Jan 29, 2014
Executives
Jason Thompson - Director of Investor Relations John A. Luke - Chairman, Chief Executive Officer and Chairman of Executive Committee Robert K.
Beckler - Senior Vice President and President E. Mark Rajkowski - Chief Financial Officer and Senior Vice President Robert A.
Feeser - Executive Vice President
Analysts
George L. Staphos - BofA Merrill Lynch, Research Division Mark A.
Weintraub - The Buckingham Research Group Incorporated Mark Wilde - Deutsche Bank AG, Research Division Mark W. Connelly - CLSA Limited, Research Division Gail S.
Glazerman - UBS Investment Bank, Research Division Ghansham Panjabi - Robert W. Baird & Co.
Incorporated, Research Division Chip A. Dillon - Vertical Research Partners, LLC Alex Ovshey - Goldman Sachs Group Inc., Research Division Paul C.
Quinn - RBC Capital Markets, LLC, Research Division
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter and full year 2013 results conference call. [Operator Instructions] And as a reminder, today's conference is being recorded.
I would now like to turn the conference over to your host, Director of Investor Relations, Mr. Jason Thompson.
Please go ahead, sir.
Jason Thompson
Thanks, Kiwi, and good morning, everyone. John Luke and Mark Rajkowski are here to review our fourth quarter and full year results and we also have Bob Beckler to discuss our recently announced margin improvement program.
Jim Buzzard and Bob Feeser are also here for Q&A as well. The notification for this call was broadly disclosed and is being webcast at mwv.com, where slides are also available.
Our results and commentary are presented on a continuing operations basis and are correct as of today, but could include time-sensitive information that is subject to change. In addition, any statements that are forward looking are subject to known and unknown risks and are not guarantees of future performance.
I'll now turn the call over to our Chairman and CEO, John Luke.
John A. Luke
Jason, thanks very much, and good morning to all of you. Before we get started, I want to welcome both Bob Beckler and Bob Feeser as participants on this call.
As newly elected Executive Vice President, they'll play important leadership roles as we drive further progress with our profitable growth strategy. I'd also like to thank Jim Buzzard who's stepping down after a long and distinguished career at MWV.
Jim has made an indelible mark on the company and he'll be missed. Turning now to our commentary on the quarter, we are pleased to see each of our businesses rebound in the fourth quarter, ending a challenging year on a positive note.
Our overall revenue increased by 3%, extending gains that we made throughout the year with our capital investment and commercial capabilities. Our segment earnings did not keep pace with our top line progress for the full year, largely due to several operational challenges.
We operated much better in the fourth quarter and as a result, delivered a 30% increase in combined segment profits from our Packaging and Specialty Chemicals businesses. Despite this progress, we are very determined to further improve our margins and our cash flow.
In addition to stronger financial performance during the fourth quarter and our development of the recently announced margin improvement program, we achieved substantial milestones across the business. First, we sustained targeted production levels on our new paperboard machine in Brazil.
This led to EBITDA margins of almost 23% in the fourth quarter, well on our way towards the 25% to 30% EBITDA target we expect to achieve by the end of this year and our goal of doubling earnings in this business. Second, we commissioned the new biomass boiler at our Covington paperboard mill, realizing initial productivity benefits in the fourth quarter with more to come.
And third, we closed the forestland and development transaction with Plum Creek, giving us the opportunity to return $700 million to shareholders in the form of a special dividend and share repurchases. The momentum from these activities and more during the fourth quarter has continued into 2014.
We're moving forward confidently with our successful growth strategy and profit improvement actions. In both cases, building on the commercial and operational success that is already evident in each of our segments.
Bob Beckler will discuss in greater detail our margin improvement program, but let me just say that with the plans that have been scoped out and Bob's leadership in implementing this program, we have tremendous confidence that we'll achieve an additional $75 million in savings this year, with a full $100 million to $125 million run rate in 2015. These expected improvements to our profitability will be additive to the progress we're already making with our existing growth strategies, productivity and cost reduction programs and capital investments.
Our work on commercial excellence, innovation, emerging market and expanded participation remain very important and continue apace. In fact, in the fourth quarter, really throughout last year, we had very good success with these elements of our profitable growth strategy in key targeted packaging and specialty chemical markets around the world.
We continue to drive strong gains for our unique paperboard solution for aseptic liquid packaging, especially in China, and win share in the global food and beverage markets. We're winning business with our dispensing platform for home, health and beauty markets including continued strong growth for our preservative-free medical plastics, our Melodie collection of fragrance sprayers and our VersaPlast Trigger for home cleaning.
We achieved growth of almost 10% across the dispensing platform during the fourth quarter and have a very strong pipeline of new products for these markets ready to launch in 2014. And we are compounding our performance in the marketplace with pricing momentum across a broad range of our value added solutions, especially bleached paperboard and CNK for Food & Beverage packaging, as well as our high-quality paperboard and innovative corrugated packaging in Brazil.
Despite these exciting opportunities, we have significant potential to accelerate the improvement of our profitability and cash flow. Our growth strategy and market participation work have provided a solid foundation to begin 2014 and we're seeing the expected returns from our recent investments.
We will build on that success with the additional focus on reducing business and corporate cost to improve profitability to the level that we and our shareholders expect. We're confident that we'll deliver strong earnings and improvement this year and beyond.
I'll now turn the call over to Bob Beckler for additional details on our margin improvement program before Mark Rajkowski talks about the fourth quarter financials and near-term outlook in each of our segments. Bob?
Robert K. Beckler
Okay. Thank you, John.
The margin improvement program we recently announced is well underway. As John just noted, our program will achieve at least $100 million of incremental cost savings with $75 million of benefit in 2014.
These actions within this program are fully scoped and quantified to a level that gives us good confidence in completing the majority of the program in the first quarter. Upfront, it is important to emphasize that the benefits of this program are additive to the profitable growth plans of our businesses in 2014, which already includes savings from our 2013 overhead cost reduction initiative.
We were encouraged by the progress we are making in the Packaging and Specialty Chemicals businesses, and these new actions will further strengthen our performance. We also remain committed to the way in which we operate our business and serve customers around the world, especially with our focus on the fundamentals behind our strategy: commercial excellence, innovation and operational excellence.
The margin improvement program includes 4 main elements. One, we are simplifying our organization design in our packaging businesses.
Within each of the packaging segments, we are realigning our structures to reduce complexity and accelerate the pace of decision-making and execution. Two, we're realigning our corporate infrastructure to the new size of the revenue base following the recent consumer and office products and forestland transactions.
Three, we are continuing to assess our participation choices in packaging. On this point, just as we determined last year to exit the Europe and Brazil-based beauty and personal care folding carton business, we will continue to evaluate options to accelerate our profitability by concentrating resources for growth in the most attractive end markets.
We will not have further specifics for you today, but we are moving with pace to complete this assessment in early 2014. And finally, four, we're prioritizing our capital to an even greater degree.
This includes a $50 million reduction in our capital expenditure plans for 2014. Roughly half of the total benefits from this program will come from the businesses and the other half will be from corporate cost reductions.
Overall, about 75% of the $100 million savings target will be from headcount reductions. As of now, we expect that this could include 500 to 550 positions across the company, mostly being salaried workers.
These actions are to support the implementation and the bottom line impact of our profitable growth strategy. We are moving quickly in order to have an immediate, positive impact on our earnings and cash flow.
And as John said, we are confident that the actions we're taking will build on the momentum we established in the fourth quarter and continued in to the early part of this year. And with that, I'll turn it to you, Mark.
E. Mark Rajkowski
Thanks, Bob. After a challenging year, we got back on-track in the fourth quarter with strong year-over-year earnings improvement.
We realized more top line benefits from our capital investments in commercial wins and saw more impact on the bottom line for much improved operations and lower overhead costs. The momentum we generated in the fourth quarter has continued into 2014, giving us good confidence that we can accelerate our progress further with the recently announced margin improvement program.
Let me share some highlights from the fourth quarter. First, we had solid volume gains.
We had measurable improvement in each of our Packaging and Specialty Chemicals businesses, providing further evidence that our profitable growth strategy continues to generate good traction in our targeted end markets. Second, we generated strong productivity.
While many of our facilities ran full and operated much more efficiently, the greatest productivity impacting the quarter came from the Industrial business in Brazil, as the expanded Tres Barras mill ran at design capacity throughout the quarter. Last, but not least, we had robust cash generation.
We delivered $194 million of cash flow from operations in the quarter, bringing our total for the full year to $358 million, which is a substantial improvement versus 2012. With these highlights as context, I'll run through our financial performance and segment results in more detail.
Since we completed the sale of our forestland assets to Plum Creek in the fourth quarter, I'll be discussing our results on a continuing operations basis, which excludes the benefits of land sales and forestry activities for all periods. Starting with sales.
We generated 3% growth, including 1% negative impact from unfavorable foreign exchange. The volume gains I mentioned, as well as sales from Ruby Macons, which was acquired late in the fourth quarter of last year, were the main drivers of our revenue increase.
Pricing also improved modestly overall with strong gains in Brazil. The volume improvement in the quarter was led by gains across packaging, as Specialty Chemicals volumes were essentially unchanged from a very solid fourth quarter last year.
We continued to make great progress in targeted food, beverage and tobacco markets, which drove total paperboard volumes up 8% in the quarter. Similarly in Home, Health & Beauty segment, volumes were up 6%, due to strong sales of dispensers for skincare, fragrance and health care markets around the world.
We also saw a strong bounce back in home and garden volumes, as key customers build inventory for the spring garden season and our new home cleaning trigger sprayer gains traction in North America. Gains in these areas were partially offset by declines in beauty and personal care folding carton, which we're in the process of exiting.
In Brazil and India, our industrial packaging volumes grew 12%, as we had higher paper production in sales both from the new machine in Tres Barras, as well as from our India operations. In Specialty Chemicals, continued solid demand for higher value pine chemicals used in asphalt, publication inks and oilfield applications, as well as good demand for carbon technologies used in automotive emission applications were offset by lower sales of more standardized pine chemicals products.
The modest overall contribution from pricing that we saw in the quarter was led by the industrial packaging business in Brazil. The business continues to benefit from pricing actions to offset the significant inflation it's experienced over the last couple of years.
And with overall inflation continuing to run around 6% and with labor and fiber cost at rates that are even higher than that, we will remain vigilant and take further necessary pricing measures to protect our margins. Looking quickly at price and mix across our Food, Beverage and Tobacco grades, pricing was modestly negative year-over-year in the quarter, but improved by about $5 million quarter sequentially.
Importantly, during the fourth quarter, we negotiated price increases and volume commitments across our major brand-owner contracts, and expect to realize the benefits from those new contracts on top of our existing price actions beginning in the first quarter. In Specialty Chemicals, price and mix was lower, mainly due to the supply-and-demand dynamics driven by alternative materials that are currently impacting standard pine chemicals products.
We continue to execute on our strategy of reducing our exposure to standard product offerings by further penetrating higher value markets, such as oilfield services, adhesives and asphalt. In addition to very positive commercial progress in our markets, we also improved our operating leverage in the quarter.
Through increased volume levels and lower overhead costs, both adjusted COGS and SG&A declined year-over-year resulting in approximately $80 million of improvement to operating profit. Adjusted EBIT from continuing operations in the fourth quarter of 2013 was $108 million or 8.2% of sales, much improved compared to the 2.4% last year.
The improvement was largely driven by enhanced operating productivity. Our domestic mills, our chemical plants and converting facilities ran better and benefited from volume leverage compared to the year-ago quarter.
However, the most significant improvement was driven by the productivity benefits we saw from the Brazil mill, which consistently achieved plated production rates throughout the quarter. We're now pursuing further cost optimization programs in Brazil that we expect will deliver significant earnings growth in 2014.
We also began to realize productivity benefits from the new biomass boiler at the Covington mill and look forward to a much larger contribution to earnings beginning in the first quarter of this year. Adjusted SG&A declined $34 million year-over-year to $150 million in the quarter, or 11.4% of sales, which is almost a 300 basis point improvement year-over-year.
Most of the benefit is at corporate, reflecting reduced overhead costs from our 2013 cost-reduction program, lower variable compensation expense and the benefits from higher pension income. Savings from our 2013 overhead program were $43 million for the full year.
We generated $194 million in cash flow from operations in the quarter resulting in a full year total of $358 million, which is a significant improvement over the $220 million in 2012. Higher earnings and working capital improvement were the main drivers for each period.
Turning to the outlook. For the first quarter, we expect earnings to be well above last year's level on a normalized continuing operations basis, including year-over-year profit improvement in each of our segments.
The key drivers of improvement will be higher demand for many of our value-added products, increased pricing, improved productivity at all of our facilities and the benefits of our overhead cost reduction in margin improvement programs. We expect to begin realizing some modest amount of benefit from the new program beginning in the first quarter, as most of the actions will be completed by the end of March.
Now, turning to the segments. In Food & Beverage, we expect segment profits to be strongly above last year's levels.
Paperboard backlogs are extended between 4 and 6 weeks, and price and mix improvement is expected to more than offset energy and raw material inflation. In addition, we expect significant productivity improvement, including the benefits from the Covington biomass boiler and lower mill outage costs.
In Home, Health & Beauty, we expect segment profits to double from year-ago levels. We're expecting to see continued strength across our dispensing systems business, including a recovery from the very difficult first quarter last year in home and garden and solid momentum in targeted beauty, skincare, fragrance and medical dispensing markets.
We're also raising prices to offset the impact of resin and other inflation in this business. These benefits will be partially offset by $2 million of transition costs related to the repurposing of the Brazil folding carton operations.
In industrial packaging, we expect segment profits to improve strongly versus last year on a constant-currency basis. Higher volumes from paper sales, productivity benefits from improved operating rates in the Brazilian business and continued pricing actions to offset rising fiber costs and other inflation will be the main drivers of the expected profit growth.
Modest losses in the Indian industrial packaging business and unfavorable currency translations will partially offset the expected improvement. Chemicals segment profits in the first quarter are expected to improve modestly versus the first quarter of last year.
Continued gains in value-added pine chemicals and carbon technologies, improved operating productivity and lower maintenance expense will drive the expected improvement. These benefits will be partially offset by lower volumes and pricing in standard product lines.
So given the substantial benefits to be realized from our past investments, the momentum from our recent commercial wins and the new actions that we're taking to improve our margins got great confidence in our ability to significantly increase our earnings and cash flows in the quarter and throughout 2014. With that, back to John.
John A. Luke
Mark, thanks very much, and I think with that conclusion, you've nailed it. We'll now turn to our investors for questions.
Operator
[Operator Instructions] Our first question will come from the line of George Staphos of Bank of America.
George L. Staphos - BofA Merrill Lynch, Research Division
I guess, John, the first question to you, we're obviously looking at the reduction in SG&A and the continued improvement in corporate and that's been something, certainly, we've talked about in our research and that's positive. When we look at this latest program and changes, was there 1 or 2 events or issues that catalyzed in your mind in the management team's mind that you needed to move forward with even greater pace and if there were, what were those factors?
And then I had another couple of questions unrelated.
John A. Luke
George, I think I would probably characterize that by saying that as we were coming through what was clearly a very challenging year, where our margins were under pressure, and then reviewing our overall strategy with our board at our annual strategy session in November, we and the board were very enthusiastic about the opportunities that we saw looking forward and that the assessment of the opportunities for our margin improvement really came from that. We saw a great opportunity, but we also saw a significant potential to improve our margins.
We knew that, that was important to our major investors, to all investors. It was important to us.
And we put our shoulder to the wheel to drive that. We see great opportunity and one that can be enhanced by better performance and better generation cash flow.
E. Mark Rajkowski
Yes, John, I'd add that -- absolutely right. And on top of that, we were in the process of completing a large transaction with Plum Creek, exiting our land and forestry business.
So as you look at that and the C&OP transaction the year before, as we've shrunken the size of the revenue base it was important to get that overhead -- corporate overhead structure in line with that as well.
John A. Luke
I think that's right. And I would simply add, given the enthusiasm for the packaging strategy that we have, that we can -- we have carefully worked this, as you've heard from Bob Beckler, that we can lean out in the manner we're talking and have a more nimble packaging business as we go forward, one in no way that in any fashion lessons our enthusiasm or our planned investment in that business.
George L. Staphos - BofA Merrill Lynch, Research Division
Two questions, I'll ask them in sequence, just for time. Number one, do you have a target margin at this juncture for Home, Health & Beauty?
And if you do have one already, can you remind us what that is and how quickly expect to get there? And then secondly, with the continued declines in beverage markets, especially in developed markets, do you have any sense for need to change in your portfolio or do you have any reason to be more optimistic about your customers' demand profile there going forward?
John A. Luke
George, thanks very much. Let me take your second question first.
I'll invite others to comment. And then, I'll let Mark pick up the Home, Health & Beauty question.
You've nailed, clearly, a challenge. We've had some very good success in the developed markets with our major customers.
We've continued to reach out and build newer customers and we've had very, very good success and are optimistic. But importantly, what we see happening and are very much at the coal face of actually helping develop is a very robust global marketplace for beverage packaging and we're excited about those opportunities and clearly look forward in future calls to be talking about some tangible indications.
Mark?
E. Mark Rajkowski
Yes. On the Home, Health & Beauty margin question, George, listen, I mean, we're in this business to win.
And we know and look at what our competitors are doing in terms of their margin performance, and we think it's essential that we're at or above those levels and that's what we're striving for. And that's -- as we look at it, that's all in.
So it includes an allocation of all of our corporate costs. So our expectation is that to be a winner in that space, we have to be at or above our competitors margins.
And we're going to make significant progress in achieving that goal in 2014.
Operator
We'll go next to the line of Mark Weintraub with BRG.
Mark A. Weintraub - The Buckingham Research Group Incorporated
Two questions. First, with the $75 million -- the new $75 million cost reduction profit improvement program, does that mean that we should be thinking of the EBITDA guidance for 2014 to now be between 1.025 and 1.075?
Is that the right way to think of it?
John A. Luke
Mark?
E. Mark Rajkowski
Yes. As usual, Mark, your math skills are outstanding.
Mark A. Weintraub - The Buckingham Research Group Incorporated
Okay. And then second, on consumer packaging, one of your competitors has noted that a not insubstantial share of the pricing initiatives that have already been -- that are being put in place, will actually show up in 2015 from an earnings perspective.
Maybe it gets phased in during 2014, but a lot of the benefit will show up in 2015, a lot in 2014 too. Is that true for you as well?
John A. Luke
Well I think we certainly expect this, as our comments have indicated, to realize benefits from the improvement in that business. Including our pricing actions, it will start showing up right here in the first quarter.
So we're -- and we certainly hope with everything that we're going to be doing as we move through the year, both enriching our mix and moving prices accordingly, that we'll have more in 2015. But that's the story that we're sticking with.
Mark A. Weintraub - The Buckingham Research Group Incorporated
Okay. And I guess, just one to -- is the timing of when -- if there have been price increases that are in process of being implemented, is the timing such that some of it won't show up until -- and this is a good thing, if I'm from a delta perspective, some of it won't show up until 2015?
John A. Luke
Well let me answer this way, and I'll ask Bob Feeser to comment if there's anything to add to this, that we had significant contracts renegotiated for roughly 40% of our business during the latter part of 2013 and those increases were effective as of the 1st of January this year. Other market-based pricing increases in that business will be put in place as we move through the first quarter.
Robert A. Feeser
John, I think you nailed it. That's exactly right.
We have significant contracts with major customers, where pricing improvements were part of that, which went into effect in January. And certainly, as market conditions provide, we will continue to look to address pricing throughout the course of the year, but we would fully expect the improvements that we've made to impact us early in 2014.
John A. Luke
Yes, we'll see that in the fourth -- first quarter.
Operator
We'll go next to the line of Mark Wilde with Deutsche Bank.
Mark Wilde - Deutsche Bank AG, Research Division
Yes, a couple of questions. First, I just want to come back to Home, Health & Beauty and ask whether we need to really just take 2 steps further back and look at this business.
Because it seems to me, if I add up things like Mebane and Spray Plast and Calmar, you've made a good $1 billion in investments in that business over the last probably 10 or 12 years and we've only got $21 million of EBIT this year and maybe $90 million of EBITDA. So I'd like you to address that and then I have one other follow-on.
John A. Luke
Mark, we are not surprised that you've raised that question, as you often have and I think it's a very fair question and, frankly, it really gets at the heart of the evaluation we have underway of that business and the determination to improve the performance, at the very least, to the levels that Mark Rajkowski just talked about. So I think that is our mission at this stage of the game.
We see a clear pathway to get there and that's what we're driving towards.
Mark Wilde - Deutsche Bank AG, Research Division
Okay. The follow on I have is -- really involves Specialty Chemicals, which if we go back 10 or 12 years ago didn't get a lot of attention and has just delivered remarkable performance.
I'm just curious if you can talk about runway that you -- further runway that you see in that business over the next 2 or 3 years? And then also, if there any kind of lessons that you might take from this news we had earlier this week about another company in the industry, kind of spinning off its specialty business?
John A. Luke
Sure, Mark. Let me do this and I'll ask Bob Beckler, who really was the architect of the tremendous improvement in the chemical business over the last several years, to comment further.
First of all, I think that what happened in that business was a very strong and concerted end-market focus, supported by a very significant innovation, and an opportunity to leverage those key areas of market leadership, most notably activated carbon, in the global marketplace. As we look broadly to the runway you're talking about, we see a significant opportunity for prudent and very attractive investment in support of activated carbon as we go forward that will only strengthen and enhance the contributions from that business.
We clearly take note whenever there is any transaction of the sort that you referred to. This business is and has been a very important part of our company, but our view in looking at this business is that, over time, we have to look at it through the lens of what is best for our shareholders.
And we're prepared to do that just as we've done with other segments. Bob Beckler, comments on chemical?
Robert K. Beckler
Yes, John, and I think you said it well. I would just add, tremendous upside opportunity to grow off the existing base.
By no means is this business topped out. Whether it's the asphalt emulsifiers, the oilfield chemicals or the automotive carbon that John just mentioned, there's tremendous upside in these markets and tremendous upside globally for this business.
What the business continues to do well is to bring new products and highly differentiated products to these markets and they're leaders in virtually every category. So great work in the business.
And I would just echo what John said in terms of the strategic value of the business, we like Specialty Chemicals. It's been a part of our company for more than 100 years and has tremendous synergy because of its proximity to our mills and to the raw material base.
But obviously, we're going to do all that we can to maximize the value of this business as we go forward. Ultimately, that's the right answer for our shareholders.
Mark Wilde - Deutsche Bank AG, Research Division
I agree.
Operator
We'll go next to the line of Mark Connelly with CLSA.
Mark W. Connelly - CLSA Limited, Research Division
Two things. I wonder if you can give us some sort of rule of thumb on your real sensitivity and any early sense you have of the cost inflation we may be facing down there?
And the second question is, if we look at your European operations x the folding carton that you're going to get rid off, how confident are you in saying that you have completely turned the corner in those businesses. Obviously, Europe was pretty disastrous for you last year.
John A. Luke
Let me comment on that and invite others to jump in and then I'll turn to Bob Beckler to comment on the Brazil questions, Mark. I think it's fair to say that with the changes we're making in Europe, that you referred to, with the very strong and focused leadership that Pete Durette is bringing to the Home, Health & Beauty portion of the business there and the concerted effort that we have underway to really ensure that we capitalize on our strong position in the beverage marketplace, that we can look at Europe very positively as we move through 2014.
Clearly, Europe, as with other parts of the developed world today, has its own set of challenges, but we're very comfortable that we've been able to navigate change in that arena in a way that it will be additive to our performance as opposed to a drag. Bob?
Brazil?
Robert K. Beckler
Well, Mark, on Brazil. First, around your question on currency, it's a little bit of a 2-edged sword.
Obviously, there's the translation impact into dollars but this is a business that operates in local currency and, largely, the end products stay within Brazil. And so, really, we look more at the effect of the currency on our end markets.
And quite honestly, it tends to be more positive than negative. It's very good in terms of stimulating more exports by our customers and improving the competitiveness of the domestic non-durables and industrial products in Brazil.
So generally, that tends to be in our favor from a commercial standpoint and it's something that we've anticipated into our plan for 2014. And just to your question around inflation, inflation really is running at a high clip in Brazil over the last 3 years.
It's been at the top end of what the government would target in Brazil. And if you look at our business in the industry that we operate within, overall inflation even higher than that because of labor costs rising 1 or 2 points above inflation and fiber costs, that I'm sure you're aware of, being 40%, 50% above year-ago pricing.
So we took a lot of action last year, as you can see in the numbers. A good bit of that was really to gain back lost ground from the previous 2 years of inflation, and inflation is continuing to march on.
So as we said in the prepared comments, we're continuing to take action to be sure that we do not lose ground to inflation.
John A. Luke
Bob, thanks very much. Mark, let me just turn to Mark Rajkowski and see if he has any comments on either the Europe or Brazil dimensions of what we've covered.
E. Mark Rajkowski
Yes, on the impact on reported results, Mark, I think you were asking about that as well. And the sensitivity would be for a 10% movement it's roughly around $8 million.
That gives you some perspective. But as Bob said, some of that, when you look at it on a local currency basis, is actually a positive for our business.
Operator
We'll go next to the line of Gail Glazerman with UBS.
Gail S. Glazerman - UBS Investment Bank, Research Division
I guess, just to start, can we take a step back and can you just give some perspective on what you're seeing in terms of kind of more broader underlying demand trends, macro trends, as we enter 2014?
John A. Luke
I think we're seeing, Gail, pretty much across the board, reasonably firm markets and I think that is a positive in what is still, in our view, an uncertain global marketplace. We'd love to see the U.S.
and European economies perform more strongly. We've all gotten used to the retrenchment, if you will, in the emerging markets around the world.
But I think even against that backdrop, we're seeing good firm demand and that is both a reflection, I think, of market tone, but also we believe the focus of the strategies that we have in place and our market leadership.
Gail S. Glazerman - UBS Investment Bank, Research Division
Okay. And shifting gears on the new profit improvement program, if you expect to complete pretty much all the actions by the end of the quarter does that mean you;'d expect to be at kind of a $25-million-a-quarter run rate entering the second quarter?
Robert K. Beckler
Gail, this is Bob. We're at a point now where we clearly have line of sight to $100 million of the savings and continuing to work aggressively to edge that number up.
I think it will be a little bit of a ramp quarter-to-quarter. So I wouldn't give you the impression that it's going to be a step change into the second quarter.
But our intent is to largely be there in the quarter and continue to push that up as we move through the year. So just to assure you, we are moving at pace and we'll keep you updated throughout the year.
E. Mark Rajkowski
Yes, there will definitely be a big ramp-up in Q2. As Bob said, we may not get to your $25 million run rate.
We'll get pretty close in Q2 and for sure in Q3.
Gail S. Glazerman - UBS Investment Bank, Research Division
Okay. And on Covington, can you just quantify the benefit in the first -- in the fourth quarter and how you would expect that to ramp up in '14?
E. Mark Rajkowski
Yes. Modest, Gail, and...
John A. Luke
Modest in the fourth quarter.
E. Mark Rajkowski
In the fourth quarter, yes.
John A. Luke
Significant.
E. Mark Rajkowski
Significant in Q -- starting in Q1. So we're looking at $7 million to $8 million of benefit.
So big ramp up in -- by -- per quarter, $7 million to $8 million per quarter. So a big ramp up in Q1 from Q4.
Gail S. Glazerman - UBS Investment Bank, Research Division
Okay. And just one last question, going back to the discussion of Brazil and inflation.
I thought there was a comment in the release about maybe some impact from -- on volume from the effort to lift price and if so, is that a concern and a constraint you have as you look to kind of keeping up with the ongoing inflation?
John A. Luke
Bob Beckler?
Robert K. Beckler
Yes, Gail, I think the comment is related to the fact that our commercial strategy in Brazil, particularly in the current market, is not to force the growth, but to grow in a disciplined way, which means that we must continue to offset inflation with price. As we look ahead, the corrugated industry will tell you that they expect 2% to 3% growth in 2014 and that's about the rate that we have factored into our planning process, while keeping a very strong discipline on the pricing side.
So not impacting us to the negative side, but we're being very smart in terms of how we grow relative to the pace of the market.
Operator
Our next question will come from the line of Ghansham Panjabi with Robert W. Baird.
Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division
On the new cost-cutting program, how should we think about the distribution and savings between segment profitability versus the corporate line? Is it sort of 2/3s, 1/3s or...
John A. Luke
Bob, you want to pick that up?
Robert K. Beckler
Yes. Ghansham, Bob Beckler here and then I'll invite Mark to fill in.
Yes, so this is an enterprise-wide initiative. Let me first emphasize that.
But given the structure of our portfolio and the opportunities that we see, the benefits are largely concentrated within the packaging platform. In terms of how I could break that down for you, I won't go too much more specific than that, but roughly we see that as a 50-50 split across the corporate and related functions that serve the businesses and then the other 50% would be in the businesses themselves.
E. Mark Rajkowski
And I -- the only thing I'd add to that, Bob, is that there are a number of those corporate costs that are incurred to support the business. So as we reduce those corporate costs, that will -- you'll see that manifest in segment results as well.
But ultimately, as we look at our -- the business model for each of our businesses, each of our packaging businesses, we want to make sure, as I mentioned earlier, that we've got margins all in, including all the corporate costs that are at or better than our competition.
Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division
Got it. That's helpful.
And then the -- on Specialty Chemicals, is there any sort of impact to think about as it relates to the extreme cold weather, maybe on your asphalt business? And also what about your raw material basket for that particular business as well, because a lot of plastic and specialty chemical prices are going up?
Robert K. Beckler
Yes. No impact in terms of the road construction markets.
It is a seasonal business and from that standpoint, we don't anticipate any down side at this point in time. And in terms of raw material impact and inflation, the business is doing a responsible job in managing inflation with pricing.
So we don't see any downside to that.
Operator
Our next question will come from the line of Chip Dillon with Vertical Research Partners.
Chip A. Dillon - Vertical Research Partners, LLC
I had a question just on the pension situation. I noticed that the credit started to go up during the year in '13 and I know the balance sheet benefit is even another 20% higher, should that stay in the 30% to 40% -- 35% range per quarter as we go through 2014?
And if the markets are kind of flat this year -- or sorry, through '14, would you see that changing in '15?
E. Mark Rajkowski
Yes, as we look at next year and these things can change depending on assumptions, discount rates. But right now as we're outlooking 2014, we'd see pension and income in the range of somewhere around $125 million; so up slightly on a quarter-by-quarter basis in 2014, but not significantly.
Chip A. Dillon - Vertical Research Partners, LLC
Got you. And just, I have to ask this, I think I know the answer, but I know the books are different in terms of the required contributions that the government -- past companies make.
I would assume that you guys have nothing you need to do as far as the eye can see.
E. Mark Rajkowski
As far as the eye can see, have not in -- and that's how we're managing our portfolio, in terms of really protecting that funded surplus, so we never have to make a cash contribution again.
Operator
We'll go next to the line of Alex Ovshey with Goldman Sachs.
Alex Ovshey - Goldman Sachs Group Inc., Research Division
I may have missed this, would you be able to provide a relevant dollar range for what you expect the benefit to be from higher bleach board and CUK prices? Or it leaves that 40% of the business that was renegotiated down in the year?
John A. Luke
Mark?
E. Mark Rajkowski
Yes. It's -- I'm not going to put a specific dollar target on it.
What I said in my comments, and as Bob reiterated, we're going to see a noticeable benefit in terms of pricing improvement on those grades in Q1.
Alex Ovshey - Goldman Sachs Group Inc., Research Division
Okay, Mark. And if I heard you correctly, Ruby Macons is running at a loss.
So what has to happen there for you to be able to really flip the switch and start -- and get that business to contribute positively to the bottom line?
John A. Luke
I think there's several factors, Alex. That's a great question.
We're very enthusiastic despite our operational performance -- reported operational performance, about the longer-term potential with that business. It is a very good business but it's one that, in our year of ownership, has been beset by a variety of factors, not least of which has been a significant devaluation in the currency and a turbulent economic and political environment in India.
The devaluation in the currency has added significant cost pressure to our importation of recycled fiber, which is our principle raw material for that operation. Now with that dire story behind us, if we look ahead, the Indian marketplace is one that we say is continuing to modernize, continuing to grow and the quality of our paperboard is unparalleled in that marketplace.
So there's significant potential and upside there. More broadly as we look at the political and economic environment, there is an election coming this spring and the principal focus is on deregulation and more of a free-market set of activities and a return to what Indians got a taste of in the early part of the last 10 years and that is the visible potential for upward mobility.
And so I think that, clearly, we're going to have to wait and see what the outcome of that election and leadership change, if it occurs, would look like. But the important thing is that we see significant potential going forward to participate even in today's market at a more profitable level.
Operator
We'll go next to the line of Paul Quinn with RBC Capital Markets.
Paul C. Quinn - RBC Capital Markets, LLC, Research Division
Two quick questions. One on paperboard markets.
You mentioned 4- to 6-week backlogs and clearly 2013 was assisted by competitors' machine shots. Could you give us some flavor on current conditions in export markets and your expectation of North American import pressure from Asian competitors?
John A. Luke
Bob?
Robert A. Feeser
Yes, Paul. This is Bob Feeser.
In terms of export pressures from Asian competitors, we really haven't seen a tremendous impact in any of our markets in the United States. Those conditions could always change, but we feel like we're very well-positioned in our markets in the U.S.
and expect the situation with Asian imports to remain stable. And in terms of overall demand, continues to be a fairly robust outlook for us.
But I think it's more of a factor of how we're positioned around our end markets, particularly in the export markets around liquid packaging in the developed markets, in particular.
Paul C. Quinn - RBC Capital Markets, LLC, Research Division
Okay. And then the other question I had was just on Specialty Chemicals.
I mean, you've invested significantly in other businesses. This has obviously been a segment that's a huge win for you.
Just wondering if there's plans for investment and additional capacity, given the tremendous upside that you see in that business?
John A. Luke
Well, I think, Paul -- it's John. I think it's fair to say, and I alluded to it earlier, that as with any business that's generating the returns this one is, that it's important to maximize value through prudent investment where you've got clear line of sight to profitable growth.
That's the right thing to do for our investors and we'll continue to evaluate those potentials. I think we see a particularly attractive potential with the growth in the automotive industry around the world, most notably in the Asia Pacific region.
Operator
And our last question will be a follow-up from the line of Mark Wilde with Deutsche Bank.
Mark Wilde - Deutsche Bank AG, Research Division
Yes, just a couple. Can you give us, like, some timeline on how you see kind of the profitability at Ruby Macons rolling out?
John A. Luke
Mark, I think that -- let me -- and I'm not doing a soft shoe here, but let me give you an example. I think we can lay out for you a game plan for attractive profitability against the current backdrop of political and economic activity in India, assuming that we don't see any more significant devaluation of the currency.
And if we have a favorable outcome in terms of economic policy coming out of the spring election, we can give you a second alternative. Because I think that will indicate a much more robust investment in growth in that market.
Conservative as we are, we'll put together an estimate and be happy to share that with you, what a steady state pro forma would look like. And I think you can expect that, again, barring significant change from this, that we would see a return to profitability as we move through the coming year and a good trajectory beyond that.
And that's where we're focused.
Mark Wilde - Deutsche Bank AG, Research Division
Okay. And then, Mark Rajkowski, can you just talk a little bit about where capital spending is going in the company and whether it wouldn't be possible to bring capital spending down further.
I mean, if I look across the company, you've just finished capital programs in Brazil and at Covington. I think the Mahrt mill was always very well capitalized and Temple basically rebuilt Evadale before you bought it.
So if you can give us a sense of where you're spending capital and whether we could see the capital spending number go down further?
E. Mark Rajkowski
Well, we are spending, as you would expect, a base amount of capital making sure we can maintain the good functioning of our mills and maintain a safe work environment. That base really hasn't changed.
Mark Wilde - Deutsche Bank AG, Research Division
What is that base, Mark?
E. Mark Rajkowski
It's in the low to 200s, roughly and -- maybe 225 to 250. So the -- and just to take a step back, Mark, we're going to be down over $150 million in terms of our capital spend this year.
As John and others have mentioned, there are some attractive opportunities for us to continue to deploy capital in very attractive return projects and whether that's in our packaging business or in Specialty Chemicals, that's all in the estimate that we provided you. That's in the $350 million.
I would say going forward, we're going to continue to look to be as efficient and as focused in terms of deploying capital to maintain our business and to profitably grow.
Mark Wilde - Deutsche Bank AG, Research Division
Okay. And then the last thing I had, just Bob Feeser, what did we miss last year?
I think, kind of going into the year, a lot of us were very concerned about all of this Chinese box board capacity coming into the market and the kind of ripples that it would create globally. And it just -- it seems like it's had a lot less impact than we would have guessed.
Robert A. Feeser
Yes, Mark, I think the Chinese competitors face a lot of challenges in terms of access and distribution to the market. And particularly in the packaging market where many of the substrates are -- have a long history and in some cases strong specification with brand owners, it's very difficult for many of those Chinese imports to gain ground.
So I think that will continue to be the case. But I think the big difference is just how difficult it is to actually gain market access.
John A. Luke
Yes, I think, Bob, you summed that up well. And I think the one thing that is implicit in your comments that is important is that with our specialized mix of products, we believe we have -- we're not immune, but we feel we have an added dimension of protection against what could, at some point, be more competition from the board produced in that part of the world.
But I think right now, as Bob indicated, there are a variety of factors that led to a changed view over the course of the past 12 months.
Jason Thompson
Kiwi, will you please give out the replay information. And thanks, everyone.
We'll speak with you next quarter.
Operator
Thank you. And ladies and gentlemen, today's conference will be available for replay after noon, Eastern Time today, running through February 28 at midnight.
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