any thing within consumers trading down, something we're obviously are watching closely. Its really too early back-to-school season to see that and the fact. The fact is we've got nine out of ten top brands in that and market place in many of the retailers we are to category captain, we manage full category for them. In fact they like our brands because they make more money that retail of our brands and they do of with more commodity oriented ones so, our retailers like it, we have a very, very strong position with our brands have had for many years. It's a business that drives on innovations, keeps things fresh and different. There is no question we are seeing it today our retailers are going to manage our inventory closely, but as the back-to-school season comes in that will press us to make sure we can service some and send in the replenishment orders. So we are still...we are still feeling good about to back- to-school season but obviously the cost is giving what we see in the in consumer environment.

Mark Connelly - Credit Suisse

Both were helpful, Thank you.

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

Thanks Mark.

Operator

We'll now go to the line of Gail Glazerman with UBS. Please go ahead.

Gail Glazerman - UBS

Hi, Thank you, maybe taking the flipside of Mark's questions, as you move closer to selling Charleston, are there any other kind of sizable divestment or things that don't appear core at this time?

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

Gale, I think we have been to true to form in recent years in divesting businesses larger or smaller that don't necessarily fit our profile and we have been somewhat contrarian in the marketplace by not doing these things purely opportunistically but by ensuring that we're taking the time to maximize value and we continue to work through that process with respect to all assets that we presently hold.

Gail Glazerman - UBS

Okay, and I think I saw somewhere in the press release a comment about landfills increasing this year, I was wondering if you could give a little bit of color in favor of what we should be expecting?

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

Yeah Gale, this is Mark. We do believe that we will see increased revenues from the sale of land compared to the prior year. It's a... while it's certainly a difficult market, we do have a very strong portfolio in great locations and the team has been very, very proactive in getting those properties ready, enhanced and they have a quite a quite a strong marketing program, so we do still expect to see increased land sales year-over-year.

Gail Glazerman - UBS

Okay, and finally I thought I heard a mentioned of increased maintenance expense at Covington in the quarter, I was wondering if you could compare that to the cost that you had in the first quarter Mahrt?.

James A. Buzzard - President

It will certainly... Gail, it'll be less than what we had in the quarter at Mahrt.

Gail Glazerman - UBS

Okay. Thank you.

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

Thanks Gail.

Operator

Moving along to the line of George Staphos with Bank of America Securities. Please go ahead.

George L. Staphos - Bank of America

Hi guys good morning. How are you? First question, I thought I heard you say something about realigning the sales forces, I want to say in consumer solutions, but might have been in packaging resources, if I heard correctly could you give me a bit more detail in terms of what's involved and how long that process might go on for?

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

George, at a high level we have had a very, very successful effort selling to each of our major customers in the segments we have targeted, business-by-business, product line-by-product line and I think what we have seen as we have knit together very attractive packaging platform, but there is very good opportunity for us to move more logically to an approach where we are selling as a platform aligning our products with various solutions we have, as levels of interaction with our customers that will enable us to strategically support their needs a lot more affectively. So, what we are doing is gradually making shifts and we are starting as I commented in my openings remarks with healthcare and personal care to bring the breadth of our packaging platform to bear and that's what where... that what we are all about. It's a logical next step and it's something that we will be gravitating towards in the coming months.

George L. Staphos - Bank of America

Okay. And my experience with the sorts of realignments in the past is that while they ultimately work out and they are well intended, they are often pretty tricky to implement the first few quarters. I don't know if you agree with that or not but how do you manage against that and then specifically within a market like healthcare does your customer really care that you can offer the carton and offer this dispensing system? I would imagine that the performance and the pricing are separate but obviously there are some advantage there, what would you have us think about? Thanks.

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

George, great question. First of all, we're mindful that any kind of realignment, can involve some breakage of glass and you can be sure as they we are very focused on managing any realignment, we undertake with a view towards maximizing opportunity and minimizing disruption and so we are very focused on that, we would look at more of the half full approach to the glass that is we see more opportunity at this stage when we do disruption. With respect to the second question, whether its health care or other markets, I think what we have found is indeed, that our customer values strategic insights, the growing consumer insight and the breadth of the platform that we can collectively bring to there, so it is really more knowledge about them, their needs and our ability to serve it with that range of products and solutions, it is at the core of the value and so the customers do, appreciate, the breath that we have. And it's our job to continue to remind them of that, but that is, as any of these moves and talk to talk about these moves have... you can be sure, reinforced by interaction with the customers that have validated the re-alignment we are working towards.

George L. Staphos - Bank of America

John a couple of other ones and I will turn it over, is there any way and perhaps its in the detail in the appendix, I didn't see it too, breakout the fact that media is having on consumers solution and perhaps offsetting a better story, said differently, is there anyway that you can roughly quantify for us what type of revenue or EBIT growth you are getting out of the dispensing systems year-over-year, or over the last couple of quarters, that would be helpful if you had it.

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

Yeah let me offer a couple of qualitative comments and I will turn it over to Mark to supplement what I am saying. I think there is a very positive underlying story here, Gorge and its embedded in the comments that we've talked, but you'll see more of that as we move through the next several months, whether its clearly in personal care right now and our global markets, whether its an health care broadly or building or be it from a relatively small base and growth in the international beverage market. There are a lot of good things going on and I think in the... even in the dispenser market where resin price have masked results, the innovation, the technology advance and the growth and responsiveness to all of that in the market place is very, very positive, so we're incurred, we don't like the numbers fairly in the aggregate, but we like what is going on underlying all of that and we are encouraged by the opportunity we have to share with you in the months ahead, Mark.

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

Yeah, and Gorge on your questions around media and Calmar on the media side revenues were down year-over-year but more moderate than we had seen in the past we... we are certainly having success in the gaming... gaming space the... and the fact is that absent that charge we took for the accounts receivable write off are of media business would have been up slightly year-over-year, driven mostly by taking out cost in productivity.

In terms of Calmar that you know we are... we've talked about end market segments but if you look at Calmar holistically, that business continues to perform very well, sales for that business were up over 20% year-over-year so we continue to really like the growth side in profitability of that business.

George L. Staphos - Bank of America

Alright I'll turn it over and I'll try to come back later, thanks.

Operator

We'll now go to the line of Mark Weintraub with Buckingham Research. Please go ahead.

Mark Weintraub - Buckingham Research

Thank you, just a few clarifications. First the pension that $30 million in the quarter, does that include... what's included in that or put another way, what is the pension credit for the full year going to be?

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

Roughly, full year roughly $80 million included in the first quarter was a gain that we had as a result of pension curtailment, so it was a little bit higher than you would expect to see on a run-rate basis.

Mark Weintraub - Buckingham Research

So for is it going to be $17 million or so quarter going forward or what's the?

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

No, it's roughly 20 million a quarter and we had an additional 10 million this quarter for that curtailment gain.

Mark Weintraub - Buckingham Research

Got it okay, and also can you give us an update on cap spending and I don't know if the sale that Charleston mill has any implications on that number, perhaps going lower. And then maybe DD&A, actually while your at it.

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

Sure, the cap spend for the year is still in that 330 to 340 million range, there certainly is capital associated with the Charleston mill off course and that is before the exclusion of Charleston. So, there is certainly would be some decrease in that full year forecast related to Charleston.

Mark Weintraub - Buckingham Research

Okay. And is too early to give us a sense as to what next year might look like of cap spend side?

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

Yeah it is.

Mark Weintraub - Buckingham Research

Okay.

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

We are working on continuing to really focus on capital spend, make sure that we have got very tight hurdle rates and good returning projects and as we see continued softness in the economy and potentially tougher times ahead, we are going to continue to look hard at our capital spends.

Mark Weintraub - Buckingham Research

So, certainly there is no major capital needs that are coming-up that's going to make that number necessarily go higher and unless you have great projects you want to be pursuing?

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

Absolutely correct.

Mark Weintraub - Buckingham Research

And then lastly, on the land management, on... what... can you tell us how many acres you sold, what you sold them or whatever the best way to be looking at 8 million?

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

Yeah, it's relatively minor in the first quarter. I'll have Jason get back to you and Mark with the details on that.

Mark Weintraub - Buckingham Research

And follow-up on that, with timberland values remaining extremely strong in fact seem to be continuing to go higher, are you constantly evaluating what another significant transaction firm from the land that you still own might make sense keeping a base for the development work that you are looking at but maybe supplement that with one or two larger timberland sales or are we kind of done with that process?

James A. Buzzard - President

Mark, I'll take that up. I think that we continue to evaluate opportunities as we look at markets and relative values and the land holdings to consider any and all such opportunities. I think it's fair to say though that as we talked following the conclusion of the last major transaction that that was the biggest single transaction in the past we had going forward, but again consistent with my comment to in response to Gail's question earlier, whether its hard assets or land assets like. We'll continue to evaluate what is the best approach to achieving value with assets that we have. You mentioned though the development activity and again, I think we're very encouraged as we commented during our prepared remarks with the progress that we are making and I would reinforce that the opportunity is there to create value within longer term prospective in mind and clearly, supporting that with the strong next stage focus on developing the final master plan for this East Edisto and following that entitlement is the key.

Mark Weintraub - Buckingham Research

Thank you.

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

Thanks Mark.

Operator

And we'll now go to the line of Mark Wilde with Deutsche Bank. Please go ahead.

Mark Wilde - Deutsche Bank Securities

Good morning. First a comment then a couple of questions. I just want to comment that I think that the value of Charleston was quite good. I know that that was a very good transaction for you but it's a good price and it really contrasts I think it what a lot of us saw at Stevenson a few year ago where we thought the mill was sold awful cheap. The questions I have are, first just on a detail basis, can you just talk with us a little bit about what the plan is down at Rigesa over the next two or three years. It seems like you're rebuilding an awful lot of the back end of that mill and you could be getting ready to do that machine that I think you've talked about.

James A. Buzzard - President

Mark, I'll pick up on that. You are correct and we are doing some work in the back end of that mill, more around however energy costs and what we have seen are dramatic increases in electrical cost down there, so it makes an awful lot of sense for s to go in and put it in the to capacity both from a power boiler and a turbo generator to make ourselves more self sufficient, and that was the driving factor behind those investments.

Mark Wilde - Deutsche Bank Securities

Okay. But it does look like kind of the infrastructure is getting built out to do make that mill potentially larger at some point.

James A. Buzzard - President

Well I think as we've talked in the past, we like Regisa a lot, the whole Latin American cost structure and, as we said, we've considered additional capacity down there. At this point in time, there is nothing on the table.

Mark Wilde - Deutsche Bank Securities

Okay. And then from a big picture standpoint, I know its about eight years ago when you kind of laid the strategy out to us which was the focus on these downstream packaging businesses really focus less energy and less capital on the back end of the business, and it seems to me, in the interim we have seen a very interesting transaction with Mead done. We've seen the value of the underlying land in the company go up tremendously. But if you just look at the value of a share in the company, it hasn't really done anything over that eight year period, and I just wonder if you just step back, are there any lessons we need to take from that or do we just need to give this more time?

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

I guess I should answer that question, Mark. And I think that there's nobody more frustrated with the share value performance than yours truly here leading the company today. But we're absolutely confident that the transformation that we are on is one that is directed to achieving the value that... the increase in volume that we believe is appropriate for shareholders. I think if we look at performance of companies across this industry, it reinforces to us that the actions were undertaking while those are not yet generating the results that is manifesting share price that a course of action which would have been stay the traditional course is one that would not have generated the prospects we see going forward. So, we were going to keep our nose to the grindstone, we have confidence in what we are doing and we believe that our shareholders will be rewarded as a result.

Mark Wilde - Deutsche Bank Securities

Yeah, I guess John. I'd agree and I think staying the old course would not have been good decision. I just... do you think that there are any kind of modifications to the course that need to be made here in order to really generate more value?

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

Mark, that's a fair question and you can be sure that as we look at the course and as we look at aspects to implementing plans along the course that we are relentless in challenging ourselves day in and in day out. And as we have any changes with respect to the course or modifications that we think are appropriate to discuss externally, we will do that. I would note just in terms of the comments we made in our remarks and the questions that George raised about go-to-market strategy that those are... those reflect very clear modifications to the course that on one hand, while subtle and not requiring a huge amount of hand fanfare and investment, are ones that reflect the logical next step in the execution of the commercial strategies that we have.

Mark Wilde - Deutsche Bank Securities

Okay and just as a kind of a final point on that. John, you are giving more detail on the company, on the business segments than we got a few year ago. I just want a particular insight, consumer solutions. Are there any ways that you can give us yet additional information to really help us understand what goes on within all of those different businesses on a sort of a regular basis? We get kind a segment commentary each quarter now but we have still don't head along in terms of numbers that we can look at there, that really help us understand those businesses.

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

Mark I think that's a very fair question and we... I answer this knowing that there is probably never enough that we can provide that will satisfy all of your deals. But I think that as we go forward whether it is in a quantitative breakout or certainly qualitative information that we can support with numbers as appropriate, we will look to do that to build of the kinds of responses we gave in the questions today on what's happening with Calmar versus other forms of packaging. I think the other thing that we will do consistent with the market focus that we have talked about is that we will build into our commentary prospectively a greater measure of color as is appropriate on what we are seeing as our performance and progress and certain market segments, either healthcare market or a personal care market and we are appropriate the sub-segments there. So, you will get not only an assessment of what we are seeing in the subsets of the business but probably most important from our standpoint, which happening in the market place and how we are tracking there.

Mark Wilde - Deutsche Bank Securities

Okay, very good. Thanks.

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

Thank you.

Operator

We'll now go to a line of Peter Ruschmeier with Lehman Brothers. Please go ahead.

Peter Ruschmeier - Lehman Brothers

Thanks. Good morning. I had a couple of questions, may be for Mark, I was curious if you could comment on the type of annual cash tax savings MeadWestvaco might enjoy if the Tree Act were passed?

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

In essence what that will end up doing is reducing the tax rate on those sales from the current 35% rate down to closer to 14%. Right now, our sales are modest but, you can merely just take some type of pro forma amount of land sales and multiply it by that delta in the tax rate.

Peter Ruschmeier - Lehman Brothers

Okay. And then coming back to consumer solutions, I mean I know there is certainly lot of challenges in that business. I was curious John if you could try to help us at a higher level to understand in different buckets perhaps, what has to happen to go from point A to point B, and we when we're think about it, if you were get to the high single digit, EBIT margins that you've talked about in the past, I think you're talking about $150 million kind of improvement that's needed, and the factors that impacted business are some out of your control, whether these... whether the economy resin cost pressures, secular trends that are out of your control... how much help do you need from those factors, and then the factors that are in your control, if there's any way to communicate the controllables that you can get X dollars from cost cuts or X dollars from mix or X dollars from new products? So just recognizing there's a lot of a headwind, I am just curious if you can help us to say here is where we are and here is some different pockets that we think that if we can get X, Y and Z, we can get to that objective?

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

Fair question, Pete. I think clearly, as we comment at the earlier, we are very focused on the ambitions we have set for the year and clearly with this platform, moving well beyond 5% margins to higher single digit is absolutely the key. And as we go forward as I responded to Mark's question, we will attempt as appropriate to provide greater insight into those buckets so that we can have conversations with you about what those and entail.

Cleary, there are as you have reinforced, unusual factors that represent headwinds today and we recognize it one form or another. In a challenging competitive global marketplace, there will always be things that we say as headwinds. And so, our plans and the conversations we'll have what you will focus on those things that we view our very much within our capacity to influence and you're going to have to measure our progress against those ambitions, but we'll look to be ever more clear in defining what those buckets if you will look like and want the performance expectation should be.

Peter Ruschmeier - Lehman Brothers

And just may be a real high level, are the factors out of your control, are they going to impact this or do you think that you can get to your objective? Just trying the hard level say well, do you need $50 million or $75 million of help on these macro variables that are out of your control to get to your objective or do you think you can get there independent of that?

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

Well, I think that... let me answer it this way. We would never make promises that headwind in the short-term making is going to make anything we are doing, easy. But I would go back to the comments where you've offered across the board and that is the growth in our markets the segments were targeting, the initiatives that we have, give us great confidence of the mix of business that we are looking to build in the segments we have targeted, will give us a significant opportunity to achieve the profitability targets and the profitable growth ambitions that we have set for ourselves, and we are absolutely determined surmount unusual headwind in the face of for example, energy related raw material cost with pricing that... if not immediately certainly through a stage pass through more than offset those costs so that the good work we are doing in the market places is not diluted by the raw material cost.

Peter Ruschmeier - Lehman Brothers

Okay. That's helpful. You did give one example of something you are doing, I mean the Shelpak rollout, I am curious, is that a $10 million revenue opportunity, a $100 million revenue opportunity, I mean, any thoughts on as an example of a new rollout, if it goes well, how could... how much could that contribute for you?

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

That is a great question Pete and I would put that in one of those buckets that we'll talk about in the future. But surprised to say that it represents growth in itself as well as more broadly in terms of the healthcare initiatives, healthcare packaging initiatives we have, but one of several very, very exciting opportunities that we see for taking our leadership position in compliance base packaging at a time when there is great and increasing focus on to newer and higher levels of growth and profitability. So we'll come back and talk about that more fully at a later day, when we've got more specifics to disclose and we're in good alignment with customers and of more broad based the several customers' confidence in our disclosure of any of that information.

Peter Ruschmeier - Lehman Brothers

Okay, that's helpful. I know we're running late but may be last one if I could. On the cost side equation, can you help us to better understand hedges that you may have in place, contracts you may have in place, whether its hedges in nat gas or longer duration contracts and things like coal so that we can better understand if and when the recent escalations may actually impact your business or whether you have protections from the recent escalations and some of your cost inputs?

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

I'll pass you on to Mark.

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

Yeah Pete. Probably the biggest area for us is nat gas and we are hedged almost 70% going into the second quarter and 55% for the full year, and right now, those hedges are some where around 865, 870. So, as nat gas goes up, we should be fairly well covered.

Peter Ruschmeier - Lehman Brothers

Anything else outside of gas or coal for example?

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

No. We have contracts on coal that are longer term that we like right now and we... that's really it from a commodity perspective.

Peter Ruschmeier - Lehman Brothers

Okay, very good. Thanks guys.

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

Thanks have a good one.

Operator

We have exhausted our time for questions today. Please continue.

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Source: MeadWestvaco Corp. Q1 2008 Earnings Call Transcript
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