MeadWestvaco Corporation’s (MWV) second-quarter 2013 adjusted earnings (excluding special items) from continuing operations declined 20% to 37 cents per share from 46 cents in the year-ago quarter. The results surpassed the Zacks Consensus Estimate of 27 cents.
Growth across targeted packaging and specialty chemicals end markets, positive contribution from Brazilian pine chemicals business, Resitec, and the Indian industrial packaging materials business, Ruby Macons, were offset by lower forestland sales, unfavorable foreign currency exchange and planned outage at the company's paperboard mill in Covington, Va.
Including the net effect of pension settlement charge of 6 cents, restructuring charge of 2 cents and discrete income tax benefits of 8 cents, earnings on a GAAP basis stood the same at 37 cents per share. Including restructuring charges of 2 cents per share, earnings in the year-ago quarter was at 44 cents. Thus, earnings declined 16% year on year.
Operational Updates
Total revenue inched up 1% year over year to $1.43 billion in the reported quarter, falling short of the Zacks Consensus Estimate of $1.49 billion. Results were aided by solid revenue growth in many targeted packaging markets, particularly food, beverage, healthcare and personal care, as well as in specialty chemicals. Sales also improved from the additions of the corrugated business in India, Ruby Macons, and the pine chemicals business in Brazil, Resitec.
Cost of sales increased 7% year over year to $1.17 billion in the second quarter. Selling, general and administrative expenses in the reported quarter dipped 11% to $160 million from $179 million in the prior-year quarter.
Segmental Performance
Food & Beverage: Revenues in the segment declined 1% year over year to $802 million. Increase in food packaging and commercial print was offset by weaker beverage, tobacco and food service packaging sales.
Segment profit plunged 48% to $52 million in the reported quarter from $100 million in the year-ago quarter. Gains in targeted food packaging solutions were not substantial to offset higher-than-expected associated costs with the planned outage and a previous system implementation at MeadWestvaco’ Covington paperboard mill.
Home, Health & Beauty: Revenues in the segment dropped 7% to $188 million from $203 million in the prior-year quarter. Unusually wet and cold weather in North America resulted in lower-than-expected volumes in home and garden packaging. The decline was partly offset by gains in higher value beauty and personal care products.
Profit for the segment was $8 million in the reported quarter compared with $11 million in the year-ago quarter. The decline was result of lower volumes in home and garden packaging solutions, losses in the European folding carton business, as well as costs to repurpose the company’s Brazilian folding carton facility to manufacture higher value plastic pumps and dispensers.
Industrial: Net sales in the reported quarter went up 24% year over year to $138 million, driven by improved product pricing in Brazil along with contribution from the corrugated business in India, partly offset by unfavorable foreign currency exchange. Segment profit rose 43% to $20 million from $14 million in the prior-year quarter. Increased product pricing and lower startup expenses associated with the company’s business expansion in Brazil were somewhat offset by higher raw material and labor costs.
Specialty Chemical: The segment reported revenues of $260 million, up 6% 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. However, the segment’s profit declined 2% to $61 million from the year-ago quarter as lower pricing and unfavorable product mix, incremental maintenance costs and unfavorable foreign currency exchange offset the benefits mentioned above.
Community Development and Land Management: Revenues in the segment declined 16% year over year to $47 million. Profit for the segment dipped 19% to $22 million in the reported quarter compared with $27 million in the prior-year quarter.
Financial Position
As of Jun 30, 2013, cash and cash equivalents amounted to $431million versus $663 million as of Dec 31, 2012. Long-term debt amounted to $2.05 billion as of Jun 30, 2013, compared with $2.1 billion as of Dec 31, 2012. Cash flow from operating activities was $112 million during the first half of 2013, a significant improvement compared with $11 million in the prior-year comparable period. Lower working capital levels and higher cash flow from the company’s expanded operations in Brazil led to the improvement.
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 $16 million generated in the first half of 2013, MeadWestvaco expects its savings to exceed the high end of its range of $25 to $30 million by the end of 2013.
Outlook
MeadWestvaco did not provide any specific guidance for the third quarter, but expects higher revenues 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 and weaker foreign currency exchange, mainly the 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).
Among the peers of MeadWestvaco, Packaging Corporation of America (PKG) posted second-quarter earnings per share of 71 cents, up 45% from 49 cents in the year-earlier quarter and beat the Zacks Consensus Estimate of 63 cents.
Graphic Packaging Holding Company (GPK) reported earnings per share of 13 cents, an 18% year-over-year increase, beating the Zacks Consensus Estimate by a penny.
Sonoco Products Co. (SON) reported second-quarter 2013 adjusted earnings of 59 cents per share, beating the prior-year quarter’s earnings and Zacks Consensus Estimate by a penny.
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