希悅爾 (SEE) 2003 Q4 法說會逐字稿

Good morning. Welcome to the Sealed Air analyst and stockholder's conference call. This call is being recorded. Leading the call today, we have William B. Hickey, President and Chief Executive Officer, and David H. Kelsey, Chief Financial Officer. After our prepared comments, we will be taking questions.

[Operator Instructions] 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 the call today, I would like to remind you that statements made during this call stating management's outlook for predictions for the future are forward-looking statements.

These statements are based only 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 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 of non-GAAP financial measures that we expect to discuss on our website at www.sealedair.com in the information section under the reports and filings section.

Now, I will turn it 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 fourth quarter of 2003. Dave will then review the details of our financial results. Following Dave's remarks, we will be available to take your questions.

For the fourth quarter and full year 2003, Sealed Air is pleased to report strong growth in net sales, which helped us meet our diluted earnings per share expectations for the quarter and for the full year.

Our net sales increased 10% in both the quarter and the full year 2003, leading to record sales for both the fourth quarter and the full year. In fact, our fourth quarter sales of over $935 million marked the third consecutive period in 2003 that Sealed Air has achieved a new record level of quarterly net sales.

Sealed Air's global reach which encompasses operations in 50 countries around the world helped drive the success of our business in 2003. Although the positive effects of foreign currency were a significant part of our growth in net sales for the year, I am pleased to report that even excluding the effects of foreign currency, every region of the world delivered a positive contribution. Our business in Latin America, Asia Pacific and North America all achieved mid to high single-digit sales growth for the year, excluding the effect of currency translation.

Our food packaging segment, once again, benefited from strong results in our strategic growth programs. Sealed Air's leadership position in the global case-ready packaging market helped us deliver sales growth in excess of 20% in that category for the year.

Global reach, as we know it in our overall results, was also evident in our case-ready business, with all our regions contributing to our success. The same theme applies to our vertical packaging business, where all regions made a positive contribution to our annual results, giving us percentage growth in the mid teens in this market for the quarter, and for the whole year.

Overall, Sealed Air's food packaging segment sales increased 12%, or 5% excluding the effects of foreign currency translation, which helped drive an 11% increase in operating profit for the food packaging segment compared to the full year 2002.

Our protective packaging segment continues to be affected by the persistent challenging economic conditions for the year, and also the challenging comparative results with our 9% growth in the fourth quarter of 2002.

Despite this, our protective and specialty packaging segment sales achieved 9% growth in net sales in the fourth quarter, or a solid 4% growth in the quarter excluding the positive effects of foreign currency translation.

In the fourth quarter, we continued to emphasize the differentiated value and performance of Sealed Air's products for our customer's bottom lines. The result was a meaningful increase in price mix, which contributed to the growth of the protective business in the quarter.

Despite a double-digit increase in sequential commodity raw material costs in the fourth quarter, compared to the third quarter of 2003, or approximately an 11% increase, Sealed Air's consistent focus on differentiated value and performance in the marketplace helped to reduce the negative impact of raw material costs on our protective business operating margins for the fourth quarter.

Finally, we used our significant cash position to reduce debt by approximately $217 million in the fourth quarter, which will reduce interest costs and repayment obligations in future years.

This debt reduction, combined with the improvements we made in the capital structure earlier in 2003, by redeeming our series A convertible preferred stock, benefits our business and our shareholders going forward.

,Our significant cash flows from operating activities which are an important part of our focus on our culture, are a key to our long-term success. We expect to continue using our strong cash flow to provide for the future growth and added value of Sealed Air's businesses.

Now we will turn the call over to Dave to review some additional details of our financial performance.

Thank you, Bill. I would like to start with some additional comments on our record sales. As Bill said, our fourth quarter sales were up 10% or $89 million. Included in this growth is a $60 million positive effect from foreign currency translation.

For those participating in the call who would like additional detail, tables posted on our website, sealedair.com, presents the impact of foreign currency translation on sales by geographic region, and the components of change in net sales by business segment and by geography.

Turning to our statement of operations. The company's gross profit was $295 million for the fourth quarter. Gross profit margin was 31.5%, compared with 31.8% in the third quarter and 33.4% in the fourth quarter of 2002. Commodity resin costs rose in the fourth quarter compared to both the third quarter and last year's fourth quarter.

As part of our actions to maintain margins, the company did increase selling prices in the first half of 2003. Equally important to maintaining margins is the wide range of projects undertaken as part of our world-class manufacturing initiative. Moreover, the company invested in the construction of three new facilities in 2003 that will lower costs and increase capacity.

Marketing, administrative, and development expenses increased only $1 million to $148 million, compared to the fourth quarter of 2002. As a percent of revenue, these overhead expenses were 15.8%, compared with 17.3% in the fourth quarter of 2002.

Operating profit was $148 million, or 15.8% of net sales. By segment, food packaging contributed $102 million, and protective and specialty packaging contributed $54 million. Interest expense was $42.9 million, compared to $16.6 million in 2002.

This substantial increase is attributable to $6.2 million of additional accrued interest on the cash portion of the asbestos settlement that we recorded in the fourth quarter of last year, $3.3 million from the April issue of $300 million of five year maturity senior notes, and most significantly, $16.3 million from our $1.3 billion financing completed in July.

Income tax expense of $25 million represented an effective tax rate of 35%. This decline in our effective tax rate from the third quarter of 2003 is attributable to the loss we incurred in the fourth quarter to repurchase debt. Our expectation for 2004 is for an effective tax rate of approximately 36%.

Diluted earnings per share were 50 cents for the quarter. As shown on the financial exhibit to our earnings press release, the number of diluted common shares outstanding for the fourth quarter of 2003 includes the 9 million shares to be issued under the terms of the asbestos settlement.

As also cited in our earnings press release, the loss incurred to redeem a portion of our high coupon bonds reduced fourth quarter diluted EPS by 22 cents. I'll conclude with some key cash flow and balance sheet items. First, EBITDA of $159 million for the fourth quarter includes the loss of $33.6 million on our repurchase of debt.

At 17% of sales, or 20.6% before deducting the loss incurred to repurchase debt, we were in line with our expectations. Capital expenditures were $47.5 million for the quarter, primarily in our food packaging segment, and include construction of new facilities in Hungary and Arkansas that we previously announced.

Cap Ex for the year was $124 million, at the low end of our previously communicated range of $125 million to $150 million. We anticipate this range to remain appropriate for 2004. Our cash balance at December 31st was $365 million, down $146 million for the quarter.

This reflects cash used to repurchase debt, and reduced borrowings under the revolving credit facilities, partially offset by cash generated from operations. Our quarter end accounts receivable totaled $615 million, up $68 million from December 31, 2002, while our quarter to quarter revenue increased $89 million.

Compared to September 30th, receivables investment increased $27 million while our quarter-to-quarter sales increased $26 million. Inventory investment at December 31 was $371 million, down $4 million during the quarter, but up $42 million from December 31, 2002.

Foreign exchange, resin prices, and inventory built to handle double-digit revenue growth, all were factors in this year-over-year increase. Total borrowings at December 31st, net of our $365 million of cash, were $1,915,000,000, down $71 million for the quarter.

As previously disclosed, the company has entered into a new $350 million three year global revolving credit facility, which was undrawn at year end. Our next substantial debt maturity is in July of 2006, when our 200 million Euro note issue matures. Now, I'd like to turn the call back to Bill.

Okay. Thank you, Dave. Now, Operator, we'd like to open up the call to any questions.

Ladies and gentlemen, we would now begin the question and answer session. [Operator instructions]

For our first question, and that will be from George Staphos with Banc of America Securities.

Hi, everybody, good morning.

Hello, George.

Good morning, George.

Happy new year.

Got your flash notice this morning.

Well, thank you. At least someone's reading it. First question. Food decelerated in the quarter.

What would you attribute that to, relative to the volume growth you saw in the third quarter? Was any of it related to mad cow, or is that really way too late in the quarter to have an impact?

No, George, I think mad cow was too late in the quarter to have an impact, and we can address that separately. I would like to comment on that.

But the principal item in the fourth quarter was really the case of "fewer cows coming to market". There's a couple of factors in that. One, as you know, the Canadian border was closed.

Right.

Two, cattle prices were at record highs and you probably saw that the prices of beef reach highs in the marketplace or in the supermarket. And as a result, a lot of the packer spreads were becoming thinner, so it became kind after little bit of a slowdown in bringing cattle on to slaughter in the hope that prices would ease a bit.

So, that seems to be it. The cattle on feed number actually has gone up, so it would suggest that--

--which it always seems to do.

--which suggests that those animals are still out there to come to market.

Right.

But I do think in the fourth quarter, you saw fewer cattle come to market in response to the extremely high prices that packers had to pay for the cattle.

Okay. Do you want to address mad cow then?

Yeah, let me. Because I know I'm sure someone's going to have that question and in fact, it came up on one of the early other reports. Let me just say that the identified animal was confirmed through DNA tracing to be 6 and a half years old and came from Canada, Alberta, Canada, which is also where the Canadian case of BSE was discovered back in May.

Feed restrictions were implemented in 1997 by the US and Canadian governments to limit the potential spread of BSE by banning any animal feed that contained animal parts. And unfortunately, both of these suspected animals were born prior to the change in the animal feed restrictions.

In terms of what's happening in the market, U.S. beef demand is holding up quite well at retail and at food service. Beef prices have come down a bit, due to export restrictions increasing the available supply of beef in the United States. Retailers are featuring beef on specials due to the lower prices, which should help to drive sales.

I will say, though, the kind of volumes in the slaughterhouses are down, and packers are working fewer hours due to the export restrictions. I think you have heard me say before that exports represent about 9% of U.S. beef volume. However, hog slaughter is strong, and the over all outlook for hog slaughter is quite good this year. And this provides a natural hedge in our business.

Remember, that Sealed Air packages all animal proteins, not just beef. Our view is that the effects of mad cow will be short term and diminish as we move through the year. The Canadian origin and age of the animal gives the USDA a strong argument for reopening trade. The USDA is also working to show that this is not a U.S. problem, and this is also a good argument for reopening trade.

You have also seen in the newspapers as recently as this morning changes continue to be enacted by the USDA to eliminate what are called the "high risk" animals, including the prohibition of downer cattle, specified risk parts of the animals, prevent mechanically separated meat from going into the food chain, as well as the implementation of a verified national system of animal identification, which should also boost confidence in the U.S. meat supply.

As I mentioned, feed cattle are starting to build in feed lots. The cattle are be held back from slaughter due to the export restrictions and depressed prices, but eventually these animals will come to the market.

I should also remind you that we serve the beef market in many other parts of the world and many other major exporting countries, including Argentina, Brazil, Australia. However, interesting to note that beef producers outside the United States are not currently seeing a big pick-up in orders to make up for the shortfall in U.S. exports, and that's probably because of the pipeline.

But this could change, and if the export demand begins to be satisfied by cattle from other parts of the world, we should benefit in markets outside the United States. I do think,also, that this issue provides an added lift to case-ready, especially in ground beef, where you do have the capability to better ensure quality and traceability.

So, that's my commentary, George, on BSE.

All right, Bill. Thanks for the update. I'll turn it over to the other guys.

Next question.

We will go next to Rosemarie Morbelli with Ingalls & Snyder.

Good morning and good quarter, congratulations. So, just to finish up on the mad cow, then this should translate into some kind after decline in the food packaging for the quarter versus the prior year, or just flattish would be enough of a negative impact in your mind?

Well, Rosemarie, I think I tried to say in my comments is we really don't see a meaningful impact. U.S. exports are about 9%. If the export ban remains in place, we would expect that that demand around the world-- particularly Japan and Asia who were major import of U.S. beef --would get their beef supplies from Australia, Argentina or Brazil. So we would see a shift in our business, Rosemarie, from the United States to some other part of the world.

Yeah, now, I understand that. I just meant net-net, even though you would have some shift, whether you would still net net end up with the slight negative versus last year?

I would say if you look at the the export piece in terms of our over all business, it probably represents less than 1% of our revenue.

Okay.

And could you take--as you mentioned, that you still were seeing some difficult economic environment on your protective packaging. Could you take us with a different market you serve, or industries, and let us know whether you see some light at the end of some tunnels?

Well, it's interesting, Rosemarie. Let me make a couple of comments on the economy. Just before the call, I checked two numbers which I think are helpful indicators of the economy.

As most of you I'm sure know, about 10% of Sealed Air's business is equipment. Which these are basically packaging equipment--packaging systems that we place in customers' plants and factories so that they can use our materials to package their own products.

And in terms of a kind of a unit basis, quarter-over-quarter we still see weak equipment sales. Actually down depending on the product, between 2 and 3% lower equipment sales in terms of units, and 8 to 10% in terms of sales dollars in that particular part of our business.

And that's usually a pretty good sign of confidence in the economy, that customers have not stepped up their orders of packaging machines. Overall, stronger sectors in the fourth quarter were electronics and computers, sports and recreation, and e-commerce, which was up in the double digits.

On the other side of that, continuing to see flat to declining markets in furniture. As you know, a fair amount of that continues to move offshore. And also within the United States, those companies that are remained here, particularly the office furniture type market generally centered in the Midwest and upper Midwest, are also essentially flat to slightly down. So, that's where the segments are shaping up.

And on the appliances and these kind of industry, do you have -- do you sell a lot into that area and do you see any difference?

No, Rosemarie. Actually, appliances are not a major market. But an interesting other factor is that as another indicator of the economy,Federal Express shipments I believe were flat to down through November.

So, although on the optimistic side I feel, and a lot of people I talk to also feel that the economy is gradually picking up, but we really don't see the roaring economy reported in the statistics and by the media. We're probably seeing numbers about half that rate.

Okay. Thanks. I'll get back in queue.

And we'll go next to Amanda Tepper with JP Morgan.

Thanks. Can you talk on the protective side, and then maybe also on the food side, on where you would stand on any further pass-throughs of higher resin costs? And also, what did you assume in your guidance for energy costs?

I think you said in the press release that you were thinking -- you were assuming stable energy costs. Is that from Q4? Is that year-over-year, or kind of where things are today? Thanks.

Okay. That's a good question, Amanda. I was really going to try to make that comment in my closing remarks, but I'll do it now, and partly in response to your--

--sorry steal it from you.

No, that's fine. It's fine. Usually by the time you get to the wrap up, some people are already off the call.

I think it's important to note, and these numbers are on our website, that in the fourth quarter we actually had a 1.7% positive price mix, and 2.9 or 2.8 of that was in protective and 1.1 of that was on the food side. So we continue to make concerted effort to maintain our pricing in the marketplace, because as you aptly point out, we're in a period of high and volatile energy prices. And I mentioned in the open comments that the petrochemical raw materials were up 11% sequentially fourth quarter over third quarter, and up over 13% fourth quarter over fourth quarter.

And there is also announced price increases coming in the first quarter of this year, which would put a lot of the petrochemical-based raw materials back up to their peaks of last year.

And as long as the winter continues cold in the northeast, as long as oil prices remain volatile, we believe that raw material prices will remain high. And we feel, therefore, that maintaining our position in the market so that we can be prepared as those higher prices come through the system.

And I would say that one of the reasons where we came out on our outlook for the year in the 280 to 290 range is primarily based on our caution, that we are in a period of high raw materials and that we really expect them to pretty much remain through most of 2004.

Okay. Thanks. That's very helpful.

And separately, the -- your SG&A margins were a bit lower than I had thought. Are you at a bit lower run-rate going forward? Is that going to be sustainable, kind of below 16%?

Well, I think you may have heard me say on the third quarter call that we've had a long-term target for number of years to get to a 16% operating expense level. And I think we've been pretty close to that, and we're actually looking about whether we should ratchet that down another notch. But at this point , our sort of formal target is still 16%, although it is possible we may come in under that as we go forward.

Okay. And then lastly, on interest expense. Just trying to get my arms around that. Based on the several financings, refinancings you did in the fourth quarter, if we were looking at '04 on a run-rate should your quarterly -- how much lower than say, Q4 , should it be?

Okay. Let me ask Dave to address that.

You know, I think we put the information out there in the press release for the two bonds that we repurchased face value of around $125 million. To avoid a reg-G comparison, let me ask you, Amanda, to do that calculation. But it's in the ball park of 10 cents a share on a total year basis, if you go through the calculation and pick up the fully diluted share account.

Okay. So there's no other swaps or any noise going on, other than just the straight savings on the refinancings?

That is correct.

Okay.

There were related cost that we incurred as part of the buy-back.

But that was all taken in the fourth quarter?

That's all taken in the fourth quarter. So going forward, it's really just taking the face amount of the debt that we retired times the coupons.

At new rate?

Yes.

Okay. Thank you.

You're welcome.

Next question.

Before we go to our next question, I'd like to remind everyone to please limit yourself to one question, so everyone has an opportunity to ask a question today. We'll go to Edings Thibault with Morgan Stanley.

Good morning. A couple of questions, Bill. I wanted to ask you on the geographic breakdown. I was wondering if perhaps you could anticipate the annual report and give us the breakdown of sales by region for 2003, updating our numbers.

Sure. Sales by region. I think I've got that somewhere here Edings, but we may need to come back to that. Is there anything else I can answer while I'm sort of finding the page? I do I have it.

I can tell you roughly it's 26-27% Europe. It's still roughly 48, U.S. Roughly 10 Asia. The numbers bounce around a little bit with the currency, but it hasn't been a very dramatic change. I can be a little more precise, if you'd like. I've got some numbers--

I mean, I know you're going to break it out in your annual, so I was just hoping --

Right here. Yeah, I think 26 -- I think I'll come back to that question as you go.

Sure. Well, just a question on that.

Yeah.

I think when you look at the company's margins over the last couple of years, and really focusing on EBITDA margins, you've seen a little bit of decline from that sort of '99 level and even 2000 level. There are a lot of pressures on those margins, and I think some of them are well understood with the economy; some of them well understood with recent raw material costs.

But is the growth of the foreign businesses due at least in part to foreign currency moves? Has that had a negative impact on margins? In other words, are you less profitable overseas on a percentage basis?

Let me go back to your question, too. Okay. Basically, North America, with U.S. and Canada, is 55% of the business in '03. Europe is 26.2, Latin America is 6.5, and Asia Pacific is 10.7. So that gives you about 55 North America, and 45 outside the U.S.

Great.

Okay. You get those numbers?

Yep.

Okay. Now, in answer to your second question. The growth in Europe includes both obviously, the effect of foreign currency, as well as actual growth in the business.

And if you really look at numbers that are on the website, you will see that even excluding foreign currency, Europe is up by 3%, Latin America by 9, Asia Pacific by 9 for the quarter. And for the 12 months excluding currency, Europe's up by 2, Latin America up by 8, Asia Pacific up by 6.

So, Europe still continues to be a slow grower, but actually did do better in the fourth quarter than they had done for the first three. Latin America and Asia Pacific continue to perform in the high single digits.

To the extent that there is mix in profitability, it often times, Edings, is one of scale. Where in the U.S. business there is a large market, a well established infrastructure, and as a result, the leverage on volume's pretty good. When you get into the more developing parts of the world, you find yourself in kind of the development days of having your infrastructure costs spread over a smaller volume.

So on that basis, you have a mixed difference in profitability, but I do think in terms of how we go to market, it's pretty consistent.

Okay. And one other question, if you will. Just kind of an intriguing comment that you made, Dave, about use of cash. I think you are highlighting that the company has no near term debt repayments before 2006. Clearly generating a lot of cash.

I think one of the great constants of the company has about been to buy back effectively the preferred, and now to be looking at deleveraging in the fourth quarter. How would you characterize your priorities for the use of cash? It's still debt repayment, or you think that's largely been accomplished?

Edings, I'll answer it in terms because if gets to be kind after broader thing here. I think as we've always said, our first priority is always to reinvest in the business for growth. I mean that still remains the number one priority.

And to the extent that we have cash beyond that, then paying down debt at this point moves to the number two priority, because I think that benefits the company and long-term benefits the shareholders. And when we reached the appropriate balance in debt, then of course, the third is to find ways to reward our shareholders, which in this market can be things such as buying back stock.

So, how much of your debt is available for -- I mean what is -- actually, I'll get it out of the annual. I was just going to ask how much is revolving.

Most of the debt's trading at a premium, Edings. Most of the debt's well over par right now.

But there are--there is over $2 billion of various issues we have outstanding. So, if and when we choose to go back to the market, there is no shortage of traded debt that we can consider.

That's the good news, right?

Yeah.

Congratulations on the quarter, and good luck in 2004.

Thank you.

Thank you.

Okay, next question.

Just a reminder for everyone, please try to limit yourself to just one question due to time constraints today. We'll go to John McNulty with Credit Suisse First Boston.

Hey guys. Just a quick question, actually maybe two, if that's all right with the operator.

I know--they hold you to it, John.

They're pretty tough, I know. Just on the food business. In the second and in the third quarter we saw pricing that was pretty robust in the business for you--better than 3% each of those quarters on a year-over-year basis. And then it looks like it slipped off a bit in the fourth quarter.

I'm wondering if that's a mix issue, or if that's really where you are starting to get a little pushback on come some of the price increases you've been putting through? And then the second question is just back in the beginning of 2003, your case-ready forecast was kind of looking for a more muted 10% kind of growth rate. Clearly you had a lot better penetration over in Europe throughout most of the year that helped to drive that close to 20%.

What I'm wondering is, looking to 2004, do you see a lot of growth opportunity there's for you in some of the more emerging European areas? What kind of growth rate maybe are you forecasting for that business in '04?

Okay. Sure, John. Let me go back to your question on the price effect going through the quarters. If you remember, we announced, really, price increases in the beginning of '03. There really weren't any increases announced in the third or fourth quarter, and what you're really seeing is the roll through of those announced increases through the customer base. The fact that it's has come off a bit is much more a case of it having rolled through the customer base than any change in the pricing dynamics.

As far as your second one on case-ready, you're right. The very positive development in Europe in 2003 helped us to go well beyond our expectations for the year. And we see the European penetration in case-ready continuing. And still looking--I think we are still looking for mid-single digit growth over the longer term, which would carry us in the 2004, 2005.

Still no major supermarket conversion in the U.S., but gradual conversion of a lot of specialty meats, as well as kind of the benefit of the largest supermarket chain, Wal-Mart, continuing to add supercenters and expand their own share around the country.

Okay. Just so I understand you, on the pricing you'd said you started the price hikes in early 2003.

Right. We had price increases in the first and second quarter of '03. There were really no announced price increases in the third and fourth.

Okay. Because, I guess, if you hiked up the prices in the first and second quarter, and assuming that that continues throughout the rest of the year, I'm not exactly understanding why we didn't see year-over-year improvement? Even though you didn't raise or put new price hikes through in the fourth quarter, why we're still not seeing the kind of the momentum you got in the first and second quarter carrying out throughoutt the rest of the year, and in particular in the fourth quarter.

Okay. Well, you also begin to compare price increases at the end of '02. You're beginning to compare price increases at the end of '02, which I remember went through period of probably third, fourth quarter '02, and first, second quarter of '03, where really some high raw materials and by and large, the industry moved prices up over that period. So, you are beginning to lap some of the earlier price increases.

Okay. Great, thanks a lot.

Yeah.

We'll go next to Gansham Panjabi with Lehman Brothers.

Hi, guys. How are you doing?

Gansham, good morning.

Morning. One of the major competitors has announced a pretty substantial price increase, I guess for March 1st in protective packaging. Can you just comment on whether Sealed Air has similar initiatives in that particular business or [inaudible].

I don't think it' appropriate to comment on competitive price increases. I just think that is not a very wise thing to do.

Is it -- have you guys announced any price increases? I mean, I'll just rephrase it differently.

We have not.

You have not. Okay. And Bill, just from a bigger picture, can you comment on Sealed Air's positioning in China? In terms of the level of investment over time,, the ramping up of the investment, and what you expect for '04?

Well, are you talking about in different parts of the world?

Yeah. Well, specifically, I guess, China.

Okay. We continue to believe that's an important important place to be. We've had three plants operating in China now for a couple of years. Business continues to grow nicely. We have not taken the view that "if you build it and they will come." We've done it on deliberate step-by-step basis. We have no major new investment planned for 2004, but just a gradual kind of build-up of the market.

I still remain optimistic. I still think it's a great place to do business, and we are seeing Chinese consumption of protein going up. We are seeing more need for packaged foods. And I will actually be over there in about six weeks or so, so on the first quarter call I'd be happy to give you a first-hand update.

That sounds good.

Okay.

And just one final question, if I could. How much does e-commerce account for in terms of the protective packaging business on a sales basis?

I tell you, it was interesting. E-commerce business in the fourth quarter--and I think as you pointed out in your quick commentary this morning--that really, we're challenging comparables to the fourth quarter of last year based on the strong fourth quarter. But our early look at the fourth quarter sales of e-commerce is probably up in the 12-16% range, with a lot of the well known .dotcoms and maybe some of the lesser well known .dotcoms contributing to that.

But it's still a relatively small part of our business, and the quarter it is probably just under 10% of fourth quarter protective business.

Okay. Great. Thank you so much. Good luck in the quarter.

Thanks. Next.

We'll go next to Dave [inaudible] with Glenview Capital.

Hi. I have one question. Can you hear me?

Yes.

Hello? Can you hear me?

Yes, go ahead.

Sorry about that. I have one question with many semicolons.

That's the way to get around the one question rule, huh?

Well, it's sort of one big question. I know you haven't announced the price increase, but it would sound without any further increases that gross margins will -- would stay roughly at the Q3/Q4 level, which would be below your long-term target. Is that what is contemplated in your guidance for '04, or does the guidance contemplate actions to move the gross margins back up towards the 33% low end target?

Okay. No, that's a very good question and one we talked about here in putting together our guidance.

And I will tell you that I think our view on our guidance is we did it on the side of caution because of the volatility in resin prices and the whole volatility in the natural gas environment. Those of us here in the northeast, as you know, are probably through our third or fourth major snowstorm, and it isn't even the end of January yet.

And we're all well aware of the pricing of natural gas, which is approximately two times its historical average. So, just on the side of caution, we've assumed raw material prices sort of staying in the range where they are now, which is historically at the upper end of the cycle, and then factored that into our outlook for the year. Can we do better? We will work as hard as we can to try do better, Abe.

Okay. But said another way then, the combination of the volatility in resin prices and the natural limitations on the rate at which you can increase prices. Is that the forecast sort of incorporates no net gain in gross margin for this year, even though you may be able to effect such a change. Is that a fair statement?

I wish I could have said it that way, Abe.

Okay. Then, say on the similar topic. Mad cow in the forecast--if mad cow were not in the forecast, would the range shift or does the range encompass your estimates of the possibilities of the impact of mad cow? In other words, if mad cow didn't exist, the problem-- would your range still be 280-290, or would it be something starting at 290?

I'll tell you, I'd rather be a little cautious here, also. I will tell you for internal planning purposes, we are operating on the basis that the export restrictions on U.S. beef will carry through to at least the middle of the year.

So --

So that --

So we're talking about losing 1% for six months of revenues; is that correct?

No. I don't think I've been that precise, but that is not a bad place to be.

Okay. Just one last thing with respect to the cash. You obviously are carrying a huge amount of excess cash and so you are in a negative arbitrage against the expected asbestos liabilities.

But those -- satisfying those liabilities finally depends on Grace emerging from bankruptcy, which appears to be somewhat out in the future. Is the plan then with this revolver in place to reduce those balances significantly against the debt to over come this negative arbitrage?

We estimated it being at least 10 cents a share a year right now on the cash balance, versus the 5 plus percent you accrue for asbestos.

There is a cost to the arbitrage. Let me ask Dave to answer the question.

I think earlier last year during an earnings call, we indicated that it was our goal to accumulate somewhere around half of the cash portion of the obligation on our balance sheet, and with that $350-$360 million of cash that we have now, we are at, or slightly above, that previously stated objective. Okay. So we're going to stay at that level until we satisfy the obligation? Approximately?

There is no contractual reason in the settlement agreement that we have to maintain any cash balance.

It's just prudent.

But we will keep something in the order of half on the books. You know, everything else being equal.

So we'll have a step function up in earnings when that is settled. Can you update us on what you know to be the status of the Grace bankruptcy, and what it looks like now as to when we might get rid of that burden?

I will tell you, Abe, I also kind of feel the pain when you have that arbitrage-- or negative arbitrage-- on carrying $350 million in cash and not earning very much on it. But the Grace bankruptcy is right now, kind of moving very slowly.

I think it is generally known that there is a review going on in the terms of the judge that is handling the Grace matters. And as a result, the attention of the Court has been really focused on the recusal issue. And as a result, I believe the Grace bankruptcy is not moving very fast. But, on the other hand, as Dave said, we don't know when this will happen.

I have seen bankruptcies all after sudden get resolved very quickly, and I have seen them go on for a long period of time. And what we are trying to do, Abe, is to pick that delicate balance that gives the company the capability to resolve this matter when it's settled very quickly without an undue financial crisis.

On the other hand, understanding that there is a meaningful cost in earnings per share in this entire process. So, the short answer to your question is that at this point, I just don't know when the Grace case will settle.

One last thing and I will let you go. I know you had this SG&A target of 16 for many years, and you have gotten there. But that target was created before we had the current situation with resin and the difficulties that creates. Is there room to move that target lower? Can we go to 15? Can we go to 14? And is there -- are you thinking about actually revising that target formally, so that we can see some other offsets to the margin pressure other than price increases?

We are looking at that, Abe, but at this point, as I said, we're not necessarily prepared to make a formal kind of target yet.

Great, thanks guys.

Operator, I've got a question that's come on the webcast. I would like to just make sure that people participating on the webcast have an opportunity on their questions.

Let me read the first question. It says, to what extent can you purchase imported resin that is based on lower feed stock costs, and that which is available in the United States? I think my quick answer to that question is, we are always looking at all of those opportunities and there are various actions being taken around the company to address the higher costs in the U.S.

Second question from the webcast, is if Judge [Wollen] is recused, is your settlement with the plaintiff's attorneys affected in any way? I just don't know, and I really am not prepared to speculate on it. I just don't know. Operator, can we go back to the next question on the telephone?

Certainly. Our next question comes from Ildigo Hildrid with Deep Haven Capital.

In response, or in tandem to the question about if gross margins can increase from here based on your assumptions, how about can gross margins decrease when you do your assumptions, and specifically there's that resin price increase that you talked about. Is that built into your assumptions? We're still trying to figure out--

Yeah, I mean, I think that's what I said. I think that's what I said in response to the earlier question. And I think we sort of have this February outlook in our thinking.

So that is built in?

So we have proceeded to this number with caution.

Thank you.

Next question.

Next to [inaudible] with Credit Suisse First Boston.

Yeah, it's [Mark Altier]. On the cash flow for modelling, are there going to be any big uses this year that we didn't see last year, or will the free cash flow more or less increase in line with your new estimate for 2004?

Let me ask Dave to address that.

There is nothing unusual on the horizon. As we've already indicated, there are no mandatory debt retirements coming up. The outlook for Cap Ex remains in the $125 million to $150 million range. So I would see no reason to change assumptions in terms of how that might be modeled out.

And then just to follow up on that, on the question on how much cash you like to have on hand. Whether you do future debt repurchases is going to be opportunistic, or is there an element to how you are looking at the Grace bankruptcy process as to when you might need the rest of the cash.

I like your former characterization as opportunistic.

Okay. Thank you.

Um-h'm.

Next question.

We'll go to Larry Robbins with Glenview Capital.

I'm sorry. My questions have been answered.

Okay. Thank you. Next.

We'll go to John Roberts with Buckingham Research.

Morning. A lot of your resin suppliers talked about removing some of the price protection from the clauses. Were they successful in achieving that through the fall negotiations?

I'm not aware that they were.

So you wouldn't expect any additional volatility in your raw materials from not having a 30 day or 60 day lag in when pricing affects you?

No, I think the industry practice that's been in effect for a number of years is continuing.

Thank you.

Yeah. Next question.

We will take a follow-up from George Staphos with Banc of America Securities.

Hi guys. I'll make it quick. You know, the last couple of years we've talked obviously about case-ready, vertical pouch packaging, inflatable. These have been the key areas in your product, growth-wise, that have helped the volumes. Without necessarily giving away what you may be thinking about in terms of new products, should we expect any comparably sized new products within the next two years? And if you could give us some direction, where may they lie?

That's an interesting question, George. I try to keep the pipeline full, and I don't want to develop a habit of trying to preannounce new products before they come to market, which we haven't done.

But I will feel comfortable saying I don't think you will see anything meaningful in the next probably six months, but we are working on a number of products and I do hope they will fall into the growth categories, very similar to what you've seen case-ready and vertical pouch. But I don't think it's appropriate to go into them that the point.

Okay. Fair enough, guys. Good luck.

Thanks.

We'll take a follow up from Rosemarie Morbelli with Ingalls & Snyder.

Just following up on George's question. Could you bring us up to date on what is going on on the medical side?

Sure, medical side, I think we started up our new plant in December. I think we mentioned to you that we were building a new plant, primarily to supply the Asian market. That plant will go through trials probably through April.

And because of the nature of the product, which are IV solutions bags and new nutrient bags for pharmaceutical applications, there is a stringent qualification process of the material off of the new equipment. So it will probably be late second quarter before products are commercially available off of the new plant. We're currently approaching our capacity on our existing operations.

In the meantime, we continue to have active discussions with the Chinese medical authorities in securing a prime supplier role for their conversion from glass pharmaceutical bottles to flexible bags. So that's all in process. And Rosemarie, maybe when we get to the second half of the year we can maybe take the particular time to update you on how that is going.

Okay. And lastly, on the Cap Ex,. The $125 million to $150 million is kind of high. I mean, you spent $92 million in 2002 and '03 you built two new facilities. Any major projects--what are the major projects rather, in 2004, which really translate into that high a number?

Well --

Or is that a new level?

Rosemarie, this Dave. There will be some carryover on the spending on the 3 projects we have been talking about in Hungary, South Carolina and Arkansas, that will get picked up in the 2004 numbers. There is no significant new facility that is currently part of our thinking. But I think the number is--that range is not something that we just pull off the shelf. There is a fair amount of thought that has gone into the needs of the business in compiling that. So I think that's -- at this point in the year, which is still early, that's a good number to focus on.

And where do you stand overall in terms of available capacity? In other words, in 2005, do you need to add more or do the Cap Ex go down to a $100 million type of level?

Well, our depreciation is running in the $170 million range, so clearly that is one yard stick to keep in mind when we talk about the need to reinvest in the business.

And to go back to one of the comments that I think Bill and I both made, regarding how we respond as a company to resin prices, clearly investment in more efficient capacity, productivity gains, is a very important way of dealing with cost pressures coming from outside the company.

So I don't see any reason to think that that $125 million to $150 million range isn't appropriate for both new capacity and replacement and productivity enhancements for the foreseeable future.

Okay. Great. Good luck on the quarter.

Thanks, Rosemarie. Next question which I believe is our last one.

Goes to Edings Thibault with Morgan Stanley.

I promise to make it short and sweet.

No cleanup, either. You're the cleanup--

Cleaning something up! Dave, would you like to give some guidance on depreciation D&A going forward, and how should we think about modelling that given your Cap Ex outlook? You seem to be indicating you're comfortable with the range below depreciation. At what point should we expect depreciation to peak and begin to decline, given the current mix of business?

That goes I think maybe a step beyond what we are prepared to disclose this morning, Edings. There is nothing in how the capital is getting layered in over the last couple of years--relative to equipment, that is-- reaching the fully depreciated stage that would suggest there is going to be any dramatic shift in our depreciation expense in 2004.

So I don't--it's going to vary modestly, but nothing that I think warrants comment in terms of how one might want to determine what our free cash flow is going to be.

Sure. Will it be-- and again realizing you're characterizing as "modestly", will it be modestly higher in '04?

That's probably a reasonable assumption.

I mean, certainly we have some currency effects that come in to play there as well on our overseas assets, so modestly higher is probably not inappropriate. And I won't quantify what "modest" is.

Thanks very much.

Okay. Thanks, Edings, and thank you all for participating in the call.

Before we finish, I do want to leave you with some reminders of what set Sealed Air apart as a company. I know there have been a lot of questions about resins, and I want to assure you that Sealed Air has been managing its way through resin cycles for well over 25 years. We've been through the highs and the lows, and we've managed to continue to come out of the cycle as the premium packaging company with leading positions in most of the places we do business. And we continue to manage our cash flow and manage our pricing and costs that over an extended period of time.

And to the extent at that time past is prologue to the future, I look at our continued capability and long experience in managing our way through the challenges of the current petrochemical feedstock environment.

Also, as I said in my my opening remarks, global reach is a key component of our success in 2003. And I believe it will be an important contributor to our success in the future. Our operations around the world allow us to bring Sealed Air's high quality products and services to our customers almost anywhere, any time. We are truly a player on the global stage and we continue to add to our global reach with new plants coming online in Hungary, South Carolina and Arkansas. These plants support the global growth of our food packaging and our medical packaging businesses.

As we are doing now, as we have always done, Sealed Air will continue to invest to support the growth of our customers around the world. We are also committed to continuously improving our operations. In an environment of rising petrochemical costs and the ever increasing costs of doing business, our commitment to world-class manufacturing provides a means for productivity improvement to help offset these costs.

All of us at Sealed Air will continue to drive productivity improvements in 2004 through the tools of world-class manufacturing. For these reasons and for many others, I am very comfortable and confident with our position and our long-term outlook, and I am personally glad to be a Sealed Air shareholder. Thank you all for listening.

Thank you. Once again, everyone, that does conclude today's teleconference. We do appreciate your participation, and you may disconnect at this time.