Apr 25, 2012
Executives
Jason Thompson - Director of Investor Relations John A. Luke - Chairman, Chief Executive Officer and Chairman of Executive Committee James A.
Buzzard - President E. Mark Rajkowski - Chief Financial Officer and Senior Vice President
Analysts
Ghansham Panjabi - Robert W. Baird & Co.
Incorporated, Research Division Phil M. Gresh - JP Morgan Chase & Co, Research Division Mark W.
Connelly - Credit Agricole Securities (USA) Inc., Research Division Mark A. Weintraub - The Buckingham Research Group Incorporated Gail S.
Glazerman - UBS Investment Bank, Research Division George L. Staphos - BofA Merrill Lynch, Research Division Mark Wilde - Deutsche Bank AG, Research Division Chip A.
Dillon - Vertical Research Partners Inc. Chip A.
Dillon - Crédit Suisse AG, Research Division
Operator
Ladies and gentlemen, thank you for standing by, and welcome to MeadWestvaco Corporation First Quarter Results. [Operator Instructions] As a reminder this conference is being recorded.
I would now like to turn the call over to Director of Investment Relations, Jason Thompson. Please go ahead.
Jason Thompson
Thanks, Suzanne, and good morning, everyone. This morning, we announced our results before the market opened, and a notification of this morning's call was broadly disclosed.
Further, this morning's call is being webcast at mwv.com and slides that accompany this call are available there as well. I'll briefly remind you that certain statements we make are forward-looking and are not guarantees of future performance and are subject to known and unknown risks and uncertainties described in our public filings.
Furthermore, contents contain time-sensitive information that, although correct today, may change with the passage of time. All the results we share this morning are presented on a continuing operations basis.
For the first quarter, the company's income from continuing operations was $49 million or $0.28 per share. Excluding special items, adjusted net income from continuing operations was $60 million or $0.34 per share.
Now here to tell you more about our results in the first quarter are John Luke, Chairman and CEO; Jim Buzzard, our President; and Mark Rajkowski, our Chief Financial Officer. I'll now turn the call over to John.
John A. Luke
Jason, thanks, and good morning. Moving on the momentum of our strong performance last year, we have extended our performance with a solid start in 2012.
Our profitable growth strategies generated increased top line sales and solid earnings during the first quarter. Performance that was gratifying given the continuing challenges in the global economy, especially the crisis in Europe and the related growth impacts in Brazil and China.
We had year-over-year sales growth of 4% in the first quarter. This is a significant improvement compared to flat performance in the fourth quarter and this renewed growth included both volume increases in our Packaging and Specialty Chemicals markets, as well as higher pricing and product mix improvement.
We also had a very good quarter of land sales and development activity in our CDLM business. We're generating above-market growth in several of our end markets by executing our strategy focused on commercial excellence, innovation, emerging markets and expanded participation with new technologies and capabilities.
This morning, I'll use these 4 pillars of our growth strategy as the context to share some highlights for our performance. First, commercial excellence, where we're working to become the most commercially proficient company in our industry by continuously strengthening our ties to the world's largest consumer products companies in order to earn a larger share of their packaging spend.
As an example of our success during the quarter, we outpaced underlying growth in the beverage market, in part, due to contributions from a new product launch for AB InBev's Michelob ULTRA. This is one of the first solutions to hit the marketplace from the pipeline of projects we developed through our brand engagement work that our beverage team detailed for you during our meeting here in Richmond last December.
Second, innovation, where we're using insights to develop new solutions that deliver valuable benefits for brand owners, retailers and consumers. We had a few exciting developments during the first quarter.
Two of our adherence packages, Shellpak and Dosepak, won awards from the Healthcare Compliance Packaging Council. This is an affirmation of the leadership position that we have built in this segment of the health care market.
Also, during the quarter, we launched a new product, Shellpak Renew. It combines the same adherence-enhancing characteristics of our classic Shellpak with a fully recyclable paperboard format.
Shellpak Renew is now in Kroger stores nationwide. Also at Kroger's, we're running the first store trials for Captivate.
As you'll recall, Captivate is a shopper-ready packaging solution that can revolutionize grocery categories that are hard-to-stock, hard-to-shop and hard for brands to stand out on crowded store shelves. The early response to these trials is positive.
Third, emerging markets, where we're using our existing leadership position to translate our market and consumer insights for the growing middle classes in places like Brazil, China and India. We had 5% growth in our corrugated business in Brazil during the quarter, compared to a reported industry average in Brazil of about 1%.
This follows 2.7% GDP growth in Brazil in 2011 and annual projections of 3% to 4% for 2012. In China, where GDP estimates have been revised down to roughly 8% and many are closely watching trends in manufacturing output, we have low double-digit growth.
Among the many highlights in China, we continue to increase sales of beverage multipacks as this format gains favor with consumers. In India, we have a modest presence and continue to proactively evaluate opportunities to expand our participation in that country where growth, while projected to be about 7% this year, is facing long-term, very attractive prospects.
And fourth, under expanded participation, we're already gaining traction from the moves we have made recently to add to the range of solutions we provide our customers, namely, the acquisitions of Spray Plast and Polytop. Both had a positive impact on the top and bottom line results during the first quarter, notably in our food, beauty and personal care and home and garden sectors.
With the profitable growth initiatives we have in place, you'll recall that we're aiming to add roughly $1 billion in profitable new revenue over the next 3 to 5 years. We're very confident in our ability to reach and exceed that ambitious target, including additional progress in the coming quarters and beyond.
Essential to this growth strategy is our economic profit discipline, which means we are building a business model that ensures the growth we're generating create shareholder value with solid above cost of capital returns. Despite this confidence, the fundamentals in the global economy have not changed markedly, and we're still very cautious about the nearer-term impact of slower growth around the world stemming from the financial crisis in Europe.
We are confident, however, that our growth strategies and business model enhancements will enable us to preserve and extend our momentum during these tough times, just as they did during the first quarter. Jim will now share some more detail about the impact of these growth strategies on the performance of our business segments during the quarter.
Jim?
James A. Buzzard
Thank you, John. As you know, we are reporting the results for our Global Packaging business in the new segment structure for the first time.
This aligns our external reporting with how we are managing our Global Packaging business. And it is consistent with our strategy to drive profitable growth in large and growing packaging end markets.
We'll focus the conversation today on these new packaging segments, as well as Specialty Chemicals and Land Management. In the Food & Beverage segment, we provide primary and secondary packaging solutions for frozen and dry foods, food service applications, soft drinks, beer and dairy products.
This segment also includes results from our tobacco packaging and commercial printing businesses. Sales in this segment were up 5% from pricing and product mix improvement, as well as volume gains in Food & Beverage end markets.
Earnings were down due to a planned maintenance outage at our marked facility where we make paperboard for retail food packaging and beverage multipacks. The outage impact was $9 million in the first quarter, and we also had unfavorable foreign currency exchange effects of $7 million.
Commercial excellence initiatives including brand and packaging strategy engagements with our biggest Food & Beverage customers, as well as continued gains in emerging markets, are what drove better-than-market performance in the Food & Beverage segment during the first quarter, in the quarterly gain share in retail food packaging and had strong gains in liquid packaging in Asia. We also continued to establish our hot and cold drink cups in leading quick-serve restaurants and had a positive contribution in the quarter from Polytop's caps and closures from major food brand owners.
Overall, the market for food packaging continues to grow, with an emphasis on solutions that enhance freshness, convenience and product safety, and it also improved the consumer experience. We are well positioned to capture growth from these trends with our new products and solutions, including Captivate, Evertain, our replacement for the composite can and Polytop's differentiated caps and closures.
The market for beverage packaging was also strong, in part due to warm weather and promotions in North America and higher consumer activity in Europe. We gained share in North America with our first sales of Dr Pepper.
That's the new business that we won last year. And we also had volume growth at our largest beer and soft drink customers that outpaced the overall market.
We continue to convert customers to our paperboard solution for glass bottle multipacks, as well as introduce new packaging formats to the marketplace as part of our pipeline of projects we developed through our brand engagement process with AB InBev. Our performance in Asia-Pacific was also strong.
We have a relatively small multipack business in China, but it is growing rapidly. Overall, our outlook in these beverage markets is very positive, with a growing pipeline of innovation projects that deliver supply chain savings and stronger shelf differentiation across our global markets.
In the second quarter, however, we expect earnings in the Food & Beverage segment to be lower than the strong performance in the second quarter last year. We expect that uneven demand will keep volumes flat in developed markets, but we will have continued pricing, product mix and productivity gains.
However, these improvements are expected to be more than offset by input cost inflation and unfavorable foreign currency exchange. In the Home, Health & Beauty segment, we primarily serve customers with dispensing solutions for personal care, fragrance, home cleaning, lawn maintenance and over-the-counter health care products, as well as adherence packaging for prescription drugs.
Sales increased about 2% during the quarter compared to last year, and earnings increased 50% to $12 million. Innovation and expanded participation in the marketplace, coupled with strong productivity gains, were the main drivers of performance in this segment during the first quarter.
Sales of our proprietary adherence packaging for prescription drugs were up with our biggest retail customer, and we continue to make very strong gains with our medical pumps in Europe. Overall, health care packaging volumes were up 15%.
MWV is the clear leader in the growing adherence segment of the health care market, and we expect to remain the leader by introducing new products such as Shellpak Renew. We've also had tremendous success integrating and growing the capabilities we acquired from Spray Plast and Polytop into our global platform for Home, Health & Beauty.
We're cross-selling these solutions to existing customers, and the initial response from our global brand owners has been very positive. For example, we are growing our home and garden business in Europe with Unilever as a result of our Spray Plast expansion there.
And with Polytop, we have new programs launching in late summer with major customers, including Scotts and BioLab. Our commercial success with these products help drive low-single-digit volume growth, which is better than the flat to negative growth the overall home and garden category has been experiencing.
Looking at personal care. Carton volumes were restrained by lower demand in Europe.
However, we continued to partially offset weakness there with solid levels of business activity with major global fragrance houses utilizing our dispensing solutions. The global outlook for the markets we serve in the Home, Health & Beauty segment remains positive.
We are beginning to see increasing leverage from the upfront investments we've made in our commercial organization and new product development. In the second quarter, we expect earnings in the Home, Health & Beauty segment to again improve.
Higher volumes of our innovative health care and home and garden solutions, contribution from Polytop and productivity gains will be the performance drivers. In our Industrial segment, we provide high-value corrugated packaging for frozen meats, fresh produce, personal care and household products and white goods, primarily in Brazil, and we are also growing this business in India.
Sales and earnings in this segment were down slightly in the first quarter compared to a very strong period the previous year. We outperformed the broader industry during the first quarter by executing commercial excellence initiatives that focus on deep market insights.
Our efforts drove share gains in targeted corrugated end markets for food and household products. As a result, our corrugated volume growth was 5%, outpacing the overall Brazilian corrugated market growth of less than 1%.
That includes volume from our fifth box plant in Aracatuba, which positions us to serve customers in a broader area west of São Paulo. Expansion into this new geography, which is dominated by agribusiness, has allowed us to better serve new and existing customers in meat and other food markets.
We expect to continue to increase our share of corrugated food packaging with this new modern facility. The government in Brazil has made a number of moves to strengthen the economy, including lowering interest rates and taxes to promote investment and consumer spending.
As the economy in Brazil continues to grow and the middle class increases consumption, we expect even greater adoption of the high-quality solutions we provide in this segment. That's why we've made the investment in the new paper machine to expand and improve our advantaged corrugated platform.
And this machine is on track to start up in the third quarter. We are confident in the long-term growth prospects for the Brazilian economy, and the demand outlook for the end markets where we are growing our leadership position remains very positive.
In the second quarter, however, we expect earnings in the Industrial segment to decline. Benefits from volume improvement will be more than offset by lower price mix and higher cost as a result of the investments we're making in the new box plant in Aracatuba.
Modest start-up expenses for the expansion project and unfavorable foreign currency exchange will also impact our results. In the Specialty Chemicals segment, sales and earnings were higher in the first quarter, continuing the pace of improvement the team has set for more than 2 years.
This performance was driven through commercial excellence and a strong lineup of innovative formulations that deliver quantifiable performance benefits to our customers. We gained share with our solutions for oilfield drilling and also saw increased volume for activated carbon as auto sales globally continued to recover.
North America was particularly strong in the quarter, where auto volumes reached a seasonally adjusted annualized rate of 15 million vehicles. These gains were accompanied by solid performance in segment solutions for paving, inks and adhesives resulting in overall volume growth of 8%.
We expect to again generate year-over-year profit growth in the second quarter, but the comparisons get more difficult and we have a planned maintenance outage in the quarter as well. Nonetheless, we still expect solid growth and higher value performance chemical in carbon markets.
In Community Development and Land Management, the pace of rural land sales was seasonally slower in the first quarter. In the quarter, we sold a large forestland parcel, more than 12,000 acres for $20 million.
The more than $1,600 per acre on this transaction is very good for the location in Alabama and has further evidenced that our segmentation process, as well as the quality of our land, is a true differentiator in this difficult real estate market. Moving forward, the story in this segment increasingly will shift to the development side of the business, and excellent progress continues on our industrial parks and master-planned communities.
There have been reports about the dearth of class A industrial space available in the Charleston, South Carolina market, due to insufficient investment in new manufacturing, warehousing and distribution space following the arrival of Boeing and other economic development projects. Because demand far exceeds the supply of appropriate space, we have prepared 2 ready-to-build pads at our industrial park joint venture with the Rockefeller Group, as well as made similar plans for our other industrial sites throughout the region.
These sites will allow us to shorten the time to erect new buildings and will enable us to take advantage of this growing opportunity. And with the job creation that is associated with growth in Charleston, demand for mixed-use space and new residential housing will also increase.
We are well positioned there with our master planned communities in East Edisto and Parks of Berkeley. Earnings are difficult to predict for the Land business in the second quarter due to possible shifts in the timing of transactions.
But based on the current pipeline of deals we expect to close during the second quarter, we expect earnings to be in the low-single digits. Overall, each of our business segments is performing well, and we expect positive progress in each for the duration of this year.
Now I'd like to turn the call over to Mark. Mark?
E. Mark Rajkowski
Thanks, Jim. The strengthened business model that we've created continued to perform in the first quarter, and our fundamental profitability remained solid.
The profitable growth strategies we're executing drove share gains and higher sales of new products across our targeted end markets, resulting in both volume and price mix improvements. In addition, we continue to generate productivity through our operating excellence initiatives.
The leverage from our improvement in these areas was masked by some unusual items in the comparable periods in foreign exchange translation. Normalizing for these items, our underlying operating margin this year was comparable to last year's 10% plus margins.
The fundamental strength of our business model is also reflected in our year-over-year improvement in cash flow from operations of over $30 million. Adjusted SG&A was up modestly, but as a percentage of sales was roughly flat with the prior year.
As you know, we're continuing to invest in new capabilities and talent to accelerate our profitable growth. We're already seeing payback on these investments as reflected in recent share gains and continued improvements in price and product mix that Jim highlighted earlier.
Our financial position remains very strong, which will continue to serve us well in these still uncertain times. When the Consumer & Office Products spin merge closes next week, we expect to receive roughly $460 million of cash.
This amount, combined with cash on hand at the end of the quarter and the strong underlying cash flow from our businesses, will be more than adequate to fund our major capital projects, our ongoing capital needs, as well as our dividend. Importantly, as we look past this near-term period of investment, we expect to generate significantly higher levels of cash flow that we will use to both reinvest to profitably grow our business and return to shareholders through a strong dividend.
Looking ahead to our performance in the second quarter, we expect total company earnings from continuing operations to be modestly lower than last year's record second quarter earnings. We expect underlying demand in the second quarter to remain stable, but uneven with poor visibility, particularly in Europe.
We'll also continue to see the impacts from cost inflation and unfavorable currency translation. That said, we will continue to manage our business effectively given that environment, including the execution of our profitable growth strategies and continuing to deliver savings through our productivity programs.
Now I'll turn it back to John.
John A. Luke
Mark, thanks. To summarize, we're off to a good start in 2012.
We're executing the profitable growth strategies we've laid out for each end market and we're getting results. Our revenue growth is in line with the long-term annual targets we've set, and we're pleased with our performance given the conditions in the global economy.
You'll note that we focused our comments this morning on Packaging, Specialty Chemicals and Land, the businesses that will remain going forward following the spin-off and merger of our Consumer & Office Products business with ACCO Brands. We expect that transaction to be completed next week.
We're confident that this new company comprised of ACCO and MWV's Consumer & Office Products brands will be a leader in the industry, and we wish them and especially our MWV employees who'll become part of ACCO much great success. We're also confident that our remaining businesses will continue to generate positive momentum in the marketplace in the second quarter and beyond, as we pursue the significant profitable growth potential that we see in our markets around the world.
This concludes our prepared remarks, and we'd now be happy to address your questions.
Operator
[Operator Instructions] And your first question comes from the line of the Ghansham Panjabi from Baird.
Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division
How would you characterize the first quarter volumes overall relative to, perhaps, your internal plan on -- if it was higher, was it mostly weather related in your view? Or was there any end market improvement as well?
John A. Luke
Ghansham, it's John. I'll start by giving a high-level comment.
I think overall, we felt very positively about overall volumes. I think they were pretty much up across the board.
Certainly, they could have been better, but I think given the backdrop of macro circumstances we were facing and developments in certain markets we felt positively overall. Jim?
James A. Buzzard
I think that's right, and obviously, given the breadth of the markets we participate in, we -- as I commented, we feel good about our Food & Beverage volumes, the home and garden season got off to an earlier start this year and point of sales are strong and so we expect that to continue in the early part of Q2. Having said that, clearly things like fragrance and some of the higher-end products in Europe are seeing some impact year-over-year.
So on balance, we continue to feel very good with some ups and downs, as John said, based on the macro economy.
Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division
Okay. And then on specialty cans, was there any sort of pull forward for asphalt paving just because the weather was warmer and maybe some new disparities [ph] were able to get some projects done earlier?
James A. Buzzard
No, not really. Actually, we're seeing a little bit of shift in that business where there's less paving of new roads, if you will, given some of the pressure on budgets.
But given our new products that we've developed that are positioned in the preservation and the maintenance side of the business, we're actually picking up good share in that and that's what's driving the paving business for us this year. So we play in both categories but the new products are really helping us.
Operator
Your next question comes from the line of Phil Gresh from JPMorgan.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
On the SBS side, the volumes there are only minus 1%. That's pretty good in the context of the industry and I know you guys are about, I believe, 50% or so of that is export.
You talked about some strong trends in the Asia-Pacific. I was just wondering if you could maybe break apart how domestic was versus export and just remind us within the export how much of that's Asia versus Europe versus other.
James A. Buzzard
Phil, this is Jim. I'll take that.
In terms of across-the-board North America and our export business, we again saw some positive growth in both. So in North America, we had good opportunities in food service, for example, with some new customers, new products around PLA were positive for us and we actually saw some share gain through our commercial excellence initiatives in the existing accounts.
Again, we saw some pressure in some of the more commodity-oriented areas in North America, but on balance, good performance there. And in terms of overseas, our liquid packaging business is up.
We've got a nice position, particularly in Asia, around aseptic packaging for milk and we saw -- continue to see good growth from our regional converters there. So again, it's some ups, some downs, but on balance, we felt very good about the relative performance.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
So is your overall export business up year-over-year in the quarter?
James A. Buzzard
Yes, it was. It was up marginally.
Stronger in Europe, down on some of the commodity parts of Asia, but again up in the aseptic part that I mentioned.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
Okay. And then on the Industrial side, you talked about the price mix pressures from the more standardized entry-level solutions there.
So I was wondering if you could give a little more color around that. Is that something that's kind of developed more recently?
Or has that been an ongoing challenge now that you break apart the numbers in a different way it shows, but just kind of wondering what's going on with that.
James A. Buzzard
Sure. I would characterize that more as mix than I would with price.
And so with the new business, new plant in Aracatuba, we're moving into more of the food area, as I mentioned in my comments, and good profitable growth, good profitable business for us. But from a mixed standpoint, it is slightly less attractive than the overall business down there.
But in sum [ph], we feel good about our growth performance relative to the industry, and we feel like we're on track to deliver the growth that we have planned for that business for the long term.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
Okay. And then a final question here for John.
With the spin basically in the rear view at this point, maybe you could just talk about how you're feeling about the portfolio today and any other things you might consider doing, either in coming quarters or perhaps even coming years, just how you're thinking about how the company is positioned today.
John A. Luke
Phil, as we commented before, we're always evaluating the overall portfolio in the context of broader strategies and global opportunities for profitable growth. But I would say with this transaction coming to a close next week, the portfolio that we -- that represents MWV today is one that we feel very good about and are committed to growing profitably in each of the areas that we're continuing to focus the business on.
Operator
Your next question comes from the line of Mark Connelly from CLSA.
Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division
A couple of issues related to the top line and obviously, it's nice to see top line performance, but I wonder if you could give us a little bit of better sense of what to expect, for example, from new product launches this year. You highlighted a couple.
Are there more significant launches coming this year that are going to help on the top line? And then a second question related to acquisitions.
It sounds like these Spray Plast and Polycap are -- Polytop are coming together a little faster than some of your previous acquisitions did and I'm curious why that might be. I mean, obviously, Calmar got off to a little slow start.
But even as we go back further, some of the acquisitions didn't have as much impact as quickly. So again, I'm just trying to make sure I understand where the top line is going to come from.
John A. Luke
Great question, Mark. Let me answer it in a couple of different ways.
First of all, I think the innovation pipeline is certainly one as we've described as robust. We have opportunity to both further introduce new products.
Jim mentioned Evertain, I believe, a little bit earlier. We both touched on Captivate.
While those are in the early stages, we see opportunity presuming what we're confident will be good market acceptance for volume growth in both of those areas as we move through the year. And there are other initiatives like that.
The Shellpak Renew is one that we're confident about as well. And again, there are -- these are a few among many, many others.
To your question about Spray Plast and Polytop, I think what we have learned and what we're very excited about in both cases, relatively small but specialized acquisitions, we have an opportunity with the go-to-market structure that we have in place today to leverage these technologies in a broader range of market segments and geographies than we were equipped to do earlier on. So the success, early success that we've talked about and that you've addressed is a direct result of our go-to-market strategy.
And it's, with that in mind, that I would say that our focus from an M&A standpoint is, as we go forward, to deliberately work to identify opportunities that will extend our profitable growth strategy, enhance capabilities, enhance technologies like the Polytop and specific opportunities to extend our positions more broadly in the emerging markets we've targeted for growth.
Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division
Okay, that's very helpful. Just one more question.
With respect to Rigesa, you talked about start-up cost and that sort of thing. Are your overall expectations for the Rigesa expansion in terms of both top line and contributions still what they used to be?
John A. Luke
Absolutely. We're very bullish on that.
The project is coming along well. The market planning is coming along well.
The work that Jim alluded to at Aracatuba is part and parcel of that. Our performance in the first quarter relative to the market in Brazil is an indication of the market position we have and the first quality team that we have in place to take us forward.
So we're very encouraged.
Operator
The next question comes from the line of Mike -- Mark Weintraub from Buckingham Research.
Mark A. Weintraub - The Buckingham Research Group Incorporated
First, you had mentioned that foreign currency was going to have a negative impact in the second quarter. Can you try, in order of magnitude, quantify that for us?
And I'm also trying to understand whether that's kind of a quasi-onetime thing or whether the changes, if currency, then were not to move, if it kind of resets the earnings level. And so kind of on a go-forward basis, what we would see in the second quarter would be reflective of the earnings power of the businesses at the exchange rates in the second quarter?
E. Mark Rajkowski
Yes. Mark, on currency, as you know, that moves around, right?
And -- but what's interesting in the second quarter, when you look at where both the euro and the real were in the second quarter of last year, they were really starting to hit peaks, okay? And those currencies currently as we outlook them for the second quarter of '12, both of those are more than 10% lower year-over-year for the second quarter.
So that has a pretty substantial impact. And you can think about it as almost a 10% impact on earnings year-over-year.
So it's relatively substantial. But these move and the currencies started to move down towards the end of the year.
So what we're focused on really is ensuring that we continue to drive volume growth by winning new business, introducing new products, getting higher levels of pricing, improve product mix and continuing to drive cost out through our productivity program. So the currencies will always move.
They happened to be a little bit extreme in the second quarter. But we feel very good about continuing to improve the fundamental margin growth in our business model.
Mark A. Weintraub - The Buckingham Research Group Incorporated
Okay, that's helpful. So that was a year-over-year comparison you were making so it really was -- this is where the earnings power is.
It's not like where you have kind of quasi-onetime...
E. Mark Rajkowski
No, no, no, that's right.
Mark A. Weintraub - The Buckingham Research Group Incorporated
Okay, understood. And then second, you talked about input cost inflation, particularly in the Food & Beverage business, and you could see it was fairly significant in the first quarter.
Can you help us understand what are the main drivers there? And in particular, I would have thought nat gas would have been working very much in your favor and if you could include that into the conversation, that would be helpful.
E. Mark Rajkowski
Yes, Mark. Nat gas is working in our favor.
And as we break down our, what we call, our primary input costs, we have energy materials and freight. Actually, energy year-over-year was favorable.
The big sources of inflation for the first quarter was in materials and a lot of that we saw in our Food & Beverage segment. And what's driving that are a lot of materials that we use in our papermaking, such as TiO2, resin, starches and caustic and other chemicals.
So those are the big drivers of input cost inflation in Q1.
Mark A. Weintraub - The Buckingham Research Group Incorporated
And presumably, that's also what you're looking to in Q2 to be the issue?
E. Mark Rajkowski
Yes, yes, we are. And we expect to see maybe a little bit of moderation.
So a little bit better, but still it'll be inflationary in Q2 as well but at a slightly lower level than Q1.
Mark A. Weintraub - The Buckingham Research Group Incorporated
Great. And really quick, do you make money in China?
You talk a lot about growth there, et cetera. Do you actually make money in China?
John A. Luke
We do. We do and we take in the same very disciplined approach, Mark, that we have talked about in other areas to managing our participation in any investments with an economic profit discipline and we are encouraged by the results.
Operator
Your next question comes from the line of Gail Glazerman from UBS.
Gail S. Glazerman - UBS Investment Bank, Research Division
Just following up on the inflation. Can you talk maybe, as opposed to year-on-year sequentially, what you're seeing?
E. Mark Rajkowski
Right. Year-over-year, Gail, we were up 3.5% roughly Q1 and that's down slightly from what we had seen in Q4.
So while it's inflation, it's -- it is moderating. And as I said to Mark's earlier question, we're looking at inflation in Q2 that's slightly lower year-over-year than what we saw in Q1.
Gail S. Glazerman - UBS Investment Bank, Research Division
Okay. Then I was just wondering sequentially [indiscernible] should fall in?
John A. Luke
Gail, you're breaking up.
Gail S. Glazerman - UBS Investment Bank, Research Division
Sequentially, I mean, are there any of those inputs that you discussed that are still rising that are a concern.
E. Mark Rajkowski
If your question was, is there anything out there in terms of input cost items that are of any particular concern going forward, nothing, there's nothing significant. And as I said, we do expect some moderation in Q2 and beyond.
Gail S. Glazerman - UBS Investment Bank, Research Division
Okay. And in terms of the Home, Health & Beauty segment, in the past, kind of referring to the old CSG segment you've given us a little bit of margin goals and we've talked about maybe getting to 10% margins, is that still a good goal for the new segment?
John A. Luke
Absolutely.
Gail S. Glazerman - UBS Investment Bank, Research Division
And just finally, kind of going back to the demand side. When you look at industrial production for consumer nondurables, things like food, the overall volumes seem pretty weak and you're obviously taking some share, but I'm just wondering if you can comment maybe a little bit more specifically on some of the underlying market trends and whether or not you think it's kind of a new normal or if there's been anything on the supply chain that might lead to better volumes down the road.
James A. Buzzard
Gail, this is Jim. I'll take a crack at that.
I think that, clearly, in the fourth quarter, we did see some adjustment in the supply chains where people were taking inventories down. We think that's largely behind us.
We did not really see any impact on that in Q1. I think going forward, to your point, I think that it is uncertain as we talked about.
I think given what's going on in Europe, certainly the weak growth in North America that we've seen, we expect markets for the near term to be somewhat modest in the developed economies. Having said that, clearly, our focus around innovation, our focus on the emerging markets and our commercial excellence, as well as our ability to drive the technologies John referenced in places like Spray Plast and Polytop around the world, those are all the things that are helping us to drive the growth, and that's what our strategies are built around and that's the focus that we will continue to execute against as we go forward.
John A. Luke
Yes. And I would just add, I think Jim has nailed that, Gail.
I think the real thing as we look around the world and we're participating, as you know, much more broadly, Jim mentioned the innovation and the technologies, those will be the key differentiators. The overall consumption of Food & Beverage, I think we can safely say, will continue to be strong and grow as populations grow.
But they will be mixed in the nearer term by some of the economic pressures that exist in various corners of the world, but that's where the differentiation opportunities for us represent the upside potential.
Operator
Your next question comes from the line of George Staphos from Bank of America Merrill Lynch.
George L. Staphos - BofA Merrill Lynch, Research Division
I guess maybe a quick one to start for Mark. Mark, considering your guidance for the second quarter to be down modestly on a year-on-year basis versus continuing ops, would one way to frame it be to look at last year's earnings per share, which I think were somewhere around $0.54 or so, take out Consumer & Office, on a tax effective basis, I think you'd be around $0.42, $0.43, if I did my math right, would that be the right relative frame of reference for 2Q in terms of your guidance going forward?
E. Mark Rajkowski
Yes. I mean, you got the CNOP numbers from second quarter last year.
You can apply 35% tax rate on that and that's the right way to look at it.
George L. Staphos - BofA Merrill Lynch, Research Division
Okay, great. Bigger picture, back to Food & Beverage packaging.
You obviously spent a lot of time going through Captivate and Evertain back at the Analyst Day in December and it seems like you have some trials here, at least on Captivate, this quarter coming up. Do you have anything else going on with Captivate or Evertain that is meaningful?
From our trade checks, we haven't seen much of it in the market but want to see what else might be shareable from your vantage point in terms of market penetration?
John A. Luke
I think Captivate, we're proceeding at pace as we talked the Kroger trials that I've referenced, George, are proceeding well. Those will continue over the next several months.
And we have a number of other initiatives that we're not prepared to go public on at this stage that we're very bullish about as well.
George L. Staphos - BofA Merrill Lynch, Research Division
John, on Captivate, are you selling to the retailer or are you selling to the brand owner to basically pull or push it through to the retailer?
John A. Luke
I think with the model, George, that we're working on is that it would be a product that is sold to the brand owner, but the retailer plays a very key role in the pull, the acceptance and the success in the store.
George L. Staphos - BofA Merrill Lynch, Research Division
Okay. Two last ones and I'll turn it over.
First of all, on corporate expense and SG&A, more broadly, I think you had some good progress on corporate expense on a year-on-year basis, if I remember from the slide. Still, when we look at overall SG&A from MeadWestvaco, it's higher as a percentage of sales versus what we'd normally see, call it, 7% to 9%, 7% to 10% for the broader paperboard and packaging comparable universe.
Mark, what progress do you think we should see in SG&A over the next couple of years as a percentage of sales? I know you want to invest for growth, but on the other hand, there seems to be a cost-savings earnings lever here that's yet to be tapped.
How would we quantify it if you're in our seats?
E. Mark Rajkowski
Yes. George, a couple of things.
One, what you're looking at, you got a little bit of apples and oranges, right? We've got a -- still in our continuing operations, we've got a Consumer & Office Products business that's got a business model that carries with it an SG&A rate of 15-plus percent, okay?
So that's part of it. But we are very much focused on the efficiency of our spend.
You are right, we are -- have been and continue to invest in SG&A that represents commercial capabilities, innovation, investments in emerging markets. And -- but at the same time, we are -- it's not all incremental.
We are also identifying opportunities to take cost out in areas, back office and other areas where there's opportunities to do that. So some of this we're self-funding and that's what we're looking to continue to do.
But ultimately, what it's all about is growing the top line and driving the profitable growth, executing on the growth strategies that Jim talked about. We will -- you can count on us continuing to be very diligent in terms of driving non-value-added cost out.
What we want to do is really get the leverage in our model by driving the top line.
George L. Staphos - BofA Merrill Lynch, Research Division
So we should be seeing the percentage decline even if the dollars move up?
E. Mark Rajkowski
Yes. And we're -- what we're working on is making investments, but finding other places to pay for it.
John A. Luke
Yes, and that's exactly right, George. We're very, very focused on that and I think Mark's response has reinforced that.
And I would just add to what Mark has already teed up as areas of opportunity. I commented earlier, in response to Mark Connelly's question, about what we're seeing work very, very well in terms of our go-to-market strategy.
We're finding that as we put that very much in place, not only are we getting the growth and identifying more growth opportunities to the point that Mark made, but we're also finding ways that we can be a whole lot more efficient. And so there will be efficiencies that we are targeting actively in how we're structured right down through our business units to have a much greater efficiency while not in any way diminishing the overall effectiveness of our strategies.
George L. Staphos - BofA Merrill Lynch, Research Division
Okay. And on Brazil, just trying to reconcile the prior comments.
Volume, you said, I think, grew 5% better than the industry. You said mix was really the factor in terms of driving negative pricing.
By my math, your pricing per ton, even though I know you don't look at the business necessarily that way, it was down $3 to $4 per ton, so it was profitable growth, yet the segment was down in EBIT. So help us understand why there was profitable growth, yet you saw a decline in EBIT year-on-year and it was an even greater decline when you x out foreign exchange.
James A. Buzzard
Primarily, what you're seeing around the dollars per ton in the mix is we also had a shift, so we did not have nearly the significant external paper sales that we have, and those sales on dollar per ton basis are obviously -- are quite high and that was also part of the mix, as well as I noted as we are growing the Aracatuba business, good profitable growth, but it's in some of the markets that are not necessarily as differentiated as the overall mix.
E. Mark Rajkowski
And some of that timing on those sales -- or some -- the impact was timing, right? We had a big push at the end of last year and just lesser push at the end of this first quarter.
Operator
Next question comes from the line of Mark Wilde from Deutsche Bank.
Mark Wilde - Deutsche Bank AG, Research Division
I have a few questions. One is, I'd like to just come back to kind of Home, Health & Beauty first.
If I go back and look at the numbers when you bought Calmar, you said that had about $410 million of sales and about $81 million of EBITDA, so about a 20% margin. Since then, you've added Spray Plast and Polytop and then all of this growth in the adherence pharma, yet -- and sales have grown, almost doubled, yet the EBITDA has not grown a lot and the margins have really come down.
So can you help us understand what's going on inside the business?
E. Mark Rajkowski
Yes. Mark, let me -- I'll take the first shot at it, and Jim and John can chime in.
But -- when you look at Home, Health & Beauty, roughly 75% of those sales is what you refer to as the old Calmar and Plastics-type business. And they -- those products, whether it's in home and garden, personal care and health care, in terms of our medical pumps and dispensers, continue to perform very well.
They are growing and have EBIT margins in the high-single digits. And there's a -- as you noted, there's a lot of D&A that you'd add on top of that related to the acquisition.
What we also have in there is a -- our Folding Carton business in Brazil and Europe, but predominantly Europe, that supports beauty and personal care customers. That represents about 10% of our sales.
And with some of the issues and the crisis in Europe, we saw a big sales decline in our folding carton sales in Europe and they lost some money. And on the adherence side of health care, as you mentioned we are seeing solid growth and what you don't see is that we are continuing to invest fairly substantially in that business commercially and innovation to take advantage of our leading position because we expect that space to grow substantially in the years ahead.
So while that business is growing, we are investing in it and it has more of a breakeven set of margins. So getting back to your original question, there is -- there are several pieces to this segment, and we are positioning certainly our health care for profitable -- significant profitable growth in the future.
Our home and garden and beauty and personal care products, the old Calmar products, if you will, are performing well and we continue to expect to profitably grow that business. And folding carton has been a little bit tougher and that has been a function of some of the slowdown in Europe.
So hopefully that helps get to the...
John A. Luke
And I just -- Mark, I'll just piggyback on what Mark has said because I think he's addressed it well, is that the overall objectives that you outlined in your question are very consistent with the objectives we have for the business. Again, as I've said in response to other questions this morning, the very focused, profitable growth initiatives we have underway are ones that will enable us to achieve those.
Mark Wilde - Deutsche Bank AG, Research Division
Okay, well, it's much very helpful. The other area I wanted to ask about is industrial packaging and you're going to have a lot going on down in Brazil in the second half of the year with the ramp-up of the machine and I think you're shutting down a media machine at another site.
Can you just walk us through sort of as we roll through the second half, what the financial impact of all of those moves is likely to be?
James A. Buzzard
Mark, this is Jim. In terms of -- we obviously feel very good about the long-term returns around this investment.
We will not see a lot of those returns in the current fiscal year, to your point, given the timing of starting up the machine, the cost associated with the ramp-up and other things. The rebuild we're going to have on number 3 Tres Barras [ph] and then the impact of Lenios [ph], shut down all of that will be fairly muted in terms of the opportunity for returns in 2012, but we feel very good as we go into 2013, as all that capability ramps up about the opportunities.
George L. Staphos - BofA Merrill Lynch, Research Division
They will -- would that actually be a drag at all in the second half, Jim?
James A. Buzzard
No, it should not be a drag.
Mark Wilde - Deutsche Bank AG, Research Division
Okay. And the one other question I had is industrial packaging.
I know that this acquisition in India is pretty small, but I'm just trying to understand why you'd be moving in there in the corrugated business, which, away from Rigesa in Brazil, is a business that Westvaco really moved out of over the last 20 years here in North America and why we don't see you going into India and some of the more value-added consumer-oriented packaging businesses.
John A. Luke
Mark, let me take that on. We are looking at India for a variety of market participation potentials, including the consumer opportunities that you referenced.
We are actively evaluating what the right strategy should be, particularly with what has been elusive, but we have confidence will be the approval at some point in the not-too-distant future of foreign direct investment for retail, which will just lead to a further explosion of what is already occurring on -- in retail modernization there as well. As we have looked hard at India, we've also seen a significant opportunity for market participation, taking some of the very same technologies and know-how that have been a hallmark of our success.
In Brazil, particularly with packaging that serves the agricultural sector, where waste and spoilage just as it was in the northeastern part of Brazil 10, 15, 20 years ago a huge problem, is very much a problem in India today. So where we can leverage -- one of the advantages we have and one of the things that excites us about the technologies we have developed is where we can export those technologies, that know-how, to other markets that will selectively give us significant opportunity to bring advancements through packaging a variety of sorts to the marketplace.
That's very consistent with our overall strategies. And to the extent that corrugated, select participation in the corrugated market forges that opportunity as we believe it does, we're going to be proactive in pursuing those potentials.
Operator
And we have time for one last question and it comes from the line of Chip Dillon from Vertical Research Partners.
Chip A. Dillon - Vertical Research Partners Inc.
Just want to make sure we're clear, just to follow up to a earlier question about -- on the numbers for the second quarter. I know last year, I believe from operations you did about $0.54, and then of course, we would need to -- since you will start reporting Consumer & Office Products as a discontinued operations in the second quarter, we need to actually take that away from what you did in the second quarter, and I think I heard you say that.
And is the right amount of dilution to use around $0.07, $0.08 a share?
E. Mark Rajkowski
You can -- Chip, come on, you can do the math and it's whatever, look at the EBIT from '11 and apply a 35% tax rate and then divide that by the shares. So that's -- I don't have that in my head, but it's...
Chip A. Dillon - Vertical Research Partners Inc.
No, no, no. Well, if you do that, you get about $0.14, but I believe there's -- there are other offsets, right?
Like the use of the cash that you're going get in that you have to make assumptions about. And also I believe from back when you made the announcement there would be some associated corporate expense reduction that would also offset some of the dilution.
Is that correct?
E. Mark Rajkowski
Well, we've got -- as part of this transaction, we are providing transition services, okay? And we'll be doing that for some period of time depending on the service over 9 months or so, and we will get compensated for that.
So some of those costs do get reimbursed.
Chip A. Dillon - Vertical Research Partners Inc.
Got you. And then just 2 quick ones to finish up with.
One, can you give us an update as to how we would expect to see the cash used that you're going to receive in a couple of weeks, at least split between debt reduction, share buybacks and possible acquisitions? And then secondly, I know Jim had mentioned that we're going to hear more about development down in the Charleston area.
My guess is that would be tilted, of course, away from single family. But are there opportunities in both multifamily and industrial?
And should we see maybe even a couple of Rockefeller-type transactions like we saw last year, say, in the next 2 years?
E. Mark Rajkowski
Okay. I'll take at least the first part of that.
Relative to use of proceeds, we -- as you know, we are going to -- have paid down, in essence, our 2012 maturities. We borrowed to do -- some of that will pay down the short-term borrowings.
We're also going to use some of that cash to fund our project at Covington. And of course, we have cash there to also support the dividend.
So we're going to remain, as we have balanced, in terms of how we use our cash.
John A. Luke
I think with respect to the second part, Chip, as Jim's comments indicated, we do see, with the dearth of industrial properties down in the Lowcountry area, opportunity with the expansion of Boeing's activities and activity driven by the port as well for the kind of transactions that you're talking about. But I think if you look at that area broadly, what we also see is that with the expansion of commercial and broader manufacturing activity, there is going to be, over the next few years, a real growth in jobs in that area as well.
And that's going to spawn a range of opportunities for development on several fronts and we certainly believe that our land is exceptionally well placed to participate, and we're going to be at the forefront of any opportunities that we either can create or that come our way.
Chip A. Dillon - Crédit Suisse AG, Research Division
And so would that mean maybe in, let's say by '14, we could actually see maybe a higher level of earnings from that segment than we have been as -- even though you may have fewer acres being sold, you're selling them at much higher values?
John A. Luke
I think -- let me answer it this way. Jason read the forward-looking statement disclaimer early on.
I don't want to get in the business of predicting, and as Jim noted aptly in his comments, this is a business that is difficult to predict in but with the fundamental trends there, frankly, I think, in many respect, they're the kinds of trends that we would like to see as Americans all across our economy today but they are singularly right there before us in the Lowcountry of South Carolina. We certainly would hope and expect that what you suggest that is more earnings coming from this area to be very much in our sights.
Jason Thompson
Okay, everyone, well, thanks for joining us today. We look forward to speaking with you next quarter.
Thank you.
Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you.
And have a great rest of the day. You may now disconnect.