希悅爾 (SEE) 2004 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, Senior Vice President and Chief Financial Officer.

After our prepared comments we will be taking questions. You may place yourself in the queue simply by pressing the star key, followed by the digit 1 on your touch-tone telephone. If your question has already been answered, you you can remove yourself from the queue by pressing the pound sign. Please limit yourself to one question per caller so that others have a chance to ask their questions.

Now, I will turn the call over to Eric Burrell, Director of Corporate Communications. Please go ahead, Mr. Burrell.

Good morning. Before we begin our call today, I would like to remind that you 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 ever 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 non-GAAP financial measures that we expect to discuss on our website at www.sealedair.com, in the Investor Information section, under the Reports and Filings tab.

Now I'll turn it over to Bill Hickey, our CEO. Bill?

Thank you, Eric. Good morning. I'm Bill Hickey, President and CEO of Sealed Air, and 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 2004. Dave will then review the detail as of our financial results. After Dave's remarks we will take your questions.

Sealed Air is pleased to report an 18% increase in second quarter diluted earnings per common share. Our second quarter sales increased 7% over the prior year, primarily by across-the-board strength in our protective packaging business. really want to point out that our protective packaging business is improving around the world we've seen meaningful improvements in operating margins in the second quarter. Our operating margins on the protective side of our business side increased 170 basis points. Our units in protective packaging are up in all parts of the world, and in many parts of the world exceeded double-digit volume growth. I wanted to remind you that we did announce price increases, and these were implemented in July, which is this current month, for our protective packaging business.

On the food packaging side, as was pointed out earlier in the year, we have had head winds in this part of our business due to the restrictions on imports of U.S. beef by many countries around the world, primarily our three large trading partners, Japan, Korea, and Mexico. It is also interesting to note that the processing of beef in the United States is down 9.4% for the second quarter. And that's about what we saw in our business. However, despite that, the remainder of our food packaging business continues to do well. Our case ready business is up in the double-digits again, I believe, for the 7th consecutive quarter, perhaps 8th. Our vertical pouch packaging continues to grow at double-digit rates. And we are continuing to invest for the future, investing in R&D, information systems, and the three new factories which we previously announced to you, in Arkansas, South Carolina, and Hungary.

Our business continues to be very solid. Cash flow for the quarter also continues to be solid. We were able to acquire a common stock of Sealed Air in the open market, about $34 million in the quarter, and at the same time we increased our cash on our balance sheet from the end of the first quarter. We also continue to work on all aspects of our P&L and balance sheet. Through reorganization of our international operations, we were able to bring down our effective tax rate. We were able to maintain tight controls on working capital that, although our sales increased at the 7% rate, our working capital changes were much smaller, illustrating our tight control over a continued -- a continued tight control over working capital.

Overall, despite the head winds of the restrictions on U.S. beef imports by other countries, the business is performing well, generating cash, continuing to grow. The new product pipeline continues to progress forward, and we continually believe that investing in this business for the long-term is the right thing to do.

With that I'll turn the call over to Dave to review some additional details on our numbers for the quarter.

Thank you, Bill. I'd like to start with some additional comments on our operating performance. Our sales of $924 million were a record for the second quarter. This was the 4th consecutive quarter that our sales topped $900 million. Included in our year-over-year growth of $58 million is a $34 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, present the percentage of sales by geographic region, the impact of foreign currency translation on sales by geographic region, and the components of the change net sales by business segment and by geography.

Moving through our statement of operations, the Company's gross profit was $283 million for the second quarter. Gross profit margin was 30.6%, compared with 31.1% in the second quarter of 2003. Compared to last year's second quarter, the unfavorable mix associated with the decline and packaging used for U.S. beef exports resulted in an unfavorable impact on gross margins. Marketing, administrative, and development expenses increased $13 million to $155 million, compared to the second quarter of 2003. More than 2/5th, or $5 million, of this increase was attributable to foreign currency translation. As noted in our press release, the majority of the balance of the increase reflects our spending on the Company's information systems. As a percent of revenue, these overhead expenses were 16.8%, compared with 16.4% in the second quarter of 2003. Looking ahead, we expect our total year expenses to be within our target range of 16 to 17%.

Operating profit was $128 million. Operating profit as a percent of sales was 13.8%, compared to 14.8% in the second quarter of 2003. By segment, protective packaging contributed $56 million, or 15.9%, of second quarter protective packaging sales, up from the 14.2% margin achieved in the comparable period last year. Food packaging contributed $72 million, a decrease of $11 million, or 13%, from the prior year's second quarter. The food packaging segment operating profit declined, to 12.6%, compared to 15.1% in the comparable quarter of last year.

Interest experience was $37 million compared to $27 million in 2003. This substantial increase is attributable to $17 million related to our $1.3 billion bond financing completing in July of last year. As a reminder, we used the proceeds from last year's financing, together with available cash, to redeem all of our convertible preferred stock. This redemption has been accretive to both earnings per share and cash flow. Our repurchase of bonds with a face value of $172.5 million in December contributed to a $4.6 million decline in interest expense compared to the second quarter of 2003. Finally, in anticipation of increasing interest rates, the Company ended the second quarter with insignificant floating rate exposure.

Income tax expense for the quarter was $29 million. For the first 6 months of 2004 our effective tax rate was 34.25%. Previously, we shared our expectation for an effective tax rate of approximately 36% for all of 2004. During the second quarter, we brought to fruition several projects to reduce our effective tax rate. Particularly on our earnings outside the United States. We expect to maintain this 34.25% rate for the balance of the year. Diluted earnings per share were 66 cents for the quarter, as shown on the financial exhibit to our earnings press release, the number of diluted common shares is outstanding for the second quarter of 2004 includes the 9 million shares to be issued under the terms of the asbestos settlement.

I will conclude with some key cash flow and balance sheet items. First, EBITDA was $172 million. At 19% of sales, compared with 20% a year ago, it reflects the margin impact of lower sales in North America to packagers of exported beef. In compliance with Regulation G, we have posted a reconciliation of EBITDA to net earnings on our website.

Capital expenditures were $24 million for the quarter. Primarily spent in our food packaging segment. In the second quarter of 2003, our capital spending totaled $30 million. We remain comfortable with our target to spend between 125 and $150 million on capital expenditures for 2004. Our cash balance at June 30th was $476 million, up over $60 million for the quarter. This increase came after we used $34 million to repurchase approximately 695 thousand shares of our common stock during the quarter. This brought our year to date repurchases to 1.2 million shares at a cost of $59 million.

Our quarter-end accounts receivable totalled $590 million, up $13 million from March 31st. Compared to June of last year, receivables investment increased $22 million, or 4%, while our quarter-to-quarter sales increased $58 million, or 7%. Inventory investment at June 30th was $393 million, up $2.5 million during the quarter, and up $11 million dollars, or 3%, from June 30 2003. This expansion was in keeping with our 7% year-over-year top-line growth. Total borrowings at June 30th, net of our $476 million of cash, were $1 billion 803 million, down $70 million during the course of the quarter.

Now, I'd like to turn back to Bill and to your questions.

Thank you, Dave. Now, Stephanie, can we open up the call to questions please?

Yes, thank you. If you would like to ask a question, please press the star key, followed by the digit 1 on your touch-tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you find that your question has been answered, you may remove yourself from the queue by pressing the pound sign. Once again, that is star, 1 for questions.

Our first question comes from George Staphos with Bank of America Securities.

Hi, guys. Good morning.

Good morning, George.

Good morning, George.

A couple of questions. First of all, Bill, on the 9.4% decline that you saw in customers reduction of red meat, that was not reflective -- or was it -- of actual U.S. meat consumption? My take is that was, hopefully, wholly reflective of just the export market, but could you comment?

I'm not sure I can answer it 100%, George. But 9.4% is what the processing was down for the second quarter.

Okay.

I haven't seen any final beef consumption numbers for the second quarter, but I would -- I would hypothesize that U.S. -- actual U.S. beef consumption didn't change that much. And I would think that most of that 9.4% represented the export markets, which interestingly enough is somewhere between 9 and 10% of U.S. beef industry.

Right, right. Now, how much of that -- you keep talking about export being a factor, and clearly it was. But how much of that was of the overall EBITDA decline for food in the quarter, and how much was mix or resin if you can comment?

I think it is -- I mean I would say it's probably a third to a half. A third to a half of it is probably that, and the rest is a whole host -- you got three factories we've opened up, you got a little bit of resin. But, again --

Yeah.

-- it is less sensitive to resin. So that's kind of -- you know, kind of a mix.

Okay. Now --

And I think the mix that Dave may have been referring to is the export bags tend to be larger. So as you downsize in bags, the mix becomes kind of less favorable.

Okay. But that's in that third to half?

That's in that, correct.

Okay. Now on the tax rate, you've talked in general terms, in the past about things you were doing to try to minimize the rate. You know, what happened? Did you all of a sudden find that you could lower the rate a lot more this quarter?

Let me pass that to Dave.

George, as you know we do business in 50 countries around the globe. And, I guess going back about two years, we took a very comprehensive look at our earnings profile globally, and have been going country-by-country trying to put in place the appropriate organizational structure to be an efficient global tax player. So as additional companies come online under this new structure, it creates opportunities to reduce our effective tax rates. So what we saw in the second quarter was the next round of companies -- or countries that we've brought in to this more efficient structure.

All right. I mean, I hear you, but it was a big delta. Next time if you can have any kind of lead time, it would be great to know it in the guidance.

Yeah. If we -- certainly if we knew it back in December, we would have talked about it. But these things take some time to put together, and we're never quite sure what quarter they'll actually become effective.

Gotcha. The free cash flow was great. It was a hundred million or so in the quarter by my calculations. What were the key drivers? And anything positively surprise in terms of your free cash flow generation? Thanks.

I think the free cash flow, for starters, you can hurt yourself in free cash flow by building working capital, and we clearly kept our working capital under control in the quarter. And our capital spending was also in line with expectations. If we look at the business, clearly the strength that we saw in the protective business, and the increase, not only in sales but in margins in that business, was a significant contributor. And even though the food business was less robust in North America than we would have liked, the food business, globally, still generates considerable cash flow. So we do have a cash flow generating business, and that was evident in the quarter.

Okay. Thanks, guys.

Next question.

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

Hi. Good morning.

Morning.

Good morning, Ghansham.

Does your full-year EPS guidance assume that the ban on U.S. beef exports will be lifted by year-end?

Our guidance assumes that it is not. We looked at the numbers and concluded that with the new tax rate going forward, with the ban continuing in affect as well as some other, kind of, minor changes in our business, that we can still hit -- hit those numbers, Ghansham. So, and I know depending on who you talk to, one of the -- one of the major players in the beef industry said on their conference call that they would look for the market to begin opening in the late fall of '04. One of the industry publications suggested it could be as late as '05. So for our purposes, we just assume status quo through the end of the year.

Okay. And so you're assuming the protective packaging, sort of, improves in the mid single-digit range -- mid to upper single-digit range volume-wise?

Sure. Sure. Actually, protective packaging was double-digits for the quarter.

Okay. And just one final question, the capacity utilization for the food packaging business in North America?

Well, you heard me answer kind of George's question, you know, the beef processing was down about 9% and that's pretty close to what we saw in our business.

Okay. And I mean, is that limiting your ability to pass, you know -- to raise prices in this business? Given the excess capacity?

I don't think -- you know, I mean, I don't think there's a cost factor behind these -- behind the beef packaging at this time, really.

Yeah, to be a little flip, Ghansham, you can't raise prices on a product line you're not selling.

Yeah. That's what I figured. Okay. Great, thank you, very much.

We'll go next to Amanda Tepper with J.P. Morgan.

Good morning. On the protective side, and the recently announced price increase, any early comments on how that is trending? And based on what you're now seeing with resin, could that mean that if volumes hold up in protective, the third quarter operating margins in protective could be better sequentially than the second quarter?

Well, I would tell you, Amanda, that, you know, it is the price increases depending on the product either went into effect the first of July or the 15th of July. But it seems to be going pretty well. But again, it's still early. And we're hopeful that the economy just keeps the wind behind our backs on this particular case. And we'll see how protective goes.

What resin assumptions did you build into your guidance? And if resin prices are flat, wouldn't we then see some margin upside, both for protective and as a Company?

Well, you know, I pointed out that we were able to increase protective margins 170 basis points in the second quarter, and of course that does not include the affect of any price increase.

Right.

So one could hypothesize that with a price increase in July, and no major change in resin prices, that that could lead to an improvement.

Does your EPS guidance for the year assume no major changes in resin prices?

It assumes no major changes in resin prices, yes.

Okay, thanks.

As a reminder we ask that you please limit yourself to one question, so others may have a chance to ask their question. We'll go next to Richard Holohan with Smith Barney.

Good morning.

Good morning.

I had a question on your IT spending. By my rough calculations, it looks like it was up significantly versus last year, maybe in the range of double. Is that accurate and could you comment on it?

No, no, no. It's up -- it's up probably 12, 14%, something like that. It is not double.

Yeah. I would say in the 10-15% range.

Okay.

And, you know, we're coming down the home stretch, albeit a year and a half to a 2-year long home stretch, bringing up the remaining parts of our business on to this new platform. So this will be a, you know, a process that will be, you know, we'll be investing in at least through the end of next year, and probably into the first half of 2006.

Okay.

Clearly, you know, the challenge is with all this new technology at our disposal, to use it as a tool to improve profitability.

Gotcha. And also, could you comment on what you're seeing in the medical film side of the food business, how that's been for you?

It's doing well. It's doing well. We -- I think you've heard us announce earlier that we are -- we have built a new plant to expand that business. That plant has actually started up, but through testing trials -- because it is a medical product and because it contains fluids when it is actually done that are used for human consumption, the extensive testing and qualification process will probably take us through October before we actually have, kind of, saleable products off of that. But, in the meantime, the business continues to grow and we're seeing growth both in Europe and in Asia, which is where the best markets for those products are right now.

Gotcha. And if I could just -- this is sort of related to the IT question, your marketing, administrative, and development costs were up about 13 million in the quarter versus last year?

Yes, that sounds right.

And that includes the IT and that includes R&D and that includes everything else, right.

Okay. And I think you said about 5 million of that was FX?

Right.

That's right.

And the balance is an increase in IT and everything else just mentioned?

Yeah, you know, wage and benefit increases, health care.

Okay. Terrific. Thank you.

You're welcome.

Our next question comes from Rosemarie Morbelli with Ingalls & Snyder.

Good morning. Can you hear me?

Yes, Rosemarie, we can hear you.

Okay, good. Could you talk about your gross margin [Inaudible question -- microphone inaccessible]? When we were in Connecticut, you mentioned that you could get back to the low end of your goal when [Inaudible question -- microphone inaccessible] 33%, and by year-end of this year. Do you think you can still do that?

We're not -- I don't -- I'm not sure, Rosemarie, we said the end of this year. I don't think we put a time on it. But if you look at where we're guiding for the year and we're assuming no major changes in resin price and no lifting of the beef ban, I wouldn't assume significant changes in gross profit, although I would hope for, you know, improvement going forward.

I mean sequentially the selling price increases should benefit that gross margin.

Right. That's what we just said on the last question. Yes.

Right. so the next two quarters should be higher than the second, but what you are saying is that by the 4th quarter, you won't be anywhere near the 33% for that last quarter. Is that true?

We're not suggesting that, Rosemarie, at this time.

When -- is there -- assuming that beef starts being exported at the beginning of next year, could you reach that 33% target by the first quarter of next year or will it take longer?

I don't think I can give you a specific date, Rosemarie. So many factors go into that calculation including what plants we utilize in different parts of the world, what happens to health care costs, what happens to raw materials, energy. It just won't be appropriate to speculate what quarter we would hit a certain number.

Okay. And then under tax breaks, considering however many more projects you are working on, could it be lower than 34% in 2005? Or is that 34, 3 a good number going forward?

Dave?

For -- you know, from my present position, I would suggest we use the 34 and a quarter on a going-forward basis. That said, we are continuously looking for opportunities to, you know, make the Company more efficient as a taxpayer, so that I would hope that over the coming years there are additional opportunities to bring the rate down. But based on the current outlook, I can't identify anything for modeling purposes next year.

Okay. And lastly, anything new on the asbestos situation?

No change, Rosemarie.

All right. I'll get back on queue. Thanks.

Okay. Thanks.

We'll go next to Edings Thibault with Morgan Stanley.

Morning, gentlemen.

Morning, Eddie.

Hey, Eddie.

Just a question as I look forward in guidance and trying to peel that back, because when I look at it and I look at the impact of the debt reduction and the debt purchases you made at the end of last year, you combine that with the lower tax rate. Implicitly you're calling for either potentially lower operating profit or slightly higher operating profit. Number one would you agree with that? And, you know, I guess given the acceleration that we're seeing in the protective and packaging businesses, you're really expecting this beef to really knock -- to continue to be a drag on the operating profit for back half of the year.

I think Edings, you basically almost answered your own question. We're looking at this beef export as it being a drag.

But when you think about that, if it's, you know -- if it's a third to half of the decline in profits, you have the start up of the other plants. You're not really expecting that the drag in the new plants to improve or how much of an improvement are you building? Because you should see a falling decline in the cost effect.

I think as Bill said in reference to the question about the medical product line, that plant, while it's essentially completed, will not have sellable product until the 4th quarter. So we're not going to see anything significant on that front. The plant in Hungary, which represents a significant expansion of our presence in some promising eastern European markets will not have a significant impact on this year. The Rogers, Arkansas plant is up and running. And that may, in fact, have some positive contribution during the second half of the year. But not enough to move the numbers. And to your point on operating profit, if you look at the quarter relative to last year, it was $127.7 million last year, and that's exactly what the number was this year. And, you know, that's -- I guess we're assuming everything is going to remain pretty consistent through the end of the year. We won't see a lot of movement.

I mean, perhaps focusing on the drag from these new facility start ups, you know, it sounds as if, you said, either 4th quarter or next year -- 4th quarter or the beginning of next year you should begin to have saleable product. Would you expect those to continue to be dilutive to profits for, you know, for how long, I guess would you consider those new start ups to be dilutive to profits?.

I would again, part of some of this capacity in the U.S. is offsetting some of the same products that are being -- are not being exported. You know, I would think you'd look at the Hungary plant and the medical business to be contributing by next year. I think I'll still hold out and say we're a little dependant on how soon the tariff -- how soon the restrictions get, kind of, lifted in the U.S..

Fair enough. Fair enough. And can you maybe just talk about your individual businesses on a geographic basis? You did a great job breaking them out by business and then by geography. But maybe if you could help us out on the European volumes on, both the food side and the protective and packaging and we're seeing a bit of a turn there.

Yeah, I don't have the numbers precisely on hand, but I think I said protective was somewhere in the, kind of, double-digit numbers in Europe, and food was in the single-digits and protective had a good quarter in all parts of the world. Actually in Asia, the number's well into the double-digits again. And econofood was, I will tell you, was, you know pretty solid in other parts of the world, again, except in the U.S.. Latin American food was, kind of, double-digits, and you get both Europe and the -- Europe and Australia were kind of single-digits, and the U.S. was negative.

And how is your margin structure, particularly in Europe. I know internationally, margins because of the newer cost of the facilities and other reasons, tend to be lower margin, but is the European business a lower margin than your North American business, in both food and protective?

At the margin, probably, yes. But, you know, it's always hard to tell because a lot of the development work is done here. A lot of the trials. So, you know, it's as I say, it's probably at the margin.

So it's not -- when you're talking about a mix contribution, that's not a big driver of any kind of mix weakness?

No, Europe is a little lower, but I think that's not what Dave was referring to when he is talking about the mix shift. I think the mix shift was primarily away from the larger export packaging.

Great. Thanks, very much.

And again, we ask that you please limit yourself to one question. We'll go next to Gil Alexander with Darfell Associates

Good morning.

Good morning, Gil.

If we x-out the beef exports, should we have a situation where at the end of the year your gross margins are above 31%?

I think that's about the third come back on that question.

Oh, I'm sorry.

And I think I don't want to put a number on it. I basically said if you look at where we were with the price increases we've announced, with some stability in, kind of, raw material costs, we should see that number, you know, go up in the next two quarters.

Right. And can I just ask one favor?

Okay.

If you people can do it. Would it be possible for you to release your quarterly earnings, you know, Friday -- the evening before the conference call, let's say after 7 p.m.. You've got just too many companies reporting in the morning.

We'll take a look at it, Gil. We'll take a look at it.

If you can, it would be wonderful.

Okay. Well, we'll take a look at it and we'll --

And I thank you.

Yeah. You're welcome.

We'll go next to John McNulty with Credit Suisse First Boston.

Hey, guys. Not to drill down too much on this, but on the food business, I'm trying to get an understanding of why this quarter actually ended up being so bad. When you look relative to even what you did in the first quarter, I mean, typically you get a seasonal pick up from the first quarter to the second in terms of margins. This time you actually saw 100 basis point decline. You had those three plants coming online in the first quarter as well. So that shouldn't have been a huge incremental drag. Mad cow should have been impacting you in the first quarter as well. So I'm wondering what the incremental quarter-over-quarter slide in margin is actually coming from.

Well, I think, John, I think it's somewhat hypothesis on my part about how the industry reacted. But I think in the first quarter -- remember this beef ban didn't become effective until sometime after December when the mad cow was found December 27th, or something like that. And I think that the industry and all of us assumed this thing would move pretty quickly. So I don't think the pipelines saw a shutdown early in the quarter, John. And I think it really wasn't -- I mean, we were all saying, even if you remember our first quarter conference call which was in April, there were expectations and negotiations going on that, kind of, the border would be lifted, kind of, shortly in middle of the year. And so I think that we really didn't see the impact, or the industry didn't come to the conclusion, maybe, quick enough, that this was really going to be, kind of, a longer term thing. And it all, kind of, came home in the second quarter.

Okay. I mean, when we think about the impact that these new plants are, you know, on -- you're basically saying it is about half, roughly, and maybe a little bit more of the impact that you are seeing. So if you add that back in, your second quarter margins still on the food side, you know, looks to be as light as, kind of, what you saw back in 2001 during the huge European mad cow scare where, you know, beef demand or consumption dropped off like 60% in Europe. I know that's a smaller business for you, but it still -- it was a much larger drop off. I'm wondering if we're missing something as well on the food side, and it may not be just mad cow and something else at work on your margins whether it is some of your business isn't quite as profitable and what have you.

No, I think -- it is interesting. I mean, I don't have the exact numbers. We can probably, at some point, get these, but the 9% decline in beef processing in the second quarter is probably a larger number than the mad cow decline in '01. I don't know that right now, but just given the relative sizes of the industry, I think I might not be far off on that, but that's -- we can look at that, John. We can look at that. But as I say, by and large, if I go by the numbers, case ready is up in, kind of, the double-digits, vertical pouch is up in, kind of, the double-digits, Latin America is up in the double-digits, and really the soft spot is really the U.S. market.

Okay. The last thing, on a completely different topic, right now your cash balance is getting to levels that are even well above what you said you needed as a cushion for eventual settlement pay outs. Should we be expecting with your stock taking the hit that it has recently that you're really going to be stepping up share repurchases, even beyond, kind of, what we have seen over the past two quarters?

I think -- you know, I don't think I can answer that question as is. I just think we continue to look at where the best place to put our excess cash is, and our priorities, you know, remain the same, which is, reinvest in the business, and after no opportunities to reinvest in the business, and find ways to return money to our shareholders.

Okay. Great, thanks a lot, guys.

We'll go next to Jennifer Trawinski with Barclay's Capital

Hi, how are you? I just wanted to ask if you could possibly give us any sort of update on how the Grace Settlement is going?

There's no change. I think -- I think we had a call when we filed our protective motion back a month or so ago. And there's been no change since then.

Okay. Thank you.

Our next question comes from Timothy Burns, Cranial Capital.

Good morning, Bill and David.

Good morning, Tim. It's been awhile.

It's been awhile, but I'm always listening. I don't always have much to say all the time. Hey, the protective business is obviously very pleasing to you guys, I'm sure. Historically, there were a lot of, kind of, benchmark things that we tracked, including machine placements, and what have you, that acquitted to even stronger growth, you know, later on in the future. Is that happening? I mean, are you getting Instapak machine orders, you know, Bubble Wrap cutter orders, Shanklin Shrink Wrap machine orders, any indications there? Anything that would positive to --

All of those are up, Tim. All of those are up and depending on the product, anywhere from, you know, kind of, mid single-digits up to double-digits. So on the protective side, yes, we are seeing a positive movement on equipment placements.

Those tend to be -- tend to be, kind of, annuities, right? Generally they will end up being material sales for quite awhile.

We hope so.

Okay. All right. That sounds confident. What about in terms of inflatable packaging? That's the one of your, I think, 3 or 4 growth legs that you haven't commented about yet. But is that still double-digit plus, or what's happening?

Yeah, I think our volumes are up, kind of, double-digits in the quarter, continuing to, kind of, move that forward as one of the opportunities on the protective side. And it's, you know, we continue to enhance the offering and upgrade the offering and I think we've got several different platforms out there now and I think we had a good quarter in inflatables.

Okay. Last question would be the -- you know, is there a way that you guys can substitute Spam for some of this beef and just utilize your high barrier films to ship the -- that wonderful product around the world?

I'm not sure Spam needs a lot of barrier protection, Tim.

You don't need anything, just an old baggy and it will survive for the next 10 years. Well, hey, I know it's not -- it's not the best quarter you guys have had, but, hey, stay at it. I'm sure better times are ahead.

Thanks. Thanks, Tim. While we're here, operator let me just take a -- we've got a couple of questions that have come over on the internet, and I just want to kind of respond to them. I'll just take the ones off the internet. First question was, can you provide a brief update on any new developments concerning the asbestos litigation after Judge Roland was removed from the W.R. Grace case? The answer is, no, there's really no changes. I think we -- the last item of news was we filed our motion -- our protective motion with the new judge, and there has been no action on that, and as far as I know there has been very little other action in the Grace bankruptcy as the new judge gets up to speed. Next question was, so your gross profit -- actually it says -- I said operating profit increased 170 basis points. They are increasing pricing, and you don't see any further supplier price indexes, cannot -- can margins not increase? I think we answered that saying we are looking for improvements in margins over the next 2 quarters. Next comment, a comment on the previous cash flow guidance for 2004. Dave, any comments on the cash flow guidance we have given before?

I think we've thrown out a broad number of $300 million, and since that's a difficult number to reconcile back to GAAP numbers, we'll stick with that as broadly indicative of our cash flow generating capability.

Okay. Next question off the internet is, what are the resin cost assumptions for the second half? Up from Q2 levels as incorporate any recent resin increase announcements? As I said in response to some of the questions we had over the phone, we're assuming no major changes in resin prices through the rest of the year. At least at this point. Next question is, what assumptions are we making about the beef imports in our second half? And I think I've answer that with the comment that we are not factoring in any lifting of the import restrictions on U.S. beef for the rest of this year. Another question says: are you seeing increased competition in Bone Guard bags? There's always competition in all our products, and we have to earn our sales every day. With that, let me go on to next question on the phone. Operator?

And that question comes from George Staphos with Banc of America Securities.

Hi, guys. A couple questions on cash flow. The CapEx guidance, you said, Dave, remains 125 to 150 and you remain comfortable with that. Your year-to-date CapEx is roughly around $50 million. Can you remind us how much is in that number right now, or in the full year number that you've guided to for the new plants.

The three new plants we've been talking about for the past year are largely complete in terms of our capital spending, So the $50 some million we've spent in the first half of the year goes a long way to completing all three of these plants.

Okay. So, when you say comfortable with 125 to 150 how should we interpret comfortable? That will not be higher than that? Or you feel really good about wrapping the spending in the second half?

I think we can say with great confidence that we will not exceed the upper end of that range.

I guess, ultimately, when you look at the business, if you can't do much more than $100 million of capital spending in a period where you are increasing your capacity relatively significantly, you know, as we think about the business, could normalized CapEx for Sealed Air be something under $100 million over time?

No, I wouldn't -- I wouldn't go there, George. I'm still comfortable in this 125 to 150 as being kind of normalized. And looking at -- looking at what we've been through this year in terms of beef bags, I think that we're kind of at a sub-normal level.

Okay. Well, we hope you remain very comfortable. Last question, separate topic, CFT, any news on how that product is progressing?

Continuous foam tubes?

Yep.

Doing very well. Doing very well. I saw something a couple days ago, I don't know, 8, 9, 10 more installations. So I like that product. I think it's an exciting opportunity, and it sort of opens up all new avenues for Instapak to be a more of a flexible kind of wrap product, in addition to being, kind of, a good cushioning material in its rigid form.

Okay. All right, guys. Good luck in the quarter.

Thanks.

Thank you.

We'll go next to Richard Holohan with Smith Barney.

Hi, guys. Just a follow-up on interest expense. Is this a good run rate for the year? And, I mean, I guess if we continue to see short-term rates move up over the balance of the year, that could actually come down a little bit as you benefit from the interest on your cash balance?

Well, the interest on the cash balance goes into the other income line. It doesn't get netted out against interest expense. So I think the interest expense should be relatively constant barring an action like the one we took in the 4th quarter of last year to buy back a significant quantity of debt. But that's not something that is imminent. So for modeling purposes, I think we were pretty much in a tight range for the first and second quarter, and there's no reason to think that would change over the second half of the year.

Gotcha. And I just add follow-up on -- sort of a small point on the asbestos issue. There was an objection filed to your motion which I guess would have been expected. And the -- I know one of the things that was pointed out in the objection was that since you guys have already agreed to the settlement, and plan to honor it, there is no need for a ruling prior to the -- to something happening to the settlement. Are you guys comfortable with that, or would you prefer to see a ruling on your motion before something, i.e., you know, the settlement happens or doesn't happen?

I don't think we're expecting any sort of action on our motion in the short-term. I think that with a new judge coming in on the case, there is a vast list of things to do on the Grace bankruptcy itself. I think that action on our settlement will probably end up towards the end of that process anyway. So we'll just have to wait and see what happens.

But, specifically, action on your motion to vacate the decision, would you be comfortable saying, well, yeah, we'll defer that until something bad happens to the settlement, if it were to happen?

We would like to see action on our motion, but I think it doesn't change the terms of our settlement.

Gotcha. Terrific. Thank you.

We'll go next to Rosemarie Morbelli with Ingalls & Snyder.

Give us a little more details on the growth rate of case ready? It used to be 20%. When you say double-digit, are we still around the 20% number?

No the number is getting bigger, Rosemarie. It is more in the mid teens. The number is approaching a couple hundred million dollars. So I think the dollars are about the same, but the percent is down to the mid teens at least for the quarter. I think for the year, it is still probably higher than that, but we'll see. But as I say, as that number grows, I think we, kind of, early in the year said, you know, let's look forward, that this number is a percent and it will continue to grow. But as the base increases the percent will probably gradually work its way down. But it's still moving forward. And although I didn't get a question, we actually have another supermarket in the Midwest which is going -- seems to be going forward with a case ready format. Not a major supermarket, but a good regional one, so that would be good news.

Okay. And then going through -- and congratulations on that. On the vertical pouch, that was more in the 15%-type of growth rate even though it is smaller, are we still --

Yeah, that's still in -- that's still, you know, in, kind of, the double-digits. And it's, again, as that base builds, it continues to move forward. That tends to have a seasonal factor in it, and it should have a better third quarter.

But seasonal was the same seasonality last year, right?

Right. Right.

And inflatable, what are we looking at 10 to15, or are we -- do we reach the 15 level?

No, I think at the -- I think at the inflatables there were, kind of, low double-digits for the quarter. We did have -- we did have a new platform come out in the quarter, and so we spent some time getting that new platform out from a technical standpoint. So that probably, you know, held back a little bit, but as I say, it was in kind of low double-digits.

So next quarter, adding this new platform and whatever time you spent pushing it, then we could be closer to the 15%-type of growth?

Could be.

Okay. So this is good. And what do you see on protective packaging in terms of trends at your customers? Are you still seeing the same kind of demand? Do you think they are building inventory, and could we see some [Inaudible question -- microphone inaccessible] in the second half?

Yeah, I don't know. On the protective side, customers tend not to build inventory, because it's sort of at the end of packaging line. It tends to be bulky, and it tends to turnover pretty quickly, and, you know, when we're offering, you know, 3 to 5-day lead times, there is no need to build inventory. So, I don't see inventory building as a concern on the protective side.

And you haven't seen -- while you are still seeing a good demand, you haven't seen that demand slowing down?

No.

Okay. And lastly, can you put a dollar amount to the beef export that you didn't have, both in terms of revenue and in income?

No. No, I can't, Rosemarie. I think I said, you know, the number that I'm using is, kind of, the publicly quoted number of beef processing being down, you know, 9.4%, and said that was a pretty good surrogate for our effect.

Okay. But no -- but whatever we are missing on the income line --

Right.

-- is mostly from that? Okay. Thanks.

Okay. Thanks I've got -- let me just see before we see what questions we have on the internet, we have a question from someone saying, any layoff expected? I don't know what the basis of that question is, but I don't have anything in mind right now. And the other one is, is a question about, is the $300 million cash flow after CapEx? I think that was a follow-up question to Dave's earlier answer. Dave, would you want to --

Yeah, that is after CAPEX.

That is after CAPEX. Okay, operator, I think we have reached the time here, so what I would like to do is wrap the call up by thanking you all for participating in the call. I think Sealed Air's global presence and focus on innovations provide us with a solid foundation for growth in the future. Although the environment for food packaging business remains challenging given the continued import restrictions on U.S. beef products. We are confident that our positioning for long-term growth in this business. Our broad product offering combined with our technical support and food science expertise, positions Sealed Air as a choice for protein packaging around the world. We would expect to see margins in the food segment to begin trending upward when import restrictions on U.S. beef products are removed, and our product mix returns more to historical levels. We also expect to benefit from selected price increases in our protective packaging business implemented during the second half of the year. Finally, our investment in three new plants coming on stream later this year will enable us to further increase our capacity to serve growing global markets. Our focus on continued investment and the growth of our business on a global scale combined with control on operating expenses, will enable Sealed Air to continue generating strong cash flow and long-term values for our shareholders. For all of these reasons and many, many others, I'm confident in our long-term outlook, and I'm personally glad to be a Sealed Air shareholder. Thank you very much.

This does conclude today's teleconference. We would like to thank you for your participation. You may now disconnect.