Why MeadWestvaco tops earnings estimates for 1Q14
Must-know: Starboard Value's activist position in MeadWestvaco (Part 3 of 6)
MeadWestvaco tops earnings estimates for 1Q14
Activist fund Starboard Value LP disclosed a 5.6% stake in MeadWestvaco Corp. (MWV) earlier last month. It urged the packaging company to unlock value by trimming costs and improving margins. The hedge fund noted that the company’s segment earnings before interest, taxes, depreciation, and amortization (or EBITDA) margins are lagging its peers in the packaging space such as Packaging Corporation Of America (PKG), Graphic Packaging Holding Company (GPK), AptarGroup Inc. (ATR), and Rock Tenn Co. (RKT).
Its 1Q14 results, reported in April, saw the company miss on revenue estimates despite improved results and EBITDA margin expansion in all packaging businesses year-over-year (or YoY). The company reported $0.29 earnings per share for the quarter on revenue of $1.32 billion, compared to $0.09 per share on revenue of $1.31 billion in the 1Q13. MWV noted in its 10Q filing that it generated increased sales and earnings across all packaging businesses compared to 2013 as its “end-market participation strategies delivered market share gains with top customers along with increased sales of innovative new products.”
Food and Beverage 1Q margins impacted by weather
In its largest segment, Food and Beverage, improved pricing and product mix as well as volume growth in beverage, aseptic liquid packaging, and food service paperboard drove increased sales YoY to $763 million in 1Q14. The management said severe weather slightly impacted EBITDA margins for the segment, “largely resulting from higher fiber costs and availability issues at the mills, higher purchased energy costs, as well as interruptions to many of our customers’ operations across the U.S.” The company has a leading share in Solid Bleached Sulfate (or SBS) and Coated Natural Kraft (or CNK) paperboard markets, but the EBITDA margins for this segment is lower than its peers such as Graphic Packaging. MWV expects product innovations and packaging machinery placements in new geographies to drive future growth for this segment.
Home, Health, and Beauty sees strong growth in fragrance
The Home, Health, and Beauty segment saw increased sales driven by the rebound in the North American lawn and garden market and a strong growth in the fragrance markets. The management said on the earnings call that adjusted EBITDA margins increased “due to expanded market participation with innovative high -margin products, a more productive manufacturing platform and a leaner cost structure.” With a view to further improve margins in this segment, the company recently sold its beauty and personal care folding carton facility in Bydgoszcz, Poland to AGI-Shorewood Group (or ASG). Also, its Brazilian folding carton facility was repurposed to manufacture higher value plastic pumps and dispensers.
MWV noted that “the global beauty and personal care market is growing approximately 4% annually and close to around 10% in Brazil, India, and China. This year Brazil is projected to pass China as the number two beauty market in the world at $48 billion, and by 2018 the Indian beauty market will have doubled in size.” Starboard Value noted in its letter that the company could shift the business mix towards the more profitable end-markets, such as healthcare packaging, which is a “fast growing end-market” and “presents a compelling growth opportunity.”
Industrial segment sales decline while Community Development and Land Management reports a loss
The Industrial segment sales declined YoY due to unfavorable foreign currency exchange. However, MWV saw slight gains in the segment from pricing driven by initiatives aimed to offset inflation. Starboard Value said the industrial segment EBITDA margins for 2013 were 19.2%, below that of Klabin S.A. (KLBAY)—MeadWestvaco’s largest competitor in Brazil. The fund added the “segment margins have been weighed down by inefficient operations in Brazil resulting from years of underinvestment , and losses at the company’s Ruby Macons facility in India.” MWV has invested over $500 million in expanding its Brazilian facilities, especially the Três Barras mill, in Santa Catarina state, southern Brazil. The fund expects these investments to yield results in the coming years.
The Community Development and Land Management segment saw sales of $2 million for 1Q14 compared to $5 million for 1Q13. Starboard said it expects MWV will seek alternatives to further monetize the value of its real estate assets in South Carolina as well as the 135,000 acres of timberlands in Santa Catarina, Brazil. The fund said it estimates sale proceeds of MWV’s South Carolina Real Estate assets to be at $315 million, and for the Brazilian Timberlands to be around $203 million after tax.
The Specialty Chemicals segment achieved increased sales in 1Q14 driven by volume growth and pricing and product mix improvements from gains in higher value pine chemicals end markets of adhesives, asphalt, oilfield services, and carbon technologies. Starboard expects MWV to unlock value by selling or spinning off this business that is discussed in detail in the later part of this series.
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