希悅爾 (SEE) 2002 Q1 法說會逐字稿

This call is being recorded. Leading the call today we have William V. Hickey, President and Chief Executive Officer, and David H. Kelsey, Chief Financial Officer. After our prepared comments we will be taking questions. You may place yourself in queues simply by pressing the star or asterisk key followed by the digit one on your touch-tone telephones. If your question has already been answered you can remove yourself by pressing the pound or hash key on your touch-tone telephone. Please limit yourself to one question per caller so that others have a chance to ask a question. Now I would like to turn the call over to Chip Cook, Director of Corporate Communications. Please go ahead Mr. Cook.

Good morning, before we begin our call today I would like to remind you that statements made during this call stating management's outlook or predictions for the future are forward looking statement. These statements are based only on information that is now available to us. Our future performance may be materially different due to a number of factors. Many of these factors are listed in our annual report on the four quarters for the year ending December 30 2001.

Good Morning, I am Bill Hickey President and CEO of Sealed Air. With me today is David Kelsey, our Chief Financial Officer. As an introduction I will provide a brief overview of the highlights in our business for the first quarter of 2002. I will then ask Dave to review the details of our financial results in the quarter. After Dave's remarks I will have a few closing comments and then we will open the floor to a few questions.

I am pleased to report that Sealed Air delivered very solid results in what continues to be a challenging economy. Tight expense controls, which we initiated last year in response to weakening economic conditions and an improved gross profit margin, resulted in increased earnings for Sealed Air in the first quarter. More importantly, and as you have heard me say many times before, this business generates cash. Once again we delivered strong stable cash flow. Our operating cash flow as indicated by EBITDA continued to be a solid 21.5% of sales. We expect EBITDA to be in the 20-24% of net sales range. So the numbers in the quarter are right on target. Now turning to the topline, excluding the effect of foreign currency translation, we had positive sales growth of 2% in the first quarter. Our food segment sales, in other words our Cryovac business, had sales growth of almost 4.5% in the first quarter excluding the negative effects of foreign currency translation. We had expected food sales to grow in the mid single digits, so food growth was right on target for the quarter. The protective and specially packaging segment of our business showed sequential improvement from the fourth quarter of 2001. However, the industrial packaging and protective packaging segment continues to be challenged by the generally soft economic conditions, with sales declining 2.5% in the quarter, excluding the negative effect of foreign currency translation. The protective side of our business with its broad base of end users continue to add new customers and applications, which should position our business well when the economy turns up. At the end of the day our very focused portfolio is a key strength of our business in both good times and bad.

In summary, Sealed Air delivered very solid results in what continues to be a soft economy. I will ask Dave to review the highlights of our results for the quarter then I will make a few additional comments. Dave.

Thank you Bill. I would like to start with some additional comments on our sales. As Bill said sales were up 2% excluding the negative effects of foreign currency translation. Including the 25 million adverse effects of currency total company sales were $746 million for the quarter compared with $758 million for the quarter last year. After having a minimal effect in the fourth quarter 2001 foreign currency translation again moved into unfavorable territory. The renewed weakness of the Euro and deepening problems in Argentina are responsible for over half of the unfavorable variants.

Our exchange adjusted growth reflects mid single digit volume gains in the major food categories. Revenue from newly acquired businesses had only a minor impact in the quarter adding $10 million to the protective and specialty segment. The company's gross profit was $251 million for the first quarter. Gross profit margin improved to 33.6%, up from 33.1% in the fourth quarter and 31.7% in the first quarter of 2001. This represents our fourth quarter of sequentially improving margin. Our goal for gross profit is to range between 33% and 36% of net sales. Resin prices remain fair with last year and more than offset the negative impact of unfavorable mix and lower protected and specialty packaging in segment volumes. Remember though that Sealed Air's business is based on selling differentiated products that add value to our customers operations. We position them according to the benefits they provide. As a result our margins do not move in lock step with commodity raw materials. Actions that we took last year also resulted in marketing, administrative and development expenses declining $4 million to $128 million, compared to the first quarter of 2001. Operating profit improved to 16.5% of net sales compared to 14.3% in the first quarter of 2001. That is excluding goodwill amortization expenses. The first quarter of 2002 marks our implementation of FAS 142, which revises the principles for amortizing goodwill. Consistent with this new accounting standard we expense no good will amortization in the quarter whereas last year we expensed $14 million. As expected, we are realizing only modest savings in the first quarter from actions related to restructuring charges taken last year. In 2002 we expect to realize approximately one half of the projected $23 million annual savings and in 2003 fully benefit from the actions announced and underway. Earnings per share were $0.56 for the quarter. The comparable number last year for basic EPS were $0.30. Some of you that follow the company using 2001 comparative EPS of $0.49, this is our as if converted EPS of $0.32 for the first quarter of 2001 with $0.04 added back for special charges. Adding back an additional $0.13 cents for goodwill results in a prior year number of 0$.49. Before turning the call back to Bill I would like to share some of our cash flow and balance sheet achievements. As Bill mentioned, EBITDA for the first quarter was $151 million or 21.5% of net sales within our target range of 20-24%. Capital expenditures were $19 million for the quarter - less than half of last years $40 million. This reflects deferred spending for capacity expansion. Before addressing our March 31 working capital and depositions you may recall that in December we entered into a receivable securitization program. This was done to give us access to an additional source of attractively priced short-term liquidity. Such securitization programs are treated as the sale of receivables for accounting purposes rather than debt.

. Consequently both our year end debt and account receivable balances excluded approximately $96 million. During the first quarter we completely repaid amounts outstanding under the receivable securitization program. Our quarter end accounts receivable totaled $500 million, up $82 million from December 31 2001. However, adjusting our year-end balances for the $96 million of receivables sold in connection with our receivable securitization program, customer receivables would have declined $14 million.

Inventory investment increased $4 million to end the quarter at $293 million. We continue to manage inventories based on our principles of world class manufacturing, including just-in-time deliveries and continuous improvement in working capital management. Lastly total borrowings at March 31, net of cash, were $923 million down approximately $84 million from $1 billion at the start of the year. This beginning balance is also measured net of cash as well as adding back the $96 million placed into our receivables conduit. During the quarter we entered into a new Australian dollar bank facility to support our Australian and New Zealand subsidiaries and as previously communicated we did not renew our $194 million 364 day bank facility when it expired in March. In closing I would like to point out that we have over $800 million in untapped but available funds through a combination of our bank credit lines and accounts receivable in conduit. Now I would like to turn the call back over to Bill

.

Thank you very much Dave. Sealed Air's performance in this economy is extremely similar to what other companies our reporting. There is very little topline growth, but increased profits due to tight expense controls and cost management. While we don't know exactly when economic conditions will improve we do see some encouraging signs at Sealed Air. Our protective customers have more of a sign of optimism than they have in the last three or four quarters. Interests in new applications are at high levels, but this optimism and interest is not yet turning into new quarters. While it may be too early to know with certainty how quickly the general economic conditions will improve I remain confident in the strengths and fundamentals of our business.

I want to remind you that Sealed Air is indeed a strong company that is posed for growth over the long term. Our key and strategic growth initiatives, including case ready, inflatable packaging and fluid packaging, all posted strong double digit growth in the quarter and should continue to deliver those results through the rest of the year.

The simplified business processes and organizational structure and the annual cost savings from our restructuring effort will provide $23 million in annual cost savings. We will realize about half of the savings this year, with the full amount of the savings beginning in 2003. We continue to focus on tight expense control and our stable cash flow will allow us to fund the ongoing growth of our business through industry leading R & D capital expenditures for our programs of growth and acquisition. It will also allow us to effectively manage our balance sheet through a combination of stock repurchases and pay down of our debt.

I remind you that the long term trends occurring in the world is rising global standards of living, expanding meat and protein consumption, the growing demand for convenience, the global expansion of the supermarket and the ever increasing demand for efficiency and value added performance continue to be favorable factors for our business.

Our long-term value proposition has not changes. Sealed Air has the leading brands in our market including bubble wrap, air cellular cushioning, our Jiffy line of mailers and our Cryovac line of food packaging materials and equipment. We continue to maintain and establish drawn customer relationships through total systems offering differentiated products that provide economically measurable benefits and a broad product offering and an extensive industry leading global reach. I am confident of all of these factors along with our strong and talented organization will help us achieve our long-term goals. I remind you again that in good times and bad this company has a tremendous capability to generate cash - and as a reminder our free cash flow in the first quarter was over $70 million or approximately 9% of sales. This is well to the higher end of our range of 6-10% of sales of free cash flow.

At this point we will now take any questions. For the information of those on the line we are doing this also as a web cast so we will be taking questions both over the telephone and from questions coming over the web. For those questions coming over the web I will read the question before we respond to it. Operator will you open the questions please.

Ladies and gentleman we will now begin the question and answer season. If you have a question you will need to press the star or asterisk key followed by the digit one on your touch-tone telephone. We will take the questions in the order they are received. If your question has been answered and you would like to withdraw your request you may do so by pressing the pound or hash key on your push button phone. If you are using a speakerphone please pick up the handset before pressing the numbers. One moment please for the first question. We go first to George D. Shapiro, Salomon, Smith, Barney.

Hey guys good morning.

Hey, I could guesstimate this but could you give us a more precise breakdown of the sales reconciliation including the price mix etc for both businesses and in the answer, since I am limited to one question, could you talk about your share and volume trends in case ready?. Thanks guys.

Why don't I let that first question go to Dave and George I will also give you the geography around the world too after Dave does the analysis by price volume and things. Thank you.

George, we will start with food packaging where unit volume was up 4% in the quarter worldwide. Price mix was up a 0.5%, exchange was a negative 4% so we ended up with a 5/10% of a growth in food.

And no acquisitions?

No acquisitions on food.

On the protective side unit volume was down 4.8%, price mix was down 9/10% and exchange was down 2.2%. I will just throw a footnote in George on exchange that we have more international business in food so a bigger impact there and then acquisitions contributed a positive 3.2%. That is the $10 million I mentioned, so the total for protective would be down 4.7%.

George, I will go around your geography. These are first quarter numbers, topline growth, excluding the effect of exchange. In North America +1%, in Europe +2%, Latin America +11%, and Asia/Pacific -1% for the total + 2% that we recorded for growth excluding foreign exchange. Your comment on case ready. That number came in at again the 20% rang for the quarter, which is pretty consistent with what our expectations are, and yes there have really been no major changes in the market place at this time.

Okay, thanks guys.

Next question.

Thanks guys and good quarter. George always takes my favorite question, so I will go to my BUS tire - but I was wondered if you could talk a little bit about the resin price outlook and anything that you are seeing there and then I have a quick follow on.

Sure I covered resin price outlook with George. Resin did pick up a little bit in the first quarter. We think that is primarily feedstock driven, although with the economy still as soft as it is I wouldn't expect kind of a major upturn, in resin through the rest of the year.

Okay and then a follow on. Tax rate is still about 40%, which puts you at the higher end of most packaging companies. I was just wondering if there were any tax strategies that you could employ this year to get that tax rate down into the 30's.

Sure, well Scott, what we actually do, as I think most companies don't, is that we actually provide for US taxes on all of our international earnings, which is a factor in increasing our tax rate. I know some other companies that tried to change their corporate headquarters, but those are essentially games people are playing. I will ask Dave though of any particular plans to work on a more effective tax strategy.

We do Scott have some projects underway, primarily related to our international operations. Those have increased in size. There are some opportunities there, short of the rather dramatic and attention grabbing ones that Bill is referring too, that we think we should be able to implement over the course of this year that will improve our tax position. But we are not talking about anything more than an incremental improvement. We are not going to be dropping down to the 10 to 15 rates that some of the other companies are targeting.

Good morning all.

Good Morning Rosemarie.

Could you touch, Bill, on the trends you saw during the quarter. I guess I am a little puzzled by the fact that you haven't seen any pick up at your customers. Other companies seem to be seeing something. So if you could be a little more precise on what you see in terms of optimism. I mean it doesn't look as though it is translating into any additional orders for you.

Is it wishful thinking on their part?

Well, I mean, as I said during my prepared comment, we are seeing from our saleforce which were received as recently as yesterday afternoon signs of encouragement on the part of our customers but they have not translated into orders yet If you remember back on our fourth quarter conference call back in January I think we had made the comment that we really were not anticipating a recovery in the economy until really kind of the second half and I think we are still in that range. Rosemarie. The other reason may be why some other companies might see it a little before us is that we are pretty coincident in indicator being that our materials are really at the end of the manufacturing process. In other words, after our customers have fully manufactured the goods, so they would have already brought in the materials from other companies and we are the last step before they ship it out the door. But if you look at shipment by FedEx, and by UPS as kind of a surrogate that gives you a pretty good indication that the economy hasn't really turned up yet.

And the trends during the quarter did you see it improve slightly month over month?

The trends in the quarter were actually pretty flat I would say. If there is any improvement it is at the margins. But as you see if you go back and look at the protective the fourth quarter last year fell last year. Second quarter unit was down kind off 4% and the third quarter went to 6%, fourth quarter went to 7%. The first quarter saw it back up to 4%. So, as I said, I think on an earlier call, is the numbers are moving in a positive direction but are still not plus yet.

And if those companies, just following up on that same topic, if those companies for examples PCS we were told yesterday are beginning to build again in Taiwan. Would that translate into more of a pick up in the second quarter than you are expecting? In other words could the, you know the big FBP [phonetic] fall in the second half. Any feel for that?

That could be it Rosemarie, but I guess I would really prefer not to speculate when actually it will occur.

Okay, thanks.

Next question.

We will go next to [Indiscernible]

[indiscernible]: Hello, [Indiscernible]. I got two questions. One is pretty straightforward. If you take a look at your end use market what end use market do you see offer the greatest opportunities in the next couple of quarters, and which the least, maybe answer that, and the second thing is getting to the resin cost. Do you see prices moving up etc. I know they were down in the first quarter but we see a lot of price increases. Could you discuss maybe your outlook on how that could impact your earnings or sales over the next couple of quarters?

Sure let me start off by your first question on opportunities. I mean we sell to over 400 SIC codes on the protective side and I would say all of those markets present opportunities for places were we continue to have successes in distribution centers, in food servers and on the retail side. Opportunities that are probably not going to be there in the short term is that segment that we sell to which is kind of technology and telecom. I think you have seen a number of the telecom players report their first quarter results in the last couple of days and you can see that that sector still has a long time to go to recover.

On the food side of our business we continue to see great opportunities and a case ready, which is as I said earlier growing at 20% rate in terms of the first quarter, and our expectation are that we will continue for the rest of the year. Our fluid packaging business, which is also growing at double digits, which is receiving wide acceptance of food servers and institutional applications to replace [indiscernible]. So those are the opportunities that we see for the growth.

On the resin side I think I responded to an early question that there was an uptick in resin prices in the month of March. We believe that was kind off feedstock driven. In our view that demand is still relatively soft, so our expectation is that there maybe some slight cost driven price movement on resins over the next one or two quarters but we do not expect to see anything of significance. Okay?

[indiscernible]: Thanks for your complete answer.

Let me take a question from the web. We have a question on the web here. I will repeat the question: What do you expect depreciation and CAPEX to be for the full year 2002? I will ask Dave to respond to that.

Let me start with the CAPEX projection. Previously we have communicated a range of $125 million - $150 million. You may recall that at the end of 2001 we were at the upper end of that number around $150 million CAPEX. I think based on the deferral of those gross related products in the first quarter that we are probably now looking at coming in at the lower end of that 125-150 range. On the deprecation side the number we recorded in the first quarter was I believe $40 million-$41 million and that is I think a reasonable basis to project out for the balance of the year. We shouldn't see any major fluctuations in fixed assert depreciation.

Okay thank you can we take another telephone question please?

We will take our next question from Joel Fits [phonetic], Lehman Brothers.

GHANSHYAM PUNJABI [phonetic]: Hi good morning guys this is actually Ghanshyam Punjabi [phonetic] now.

Good Morning GHANSHYAM PUNJABI [phonetic]: Could you give us the operating profit numbers for both food and protective and also the benefit from not having to amortize goodwill by segment.

Go ahead Dave do you what to do that?

Yes I don't have a specific operating profit number yet as you know it takes us a little bit longer to get that rolled up across our international operations. The specifics will have to wait for the queue, but I can tell you that the weighting will be very similar to the weighting that we had last year. So before deducting corporate overheads, goodwill and restructuring expenses to get operating profit we would expect food to be contributing 57-58% of our operating profit margins for the first quarter and on a percentage basis we will see both of those improve. We have already indicated on a consolidated basis we had a significant improvement from the first quarter of last year and that will be reflected in improvements in both of our 2 segments.

GHANSHYAM PUNJABI [phonetic]: Okay, great. And also one quick one. What are you guys looking for in terms of volume growth for the full segment in the second half of this year?

I think as we said kind of mid-single digit, which in our view will come to 4-6% just on a core business basis.

Next question.

We take our next question from [indiscernible] Lewis, [indiscernible]. [Indiscernible] LEWIS: Hi I just wanted to get an idea of what you are doing with your free cash flow and how you see that number moving ahead? You have used it to pay down debts and buy down some of the convertible preferred as I understand it. What are you projections going forward?

Well, I think as you heard me say free cash flow in the first quarter was just about $70 million.

We have essentially paid down the borrowings on our US bank revolver. We still have some bank debt outstanding outside the US. We did purchase 35,000 shares of preferred stock during the first quarter. Ongoing through the year, as we said, our first use of our free cash flow was to put it back into the business to achieve our expected returns. After that we will either pay down our debt or be in the market for our shares and as you heard us say before we have a bias for the preferred because it is a cash pay instrument and is expensive on an after tax basis.

Is 70 million that or better for the next few quarters of this year?

I think, Dave, our free cash flow targets are in the 250 plus range for this year.

I think that is a reasonable estimate Bill. So something in that $70 million range.

Yes I think what I would say is that if you notice Dave's comments on capital expenditure were under $20 million at $19 million for the quarter, which really helped to drive that free cash flow number. The way we look at it after CAPEX. I would expect that if the economy begins to recover and we can put more money back into the business that number might not be as high on an ongoing basis. But as Dave indicated that 125 number for capital expenditures is probably a reasonably good number for the year at this point. [indiscernible] LEWIS: And that in turn gives you $70 million or better per quarter, around $70 million say in free cash?

The 125 would bring that down on an annual basis to that 250 number that I mentioned just a couple of minutes ago.

You're welcome.

Hi Bill. Bill you know going back away some the protective business in North America is usually a pretty good indicator for that business was a change in GDP. We haven't got the final numbers in GDP but it would seem that the 1% volume change trailed GDP in this quarter. Now I know telecom and technology have been particularly weak. Is that the primary difference? And I am just wondering going forward should we not be looking at changing in the GDP as being a kind of coincidence indicator or a prognosticator for what the protective business might be doing in North America.

Pat that is a good question. You are right for a very long time the protective business has kind of been reasonably well tracked by GDP. I think two things - and I am not an economist here so if I error please feel free to correct me. I think the service component and retail components have become more important parts of GDP in perhaps the last 10 years than they may have been and our business still primarily serves an industrial economy.

Does that make sense to you Pat?

Well, I guess it makes sense. You see the numbers much closer than we do, but I would have thought you have a heavy component into retail with core view and also with the pick and pack from some of the online initiatives. So, I would have thought there would be some meeting of that service economy, if you will with industrial production, but you are getting a better look at the numbers so...

And I do think that the telecom tech has been a factor, which I am not sure why it is not having more of an impact on GDP, because as you know it is an area in our business that had provided growth for a 5-8 year period. Growth in that area now, probably in the last 4 quarters has been negative.

Okay, great, thanks a lot Bill.

Sure Pat.

In regards to the September 30 court [indiscernible]. Any comments? And if there is any adverse rulings, will Sealed Air defend its investment grade rating?

Well, I don't think I have much to add to the September the 30 date. We have provided a couple of updates to the investment community and I think that you know one of the things we look forward to on September 30 is to resolve these issues as part of the [indiscernible] bankruptcy process. We remain confident that at the end of the day, the process will resolve all of these issues and allow Sealed Air to put them behind us, which includes keeping our investment grade rating.

Can you give us an update on some of the newer product lines like oxygen scavenging and the Tabletop Instapak? What kind of demand and interest might you be seeing right now for those?

Yes well both are being enthusiastically received into the marketplace. The Instapak Tabletop has only been out, probably only 41/2 months right now, but the reception has been very good. I think to the extent that you have heard me answer a question earlier from Rosemarie about how do we see the economy picking up and I think one of the things that we see is an interest in that particular product. Oxygen scavenging continues to move. It is a longer selling cycle, because it actually is a change in how our food-packaging customers package their products and there is an extensive testing period. But I can tell you that there are tests going on at a number of large processors.

Hi guys, a real quick one. Bill, can you comment at all in terms of your case ready growth, whether you see different growth rates between film and tray? To take it another way have you seen a spur in growth rate in your tray business lately?

Well, let me tell you that the tray business has been growing faster because we have been in it for a shorter period of time George. As you know we have been in the film end of case ready for probably well in the 2 years. It has been received by the major supermarket chains. As a result we have participated in the film component of that, even though the tray may have been made by somebody else.

Okay.

We are now both in barrier foam and solid plastic and as a result solid plastic we actually have not lapped yet our introduction, which was in the second quarter last year. So those numbers are way up.

So, solid plastic.

Yeah.

Okay.

The simple answer to your question is the tray growth rate is now higher than the film growth rate because we have been in film longer and we have only been in particularly the solid trays for three quarters.

Okay, Bill.

I have a reminder. If you would like to ask a question please press the star key followed by the digit one on your touch-tone phone. We go to Rosemarie Morbelli.

Hello again. You had quite a high growth margin, at least compared to my expectations. You have done a fabulous job but I was wondering whether you could give us a feel as to how much of the 1.9% improvement came from the lower cost of raw materials as opposed to the steps of cost cutting you have taken?

Sure, I think that a large percentage of it Rosemarie is attributable to the raw material decline. The other cost measures that we put in place last year are pretty much geared towards maintaining an already efficient level of operation. So I think it is reasonable to look at a fair amount of that year over year dollar increases as trivial to resin prices.

So with the signs of resin prices coming up then it is fair to expect that the growth margin may be lower in the second quarter than it was in the first?

I think, Rosemarie, that is where our cost cutting cuts in.

Yeah.

On the assumption that resin prices go up because there is an increase in industrial activity that has impact all over our income statement.

Okay, and when do you feel that you are going to pick up on your capital expenditure regarding extension? Will it be one quarter, two quarters into a recovery or are you going to accelerate this capacity extension as soon as you see signs for a couple of months?

I think we have, particularly internationally, some projects that are close to completion that will bring on incremental capacity. So the question is not so much when will capacity be coming on line because some of that will happen in the second or early third quarter but when we think it is appropriate to go with that next round.

All right and lastly a very short one. Bill in the food growth of 46% this includes 20% growth in case ready and about 15%. Is that the right number, for the other new products?

That is right, Rosemarie, and as I say those are still small enough not to bring up the total more than that 4.5%.

You do not have any area declining?

We have areas that are growing slowly Rosemarie.

Okay, thanks.

Okay, I think that concludes all the questions that we have. I would just like to make a very quick closing comment and to remind everybody that one of the fundamental strengths of the Sealed Air business is to generate meaningful cash flow in both good economies and bad economies. You saw us report in the first quarter, because of the slow economy that we are operating in, we managed to keep a tight control on costs. We managed to keep our capital spending modest and we managed to deliver reasonable significant cash flow at 9-10% of sales. As the economy improves it is possible that one may see increases in raw materials but we also see higher sales levels and our incremental margins levels to higher sales translate also into extremely positive cash flow. So this is a business that continues to deliver solid cash flow day after day in good times and in bad, which is why at the end of the day, I am always very happy to be a Sealed Air share holder.

That concludes today's conference call, thank you for your participation. You may now disconnect.