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MeadWestvaco's Earnings & Revs Lag Estimates

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MeadWestvaco Corporation’s (MWV) third-quarter 2013 adjusted earnings from continuing operations increased 26% to 49 cents per share from 39 cents in the year-ago quarter. Despite sluggish consumer demand, growth across targeted packaging and specialty chemicals end markets, and increased land sales and savings in overhead costs led to the year-over-year rise. However, earnings fell short of the Zacks Consensus Estimate of 52 cents.

Including the net effect of pension settlement charge of 2 cents, restructuring charge of 2 cents and discrete income tax items of 1 cent, earnings on a GAAP basis stood at 44 cents per share. Including restructuring charges of 1 cent per share, earnings in the year-ago quarter were at 38 cents, which reflected a 16% year-over-year increase.

Operational Updates

Total revenue edged up 3% year over year to $1.43 billion in the reported quarter, falling short of the Zacks Consensus Estimate of $1.44 billion. Results were aided by solid revenue growth, volume gains in medical, fragrance and personal care pumps and dispensers, as well as in food and beverage packaging.

The Industrial segment benefited from higher pricing in Brazil, and the Specialty Chemicals business had strong volume growth in innovative products for global asphalt, adhesives and oilfield markets, as well as contribution from the recently acquired specialty chemicals business in Brazil.

Cost of sales increased 2% year over year to $1.11 billion in the third quarter. Gross profit improved 7% to $322 million with gross margin expanding 100 basis points to 22.5%.

Selling, general and administrative expenses in the reported quarter remained flat at $160 million compared with the year-ago quarter.  Adjusted operating profit improved 16% year over year to $162 million. Consequently, operating margin expanded 130 basis points to 11.3%.

Segmental Performance

Food & Beverage: Revenues in the segment declined 1% year over year to $796 million. Increase in food and beverage markets was offset by weaker tobacco packaging sales.

Segment profit dipped 8% to $86 million in the reported quarter from $93 million in the year-ago quarter. Improved operating productivity and favorable foreign currency exchange were not substantial to offset wage and input cost inflation, and unfavorable product pricing and mix.

Home, Health & Beauty: Revenues in the segment slid 1% to $185 million from $187 million in the prior-year quarter. Gains in higher value beauty and skin care, fragrance and medical dispensing solutions were mitigated by declines in home and garden dispensing and beauty and personal care folding carton solutions.

Profit for the segment was $6 million in the reported quarter, a 50% drop from $12 million in the year-ago quarter. The decline was a result of wage and higher input costs as well as transformation costs due to the planned exits of the beauty and personal care folding carton businesses in Europe and Brazil. However, volume growth in higher value products and favorable foreign currency exchange somewhat compensated these negative effects.

Industrial: Net sales in the reported quarter went up 16% year over year to $132 million, driven by improved product pricing in Brazil along with contribution from the high-quality industrial packaging materials business in India, Ruby Macons.

Segment profit rose an impressive 129% to $16 million from $7 million in the prior-year quarter. Increased product pricing and lower expansion costs at the Brazilian operation were partially offset by higher planned maintenance costs, wage and input cost inflation, as well as unfavorable foreign currency exchange.

Specialty Chemical: The segment reported revenues of $260 million, up 2% from the year-ago quarter, driven by growth in targeted pine chemicals markets and contribution from the addition of the Brazilian pine chemicals business, Resitec.

The segment’s profit increased 6% to $66 million from the year-ago quarter. Volume growth and contribution from the Resitec were partially offset by lower pricing in more standardized product lines, unfavorable foreign currency exchange and higher raw material costs.

Community Development and Land Management: Revenues in the segment increased 80% year over year to $63 million. Profit for the segment increased threefold to $33 million in the reported quarter from $11 million in the prior-year quarter.

Financial Position

As of Sep 30, 2013, cash and cash equivalents amounted to $462 million versus $663 million as of Dec 31, 2012. Long-term debt amounted to $2.03 billion as of Sep 30, 2013, compared with $2.1 billion as of Dec 31, 2012. Cash flow from operating activities was $148 million during the first nine months of 2013, an improvement from $117 million in the prior-year comparable period.

MeadWestvaco has embarked on an enterprise-wide overhead cost reduction plan, which is expected to lead to annual cost savings of around $75 million by the end of 2014. The company is refocusing and streamlining its operations, as well as consolidating general and administrative support across the organization. With savings of $28 million generated in the first nine-month period of 2013, MeadWestvaco expects its savings to exceed the high end of its range of $25 to $30 million by the end of 2013.

Sale Of U.S Forestlands

In a separate announcement, MeadWestvaco disclosed that it has entered into a definitive agreement with Plum Creek Timber Company, Inc. (PCL) to sell its U.S. forestlands and certain related assets, comprising approximately 501,000 acres in Alabama, Georgia, South Carolina, Virginia and West Virginia. Plum Creek will also invest in a newly-formed partnership comprising MeadWestvaco’s approximately 109,000 acres of diversified development lands in the Charleston, S.C., region.

The aggregate value of the transaction, including both parties’ investments in the partnership, is $1.5 billion. Of the proceeds, MeadWestvaco plans to return approximately $665 million to its shareholders.

Upon closing of this transaction, MeadWestvaco will no longer own forestland assets in the United States, but own and manage approximately 135,000 acres of forestland in the state of Santa Catarina, Brazil. The company plans to retain these forestlands to serve its recently expanded virgin kraftliner operation in Brazil.


MeadWestvaco did not provide any specific guidance for the fourth quarter, but expects higher earnings compared with the year-ago quarter, driven by continued volume improvement across its targeted packaging and specialty chemicals markets, pricing improvement in industrial packaging solutions and productivity gains from increased operating leverage. Furthermore, the ramp up of the new paperboard machine in Brazil and savings from its overhead reduction initiative will also boost earnings.

However, MeadWestvaco added that challenging macroeconomic conditions, higher raw materials costs (particularly resin and fiber) and depreciation of Real against the U.S. Dollar will act as a deterrent.

Our View

MeadWestvaco will benefit from its new products, profitable growth strategies, expansion in Brazil, benefits from acquired businesses and sale of non performing businesses. However, the situation in Europe remains a headwind.

Richmond, Va-based MeadWestvaco is a global packaging company providing innovative solutions to the world’s most admired brands in the healthcare, beauty and personal care, food, beverage, home and garden, tobacco, and agricultural industries. The company also produces specialty chemicals for the automotive, energy, and infrastructure industries.

MeadWestvaco currently retains a short-term Zacks Rank #3 (Hold).

Peer Performance

One of MeadWestvaco’s peers Packaging Corporation of America (PKG) reported third quarter 2013 adjusted earnings of 91 cents per share, up 65% year over year and beat the Zacks Consensus Estimate by 2 cents.

Sonoco Products Co. (SON) reported adjusted earnings of 63 cents per share, managing to beat the Zacks Consensus Estimate of 61 cents and increasing 14% from 55 cents earned in the year-ago quarter.

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Read the Full Research Report on SON
Read the Full Research Report on PCL
Read the Full Research Report on PKG

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