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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

Mark Wilde - Deutsche Bank AG, Research Division

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

George L. Staphos - BofA Merrill Lynch, Research Division

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

Gail S. Glazerman - UBS Investment Bank, Research Division

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

Mark A. Weintraub - The Buckingham Research Group Incorporated

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Chip A. Dillon - Vertical Research Partners Inc.

MeadWestvaco (MWV) Q3 2012 Earnings Call October 23, 2012 10:00 AM ET

Operator

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

Jason Thompson

Thanks, Kimsom, 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 and slides that accompanying 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 third quarter, the company's income from continuing operations was $67 million or $0.38 per share. Excluding special items, adjusted net income from continuing operations was $69 million or $0.39 per share.

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

I'll now turn the call over to John.

John A. Luke

Jason, thanks very much, and good morning. MWV's results during the third quarter shows that we're continuing to execute our strategy and performing well through a period of sustained economic uncertainty. Overall, our revenue was about the same as last year. The result was negatively impacted by foreign exchange. Our volume grew by more than 3%, and pricing and product mix were modestly positive. In most cases, our targeted markets have remained relatively firm, and we're gaining shares through our profitable growth strategies. While earnings were lower mainly due to foreign exchange and lower land sales, we have continued to execute on productivity and operational excellence initiatives that led to another quarter of solid profitability.

I'll expand on these high-level performance indicators with additional commentary about progress on our profitable growth strategies and what we're seeing in our markets before turning to Jim and Mark for a detailed report on our segments including our continuing momentum in Specialty Chemicals and progress with our Brazilian expansion and financial results in the quarter, then we'll get to your questions.

While slower growth around the world is having an impact on overall demand, our profitable growth strategies have enabled us to outperform on a relative basis by building our positions in targeted end markets and geographies despite these economic pressures. As we've noted, our work is focused on 4 key areas: Commercial excellence, innovation, emerging markets and expanded participation. We've made significant progress through 2012, and we remain confident in our ability to deliver billion dollars in profitable revenue growth over the next 3 to 5 years.

In commercial excellence, we continue to see good results from our ongoing partnership with Anheuser-Busch InBev, especially as they succeed with NFL promotional packaging for Bud Light. The unique look and feel of these packages is the direct result of our highly coordinated commercial strategy including the packaging brand engagement sessions we conducted with them and highlighted at our Investor meeting for you last year.

In innovation, we recently launched a new line of fragrance pumps based on our consumer insight work in the beauty and personal care market. These new products in our Melodie line of sprayers will help customers distinguish their luxury brands and drive exclusivity with discerning fragrance consumers. We're also seeing good order patterns for Shellpak Renew and successful trials for Captivate, our shopper-ready packaging solution for Food & Beverage markets.

In emerging markets, we just announced late last week the acquisition of Ruby Macons in India, which will significantly strengthen our profitable growth in this targeted emerging market where modern retail is just taking route and the middle class is expanding rapidly. Ruby Macons is the leader in corrugated packaging materials and has grown on average over 20% during the last several years. We'll leverage our experience with the industrial packaging business in Brazil to further accelerate growth and returns. And speaking of MWV Rigesa, the team has done an outstanding job executing on our expansion project in Brazil, and we expect significant earnings in cash benefits beginning in 2013.

In expanded participation, we're continuing to identify our customers' biggest needs and challenges and respond with the right materials, technologies and solutions. That process is ongoing and important to our profitable growth ambitions. Our recent expansion into caps and closures, for instance, led to significant new business with a major household products company, which has helped drive double-digit volume growth in this business.

Through these strategies, we're creating growth opportunities in our targeted markets, markets which remained attractive despite current economic pressures. In fact, we're seeing growth above GDP levels in many of the end markets and geographies where we have leadership positions, and we're generating profitable growth that is stronger than the market. For instance, we continue to succeed in the corrugated market in Brazil where we again outperformed the overall market during the quarter. We're also winning with adherence packaging in health care. Dispensers for skincare applications in Asia, preservative-free medical pumps in Europe and beverage multipacks in North America and emerging markets. Given these and other examples of our strong positions, we fully expect to build on of this momentum. We're leaning forward during this difficult period, and we're pleased with the progress that we have made. But we know that circumstances could become even more challenging in the coming months and perhaps beyond, given uncertainties surrounding the fiscal cliff in United States, continuing financial economic difficulties in Europe and other potential threats to global growth. We'll stay focused on executing the strategy that has worked for us so far and capturing the growth that is available in our targeted markets and geographies.

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

James A. Buzzard

Thank you, John. We executed well, both commercially and operationally during the third quarter in what remains a very tough global economic environment. Our profitable growth strategies and productivity initiatives across the businesses continue to positively impact earnings. This largely offset lower land sales in CDLM and negative foreign exchange associated with our sales in Europe and Brazil.

I'll provide some detail about performance in each of our segments starting with packaging. In our Food & Beverage segment, sales and earnings were down slightly during the third quarter and would have been substantially improved except for the negative impact in foreign exchange. Our retail food, tobacco and beverage packaging businesses were stronger in North America and Asia, where we gain share through our commercial excellence efforts and growth initiatives in emerging markets. Pricing also remained stable, and we maintained our positive price cost spread by delivering measurable value to our customers. We also had solid productivity gains at the mills and facilities that support this segment. Lower volumes in Europe and the effect of the weaker Euro had a negative impact in overall earnings in the Food & Beverage segment.

Looking at the end markets we serve in this segment, in beverage, the overall market trends this year have been flat in North America, weak in Europe, as you might expect and positive in Asia and Latin America. In many cases, the growth in the beverage market is coming from categories where multipacks do not currently participate, such as energy drinks, tea and bottled water. In North America, our volume was positive in the quarter as we added business with Dr Pepper Snapple. In Asia, our business continues to grow as we place beverage packaging machines with new customers and in new geographies including the emerging markets and then capture the benefits in terms of additional carton volumes. In the third quarter, for instance, we placed our first machine in Thailand and our first innovative machine for the food market in Korea. And we gained carton volume during the period as a result of previously placed machines in China, Australia and Japan.

In food, the market has been experiencing huge volume declines as higher food prices have hit cost-sensitive consumers around the world. Our volume outpaced these broader trends during the third quarter largely due to our innovative products such as Mware paperboard for hot coffee cups and commercial excellence with top brand owners who recognize our value proposition and specify our packaging materials product categories such as Frozen Foods.

We also continue to work on our innovation pipeline with tests and trials that will captivate our shopper ready solution that is being used by Nestlé Purina in Kroger stores and Evertain, our paperboard solution for salty snacks and other products that will begin shelf life testing during the fourth quarter.

Overall, our outlook for Food & Beverage markets remains positive. We expect segment profits in the fourth quarter to be solidly above year-ago levels. We are cautiously optimistic that stable demand trend will result in modest volume growth versus the prior year. In addition, we will benefit from lower mill outage costs, moderate input cost inflation and improved pricing and mix. We will, however, have a maintenance outage at Evadale and continue negative impact from foreign currency exchange.

In the Home, Health & Beauty segment, sales were down slightly in the quarter as some of our pricing for plastic packaging reset as part of contracts linked to the cost of plastic resin. Though as you can see in our slide presentation, the overall price cost spread was still favorable.

We had volume increases in personal care and healthcare dispensers, as well as sales growth to adherence packaging. The caps and closures business we acquired at the end of the fourth quarter last year also added to sales and we saw good growth in that business. Even with the overall sales decline, primarily from the negative impact of foreign exchange, earnings increased in the segment 20% to $12 million.

In health care, our innovative new solution, Shellpak Renew, is driving higher demand for adherence packaging. A market that is growing due to the reduced costs and improved health outcomes associated with increased patient adherence. We have also begun to introduce adherence packaging as a solution in emerging markets. We had our first revenue in India during the third quarter, and our customer won an India Star Award for excellence in packaging as a result of this launch. Also in the third quarter, we saw strong volume growth for a primary medical plastic solutions, and we expect continued growth in our Healthcare business through our ongoing innovation and global commercial efforts.

In Home and Garden, the business continues to be impacted by the slightly negative trends in North America and Europe, though we're gaining in Europe with the recent expansion of the innovative trigger sprayer we acquired from Spray Plast. And we're also bringing new solution to the North American market that leveraged this platform including a launch for SC Johnson's Windex brand.

Most of the business we added from our expanded participation in caps and closures is in the Home and Garden market, and those volumes continue to increase strongly with major branded customers. Including the new win John mentioned for a differentiated cap for Clorox's new bathroom cleanser.

Looking at personal-care, our business is roughly in line with, or in some cases slightly better than, a market that continues to be pressured by lower consumer spending especially in Europe. We're doing well with our plastic dispensers for skincare and fragrances in markets around the world, and our cap and closure business also continues to grow.

In the fourth quarter, we expect earnings in the Home, Health & Beauty segment to increase modestly versus the comparable year ago quarter. Volume growth in plastics dispensing solutions in targeted markets will be partially offset by continued declines in folding carton volumes due to weakness in Europe. The segment's price cost spread is expected to be neutral, while productivity gains and continued contribution from the caps and closure business will drive the expected improvement.

In our industrial segment, sales and earnings were down as we expected during the third quarter with much of the decline due to the continued depreciation of the dollar versus the Brazilian real compared to last year and start-up costs related to our expansion project. The corrugated packaging market in Brazil was up slightly in the third quarter, and we grew in the end markets for produce, meats and consumer products. Our strong performance in the market continues to support our excitement about the investment in Brazil. We started up the new paperboard machine in the quarter and will continue to proceed through the start-up curve through the end of this year, leading to positive incremental earnings and cash flow contributions in 2013.

In the fourth quarter, we expect earnings in the Industrial segment to be similar to third quarter levels and driven by many of the same factors, chiefly unfavorable foreign exchange translations, onetime in nature expenses from the ramp-up of the new machine, and start-up costs associated with the rebuild of the existing Três Barras machine.

In the Specialty Chemicals segment, sales and earnings grew double digits again in the third quarter even as we compare against the very strong performance last year. We continue to make strong volume gains in our highest value solutions for the carbon, asphalt paving, oilfield and adhesive markets. Productivity was impacted by growth investments we are making to penetrate targeted value-added carbon and pine chemicals markets and by certain onetime costs.

In the fourth quarter, we expect to continue our improved year-over-year earnings trajectory in the Specialty Chemicals segment. While a strong margin profile will remain relatively consistent. The absolute profit increase will be more modest as we continue to cycle earlier strong gains. Also impacting the fourth quarter will be routine maintenance downtime in each of our carbon plants and pine chemicals refineries.

In Community Development and Land Management, development activities continue to move along at a good pace, and we had a total of 12 small track sales during the quarter. Overall, we are seeing more interest in our well-located lands, as sentiment in the housing and real estate market improves. We have a number of projects in our pipeline for the Charleston region including a master plan community in Summerville, South Carolina, called Nexton and industrial properties that will support the business growth from Boeing and the Charleston Port, among others. Based on the current pipeline of land sales expected to close during the fourth quarter, we anticipate earnings in this segment to be higher than last year.

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

E. Mark Rajkowski

Thanks, Jim. We had another solid overall financial performance during the quarter, especially considering the challenging global economic environment. We're executing well in our profitable growth strategy and our productivity programs. The result was solid volume growth and good margin performance demonstrating that our overall business model is strong and that our strategy is working.

As we look beyond the current year, the progress and the foundation for growth that we're building today continues to give us good confidence in achieving our goal of $1 billion in profitable revenue growth over the next 3 to 5 years. I'll quickly hit the highlights of the quarter and then provide additional detail about our outlook for the fourth quarter.

There are 2 highlights during the quarter that stand out as reflecting the underlying strength of our business. First, the combination of volume growth in price and mix improvement drove a 3% revenue increase on a constant currency basis, and our adjusted operating income of $143 million with over 10% operating margins. This was good performance considering the significant foreign exchange headwinds we faced in the lower level of high margin land sales versus last year.

Taking a closer look at the income statement and starting with sales, we had another solid quarter. We generated volume growth across all manufacturing segments by using our strategy to capitalize on the growth opportunities despite the difficult global economy. This was particularly evident in our packaging businesses where we continue to drive above-market growth in many of our targeted markets.

Our food, beverage and tobacco packaging businesses each outperformed their respective underlying industry growth rates with particularly strong volume growth for retail food packaging materials and solutions for food service applications.

In Home, Health and Beauty, we're beginning to see the benefits from the investments we've been making in several of our growth platforms. Some examples include double-digit growth for skincare and hair care dispensing products, strong growth for medical pumps and dispensing products in health care and continued progress with our adherence packaging solutions including Shellpak Renew.

Finally, in industrial packaging, while sales were lower due to currency exchange, volumes continue to grow with key food, industrial and personal care customers. Despite the challenging demand environment, we had a modestly positive price mix contribution, which is a direct result of our more-focused, higher value product set and market discipline. As expected, the level of year-over-year price increases has narrowed as we fully cycle the larger paperboard increases we negotiated over the last 2 years. We are, however, continuing to price for value across all of our businesses and improve our product mix.

Adjusted SG&A was essentially flat year-over-year with increases for the acquisition of Polytop and growth investments in our Specialty Chemicals business, partially offset by cost reductions and currency. Our solid revenue performance combined with continued productivity gains in our manufacturing and supply chain operations enable us to deliver adjusted operating margins of 10.3% during the quarter.

Year-over-year, adjusted operating profit and margins were negatively impacted by unfavorable foreign exchange and start-up expenses for the new paper machine in Brazil. On an aggregate basis, these items reduced year-over-year operating profit by $27 million or almost 200 basis points. The takeaway is that our underlying business model remains strong, and we're delivering on the things that we can control.

Before turning to the balance sheet and cash flow, let me quickly touch on the discontinued operations line. The $16 million after-tax charge primarily represents non-cash tax and other final adjustments related to the spin merge of the Consumer & Office Products business in the second quarter. This line will go away beginning next quarter as we don't expect any further adjustments.

Turning to the balance sheet. Our financial position and liquidity remains strong. This was recently recognized by Moody's in their decision to upgrade MWV's credit-rating to investment-grade. At September 30, we had cash and cash equivalents of $745 million. We'll use these funds to complete our large capital projects, invest in our profitable growth initiatives including our recently announced acquisition of Ruby Macons, which we expect to close in the current quarter, as well as continue to deliver strong cash returns to our shareholders.

Cash flow from operations in the quarter was approximately $120 million versus $220 million in the year ago period. The year-over-year change primarily reflects higher working capital. Most of the working capital increase relates to timing of payments for accounts payable and accruals with the remainder driven by higher receivables due to unit sales growth. We expect most of the timing items to reverse and to see strong cash flow from operations in the fourth quarter.

In terms of our outlook, there are no near-term catalyst for growth and the global economic environment remains challenging. We expect to see continued uneven demand and order trends as our customers tightly manage their supply chains through the end of the year.

That said, we expect fourth quarter earnings to be significantly above the prior year on a continuing operations basis. In addition to benefits from our profitable growth strategy and continued productivity gains, our meal outage costs will be substantially below last year's level. Continued unfavorable foreign exchange translation, as well as start-up expenses related to the commissioning of the new machine in Brazil will continue to be the primary negative offsets to earnings. John?

John A. Luke

Mark, thanks very much. To summarize, there are number of positive signs in our third quarter results, namely, that our profitable growth strategy is working and the markets we've targeted have remained relatively firm. We're gratified by our performance. However, as Mark just emphasized, we are mindful that we're operating in a still very challenging economic environment and that further uncertainty lies ahead. We'll stay very focused on executing the elements of our strategy that have worked for us so far, working to build momentum on the build on the momentum we've generated in our target markets and geographies.

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

Question-and-Answer Session

Operator

[Operator Instructions] We now go to the line of Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Just a question, John, about last -- this announcement around Ruby Macons last week. For years, it seemed like the company was moving away from mill-centered businesses into more kind of packaging and converting businesses, things like the pumps and dispensers businesses and other things. I just -- it seems like with this acquisition and also the expansion of the mill down in Brazil that maybe the pendulum is swinging back the other way from a corporate strategy standpoint, can you address that?

John A. Luke

We'd be happy to, Mark. And it's a good fair question. I think one of the things we've really worked very hard to emphasize is we have targeted the end markets we have is that our strategy is to pursue and drive economically profitable growth and with -- through solutions in those targeted markets. And doing so in ways that really leverage our knowledge and our capabilities, both in the marketplace and from a technology standpoint. To your point, the expansion -- the investment in the expansion of paperboard in Brazil and this most recent investment in containerboard in India are very good examples of that, but we're also very keen on continuing to move downstream closer to the market, as well with solutions, just as Jim described and reinforced with Polytop and Spray Plast. So it's going to be a both end, all driven by the pursuit of good strong solutions-driven positions in markets where we can generate economically -- sustainable economic profitability.

Operator

We now go to the line of Ghansham Panjabi with Robert W Baird.

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

On the Specialty Chemicals business, I'm not sure if you mentioned this, but were -- what was the volume growth during the quarter? And if you can kind of parse that out by the various subsegments, pine chemicals, carbon filters, et cetera, that would be helpful.

John A. Luke

Jim , do you want...

James A. Buzzard

Sure. I'll take that. We saw growth across all of the elements of that business in double-digit range. Clearly, we have seen gains in automobiles in China, the North America automobile business so that's driving our carbon business up nicely. And then, as I reported, I think certainly oil fields, asphalt and adhesives, key target markets for us all showing good growth all around the world.

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

But it averaged double digit is up across the board?

James A. Buzzard

Yes.

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

Okay. All right. And then the lower pricing on standard products that you referred to for the segment, can you expand on this?

James A. Buzzard

Sure. We play across a broad portfolio of both end markets and products, some of them are more standardized products. And as we have seen declines in competing raw materials like gum raws and certain of those product categories have come under a little bit of pressure, but if you look at the broad base of the portfolio and where emphasis is, the price mix continues to be very good for us.

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

Okay. And just maybe one last question for Mark. Mark, how should we think about adjusted EPS number for 4Q of 2011, just to make sure that we're all in the same page here.

E. Mark Rajkowski

Yes, Ghansham, frankly, I don't have that one off the top of my head. Jason, do you -- what is it?

Jason Thompson

I mean, you guys have the 7 profitability for CNOP, income tax offset that and come up with a relatively close adjusted number.

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

Okay. That $0.05, is that what I heard?

Jason Thompson

Yes.

E. Mark Rajkowski

In the neighborhood, yes.

Operator

We now go to the line of George Staphos with Bank of America Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

I have 2 questions. First of all, maybe for Jim. Jim, are you happy with where backlogs are, given the market dynamic? And is any of the Evadale outage -- I think you mentioned it was maintenance, but is any of that related to market management, if you will?

James A. Buzzard

Sure, George. I guess I'm never satisfied with where are backlogs are, but they're holding steady at 2 to 3 weeks. They vary across the machine base. And given the market dynamics, we think we're performing well in our targeted segments. In terms of Evadale, this is a normal maintenance outage. Roughly, it's going to cost probably in the $10 million to $12 million range and -- but it's tied to a recovery boiler and will take some machine downtime with it, again, all maintenance. Having said that, as we have historically, we'll closely monitor the demand situation, and we'll adjust our production to meet the demand.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. And my follow-on would be, overall, you mentioned that maintenance will be down year-on-year, if I remember that correctly. Could you quantify what the fourth quarter year-on-year decline in maintenance will look like? And overall, what should we think about in terms of Rigesa profitability for next year if you have a bogey for that?

E. Mark Rajkowski

Well just -- George, this is Mark. I mean, just on the North American Mills, it's probably year-over-year close to $40 million and in Rigesa, we're looking at somewhere around $8 million to $10 million of costs to continue to commission #4 machine as well as restart #3.

Operator

We now go to the line of Phil Gresh with JPMorgan.

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

Just on Specialty Chemicals, the $8 million there of headwind on productivity, you mentioned the investments and carbon and pine chemicals, as well as some onetime items, I was just wondering if you could elaborate a little bit more on that in terms of the investments you're making and what some of those onetime expenses were and how we should be thinking about this moving forward?

James A. Buzzard

Sure, Phil. This is Jim. In terms of the investments, we continue to invest in talent and capability out ahead of some of the growth as we have, so we prepared for it. In the third quarter, we did open our first office and lab in India, and so we see great opportunity for the pine chemicals business over there. And as we've shown strong growth in places like China, Europe, North America continue to add on the margin the right kind of talent that we need to drive that growth and innovate with new products. In terms of some of the onetime costs, they were the host of things, we had a -- there's legal settlement, there's a bad debt expense, but just a range of onetime thing, none of them very extensive.

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

Okay. And then on Home, Health & Beauty, you continue to make progress on the margins there. Just 2 items, 2 of the moving pieces you've talked about in prior quarters, one of which is Shellpak, which I believe was breakeven a couple of quarters ago. I was just wondering what kind of progress you've made on the margins there as you continue to ramp the volumes. And then secondarily, around the European folding carton business, it sounds like it continues to struggle. Is there any potential for some restructuring that could happen there?

E. Mark Rajkowski

Phil, it's Mark. We have grown that adherence business quarter sequentially, and we expect continued growth as we move into 2013. Your recollection is right. Last quarter, it was roughly breakeven and margins were positive in the low single-digit as that business continues to grow. And with respect to Europe, as you would expect, with weak demands, we are aggressively assessing that situation, and we'll be taking the right actions to fix that.

John A. Luke

Yes, and so -- it's John. I would just reinforce everything that Mark has said on that, and I would elaborate just for a moment on the Shellpak question and the adherence business. I think we are more excited than ever by the progress that we see being made there. The potential for volume growth, attractive volume growth, driven by the increasing penetration not only in the retail sector but increasingly, the large Pharma company sector is such that we're very, very encouraged, and we look forward over the next several quarters to reporting examples of good progress.

Operator

We now go to the line of Gail Glazerman with UBS.

Gail S. Glazerman - UBS Investment Bank, Research Division

Maybe just sticking on Europe and maybe just globally for a moment. Can you just remind us at some point we should start to comp some of the weakness that I think you started to see in the fourth quarter last year? And I'm just wondering, are you seeing kind of incremental sequential weakness as you've moved through 2012? And also just talk maybe about kind of what trends you saw in North America and Asia specifically as you move through the third quarter?

James A. Buzzard

Sure, Gail. Its Jim. I'll take a crack at that and look to John and Mark maybe to add some more comments. We play in a lot of end markets in each of these regions, so you can imagine some are up down or down. At a high level, I wouldn't say that things deteriorated in the third quarter. Certainly in some of our businesses, the plastics, the beauty and personal care, we actually saw gains year-over-year. Having said that, as we referenced in all of our comments, it's a difficult environment out there. And so we continue to monitor and watch it, but no real trends that evolved through the third quarter that would say things were any weaker.

John A. Luke

Yes, and I would agree with that, Jim. And it has really been uneven. And we would expect that, that type of demand pattern to continue as our customers are managing their supply chains. We are also seeing some growth in emerging markets on a currency-neutral basis. We were up mid-single digits in terms of revenue growth in emerging markets. So I think Jim summed it up well. You really have to break it down by end market in each of the geographies, but no we don't see any significant change in the underlying demand pattern. No, and I would just comment, Gail, that what we're seeing around the world is clearly reflective of the contraction that we've seen in most markets. The only exception right now is Brazil, which seems to be modestly on the rebound. And we hope on a sustainable basis from the depths earlier this year. But as I commented and Mark and Jim commented as well, the markets that we have targeted with the product solutions we're bringing for the most part have seen relatively stable to modestly improving opportunities as we go forward. And we would want to go on record and saying in an uncertain world that, that's performance that’s predictive of the future, but it does reinforce to us that the targeted market, targeted geography approach that we're bringing to our strategy is one that is sound, gives us greater confidence, we're making greater progress, and we will stay the course.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just a quick follow-up on Mark Wilde's question on Brazil. In addition to kind of moving into mills, you're moving into recycled where you've been a virgin-based producer, does that impact how you think that business might develop compared to what Rigesa has been able to do in terms of Food & Beverage in terms of food and produce?

E. Mark Rajkowski

I assume you're talking about India, Gail, and let me comment a little bit broadly on India and get to your question as well. As we've talked in this forum and others, India is a very targeted -- key targeted part of our emerging market strategy, is one we studied closely. We've learned a lot from our early almost pilot-type experience with the investment we made, the corrugated facility -- corrugated company, Wadco. Some years back, we've had growing experience in both the consumer and health care markets as well. It's a market that is growing very nicely despite the relatively recent contraction from the peak a few years ago. We see a growing middle-class, modernizing supply chains, liberalization for investment in retail and overall surging demand for consumer and industrial goods. The investment that we've made is in a leading producer of corrugated packaging materials. Recycled, as you know, is based in the very business-friendly State of Gujarat. You've seen the particulars on the transaction. It's one that we see significant opportunity to leverage the know-how, the knowledge in the market solutions that we've developed in Brazil, and it's very timely because the Indian containerboard and corrugated market is not only growing at a double-digit rate. It's going through a huge transformation from a really old almost in some cases basic manual set of technology to one that is increasingly modernized. And Ruby Macons, producer of recycled materials is hands down based on our assessment, the leading quality producer in that marketplace. I know there have been a couple of questions beyond specifics about recycled, about the transaction itself, and let me just offer a couple more things because I think it's very, very positive from our standpoint. You can be sure to other comments that we've made that the transaction analysis was very informed by rigorous economic profit assessment. We paid less than $100 million for the transaction at roughly a 9x multiple. We see the opportunity as markets continue to grow to expand the business materially with very modest capital investment. We expected to be a very accretive transaction, only modestly so in 2013 because it's an accounting measure, but the company is a double-digit operating margin performer. It's generating mid-teens EBIT margins, and we expect a very positive trajectory going forward. We'll learn a lot with the recycled materials but again, leveraging the know-how we have in Brazil, coupled with the outstanding quality that Ruby Macons leadership has brought to the floor gives us great encouragement about the opportunities in that country.

Operator

We now go to the line of Mark Connelly with CLSA.

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

John, 2 questions. Can we go back to Rigesa and talk about what to expect in terms of the progression. Your comments talk a lot about headwinds but not much about prices. Is price where it needs to be, and how should we think about earnings facing in during the year relative to ramp-up costs, et cetera? And then the second question, you deliberately slowed your land sale process. Is it reasonable to think that you're probably looking to accelerate that again now?

John A. Luke

Let me offer just a couple of comments, and I'll turn it to Mark, Mark. We -- in Brazil, which I think your first part of your question was looking towards, we see an opportunity as we go forward, particularly as markets are firming to improve our pricing profile. And what we've first got to be sure is that market demand is back where it is as we commented on performance relative to the general market from a volume standpoint has thus far been attractive. Mark can talk about the trajectory we see as we move through 2013 in just a moment. On land sales, we have seen that slowed both in terms of reflecting demand, as well as select pricing over time. And clearly, if we do see the opportunity for increasing select land sales at attractive prices as we move through the next several months, we'll be judicious and take full advantage of those. Mark?

E. Mark Rajkowski

Yes, John, I want to emphasize that point on pricing. It is important that it continues to be a pretty highly inflationary environment down in Brazil, particularly related to wages. So getting our pricing and product mix improved there is going to be very important. And on the ramp of the new machine for next year, we will provide more detail as we get through the commissioning on our next call. However, I think it's fair to say that the ramp will be more back-end loaded but will certainly start to see some benefits as early as the second quarter.

Operator

We now go to the line of Mark Weintraub with Buckingham Research.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Just want to follow up a little bit more on Brazil. So does that mean that in the first quarter we're going to continue to see some cost, or does that go away and then we start seeing the ramp of the benefit coming in?

E. Mark Rajkowski

Yes, I think we've got a lot of work to do relative to the lightweighting as well. We've got -- that's an important part of our cost benefit, the productivity that we've talked about, and we'll be doing a lot of that work into the first quarter. So it really -- as we see those benefits come on, we'd expect to see substantial improvement in the back half. And the first quarter of this year was pretty good, if you look at that quarter's sequential performance. The first quarter performance this year was pretty solid.

Mark A. Weintraub - The Buckingham Research Group Incorporated

You mean the first quarter of 2012?

E. Mark Rajkowski

2012, yes. So part of it is a little tougher compare. We're still getting the machine up or getting our lightweighting technology in place. And then you'll really see the benefit of all of that starting to hit in Q2 and really ramping up in the second half.

Mark A. Weintraub - The Buckingham Research Group Incorporated

And I guess -- just trying to get a grasp of the potential magnitude. If I look back at the industrial businesses, operating earnings in 2010, 2011. There's $80 million to $85 million each year. Obviously, it's at a much lower run rate in the third quarter. And then you've spent a lot of money to improve the positioning, I think you talked at one point, and correct me if I'm wrong, of potentially as much as $100 million of incremental profitability that could come from Brazil. Is that still within the realm of attainable, do you think as everything gets put in place that you could be back to the $80 million run rate with a very sizable addition, $100 million type addition on top of it? Or have there been significant changes that have taken place that one really has to reset the bar?

E. Mark Rajkowski

Yes, Mark, listen, everything that went into our business case and the value drivers of that investment are still fully in place. We've got great confidence around our ability to deliver on that. Remember, I mean, we've seen on over 20% deval in the Real. So on a U.S. dollar basis, that's brought the earnings base down. But assuming the currency just stays level with today, we expect to drive significant improvements in EBIT and cash flow. And as I said just a moment ago, we'll give you a little bit better sense as to what that might be in 2013 on the next call.

Operator

We now go to the line of Alex Ovshey with Goldman Sachs.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

On the bleach board side, you reported a nice pick up in volumes year-over-year, can you just talk about what drove that? And then also I would have thought that you would have seen a more meaningful pickup in profitability from operating leverage that didn’t really materialize. Can you also just talk about the -- why there wasn’t more operating leverage from the volume improvement?

John A. Luke

Jim, do you want to...

James A. Buzzard

Sure. I'll be glad to. We did see some nice pickup in the food, food service, beverage and tobacco markets in various regions. Part of that is related to the markets where we play, the value proposition that we bring to those markets, and I think that's helped drive the volume growth.

John A. Luke

Yes, I'd add to that, that we actually did see good leverage. I mean what really impacted our earnings in the quarter was FX. I mean, that was almost a $10 million impact. Without that, we're up almost 10%. So the underlying fundamentals are exactly as Jim described. I mean, we saw volumes. We saw improvement in price and mix and really solid productivity.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Okay. Mark, and can you just remind us what the geographic breakdown for that food and beverage business is?

E. Mark Rajkowski

No, I can't right now.

John A. Luke

Well, Jason will get back to you on that.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Okay, I will follow up. And just a couple of more questions. On Covington, can you just give us an update there on how that boiler project is coming along and when we should expect to see the benefit flow through the P&L there?

James A. Buzzard

Sure. The program is going along very well. We remain on schedule and under budget and expect to -- we will finish that way. And we would see the full benefit in the fourth quarter of next year.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Okay, got it. And just last question Ruby Macons investments. I was reading somewhere that there's potential to increase capacity on an existing machine or perhaps even build a new machine. Can you just talk about whether or not that opportunity exists, what the incremental capacity add potentially is and what grade of paper that would be in?

John A. Luke

Yes. It's John. Let me just comment, and I'll ask Jim to supplement my comments. It would be all of the above. We see significant opportunity there to bring -- enhance productivity to existing equipment, as well as the real estate and the opportunity to expand production. As I mentioned, we've got a marketplace where Ruby Macons is the hands-down leader in quality and performance in this segment of the market and a market that is growing double digits. So any acquisition of this sort has to contemplate the opportunity and the cost of investment. And what really brings it both nicely together for us is both the attractiveness of the growth and the capital model that Ruby Macons has employed that I'll ask Jim to comment on. It makes the investment -- the consideration of investment and growth very, very attractive.

James A. Buzzard

Yes, and maybe just building for a second on what John has said. The -- and it's early in the process obviously, but we are very excited about the opportunities to grow the business. It's been growing I think as I referenced 20% a year. And with the investments we see from our large customers, the demands on higher-quality product to run across their high-speed filling lines are only going to grow. So as the -- already is the quality leader the capabilities we can bring to drive further quality, we remain excited about the opportunities. Looking at the asset base, a lot of opportunity around modest machine rebuilds to drive growth. And we see an opportunity to perhaps double the output of Ruby Macons over the next 4 or 5 years at a very modest investment base.

Operator

We will now go to the line of Chip Dillon with Vertical Research.

Chip A. Dillon - Vertical Research Partners Inc.

First question on the -- as you look at your machine placements, you're obviously making good progress there. We've noticed that at least one of the -- probably the fastest beverage can grower out there has canceled 4 plants. I think 1 in Brazil, 3 in China at least indefinitely, and I didn't know if that is affecting how you, all of you, the growth in your -- in the marked product?

James A. Buzzard

Clearly, we -- there are different dynamics around the world. In terms of the question on machinery, as I said, you would put a number of placements, Asia really has been a high-growth area for us and moving into non-beverage applications like food, as I referenced, with an investment in Korea. So we continue to have a strong backlog of opportunities to place new machines out there, and that drives the carton growth. So and the markets have been a little bit difficult in Europe clearly, and we've seen some pressure in the carbonated soft drinks in North America but still feel very good about the business and our positioned in it for growth.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. And then just quick follow-up. As you look at the increase in box board of all stripes, capacity in China coming on, what is your strategy of dealing with that? And can you give us a flavor as to, if any, how much of an overlap you think you guys have with some of the board that's coming online over there?

James A. Buzzard

Sure. Obviously, Asia particularly China, driving very strong growth over the next 2 or 3 years. We'll put some pressure on the margin. Those gradually don't compete with our SBS from a quality and performance standpoint. Having said that, their applications where there would likely be some crossover. So we will continue to sell the advantages of SBS in the Global Markets, be that performance on filling lines, the aesthetics and all the things that we bring to those markets. So we're going to monitor it. Those are markets to demand. Quick turnaround, food service we've done that for many, many years, and that's the game we'll have to continue to go on.

Operator

[Operator Instructions] We will now go to the line of Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Yes, a couple of follow-ons. So for Mark Rajkowski just on margins, in Beauty and Home, I noticed that there's 860 basis points of D&A in the business, just looking at the spread between EBIT and EBITDA. That seems awfully high for that business, can you offer a little color on that?

E. Mark Rajkowski

That is largely a function of intangible assets and other purchase accounting that we did in connection with the acquisitions of Calmar, as well as there's some Spray Plast in there and a little bit of Polytop as well.

Mark Wilde - Deutsche Bank AG, Research Division

All right. So would you expect that to go down over time?

E. Mark Rajkowski

Eventually, it will go down. I mean, it is going down. And as the DA goes down, our EBIT will go up.

Mark Wilde - Deutsche Bank AG, Research Division

Yes, okay. The other margin question I have, Mark, was going back a few years ago. You were talking about, I think, a 10% margin target on SG&A we’re still above that level. Is that still a good level, and what's your time frame for achieving that?

E. Mark Rajkowski

Yes, directionally, we want to be moving in that direction. And I think we talked about this on the last call. We -- even in a difficult environment, we have great confidence in our ability to grow our business. We've made a number of investments, as Jim and John have commented a little bit earlier, a little bit of ahead of the curve in terms of that growth. We are seeing some of the benefits of that growth. And as we continue to grow that top line, that will certainly push our SG&A as a percentage of sales down towards that 10% level.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. Now the last question I had. Going back about 12 or 18 months ago, we were talking about a couple of those joint ventures you had up on some of the Appalachian land for energy-related projects, can you just update us on that?

E. Mark Rajkowski

Yes, Mark, it's -- obviously, with nat gas prices being down a little bit, the whole process has slowed down a little bit. But certainly, Bluescape continues to be committed to that. They've invested in pipeline to transmit the gas. And on the preliminary test wells that have been drilled, the results have been pretty promising in terms of the pressure levels and the flow. So the market right now is a little bit down because of pricing, but we believe that there's certainly a great potential for this to be a very valuable asset for us.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. So is it fair to assume, Mark, that the pipeline is in place but you've just kind of backed off on actually drilling production wells at this point?

E. Mark Rajkowski

I mean, that slowed down a little bit, right? And this is a function of Bluescape and how they're managing their capital. So but the underlying, we believe that there's good potential for the underlying reserves.

Operator

And speakers, there are no more questions in the queue. Please go ahead.

Jason Thompson

Thanks, Kimsom. Can you please give the replay information? And thanks, everyone, for joining us and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, this conference will be available for replay after 12 p.m. Eastern Standard Time today through November 23, 2012. You may access the AT&T executive replay system at any time by dialing 1 (800) 475-6701 and entering the access code 266212. International participants dial (320) 365-3844.

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.

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