希悅爾 (SEE) 2003 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Sealed Air analyst and stockholder conference call. 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 queue simply by pressing star 1 on your touch-tone telephone. If your question has already been answered you can remove yourself from queue by pressing the pound key on your touch-tone telephone. Please little limit yourself to one question per call. 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 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 the most recent annual report on Form 10(k) or quarterly report on Form 10(q). We have also posted supplemental statistics and financial information and reconciliation of non-GAAP financial measures that we expect to discuss today during the call on our web site at WWW.SealedAir.com in the investor information section under the reports and filings sections.

Now I'll turn the call over to Bill Hickey our CEO. Bill.

Thank you, Chip. Good morning I'm 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 few highlights on our business for the second quarter of 2003. Dave will then review the details of our financial results. After Dave's remarks, we will take your questions.

Sealed Air second quarter results reflect the advantage of our global reach and the strength of our food packaging business. With almost half our business outside the United States, Sealed Air benefited from the currency strength in the Euro and British pound and the Australian dollar, partially offset by weaknesses in Latin American currencies. Excluding the positive effect of foreign currency translation on our sales, we did achieve our targeted mid single digit growth, primarily through the favorable performance of our food packaging business.

Our food packaging business continued to benefit from our ongoing focus on investing and commercializing innovative new products to our customers. To this point, our case ready and our vertical pouch packaging business both achieved strong double digit growth in the quarter.

While the currency effects and the strength of our food packaging business were positives for the quarter, continued weakness in the global economy and higher average petrochemical based raw materials were challenges in the quarter.

Top line growth in our protective and specialty packaging segment slowed in part to continued weakness in the U.S. industrial economy and slowing economies in Europe and parts of Latin America. Excluding the positive effect of foreign currency translation, net sales in our protective business increased modestly. In both the food segment and the protective and specialty segment, the attention of our sales organization was focused on achieving the price increases that we felt were necessary to counter the negative effects of rapidly rising raw material costs.

Earlier in the year, we told you we would achieve increases in our selling prices. And in this quarter we achieved an average selling price increase of 3 percent across our business. Although raw material costs finally began to moderate in June from the record highs in March and April, these costs contributed to a decrease in gross profit as a percentage of sales in the second quarter.

On average, raw material costs increased sequentially in the second quarter, and actually peaked in the second quarter compared to the first quarter of 2003. On the year over year basis, some key commodity based petro chemicals such as low density polyethylene were up more than 25 percent, compared to their price in 2002. As noted above, raw material costs began to moderate in June, and the outlook for average raw material costs to decline sequentially in the second half of the year.

Thus, the combination of our achieved second quarter price increases and average decreases in petrochemical resin costs over the second half of the year, and the normal, seasonal pick up in volume that we experience in the second half of the year should help us to return our gross profit to a more normal percentage as we move through the second half of the year.

With this broad overview on our second quarter results, I will now turn the call over to Dave to review some of the details of our financial performance.

Thank you, Bill. I'd like to start with some additional comments on our sales. Second quarter sales were up 10 percent or $79 million, which includes a $46 million positive effect from foreign currency translation. Another important factor in our growth was the $26 million positive impact from the combined effect of price and mix. This increase reflects pricing actions introduced in the second half of 2002, as well as additional actions taken in the second quarter. These actions were taken to cover a portion of our higher cost production, largely attributable to the sharp increases in commodity resin prices cited by Bill.

A third positive contributor to our revenue growth was our food segment, which recorded a 3 percent volume increase in the quarter, representing $14 million and attributable mostly to our North American operations.

To summarize our top line performance in the quarter, unit volume growth in food was 3 percent, while protective declined 2.9 percent. So that total company volume grew 0.7 percent, a $5 million favorable variance. Mix in price were 3.4 percent favorable in food and protective favorable by 3 percent and favorable for the total company, 3.3 percent or $26 million.

Currency translation was favorable in food, 6.2 percent, and protective 5.4 percent, & Company wide 5.9 percent. Acquisitions were not a factor in food and added a modest 6 tenths of 1 percent to protective resulting in two tenths of a percent growth company wide. Total revenue growth then was 12.6 percent in food and 6.1 percent in protective, and 10.1 percent for the company.

The company's gross profit was $269 million for the second quarter. Gross profit margin was 31.1 percent compared with 33.1 percent in the second quarter of 2002. The decline in percentage margin reflects increases in resin costs, only partially offset by productivity and pricing actions. Commodity resin prices peaked at the end of the first quarter and began to moderate toward the end of the second quarter. As noted in our earnings press release, the cost of key petrochemical based commodity resin were more than 25 percent above second quarter average costs.

Marketing, administrative and development expenses increased $10.7 million to $142 million compared to the second quarter of 2002. As a percent of revenue, these overhead expenses were 16.4 percent, compared with 16.7 percent in the second quarter of 2002.

Operating profit was $127 million or 14.7 percent of net sales. By segment, food packaging contributed $86 million and protective and specialty packaging contributed $49 million, while unallocated corporate expenses were $8 million.

Interest expense of $26.5 million compared to $16.5 million in 2002 increased due to $7 million of accrued interest on the cash portion of the asbestos settlement that we recorded in the fourth quarter of 2002, and $3.5 million from the April issue of $300 million of five year maturity senior notes.

Our recent $1.3 billion financing had no impact on our second quarter interest expense. Income tax of $37 million represented an effective tax rate of 36 percent, compared to 40.6 percent last year, and 37 percent for the first quarter. Compared to last year, we benefited from our 2002 reorganization of our international subsidiaries into a more effective, more tax effective structure. Moreover, we now are projecting our effective tax rate for 2003 will be 36.5 percent. This change from our earlier guidance of 37 percent reflects the substantial increase in interest expense deductible on our U.S. tax return.

Diluted earnings per share were 56 cents for the quarter, as shown on the financial exhibit to our earnings press release, the number of diluted common shares outstanding for the second quarter of 2003 includes the 9 million shares to be issued under the terms of the asbestos settlement. The comparable EPS for the second quarter of 2002 was 61 cents per share. Please note that financial exhibits through our press release contain the calculations of EPS on an as is converted basis for those who prefer this non-GAAP portrayal.

I will conclude with some key cash flow and balance sheet items.

First, EBITDA for the second quarter was $173 million at an even 20 percent of sales, we are at the low end of our targeted range of 20 to 24 percent for EBITDA margin. Nonetheless, the $173 million is a record high for second quarter EBITDA.

Capital expenditures were $30 million for the quarter, primarily in our food segment, and primarily for construction of the new facilities in Hungary and Arkansas that we have previously announced. Cap Ex for the year is still anticipated to be in the range of 125 to $150 million. Our cash balance at June 30th was $450 million. In July, we employed approximately $50 million of this balance to supplement the proceeds of our recent financing to fully fund the redemption of our series A convertible preferred stock.

Our quarter end accounts receivable totaled $569 million, up $25 million from June 30th, 2002, while our quarter to quarter revenue increased $79 million. Compared to December 31, 2002, receivables investment increased $22 million.

Inventory investment at June 30th was $382 million, up $52 million from December 31, 2002. Foreign exchange, resin price increases, and inventory build to handle third quarter demand all were factors in this inventory growth.

Finally, total borrowings at June 30th, net of 450 million dollars of cash were $773 million.

Now I'd like to turn the call back to Bill.

Thanks, Dave. Before we open up the line for any questions, I would just like to make two other comments.

One, we continue to be pleased by the performance of our food packaging business. Despite the economy and the commodity raw materials, we were able to increase the operating margins in our food packaging business from 15.2 percent in the first quarter to 15.9 percent in the second quarter. And I think that represents great performance by the folks in our food packaging operation.

I would also like to comment on the outlook that we gave you in the press release. On July 18th, we completed the call of our series A convertible preferred stock and financed that call to the issuance of about $1.3 billion in 10 year, 30 year, and new smaller issue of convertible notes. As a result of that call, which it was called at a price of $51 per share, we incurred a $1 per share charge for the call, which becomes part of the EPS calculation for the second half of the year. And that will be recorded in the third quarter.

So the preferred shares outstanding at the time of the call was approximately 26 million shares, and at $1 per share, there's about $26 million which, as I indicated, really becomes a part of the calculation in earnings per share for the second quarter. Offsetting that to some degree will be a recovery by not having the preferred shares there. That will in effect contribute 3 cents. But the fundamental message behind it is that the outlook for the operating business is still on track for operating targets. And we anticipate that 2004, we will realize accretion in earnings per share from our refinancing transaction in two ways.

One is that we are really replacing the preferred with a lower after-tax cost of debt. And secondly, we are bringing the share count down by calling in the preferred. Now the effect on EPS for 2004, we will probably not be in a position to discuss until we begin to think about our 2004 guidance. But I do want to remind you that that one item that we are expecting in the third quarter is essentially a one-time charge related to the calling of the preferred.

With that, I'd like to open up the call to your questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you do have I question, you will need to press the star key followed by the digit 1 on your touch-tone telephone. If you find that your question has already been answered and you would like to withdraw your polling question you may do so by simply pressing the pound key. If you are using a speakerphone please pick up your hand set before pressing the numbers. And once again that's star 1 if you would like to ask a question. We'll pause for just a moment to assemble the roster. And our first question will come from George Arzente of Bank of America.

Thanks, Operator. Hey guys, good morning. I guess for posterity, let's start with revenue growth in the geographies, excurrency. Kind of related question Bill, do you see any growth of protected packaging the back half of your years given your comparisons? Thanks?

Sure, George. Let me give you the across the board North America 6%, Europe excurrency 0%, Latin America 5%, Australia New Zealand 5%, total company 4%. And those numbers are also available on the web. Let me comment, though. Before the call in preparation for the call, I went back and looked at the first quarter numbers just to see if it tied to what I thought was happening to the business. And actually the numbers in the U.S. are up a little bit from 4 to 6 percent, first quarter to second quarter. But where the fall off occurred was in Europe and Latin America. If you look at those numbers are both down from the first quarter growth around the world. And I think that's kind of a troubling sign of weak economies in other parts of the world.

Fair enough. And just in terms of protective packaging, you're going up very stiff comps in the second half and you basically put up zero this quarter. What do you think going forward?

Well, you know, if you look across the landscape, you are seeing most other companies in this space reporting pretty weak industrial sales. But there is also the hope that -- I think for the third year in a row that the economy will recover in the second half. If you remember, we did post some increases in protective volume in the first quarter. I think we spent a lot of time in the second quarter achieving those price increases to offset some of those higher costs. And the third quarter we're back to selling new business.

Okay, Bill. Fair enough.

Thank you,. Next we'll hear from Edings Thibault from Morgan Stanley.

Good morning, gentlemen.

Good morning.

I want to focus on some of those same issues if you don't mind, Bill. If you would talk about some of the sequential volume trends you encountered in the quarter, did you think that some of that first quarter volume and potentially even some of the fourth quarter volume strength you saw may have been related to some pre-buying particularly in the protective packaging and others?

Yeah, I mean that's hard to say, Edings. I was thinking as you were saying your question, I know the dates of our price increases in 2002 and 2003 that you could say that perhaps there was some prebuying. But when you look at the kind of volumes our products take up, that really can't be a very big number in terms of the space it takes to store up rolls of bubbles and foam, Edings. So if it's in there it's kind of a small piece in there. I think where protective slipped the most was Europe, which is a concern. I mean -- there is some work to do there and we are taking some steps to improve the performance of our protective business over in Europe. The other is that the economies had a couple of starts and stops. I mean, I think round about April, people were seeing pretty positive signs and then May seemed to go the other way. So I think there is a lot of hope for pick up in the economy. I think every time it gets started there is a little bit of a drop off.

Okay. So following up, you didn't really see, then, any real indicative trends during the quarter that would tell you that there's a, you know, there was anything more than that, just sort of continued start/stop?

Right. In fact, it kind of validated that despite what appears to be a pickup in the service economy and, you know, the economists' statements that there is a recovery going on, I think that excludes the industrial manufacturing sector.

How about overseas, any trends there? Is Europe weakening? Did that weaken through the quarter?

Yeah, that weakened, as I responded to the last question from George, Europe actually -- actually slipped from the first to the second quarter. And if I remember, I think Europe was up 4 percent in the first quarter and essentially zero in the second quarter. And as you heard me say on these calls now for several number of quarters, Europe still has a lot of structural issues that aren't getting addressed. You know, you hear different actions in Europe, whether Italy or Germany talking about pension plans and social benefits. And every time those happen, there is a lot of labor unrest.

Right.

So it hasn't been addressed yet. In fact, I heard an interesting comment, I believe Mr. Greenspan is -- Europe's struggle today is kind of a foreshadowing of what we may face in 20 or 30 years if we don't take some action ourselves.

I'll get back in line. Thanks very much.

Thank you, sir. Next we'll hear from Panjabi from Lehman Brothers.

Hi, guys, good morning. How are you doing?

Hi.

Can you just comment on how market shares shaped up in the food packaging business in the quarter?

I don’t think we sort of follow market share on a quarter by quarter. We had a good quarter. The operating performance you heard me say improved At the operating margin line. We continue to see good growth in case ready and vertical pouch packaging. So I would say operating according to plan.

Okay. And speaking of case ready, can you just talk about, you know, maybe some other supermarket acceptance or what the outlook for the business is for the second half? And also inflatable packaging, too?

Sure. I think the number for the quarter was about 20.6 percent. So the quarters were case ready which was pretty good. The interesting thing we're finding, and I think I may have made this comment in response to a question on it earlier occasion is that we're finding that the major supermarket chains have not really jumped on board for a full scale conversion. But a lot of the processors are coming into supermarkets with a case ready product either through the turkey store like turkey store or Gineo. So it's really coming in under separate categories and it's gradually beginning to fill the shelf. The other thing which you're seeing is -- and I saw it in my supermarket actually in New Jersey for the first time last weekend -- irradiated beef. Even though there are resistance around the consumer level, we did see some pick up in the quarter for the low oxygen format going into irradiated beef. And I want to point out that we are the only food packaging company that has a material structure that's approved for irradiation. So to the extent that that becomes more acceptable to the consumer, I think that's another growth area.

Okay. And then finally on inflatable Bubble Wrap?

Inflatable bubble, inflatable overall, Bubble Wrap, inflatable category overall which includes Bubble Wrap and Fill Air are up in the double digits for the quarter, continued to grow. A little slower than the first quarter. I think the first quarter was higher in the double digits, but still positive acceptance, new versions coming out. I think we showed you a version of inflatable Bubble Wrap in South Carolina back in June. We've got a model actually out on the street right now that is running two plus times that speed. So that's a real positive.

Okay, great. Thanks. Good luck in the quarter.

Moving on to Rosemarie Morbelli of Ingalls and Snyder.

Good morning.

Good morning.

Do you feel that in the second quarter you lost some volume because of your selling price increases? Or do you think it was mostly related to the economy?

I think anything on that area would be pure speculation on my part, Rosemarie. I think, though, that we did -- our sales organization spent a lot of time getting price increases and probably not as much time out trying to develop new business.

But you have no report of some price increases having translated into a loss of small pieces of businesses?

Those are always a challenge and it's hard to point out any particular one. And also those things happen over time anyway.

Okay. And on the raw material costs, you said you saw irradiation by the end of the quarter so I'm assuming they had stabilized in June. Do you see these continuing in July? Have you seen actual decline in raw material costs?

Well, there's really been no change in July.

So June was just stabilized or did it go down a little bit?

Well, actually, I'll tell you probably from the first of May till the end of June you're down kind of plus 4 cents a pound on the polyethlenes. That's where they are from the May 1st level which was a high.

And -- I for get what I was going to ask. It is coming with age. Equipment, you talk in the first quarter about seeing some signs of pick up. I mean one to two percent on the monthly basis. Is that particular trend continuing?

Yes, and it hasn't gotten better. So you're right. I mean, it's still in the single digits, low single digits, Rosemarie.

Okay. And lastly, could you split long term debt and short term for us?

David?

Excluding, you know, not net of cash.

Not net of cash.

Right.

The short term debt is going to be roughly 43 million and --

Long term debt is everything else.

Long term debt, again, before netting out cash, would be $1.179 billion. I think those include the April financings. It does not include any of the July financings that we just completed.

Okay. And aren't we replacing some of the convertible -- I mean some of the stocks in terms of delusion from the convertible with the -- some stock from the convertible senior debt?

Yeah, there is a conversion feature to one tranche of the debt we issued. The conversion price, though, is at $70 a share versus a little under $57 a share on the convertible preferred. And the exact number of shares we convert into is about 6 million shares that convert after you factor in the green that was exercised last week.

So will you eliminate the 9 million shares, but tack on 6 million?

We eliminate about 24 million shares --

Yes, that's right.

And tack on 6 million.

Okay. Thank you.

There's a net reduction, Rosemarie, of about 17 million shares outstanding.

Okay. Thanks.

Thank you. And that doesn't even itself out, just for clarification, really until the first of '04, because the way the share calculation works, it's always an average. So you do have it in effect there for the first six months of the year.

Yeah. And one other attractive feature of the convertible on a debt security is that in terms of having to factor in the diluted impact of those 6 million shares, that would not be a factor until the share price, the common share price gets up well in excess of $70 a share.

Thank you. Moving on we'll hear from Robert Chapman of Chapman Capital.

moving on a little bit of times of Senate and overall congressional efforts on asbestos reform. You obviously already cut your deal with the plaintiffs. But since the deal has been cut, the equity value of grace has moved up to around $200 or $300 million making it seem as if that company being insolvent lower probability than otherwise, can you just walk us through your thoughts on whether or not asbestos issues have any impact on Sealed Air going forward and thus explain why maybe you think the stock is acting in such an odd fashion if you think there is no impact?

Okay, I will try to cover what is a very complex issue. First let me state that as a company, Sealed Air strongly supports any legislation that creates a fair and efficient system for helping sick asbestos victims. And also help protect companies, which like Sealed Air, which were drawn into asbestos even though we never made, sold or distributed. We support a Bill that provides protection for companies despite having no connection with the manufacture or sale. And as you stated, in November we did agree, Sealed Air did agree to a settlement that we felt was in the best interest of our company, our employees and our shareholders. And we have an agreement on the settlement that was reached December 27th last year. It's really too soon to know how this bill could affect Sealed Air. We just don't know if there will be a final bill and it's premature to speculate on what impact it might have. So I just don't think I can go there.

So you're not going to answer the question.

Well, I mean, we're speculating on a bill that hasn't reached the floor of the Senate and we're not even sure what the provisions are.

But if the bill were passed and somewhat quasi-identical form to the number that you're seeing now, the structure you're seeing now, are you saying that you have no ability to say whether or not it will affect the settlement that you may have in hindsight prematurely agreed to months ago?

I don't think it's appropriate to answer the question in that way on a speculation.

Thank you.

Thank you, Mr. Chapman. Next we'll hear from Tim Burns of Cranial Capital.

Hi, guys.

Hi, Tim.

I have a question for David. I was trying to write as fast as I could. In your normal bridge, the first role is unit volume. The second role, was that price mix?

Hang on a second.

I think it went unit volume, price mix, FX, M and A and --

Tim, hold on. I'll let you know, this is all available out on the web site. But let me walk you through it.

Just the second column that's all.

It was mix in price which we do not distinguish, was 3.4 percent favorable in food, and 3 percent favorable in protective, and 3.3 percent favorable for the total company.

Gotcha. Thanks.

Okay.

And then, Bill, I had another question. You might have an opportunity with this flex play coming up with a return envelope from injure jiffy division. I know there is an envelope set up for recollection, but maybe a double bang for the buck.

Tim, I don't know whether you saw the front page of business section of the New York Times on Monday, July 21st.

You know they don't make the New York Times in Cleveland.

But the headline says DVD's meant for buying, not for keeping. If you look carefully at the picture you'll see our oxygen scavenging film used to package the DVD's in the picture. If there's a way to get them to send it back, too, that's another opportunity.

It might be a regional opportunity, but I know jiffy and your envelope line could pick up some volume there.

Okay.

When you say vertical pouch manufacturing, are you talking about your liquid products?

Actually, actually, yes, but we broadened it because we found that we've got applications that go far beyond liquids. We can do tomato sauce and meatballs. We can do jalapeno peppers. It's gotten far beyond -- the capabilities have gotten far beyond the liquid, so we really have sort of changed the term from liquid packaging to vertical pouch packaging.

Okay. And what's driving the growth of this product format? Is it cost? Is it replacing the number 10 can? And I think you've said in the past that, you know, fresh red meat is 200, $250 million business. Could you quantify that? And how big is the vertical packaging market?

Vertical is -- I mean, a large number of the applications are in institutional and food service. And they're used for everything from jalapeno peppers to McDonald's to pizza sauce. And the reasons for conversion are a variety. There's cost, there's ease of storage, there's handling, there's less waste disposal, and there's a replacement of the number 10 can, all of which are factors in this business. And even helping out is the fact that more and more of us are eating out more and more often. And so in addition to the replacement opportunity, you also have the secular growth in kind of the food service industry. I think it's got -- has a lot of potential. I'm not sure I could put a number on the market size. I've asked a number of analysts for ranges of number 10 cans. You can speculate what that number is. And if we replace all of them, but I don't have the information to do that calculation right now.

Is this 100 million plus business, would you say?

Oh, yes, yes. I feel comfortable saying that, yes.

At least. And red meat or fresh red meat I guess is 200 plus million?

No, that was case.

Case ready. Is that right, Bill?

Our case ready is 200 plus today.

Okay. And what's holding up -- you know, in terms of the grocer stores adopting a format, I mean I've done some work on patents, intellectual property and you guys just dwarf virtually everybody in the space. It's like you've got every back covered. But what's blaming -- blaming -- what's holding these guys up from making a decision? Is it competitive issues, cost, dealing with labor unions? It seems like the product where the decision is made off-site is coming in a case ready format, but not on-site.

Yeah, I think I answered that question a little bit earlier. You're actually finding case ready product coming in through off-site suppliers, and I think coming in the back door so to speak is more palatable for a number of the major supermarket chains because they don't really have to face the labor issues head on.

They can point at somebody else.

And the other thing, too, is there's a reluctance or hesitation as opposed to reluctance -- a hesitation to have an offering that looks just like the big guy from.

Ah, okay.

They'd like a little different format. There are different formats being tested at a number of stores.

Last question. In terms of the trade component of this equation, that seems to be unsettled. I assume I guys will eventually make your own, ideally it would have been foam, but that may not be the case. Where is that going? One big manufacturer for that company down in Bentonville is in evaluation process of their plastic tray business. What's that imply? I mean, they were, you know, the king of the party a year ago and now it looks like they want to leave.

I don't know. It's a moving target. I mean, you know, you're dealing with consumer preferences and retail tastes. We've gone through a number of iterations and sizes, shapes, and colors and absence of colors, anywhere from solid to foam. So it's still -- it's still a lot of moving pieces, Tim. As I've said on numerous occasions, I still in my own mind don't believe the ultimate case ready format is out there yet. But I feel comfortable that we have the most options. And I think that's a strength that we bring to the party so to speak.

Yep, perfect. Bill, it's good to hear you're shopping at a supermarket yourself.

I do.

Have a good one.

Thank you, Mr. Burns. Moving on to Edings Thibault of Morgan Stanley with a follow-up.

Good morning again. Bill, just make maybe a quick follow-up on the oxygen scavenging film and you'd have to look very close to the New York Times picture to see the logo.

You don't see the logo, but you see the film.

They're to your eyes only, I think. Just curious on -- we've heard about, without getting in too many -- we've heard about test products and test marketing. Is that occurring kind of on a third and fourth quarter? Is that a material number, just the test products alone, you know? And can you help us on a degree of importance? Is it 1 million or 10 million? How should we think about the test marketing as maybe a proxy for potential market opportunity?

Let me actually give you a couple of comments. And I think the facts in the times article, they're very accurate in terms of the test and the size and just the number of titles. And actually, I'll let Chip -- Chip Cook was actually the business development manager that worked on the development of that product a couple of years ago early in its stages. So maybe Chip can give you a little insight.

Great.

I think I would encourage everyone to read the New York Times article. As Bill said, it's very balanced. But as we said in the past, the beta testing and the roll out of oxygen scavenging films has taken longer than a lot of new products might because food companies in general have to be convinced that the technology works. The good news is we have a premiere company in Nestle that chose to launch it. And subsequent testing is going a little bit more rapidly, but it still takes a while to switch food packages. We do have additional products. We can't identify the customers, but we do have additional customers for scavenging beyond Nestle. And we expect to have additional customers coming in the third and fourth quarter. And I think a wild card is certainly this new DVD pack. It's too early to tell whether that's going to be successful. But it's exciting. It's a product where our package helped enable the distribution, helped enable that product to get out and be tested in the market. So we'll keep our eyes -- keep a close watch on that and see how it goes.

And you know, guys, we go through the third and fourth quarter, we'll give you updates on our next call.

Okay. And just a follow-up for Dave on cash flows, I wonder if you can give us free cash in the quarter. You didn't see a huge jump there with the exception of some of the debt financing. I'd love to understand that. And then also I think you've talked about use of cash here, and it seems fairly clear that the company is assembling cash in the balance sheet in order to be able to fund a cash portion of the asbestos settlement. You know, is there a sense of what you might be thinking about either potential acquisitions on the horizon? I think you addressed that a little bit in South Carolina, Bill. Is it true we should look for the company to build something only slightly north of the cash plus accrued interest portion of the settlement on the balance sheet as you drive cash over the balance of the year and the rest of that might be available for other uses, if that's clear.

Yeah, let me try to get to sort of the uses of cash and how we're managing that balance. As I said, we had roughly 450 million dollars of cash at the end of June. We clearly will add to that month by month from operations, but we did use 50 million of that to sort of top up the cash we needed to refinance the. What we had stated earlier is that we wanted to have cash on hand equal to roughly half of the $512 million settlement plus accrued interest. So that being said, roughly 300 million is our cash set aside on the balance sheet in anticipation of funding the settlement. And I think previously we said we don't have a good handle on when that might occur, but it's likely to be some time next year. So arguably, we have 100 million plus future additions to cash flow available for other purposes. The free cash flow in the quarter was between 15 and $20 million. That was offset through a fairly significant increase in both inventory and preparation for the second half of seasonal strength in the business, and an increase in accounts receivable which has really been in line with our 10 percent year to date revenue growth. So we would still expect on a total year basis free cash flow in the $250 million range. And that's net of -- let me get that right. Where do we do that with dividends, since dividends are gone?

Is that was generally after?

Yes.

So it would be operating cash flow less Cap Ex less a preferred dividend?

That's correct.

Okay. And that would be 250 million. And you've generated it, it sounds like something around -- just check -- around 60 million, 65 million year to date?

Less than $100 million year to date.

Great. Thank you very much.

Thank you, sir. Moving on to George Arzente of Bank of America also with a follow-up.

Hi, guys. Last question for me, piggybacking on an earlier question from Edings, when you look ultimately at the tone of your business huh-uh mention that you had some stops and starts in the U.S. you mentioned that there are some troubling signs, I guess, in Latin America and from the third quarter. Is the tone of business, would you say, improving, flat or declining? Or is it indeterminate given it's been stopping and starting across your markets?

No, I would say, George, relatively flat. I think our outlook is I guess reasonably consistent with maybe what you've heard from some other people in the 1 to 2 percent range. I think kind of UPS said within the last couple of days, they saw business doing a little bit better, but pretty low, and that's a good proxy for parts of our business. I think this 1 to 2 percent number that we've been sort of seeing on and off for the last four to six months is about where July looks.

Thanks, guys. And good luck the rest of the year.

Thanks, George.

Gentlemen, our final question will come from Abe Rodstein of Glenview Capital.

Yes, hi.

Good morning, Abe Rodstein.

Good morning. I wonder if you took the price increases that you have now managed to burn to effect and let's say as of July 1st, and if you take away your resin costs are going to be for the next three months or six months, if you have them nailed down that far out, what is the implied gross margin that you're now operating at coming into the second half?

Okay. Let me just answer your question indirectly. We periodically show you a chart that shows Sealed Air's gross margin plotted over time versus low density polyethylene commodity resin cycle. And I think we're going through basically that same phenomena again, is that you do suffer at the margin line when costs go up basically at a faster rate than you've moved on your selling prices. But as costs decline, you manage to hold onto some of that higher selling price. And as a result, you generally see margin expansion in the, you know, second, third, fourth quarter following a peak in resins. And I would expect, you know, to play out a very similar manner. And if you look at peak to trial fits, its 100, 250 basis points, depending on where along the cycle you want to measure. The only sort of wild card, so to speak, in the current scenario which is a little bit different than the past is the natural gas issue. Natural gas is one of the primary components of low density polyethylene in the United States. And that's still running twice last year's price or twice the historical average over the '90s. It's generally run 250 to $3 a million BTU's and its now running 5 to 6. so that implies a little average higher polyethylene price than historical. But if you do the feed stop equation, it does speak for a price somewhat below current levels. So we're hopeful of kind of expansion and margins in the second half and we'll see how natural gas behaves as to whether the number is 100 basis points or 200.

Okay, I understand that. The peak quarter that we're going to start the bottom of the cycle that we just completed was this quarter we just completed or the first quarter?

The resin prices actually peaked, the spot price peaked higher at the end of the first quarter. But the average that went through our costs actually peaked in the second quarter.

So on the historical graph which we all have memorized, we wouldn't look, then, on that basis it would be the December quarter where we would be expecting to get the benefit of the price increase?

That's the way the pattern has occurred, yes.

Okay. That said, do we need -- just going back to what you just said, do you need further decreases in the resin levels to get that, or are current resin levels already -- do they already imply an improvement in the fourth quarter gross margin?

Yeah. As I mentioned in an earlier response, Abe Rodstein, we're down kind of 4 plus cents per pound since the first of may . That in itself continued through the third and fourth quarter will be helpful to improving gross margins. If it comes down any further, that would be even better.

Okay. Thank you very much.

Mr. Hickey, we'll turn the conference back over to you for any additional or closing remarks.

Okay. Let me wrap up here by thanking you all for participating in the call. The global industrial economy continues to present immediate challenges for Sealed Air and a number of other businesses. However, as we continue to demonstrate and did so in this quarter, our geographic market and customer mix and diversity provided strength for our business in this uncertain environment. As we look to the future, we continue to focus on our principles and operating priorities that serve to position us well for long-term growth.

As we demonstrated in June at our investor meeting in South Carolina, Sealed Air's commitment to and investment innovation is evident in our healthy pipeline of new and valuable products like simple steps heat and serve packaging oxygen scavenging film, inflatable Bubble Wrap cushioning, and other stable of growth products, like case red and I vertical pouch packaging. We continue to add to our global reach with expansions underway in eastern Europe, Asia-Pacific and the U.S. that enhance our ability to service customers around the world. World class manufacturing and its principles of improving the productivity of all of our business processes remain central to our operations. The same way that we preserve and protect our customers' products, we will continue to keep a close aye on cash flow, including control of expenses, to preserve and protect the real value for our shareholders. All of these core strengths and priorities combine to provide a platform for lasting value for our customers, employees, and shareholders.

While recapitalization during the month of July we believe provides long term value to our shareholders and our business, in line with these same operating priorities and principles. The recapitalization transaction will contribute to cash flow and earnings per share and our business will benefit from the extended maturities and lower costs of the new borrowings. Lastly, Sealed Air's substantial cast position and expected cash flow from operations will provide us the ability to fund the portion of the asbestos settlement and to continue investing in the growth of our business. For all of these reasons, I am comfortable with our positioning and confident in our long-term outlook. And personally, I'm glad to be a Sealed Air shareholder.

Thank you very much.

That does conclude today's conference. We do thank you for your participation.