希悅爾 (SEE) 2002 Q2 法說會逐字稿

Please standby, we are about to begin. Good morning everyone and welcome to the Sealed Air Analysts and Stock Holders Conference call. This call is being recorded. Leading the call today is William Hickey, President & Chief Executive Officer, and David Kelsey, Chief Financial Officer. After the prepared comments we will be taking questions. You may ask a question by pressing the star key followed by the digit one on your touchtone telephone. If your question had been answered, you may remove yourself from the queue by pressing the pound key. Please limit yourself to one question per caller so that others have a chance to ask questions. Now I would like to turn the call over to Philip Cook, Director of Corporate Communications. Mr. Cook, please go ahead.

Good morning and welcome to the Sealed Air conference call. Before we begin our call today, I would like to remind you that statements made that statements made during this call stating management's outlook or predictions for the future are forward-looking statements. 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 Form 10-K for the year ended December 31, 2001 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. Now I will turn the call over to Bill Hickey, our CEO. Bill.

Thanks Philip, good morning. I am Bill Hickey, President and CEO of Sealed Air Corporation. With me today is David Kelsey our Chief Financial Officer and as an introduction I will provide a brief overview of the highlights of our business for the second quarter of 2002. Dave will then 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 have time to take questions.

I am pleased to report that Sealed Air delivered strong results in the second quarter. Higher sales in both our Food packaging segment and our Protective packaging segment helped to achieve 15% growth in earnings per share on a comparable basis and to modestly exceed market expectations. Once again we delivered strong stable cash flow. Our operating cash flow as measured by EBITDA continues to be a solid 21.5% of sales and is well within our targeted range of 20-24% of net sales. In the last 12 months we have used our cash to pay down approximately $230m in debt and over the first six months of this year we purchased approximately $20m in preferred stock, most of that occurring in the second quarter. Our top line sales growth in the second quarter was encouraging.

We are pleased to report that Protective and Specialty packaging segment sales increased due to added sales from acquisitions and increased volume growth. On the other side of our business, Food packaging segment sales also increased on mid-single digit unit volume. As we have said we expect mid-single digit volume growth for our food business on an annual basis. So the results in the quarter keep us right on target for the year. The volume growth in both Food and Protective packaging is encouraging given the uncertainty of the economic environment. I want to note that for the first time in more that two years, foreign currency translation effects turned positive although the effects were very small in the second quarter.

In summary, Sealed Air delivered strong results in the quarter with higher sales and increased earnings. Now I will ask Dave to review the highlights in our results for the quarter. I will then make some additional remarks after which we will open up the line for questions. Dave.

Thank you Bill. I would like to start with some additional comments on our sales. As stated in our earnings release, our second quarter sales were up 3% or $25m, which includes a $5m positive effect from foreign currency translation. Our growth represents 5% volume gains in our Food packaging segment and 4% volume growth in Protective and Specialty packaging. Also our Protective and Specialty packaging segment had an additional 4% favorable revenue variance in the second quarter from businesses acquired in the past 12 months, which contributed to $11m to the top line.

To summarize our top line performance in the quarter, unit volume growth in Food was 5%, in Protective 4%, and for the total company 4%. Mix in price was unfavorable in Food by 3%, unfavorable in Protective by 4%, and for the total company unfavorable 3%. Currency translation was favorable in Food 1%, favorable in Protective fractionally, and company wide slightly favorable by 1%. Acquisitions were not a factor in Food and as I stated added 4% to Protective resulting in slightly over 1% growth in total company revenue. Total revenue growth then was 3% in Food, 4% in Protective, and by extension 3% for the company. The company's gross profit was $260m for the second quarter. Gross profit margin improved to 33.1% up from 31.8% in the second quarter of 2001. This represents our third consecutive quarter with our gross margin in our target range of 33-36%. Prices for certain commodity raw materials such as polyethylene have begun to rise. Demand for these products has been unexpectedly strong leading to this foaming of prices. Many of our more Specialty-like raw materials used in the manufacture of products remain at or near prior year levels. Remember though that Sealed Air's business is based on selling different 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.

Marketing, administrative, and development expenses increased $5m to $131m compared to the second quarter 2001. This increase is in line with our revenue growth, so the overhead expenses were essentially unchanged as a percentage of revenue at 16.7%. Included in administrative expense is approximately $2m of amortization of our votes of restricted shares of Sealed Air common stock. Sealed Air does not grant stock options. The cost to the company of issuing restricted shares is amortized over a three-year vesting period.

Operating profit improved to 16.4% of net sales compared to 15.2% in the second quarter of 2001 after excluding goodwill amortization and restructuring expenses incurred last year. As we explained in our first quarter conference call effect from January 1, we implemented FAS 142 which revises the principles for amortizing goodwill. Consistent with this new accounting standard we no longer expense goodwill amortization whereas last year we expensed $14m in the second quarter. As expected, we are realizing only modest savings in the second quarter from actions related to the restructuring charges taken last year. In 2002, we expect to realize approximately one-half of projected $23m annual savings and in 2003 fully benefit from the actions announced and underway. Basic earnings per share was $0.66 for the quarter. The comparable number last year for basic earnings per share $0.30. Adding back goodwill to 2001 second quarter EPS increases basic EPS by $0.17 and as if converted EPS by $0.13.

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 second quarter was a $169m or 21.5% of net sales comparable to our first quarter ratio and within our target range of 20-24%. Capital expenditures were $27m for the quarter compared with $41m in last year's second quarter. We anticipate that as the economy improves we will increase spending for incremental capacity and be in the range of $100-125m in spending for the total year. Our preliminary quarter-end accounts receivables totaled $543m, up $43m from March 31, 2002 attributable in part to strong sales at the end of the quarter.

Inventory investment increased $24m to end the quarter at $317m. Total borrowings at June 30 net of cash were $950m up approximately $27m from $923m at the start of the quarter. The increase in our debt balance during the quarter is attributable to the strengthening of the Euro, which caused us to increase by $23m, the carrying value of the $200m Euro note. Our remaining debt decreased by a $11m that was offset by a $15m reduction in our cash balances worldwide.

Finally, 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. At the end of the second quarter we had nothing outstanding under the receivable securitization. Overall, I would to point out that we have over $800m in uncapped, but available funds, through a combination of our bank credit lines and our accounts receivable conduit. Now I would to turn the call back to Bill.

Thank you Dave. As I said at the end of the first quarter, we saw some encouraging signs. The economic conditions were beginning to improve. I mentioned that our Protective and Specialty Packaging customers were more optimistic. But that optimism had yet to turn into orders. What we saw at Sealed Air in the second quarter was that our customers' optimism did indeed turn into new orders. Although we are cautiously optimistic that economic conditions will continue to improve through the remainder of the year, we are concerned that the recent decline in the financial environment could derail the economic recovery. Based on the company's year-to-date performance and continued improvement in economic conditions we remain confident that we will achieve our guidance of at least 50% growth in earnings per share on a comparable basis or $2.45 in diluted earnings per share for the full year. We are certainly in challenging times. But I remind you that in both good times and bad Sealed Air can deliver results and deliver positive cash flow. an uncertain economy and actions by a few corporate executives have shaken investor confidence in the market.

First I want to remind our share holders that Sealed Air is a strong business, well positioned for growth over the long term. Secondly, I want to reassure our shareholders that Sealed Air is founded on solid principles that have guided us for many years. Sealed Air is a solid business for a number of reasons. One, long term external trends are in our favor. Two, we are well positioned in the marketplace. Three, we enjoy significant growth opportunities. Long-term external trends such as the rising global standards of living, expanding meat and protein consumption, the growing demand for convenience, the global expansion of the super market, and the ever-greater demand for efficiency and performance will continue to favorably impact upon our business. We go to the market everyday with powerful industry leading brands with the global reach that extends to 47 countries covering 80% of the world population. We have a broad, deep and differentiated product offering backed by over 2500 patents often combining our packaging materials and systems to provide one-stop packaging solutions for our customers.

We continue to fill the product pipeline through industry leading investment in R&D that drives significant growth opportunities like Case-Ready, inflatable, and vertical pouch packaging. I also want to reassure our shareholders that we will continue to operate our business under the principles that have guided us for numbers of years. These fundamental principles include conducting our business for cash flow. In fact our number one priority card, which everyday reminds us of our corporate mission and our code of conduct states that customers are always first but the cash flow is our number two priority.

I also want to add that Dave and I have reviewed the accuracy and completeness of Sealed Air's financial statement like we always do and we can attest to their accuracy. We will have no problem putting our names on the certificate in August as required by the new SEC regulations at the time of our quarterly filing. At the end of the day, none of the new or proposed regulations from the SEC, the Congress, or the New York stock exchange will fundamentally change the way Sealed Air operates. We have a solid business positioned on the right side of the long-term growth curve and we have always operated under the guiding principles that have been correct for years and are still correct today.

Now we will take any questions that you may have. I want to remind everyone that this conference call is also being broadcast over the web, so we will also be taking some questions from participants who are asking their questions via the Internet. With that, operator, we are prepared to take questions.

Ladies and gentlemen, we will begin the question and answer session. Be at the telephone at this time. If you do have a question, press star one and we will first go to George Staphos with Salomon Smith Barney.

Hey guys, good morning. Hey, Bill, standard first question, can you tell us what your revenue trends ex-currency were by geography? And then as a follow on from my one question, can you comment on price mix in the quarter and whether that was a driver of the sequential margin drop actually from the first quarter?

Okay, let me go through George the second quarter, these are top line growth ex the effect of foreign currency. North America 3%, Europe 2%, Latin America 5%, and Asia Pacific 1% for a total of 3%. Your second question is on the margin? On the quarter?

Essentially, why did you see sequential margin drop, that wasn't that significant and clearly you were up year-on-year and was any of that driven by some unique factors in price mix in the quarter? You have mentioned that a couple of times in your press release.

Two things, one, there is a shift in mix on a number of products and that has been an effect. The second is as we have mentioned on a number of calls, you know, we have entered into a number of outsourcing arrangements on Case-Ready and that has been a factor of about three-tenths of a point and third, polyethylene or some of the raw materials are really up in the second quarter over the first. Those are the three components.

Okay, thanks very much. I will be back.

Next question comes from Eddy with Morgan Stanley.

Good morning gentlemen. It is a good thing to hear you say those comments about putting your name on the, thank you there Bill.

I have got no problem with that.

Delighted to hear in this market. Want to focus a little bit on the CAPEX, you mentioned that it was down a $100-125m, I had $150m in my model, was that your previous guidance or are you reiterating guidance?

No, Eddy, we had been a $125-150m. As you saw through the second quarter the numbers are in the 40s and with the economy not picking up as quickly, at least in the manufacturing sector we were sort of pulling that number down to more in the $100-125m range for this year, but for planning purposes for 2003 in the $125-150m still is reasonable.

And Eddy, elaborating on that, our depreciation for the year will run about $160m.

Great. And I was just wondering if you could you give operating profit by segment as well?

For the quarter in Food, operating profit was approximately $80m, and for Protective and Specialty it was approximately $54m, and then we have some corporate charges that hit there which brings us down to the reported number of $128.6m.

And Eddy, I think if you could translate those into percent of sales, the Food packaging segments is about 16.8% of sales, the Protective is about 17.2% of sales and of course the Food packaging segment includes the outsource trades and if you sort of add those back in, it's well over 17.5%.

And those are both up over their second quarter equivalents last year.

Great, thanks very much.

Next question comes from Rosemari Morbelli with Ingalls & Snyder.

Good morning and congratulations on a very good quarter. Could you give us a feel for what is really the change in mix in both of your areas, is it that people are buying lower priced products because of the economy or are there different reasons for that? And then if you could also give us an update on the growth of Case-Ready, and whether the ConAgra and E.coli problem will either help or hurt depending on whether they were packaging it in Case-Ready and then it was split in small pieces at the supermarket or whether, actually it would help because it was never in the Case-Ready kind of packaging?

Okay Rosemarie, let me try to go through the first part of your question on the product mix, I can give you two examples. One on the Food packaging side. We have introduced a new poultry bag, which is for whole poultry birds and that has replaced just a very low-end polyethylene bag and because it is a smaller bag and it's structured and priced for the poultry industry, it has a lower average price than our standard mix of shrink bag products. So, that has been a factor and that has really grown nicely and that has been part of the factor in the mix on the Food side. On the industrial side, in terms of economy, we have introduced a product called Bubble Wrap Lite, which is a lighter weight version of our Bubble Wrap product. It has a lower price point as low obviously as a lower cost point. And in this economy, you have found people kind of trading down in some of their material selection.

Do you think that there is a chance that they will trade back up or now that they have discovered the lighter weight this is what will be selling in the future?

Well, I do think as the economy improves, there is always an opportunity to sell up.

And could you address the Case-Ready please?

Case-Ready growth in the quarter was about 20+ percent in the low 20% range, which has been reasonably consistent, as I said, over the last couple of quarters and that growth is continuing and expect probably will still be in the double-digit range as far as the effect of the ConAgra Beef Recall, as I understand it that beef was not Case-Ready, it was basically, I guess, processed in another way. There is a feeling that if it were Case-Ready, perhaps it would avoid one less handling and as we said back a couple of years ago with the E.coli issue at Hudson Foods, that was one of the events that helped sort of help move Case-Ready forward and perhaps this will also help it going forward.

And no major change in that particular industry, vis-a-vis on Case-Ready?

No.

Okay, thank you.

Next question comes from from Lehman Brothers.

Are you seeing higher sales for equipment across both Food and Protective?

Probably, modestly.

So, are customers more willing to talk about, you know, spending some money to buy the equipment, which hopefully will be a precursor for increased demand on your consumables?

No, there is. I think it is in my comments just before we started taking questions. I said that we saw optimism at the end of the first quarter. In the second quarter, we have seen some of that optimism translate into orders. There has been a gradual pick up in orders on the equipment side, but there is still a long way to go to come back to prior levels.

We are on the right track.

Okay, and good to hear, also with the recent pull back in the stock, is there a chance to be more aggressive on share buy-backs?

I will tell you that we were in the market in the month of June. We obviously have our own blackout periods, because the company obviously follows the same rules as the SEC. So, for the month of July, we have been out of the market. But I will say that the stock is very attractively priced at this range.

And also lastly David, what is the free cash flow guidance for this year after CAPEX?

We are running about $70m a quarter before working capital investments. So, you can extrapolate . I think we have said guidance in the $250m range for the year and right now that looks like, we might be able to top that slightly because our CAPEX is down. I am sorry, that does include CAPEX in that 250-270 number.

All right. Thank you very much guys. Good quarter.

Next we go to Dan .

A followup on those questions. Actually first clarification, do you have gross debt and cash levels on the net debt? And then the follow-up question is with the free cash flow, could you prioritize your uses for that? It seems like it is going to be a pretty good number this year. And then could you refresh our memory, I think the last time we talked, the stock was little bit higher but buying back the preferreds was actually more accretive. Is it still at these levels more accretive to buyback the preferreds?

I sort of lost track of that multipart question. Could you repeat the first part on the debt?

Yes, out of net debts you have gross debt and cash levels?

The gross debt at the end of June was $964m and cash debt was $14m. So, net debt was $950. At the end of March, just keep your notes stragiht, gross debt was $952m and cash was $29m for a net number of $923m. And if you want me to walk me through your questions.

The second part was a followup to the free cash flow. You are going to have some pretty good free cash flow numbers on the year. Looks like if you could keep at this runrate you are going to beat the free cash flow you had forecasted. What is the priority of uses for that and then in particular on the convertible preferred, is that still more accretive to buy that than the common stock at these prices?

I think we have already run through on the call our guidance on CAPEX. So, that $100-125m is unlikely given the lead time on projects to ramp up much which then would suggest we either use the free cash to make acquisitions, to pay-down debt, or to buy-in shares. I think of that group, on the debt issue in particular, as I had explained we are essentially out of all of our short-term borrowings domestically and it really is not efficient for us to start buying back any of our long-term debt. As a consequence, the default answer is that at today's prices, the stock looks like an attractive proposition for us and of the two issues, the common and the preferred, the preferred is more accretive and more importantly it also eliminates the need to pay the dividend on those repurchased shares going forward and it helps us with the rating agency since they tend to view that given its mandatory redemption feature as more debt-like than stock-like.

Thank you very much.

Next we go to Sierra with .

Good morning. Switching to asbestos, can you give us an update in your take on the government joining the plaintiff in the Grace Bankruptcy?

Let me Sierra, that also then combine this, we have a question coming over the Internet which basically says the same thing. I will just read the question and then answer both of you at the same time. The Internet question is why did the US Government join the Fraudulent Conveyance suit? And second part of the Internet question is why aren't they suing Fresenius?

As to why the government has joined to Fraudulent Conveyance suit, what you actually have is the EPA, the Environmental Protection Agency, who feels that Grace may have understated their environmental liabilities at the time of the transfer and that is the basic reason why the EPA has become part of the case. As to why they are not suing Fresenius, I just don't know.

Can you give us any take on how this may color the outcome?

I don't think it will have any color on the outcome at this point.

Great.

As a reminder, star for a question. We do have a question from Jay Harris with Goldman Smith and Harris.

Good morning gentlemen. Coming back to the asbestos litigation, would you give us the time lines on this Fraudulent Conveyance action?

Sure, let me, in fact it is a follow on to the question I just answered. As we have stated before, the hearing on the fraudulent transfer is scheduled for September the 30th. In our view, there had been really nothing that has changed in the pack pattern at Sealed Air. We are extremely involved in preparing for the trial on September 30th. We really look forward to demonstrating that the 1998 Cryovac transaction was not a fraudulent transfer. As far as the timeline is concerned, the hearing is scheduled for September 30th. I really don't know how long it will run. Estimates run from one week to many weeks and I would assume where timeline lies figure is that after that hearing occurs, there will probably be sometime for the judge to issue an opinion on the matter. So, it is probably sometime before the ultimate resolution is reached, but we are very optimistic that the September 30th trial will be a big step in putting this behind Sealed Air, as I said earlier, to clearly demonstrate that the Cryovac transaction was not a fraudulent transfer.

What is the nature of this hearing? Is it going be just the submission of briefs or oral arguments before the court or is it going to be more like a trial?

It will be much more like a trial and obviously there will be evidence and experts introduced by all the parties involved. That's why I couldn't tell you whether it is going to take a week or multiple weeks. But in essence, it is a trial process heard before a federal judge acting as part of the bankruptcy court.

And the parties that will be submitting are Sealed Air, the EPA, the Justice Department representing the EPA, the plaintiff spar on asbestos litigation, and W.R Grace?

Right. W.R Grace has actually filed on the Sealed Air side of the argument here.

I presume, if at some point if Grace reaches a settlement in bankruptcy with the asbestos spar, then from that point forward, there will be no liability associated to Sealed Air. Is that correct?

I am not sure I can answer that question because I just don't know what kind of settlement that would be reached in the Grace Bankruptcy court. I will tell you though; it is our goal and our objective to resolve this matter of any claims on Sealed Air as part of the Grace Bankruptcy process. That part is correct.

Okay, thank you.

We will next go to Chris Hynes with .

Hi, had a couple of question again on the asbestos liability or any potential asbestos liability with respect to the fraudulent transfer, what sort of insurance do you have to cover any potential liability if in fact it turns out as the court decides that was transferred fraudulently?

I don't believe there is any insurance that covers such a thing as fraudulent transfer. People have insurance for asbestos and for damage, but I am not sure this is an insurable item. So, this is not an insurance that Sealed Air carries.

Okay, thank you.

Again that is star one for a question. We will go to a followup with George Staphos from Salomon Smith Barney.

Hey Bill very quickly, when you were talking about Case-Ready, you said that going forward you expect it will continue to grow double digit. I figure that is exactly the phrasing. Does that suggest that why you are very happy with momentum as a lot of big numbers are starting to take effect and it is going to be hard to keep growing to 20% or how long would you hold to that growth goal? And separate question whether the other growth businesses, inflatables and fluid is going at the same rate?

Let me go back to your first question George. On Case-Ready, I said double digits because obviously that covers a broader range and if you recall, when we first started talking about the growth of Case-Ready a number of years ago, we said that it took the poultry industry roughly somewhere between 8 and 10 years to go Case-Ready substantially 100% across the board. It does have its step functions as you bring on chains and supermarket chains begin to kind of build out, you saw you have to bring in the next chain as you go along. So, we are beginning to have great penetration that one of the leading chains and of course, the rest of the supermarket industry is still somewhat behind and we still anticipate one or more major supermarkets to begin the convert, but that hasn't happened yet. I will give you an interesting number. If you look at Tyson's quarterly earnings report which came out on April 29, 2002 they actually said that in their report their beef Case-Ready was 6.5% of beef sales and their pork Case-Ready was about 7.2% of pork sales. So, you can see penetration is still relatively modest.

Inflatables are again in the 20% range and fluid packaging or what we are now calling vertical pouch packaging was in the low double digits.

Okay guys, thanks a lot.

You have a followup from Eddy Sneibals from Morgan Stanley.

I just want to follow up on your comment on some of the new products, particularly the lower price products. Are they being sold on a lower margin or is in fact the margin higher or the same to Sealed Air?

Yes I think Eddy, as I mentioned, for example Bubble Wrap Lite has a lower price point but has a lower cost and are on course at the same margin percentage, as same or higher margin percentage you get slightly lower on the margin from overall margin contribution.

And finally, Case-Ready, you mentioned the growth rates. Do you have a sense of what the total revenue pie is for that?

If you look at the half numbers, it is just about $200m on an annual basis.

And that 20% is followed by $200m?

Yes.

Great, thanks.

No further questions at this time. I would like to turn the conference over to Sealed Air.

We do have a couple of questions that are on the web. And I will try to go through them before we conclude. Next question it comes on the Internet it suggests that is there a chance you will settle the fraudulent conveyance case?

I'd like to go back to the comment I made earlier on the question on the phone as what would happen if W. R. Grace reached a settlement in the bankruptcy court? I think we would want to be part of that, but at this point it would be premature to speculate that that would happen.

Let me go down to the next question on the Internet that came over. It says what were the earnings for the second quarter of 2002 on an asset converted basis for the second quarter of 2001on an asset converted basis? And also is the $2.45 of share guidance for the year basically diluted or as if converted? Dave?

Yeah, the cost we've crossed over the $2.20 earnings expectations for the year, there is no distinction between our asset converted and diluted. So, the numbers will be comparable in terms of our reporting this year.

The next question on the internet, it says have you taken any precautions, built up any reserves in case if there is negative recourse from the litigation surrounding Grace?

One argument is that Sealed Air doesn't have any liability. So, therefore we have not built any reserves on this matter.

Next question on the Internet, as the business picks up and you realize greater efficiencies, can gross margins approach 35% again?

The answer is yes, this business has a lot of leverage on the top line. So, if we begin to see some higher growth numbers on the sales line, we believe that we can get the business from the higher end of the range. As Dave said earlier our gross margin ranges 33-36% and 35% is well within that range.

I am trying to read the Internet once here. I think that is about it. Do we have any more questions from the call?

No further questions at this time.

Okay, I thank you all very much for participating in our second quarter conference call. I am still very confident in the economy, I am still very confident in the business and I believe that Sealed Air shares in this market are very attractively priced and I am still happy to be a shareholder. Thank you very much.