MeadWestvaco Earnings Call Insights: Food & Beverage Pricing, Rigesa Project

MeadWestvaco Corporation (NYSE:MWV) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Food & Beverage Pricing

Mark Weintraub – Buckingham Research: I was hoping to get a little color if possible on how the price increases in Industrial – sorry, in the Food & Beverage business, how they would typically roll through because obviously there was one increase you implemented earlier this year and there is another that’s been announced. When might we start seeing the benefits of that and how much of it might be in place during 2014, in particular?

John A. Luke, Jr. – Chairman and CEO: I’ll ask Jim to comment on that. I would just say at the outset, as always, that we have a mix of contract and non-contract business which influences the direction of the question you’re raising. Jim?

James A. Buzzard – President: I think as John said, clearly, we have businesses under contract and I think as we’ve talked previously, a little over half of our business is under contract. Some of that is tied to beginning of the year where we negotiate those increases on January 1. Other increases are tied throughout the year. Some of them also indexed to market indices. So, one of the things we saw as prices declined in the back half of 2012, we also saw some of those contracts resetting in the first part of this year. As those come back up again, those will reset at the higher prices. So, that’s the key part in terms of the contract side of things. There’s also a lot that goes on, as you know, around both customer and product mix that impacts those numbers as well. Having said all that, I think we feel very good about the pricing actions we took in the first half of this year. We’ve moved our noncontract business up, and clearly as our contract business comes up, we will focus on doing that as well. We’re in the throes of increasing prices again as we speak. Market dynamics feel positive in that regard, and clearly the value that we’ve provided the marketplace, we think supports the increases as well. So we feel good about that. We should see, as I think Mark referenced, those increases impact our results in the back half of the year, and then trend up nicely in 2014 as well…

Mark Weintraub – Buckingham Research: On bleached board, are the price increases effective for export business as well or is that a separate category?

James A. Buzzard – President: Again, Mark, some of those – some of our export customers are under contract; others are not. It’s really the same dynamic as we have on our domestic customers as well.

Rigesa Project

Phil Gresh – JPMorgan: First question on Industrial, obviously a good price performance there. The productivity was neutral in the quarter. I’m not sure kind of what your timeline is in terms of when you’re expecting that productivity to really start hitting. I think it was really more intended in the back half of the year. Anyway, but I guess what I was hoping for is you gave some nice color around the boiler saves, and when you expect those to flow through in ’13 or ’14. So I was hoping maybe you could do something similar for the Rigesa project.

John A. Luke, Jr. – Chairman and CEO: Jim, you want to pick that up?

James A. Buzzard – President: Sure Phil, I will take that up. I will press that by saying, I have learnt not to make bold predictions about major start-ups. But I think having said that, we’re very positive about the performance of the team in Brazil, the equipment that we have installed, the products that we’re producing and the future of that operation. So, as you know, these things go under extended start-up curves and we’re on that curve. We’re trending nicely where we anticipated that we would be. I think the other thing that we referenced last quarter that we probably haven’t been as maybe open about or transparent about is, this was more than just a new paper machine. We basically rebuilt that entire paper mill. So in addition to a new machine, we’ve got a brand new lime kiln, we’ve got new pulping capabilities and new wastewater treatment system. There is a lot of complexity that goes into operation today that candidly didn’t exist previously. Having said that, as I referenced earlier in my comments, moving nicely up the curve. As you noted, we’ve expected those benefits to accrue in the second half of the year. We’re on target to do that and so we’re very optimistic about the investment down there what it can provide for the Industrial business for MeadWestvaco going forward…

Phil Gresh – JPMorgan: If I were to ask more explicitly, I think on past calls we’ve kind of referenced maybe a $75 million savings number over time. Is it reasonable to think, similar to the boiler project, we might – on a relative scale, we might be able to get a cert of those saves starting to flow in the second half of this year, or is it more of a 2014 story given the complexity that you mentioned?

James A. Buzzard – President: Yeah, I think it’s fair to say that we should see a third of that numbers you referenced beginning to flow into the back half of this year. And just a reminder, those savings are both productivity, but it’s also some growth that goes into those numbers; reintegration of the business as well. So, all the areas that we have identified previously as benefits to the project, we see coming forward, and as I said, we should see the beginning of that in the back half of this year, but ramping up nicely in 2014.

Phil Gresh – JPMorgan: My second question was just on Home, Health & Beauty. You talked about these transition costs in Brazil et cetera. I think, kind of, the collective operating loss for Europe and Brazil folding carton last year was around maybe $10 million. So I guess, what I’m wondering is, at one point that negative $10 million kind of becomes a zero moving forward. I just wanted to hear about the progress you’re making on the European folding carton, and how long to expect a Brazil transition cost?

James A. Buzzard – President: I’ll reference maybe the Brazil transition cost, and maybe look to Mark to talk about the Europe folding carton. In Brazil, as I noted in my comments, we’re moving out of the folding carton business and expanding into primary plastics. That’s really going to probably take us at least nine months to go through that process. We want to make sure as we exit out of the folding carton business, we support our customers appropriately and making sure that they can transition to other suppliers going forward. At the same time as we move that facility to make plastics products, building out that infrastructure as well as moving the equipment in, we do it in a way that we’re supporting current customers as well. So we have a very detailed project plan laid out to do that. We will begin that implementation towards the end of Q3; and should see that ramp more fully through the six months after that. So by end of Q1, Q2 next year, we should be fully operational as a primary plastics business in Brazil.

Mark Rajkowski – SVP and CFO: On the European side, we’re in process with the marketing effort. So that is underway, and we have high expectations for that as well.

Phil Gresh – JPMorgan: Mark, one last question for you just on the CapEx front, $500 million for this year. I believe that includes a $100 million for the Covington boiler. So wondering if you have any preliminary thoughts around CapEx for next year. I think in the past, you’ve talked to kind of $350 million as more of a normalized level. I’m curious if we’re going to hit normalize next year, if there’s any other things in the works that we need to be aware of.

John A. Luke, Jr. – Chairman and CEO: Yeah, Phil, I think $350 million to $400 million is a good range. I mean, we still have some investment that we’re going to be seeing in India relative to expanding some capacity there as well as some capital for our Resitec business that we acquired, remaining interest in at the end of last year. So I think that’s a good range to think about.

A Closer Look: MeadWestvaco Earnings Cheat Sheet>>