MeadWestvaco Profits up 123%
Friday, July 31, 2009
Press release from the issuing companyRICHMOND, Va. -- MeadWestvaco Corporation reported positive second quarter earnings with year-over-year profit growth in the majority of the company's business segments despite lower overall demand. The results reflect the company's continued execution of its transformation strategies to deliver consistently higher returns for shareholders by participating in profitable packaging and other markets, reducing overhead costs and improving the overall operating productivity of its manufacturing facilities and supply chain. The results also reflect the benefit from alternative fuel mixture credits reported in other income.
- Profit Growth in Consumer Solutions, Consumer & Office Products and Specialty Chemicals Segments
- $46 Million of Cost Savings Achieved Year-to-Date; Company Expects to Exceed $125 Million Target
- Shellpak Growth Accelerating; Global Beverage and Home & Garden Businesses Achieving Market Share Gains
- Strong $623 Million Cash Position
"Our deliberate strategic actions to generate higher returns for shareholders are working," said John A. Luke, Jr., chairman and chief executive officer. "We are encouraged by the positive results we delivered during the second quarter in what remains a very difficult environment, and expect an even more significant impact from the intentional execution of our strategy when the economy improves."
Luke continued, "We are increasing the value we deliver to shareholders by making disciplined choices about our participation in key markets, and by strengthening our business model with permanent cost reductions and ongoing operating productivity. In conjunction with our priority emphasis on innovative solutions and growth in emerging markets, these efforts are helping us continue to deliver on our commitments – and shape the direction of our company for the future."
Second quarter 2009 net income was $125 million, or $0.72 per share, compared to $56 million, or $0.33 per share, in the second quarter of 2008. The results for the second quarter of 2009 include after-tax income of $112 million, or $0.65 per share, from excise tax credits earned under 2007 legislation enacted to provide a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The results for the second quarter of 2009 also include after-tax restructuring charges of $25 million, or $0.15 per share, primarily related to employee separation costs and facility closures. The results for the second quarter of 2008 include after-tax restructuring charges of $6 million, or $0.03 per share, primarily related to employee separation costs and facility closures, and an after-tax gain of $9 million, or $0.05 per share, related to a sale of corporate real estate.
In the Packaging Resources business, profit from continuing operations was $49 million in the second quarter of 2009 compared to $54 million in the second quarter of 2008. Sales were $614 million in the second quarter of 2009 compared to $674 million in the second quarter of 2008. Price and mix improvement, moderated input costs and strong operating productivity were more than offset by lower sales volume, higher unabsorbed fixed manufacturing costs associated with market- and maintenance-related downtime and unfavorable foreign currency exchange principally related to Rigesa, the segment's Brazilian operation.
As planned, in the second quarter of 2009, the segment took aggressive actions to match production with demand. These lower production levels reduced overall profit versus the prior year due to unabsorbed fixed overhead costs. In the second quarter of 2009, market- and maintenance-related downtime totaled 103,000 tons, of which 88,000 was in SBS grades and 15,000 was in Coated Natural Kraft (CNK). Increased shipments in beverage multi-pack paperboard were more than offset by modest declines in tobacco and liquid packaging paperboard and by more pronounced declines in grades that serve the food service and general packaging paperboard markets.
As part of MWV's transformation strategies to focus on higher value global paperboard packaging markets, the company made the decision in July to permanently remove approximately 200,000 tons of SBS paperboard capacity by shuttering the No. 2 paperboard machine at its Evadale, Texas, mill. The machine, which runs food service and general packaging grades, will fully cease operation by the end of the third quarter of 2009. As a result of this action, the company's remaining annual SBS paperboard capacity will be approximately 1.5 million tons.
In the Consumer Solutions business, profit increased 14 percent to $25 million in the second quarter of 2009 compared to $22 million in the second quarter of 2008. Sales were $554 million in the second quarter of 2009 compared to $656 million in the second quarter of 2008. Strong volume growth in adherence healthcare packaging was more than offset by unfavorable foreign currency exchange and pronounced volume declines in personal care, as global spending for luxury items remained weak, and in media packaging, where the company's actions to exit low return business resulted in lower volumes. Volume declines in global beverage and tobacco packaging were modest.
Profit growth in the company's home and garden, beverage, tobacco and healthcare businesses more than offset declines in global personal care and media packaging. The segment is continuing to execute the company's transformation strategies and has announced the closing or restructuring of eight global manufacturing locations to maximize production efficiency and exit unprofitable product lines. In the second quarter, the company announced the restructuring of a primary plastics operation in Hemer, Germany, and the closing of its Wilmington, N.C., beverage plant.
Consumer & Office Products
In the Consumer & Office Products business, profit increased 15 percent to $31 million in the second quarter of 2009 compared to $27 million in the second quarter of 2008. Sales in the second quarter of 2009 were $234 million compared to $270 million in the second quarter of 2008. As expected, sales were lower due to the weak global economic environment, resulting in lower volumes of most products. Envelope products sales were particularly weak as financial services customers continue to significantly reduce direct mail offerings. Benefits from aggressive productivity actions, including the effects of previous facility closures and restructurings, and tight cost control, drove improved profit in the second quarter. The segment continues to be impacted by imports from Asia.
In the Specialty Chemicals business, profit increased 36 percent to $15 million in the second quarter of 2009 compared to $11 million in the second quarter of 2008. Improved productivity more than offset lower volume and higher unabsorbed fixed manufacturing costs associated with market-related downtime. Sales were $116 million in the second quarter of 2009 compared to $146 million in the second quarter of 2008. Strong global demand for asphalt solutions and increased sales of automotive carbon in China were more than offset by lower global demand for industrial performance chemicals and decreased North American demand for automotive carbon.
Community Development and Land Management
In the Community Development and Land Management business, sales were $23 million in the second quarter of 2009 compared to $40 million in the second quarter of 2008. Profit was $3 million in the second quarter of 2009 compared to $24 million in the second quarter of 2008 due to weak economic conditions and consequently lower land sale activity. Profit from real estate activities was $1 million in the second quarter of 2009 compared to $20 million in the second quarter of 2008. The segment sold approximately 1,700 acres for gross proceeds of $4.5 million in the second quarter of 2009 compared to approximately 7,300 acres for gross proceeds of $23.8 million in the second quarter of 2008. Profit from forestry operations and leasing activities was $2 million in the second quarter of 2009 compared to $4 million in the second quarter of 2008.
Real estate industry conditions remain challenging due to continued credit tightening and weaker consumer spending. These factors will likely continue to influence near-term results. During this time, the segment will continue to move forward with its near- and long-term real estate value creation plans, including enhancing rural land, as well as entitling and master planning its highest potential development land.
Corporate and Other
Corporate and Other profit was $45 million in the second quarter of 2009 compared to a loss of $65 million in the second quarter of 2008. The results for the second quarter of 2009 include income from alternative fuel mixture credits totaling $178 million, net of associated expenses, representing a period of about 24 weeks of fuel usage at the company's three U.S. paperboard mills, and restructuring charges of $39 million. The results for the second quarter of 2008 include a gain of $15 million from a sale of corporate real estate and restructuring charges of $10 million. Excluding the effects of the alternative fuel mixture credits, the gain on sale of corporate real estate and restructuring charges, Corporate and Other was a loss of $94 million in the second quarter of 2009 versus a loss of $70 million in the second quarter of 2008. The higher year-over-year loss adjusted for the above items was primarily driven by lower pension income and lower interest income in 2009 compared to 2008.
Alternative Fuel Mixture Credit
The U.S. Internal Revenue Code allows an excise tax credit for alternative fuel mixtures produced by a taxpayer for sale, or for use as a fuel in a taxpayer's trade or business. MWV qualifies for the alternative fuel mixture credit because it uses an alternative fuel known as black liquor, which is a byproduct of its wood pulping process to power its paperboard mills. In April 2009, the company was notified that its registration as an alternative fuel mixer was approved by the Internal Revenue Service. Following receipt of certification by the Internal Revenue Service, the company submitted refund claims totaling $178 million after associated expenses based on fuel usage at its three U.S. paperboard mills from mid-January 2009 through June 30, 2009. The company received refunds totaling $134 million through the end of the second quarter. The pre-tax impact of the excise credit, net of associated expenses, is included in other income in the consolidated statement of operations in the amount of $178 million for the three months ended June 30, 2009, and is included in Corporate and Other for segment reporting purposes. The credit is currently scheduled to expire on December 31, 2009.
Strategic Cost Management Program
On January 15, 2009, MWV announced the acceleration of a series of broad cost reduction actions that began in 2008 to further reduce its corporate and business unit overhead cost structure, optimize its manufacturing footprint, and realize sourcing savings throughout its supply chain. By the end of 2009, these actions are expected to result in the elimination of about 2,000 positions, or 10 percent of MWV's global workforce, and the closure or restructure of 12 to 14 manufacturing facilities. These cost management efforts are expected to achieve $125 million in pre-tax savings in 2009, with a targeted run-rate range of $250 million to $300 million by mid-2010 for the facility and overhead rationalization actions. In the second quarter of 2009, MWV achieved savings of $32 million ($46 million year-to-date) toward these goals, including the elimination of over 370 positions (1,260 program-to-date) and the closure or restructure of 4 manufacturing facilities (12 year-to-date). As a result of its progress to date, the company now expects to exceed its initial 2009 savings target of $125 million by at least 10 percent.
In the second quarter of 2009, total pre-tax input costs, including energy, materials and freight, decreased $23 million over the prior-year quarter on a continuing operations basis.
In the second quarter of 2009, the pre-tax impact from unfavorable foreign currency exchange was $14 million compared to the prior-year quarter on a continuing operations basis.
Cash flow provided by operations was $250 million in the first half of 2009 compared to $155 million in the first half of 2008. The year-over-year increase was primarily driven by the receipt of alternative fuel mixture credits from the Internal Revenue Service totaling $134 million.
Capital spending from continuing operations was $92 million in the first half of 2009 compared to $140 million in the first half of 2008.
In the second quarter of 2009, the effective tax rate was approximately 26 percent. The annual effective tax rate for 2009 excluding discrete items is expected to be about 30 percent.
MWV paid a regular quarterly dividend of $0.23 during the second quarter of 2009, and on June 23, 2009, declared a quarterly dividend of $0.23 payable on September 1, 2009, to stockholders of record at the close of business on August 3, 2009.
Given continued worldwide economic uncertainty, results for the second half of 2009 are difficult to predict. MWV is directly addressing the uncertain economic environment by remaining focused on the key items within its control that are expected to maintain the company's solid financial position and maximize the company's performance, including:
- continuing to take actions across each business, including aggressively focusing on the most profitable markets, products and customers, to ensure above cost of capital returns;
- matching production to demand to conserve cash costs;
- vigilantly managing working capital usage and reducing discretionary spending;
- reducing capital expenditures by narrowing spending on more immediate, high-return investments; and
- continuing to reduce the company's overhead structure and rationalize manufacturing capacity.
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