希悅爾 (SEE) 2005 Q1 法說會逐字稿

Good morning, everyone and welcome to the Sealed Air analyst and stockholder conference call. Just as a reminder, today's 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. (OPERATOR INSTRUCTIONS). Now I'd like to turn the conference over to Eric Burrell, Director of Corporate Communications.

Good morning. Before we begin our call today, I would like to mind you that statements made during this call stating management's outlook or predictions for the future are forward-looking statements. These statements are based only on information that is now available to us. Our future performance may be materially different due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K or quarterly report on Form 10-K. 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.Sealed Air.com in the Investor Information section under the Reports and Filings tab. Now I'll turn it over to Bill Hickey, our CEO.

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 first provide a few highlights of our business for the first quarter of 2005. Dave will then review the details of our financial results. After Dave's remarks, we will take any questions that you may have.

The first quarter of this year was challenging due to record high costs for certain petrochemical-based raw materials and slow growth in our new European businesses. As you remember, in our fourth quarter of last year, excluding the effect of foreign currency and translation, our European businesses grew by 6%. The numbers for the first quarter of this year, excluding foreign currency translation, are 1%. I'll get a little more into that further in our discussion.

Certain raw materials experienced double-digit increases during the quarter compounding the already difficult environment that we have faced over the past year. We experienced cost increases in excess of 30% on a year-over-year basis on several of the raw materials that we purchase. Even so, recent sales price increases, combined with ongoing productivity improvements, offset much of the cumulative impact of these raw material costs. In addition, we will continue to see the flow-through in the second and third quarters of the price increases we implemented in February and March of this year.

We achieved balance sales growth in both our food packaging and protective packaging during the quarter with total Company sales up 6%. While gross margins were squeezed into substantial raw material cost increases, we did maintain a tight control of operating expenses. Keeping expenses essentially flat with prior year and actually excluding effect of foreign currency translation, our SG&A expenses were below 2004's level in the first quarter. And we showed a 100 basis point improvement in operating expenses as a percent of net sales.

We also began to realize the benefits of reduced interest expense during the quarter as a result of the retirement of approximately $200 million in debt during the fourth quarter of 2004.

Our food packaging segment net sales increased 6% during the quarter, or 3% excluding the positive effect of foreign currency translation. I am pleased that our key growth programs of case-ready and vertical pouch packaging both reported double-digit growth during the first quarter. We also experienced strength in Asia-Pacific and Latin America as Australia and Brazil continue to capitalize on growth in packaging for beef exports to Japan. In fact, as an anecdote, Australian exports of beef to Japan reached a record high in the first quarter.

Our business in Europe was essentially flat during the quarter, excluding the impact of currency. Demand was slow in Western Europe and our business in Central and Eastern Europe was impacted by certain restrictions that were imposed on the Commonwealth of independent states, the CIS or otherwise known as Russia and Ukraine; which were imposed at the end of 2004.

Finally, on a more positive note, our medical products business posted greater than 20% sales growth for the quarter and our new plant in South Carolina is running well and supporting the strong growth in sales.

Our protective packaging segment net sales increased 7% during the quarter, or 5% excluding the impact of foreign currency translation. We experienced a positive change in product price mix of 3% in the quarter supported by volume growth in North America, although offset by partially by a decline in our volumes in Europe.

Our U.S. business saw a healthy performance in both the retail and e-commerce industries. We realized double-digit growth in inflatable products supported by our new platform of Fill-Air inflatable systems. We continued to be innovative and bring new products to our customers and find broad customer acceptance of our new Priority Pak packaging system, our InstaPak continuous foam tubes, and our recently introduced Shanklin Omni Shrink Film equipment platform.

As you saw from our press release earlier this morning, we are revising our fully diluted earnings per share guidance to $2.80 to $2.90 per share compared with our previous guided range of $2.95 to $3.05 per share, as compares with last year's adjusted earnings of $2.70 a share for an approximately 5% increase over 2004 is what is turning out to be an extremely challenging year.

We felt this was an appropriate measure to take given the current level of uncertainty of the future direction of raw material costs and concern regarding the continued continuing strength of the global economy. While I still believe we're at or near the peak of the current raw material cycle, it is difficult to determine when the exact time of the -- determining the exact timing of when stabilization will occur.

We are also looking at a longer than expected delay in the improvement of the U.S. beef market as the opening of the Canadian border, which was anticipated to occur on March 7 of this year, is tied up in the courts and could take several more months to resolve. In addition, in our earlier guidance, we anticipated that the border with Japan would open by the middle of the year and although negotiations with Japan are continuing, we see no early opening of the border with Japan. As a result of the uncertainty over raw materials, the continued closing of the Canadian border for what appears to be the foreseeable future, as well as a further delay in opening the border to Japan, we feel adjusting our guidance for the year is the most appropriate thing to do.

While we are not pleased with our operating performance for the quarter, we do expect to see an improvement in the second half of the year as we begin to realize savings generated by the profit improvement initiatives which we announced in the fourth quarter of last year. In addition, we expect our previously announced price increases, particularly those in February and March of this year, to further offset the higher raw material costs during the rest of year.

We also expect to start realizing measurable benefits from our supply chain enhancement efforts to reduce our global purchasing and logistics costs. These proactive initiatives, combined with our focus on developing innovative packaging solutions for our customers, will guidance as we continue to navigate our way through this environment and position our business to deliver solid operating results over the long-term.

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

Thank you, Bill. I would like to start with some additional comments on our operating performance. Our sales of $970 million were record for first quarter. The favorable $24 million contribution from the combination of price and mix is attributable to pricing actions in both food and protective segments. A portion of our gain from price increases was offset by unfavorable mix as customers traded down to products with fewer features. The 0.7% volume growth in our food business was consistent with our 2004 global growth rate in food. In addition to the double-digit growth, Bill cited in case-ready and vertical pouch packaging, Cryovac equipment grew in excess of 20% in the quarter, primarily in North America and Asia-Pacific. This was offset by lower sales as a result of our restructuring activities in Europe and the market factors Bill just cited.

For those participating in the call who would like additional detail, tables posted on our website, Sealed Air.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 in net sales by business segment, and by geography.

Moving through our statement of operations, the Company's gross profit was $277 million for the first quarter. Gross profit margin was 28.6% compared with 31.3% in the first quarter of 2004. Compared to last year's first quarter, a combination of price increases and productivity contributions from our world-class manufacturing initiatives were able to offset most, but not all, of the dollar impact of increased resin cost. In particular, increased cost for specialty resins, compared to the fourth quarter of last year, exceeded our expectations.

Marketing, administration, and development expenses were essentially flat at $159 million compared to the first quarter of 2004. Looking ahead, we continue to expect our total year expenses to improve on last year's ratio of 16.5%. Our restructuring programs, which we undertook in the second half of last year, had little impact on our first quarter results other than $1 million increase in our reserve level. You may recall that approximately $23 million of our $33 million charge in the fourth quarter represented estimated cash severance costs associated with the elimination of slightly fewer than 500 positions globally.

Through the end of the first quarter, approximately one-half of these positions had been eliminated and slightly more than one-third of the 23 million had been paid out in cash severance benefits. The objective of these programs is to transfer production to the most efficient operations which will help to address the cost pressures created by resin price increases. We expect annualized savings of 25 to $30 million in 2006.

Operating profit was $117 million. Operating profit as percent of sales was 12.1% compared to 14% in the first quarter of 2004. By segment, food packaging contributed $76 million, equivalent to last year's first quarter result. Productivity gains and pricing actions were able to offset the dollar impact of higher resin costs.

Protective packaging contributed $42 million or 11.3% to first quarter sales, down from 14.8% achieved in the comparable period last year. Increased cost for resins and a challenging market environment more than offset the benefits of productivity initiatives and pricing actions.

Interest expense was $36.8 million compared to $38.7 million in 2004. Income tax expense of $27.8 million represented an effective tax rate of 33.25%. This is consistent with our guidance for effective tax rate for 2005. You may recall that last year we reduced our effective tax rate from 36% to 34.25% in the second quarter and subsequently to 33.25 % in the fourth quarter to reflect a successful program to improve the tax efficiency of our international operations. Diluted earnings per share were $0.58 for the quarter, which included a $0.01 per share restructuring charge.

I will conclude with some key balance sheet items. Capital expenditures were $20.6 million for the quarter, primarily in our food packaging segment. In the first quarter of 2004, our capital spending totaled $27.4 million. We are continuing to evaluate projects to expand our international manufacturing base; but the lengthy planning process for these projects are such that we're reducing our guidance for 2005 capital spending to $100 million to $125 million from $125 to $150 million.

Our cash and short-term investment balance at March 31 was $415 million, essentially unchanged from December 31, 2004. Our quarter-end accounts receivable totaled $634 million, down $27 million from December 31 2004. Compared to March of last year, receivables investment increased $55 million, while our quarter-to-quarter sales increased $57 million.

Inventory investment at March 31 was $454 million, up $36 million during the quarter and up $64 million from March 31, 2004. The majority of the increase was in our food segment and was attributable to higher year-over-year resin prices, foreign exchange rates, and the increased level of inter-company shipments to meet continued sales growth in Latin America and Asia-Pacific.

Total borrowings at March 31, net of our $415 million of cash and short-term investments, were $1.686 billion, down $14 million during the quarter. Now I'd like to turn the call back to Bill and to your questions.

Thanks, Dave. Now we would like to open the call up to your questions. Operator, would you begin taking questions?

(OPERATOR INSTRUCTIONS). Rosemarie Morbelli from Ingalls & Snyder.

The cross margin was the lowest level annualized when I looked at all of my numbers.

I look at them too, Rosemarie.

At which level do you think we could get at the end of next year and where do you see the improvement? And if you could tack onto that, vis-a-vis, the improvement, what you see in your end markets? Are you seeing the economy slowing down? Are you seeing competition, really, buying volume and therefore your volume is down because you're selling a whole system as opposed to just end products? Would you touch a little bit more on what is actually going on and where we can expect to see improvement other than price increases?

Rosemarie, that's a very comprehensive question.

I know but I am only allowed one.

I think you've answered everyone else's questions too. I'll try to give you a comprehensive answer and coincidentally, I will cover one of the questions that's coming in over the Web, which I can really answer at the same time because I will be able to address all of that at once. The question on the Web is, "What is your outlook on resin costs going forward?" Let me say that I have been looking at resin numbers for 25 years. In fact, I had one of our people here do a 25 year resin chart back to -- actually earlier than, back to 1979. We did a 25 year resin chart and we are at a level -- it goes off the chart, as you know. It is twice as high as the average price has been over 20 years, which is a pretty dramatic change in the environment. But some interesting news and it's somewhat anecdotal, on a quarterly basis, our resin costs went up between 40 and $50 million. And yet, when you look at our gross profit from the quarter-over-quarter, you really -- we missed it by about 10 million. So we have been able to through price increases, productivity improvements, cost reduction, essentially offset a pretty big piece of that $40 million increase in costs in the quarter. That's a pretty dramatic increase and one which I have not seen in my business career.

So we are doing a variety of things to address those. As Dave mentioned, part of the restructuring effort that we did last year was to begin to look at where we can reduce manufacturing in high-cost locations, increase manufacturing output in lower-cost locations. We are putting tremendous effort on our supply chain efforts because, in effect, the whole cost of the supply chain is a component of gross profit.

It's how we get goods from our suppliers ultimately to our customers and we have a new supply chain vice president on board, a fellow who use to work for Staples a couple of years ago. So we are really focusing on that whole process beyond resin to a degree we never have before.

We are continuing our world-class manufacturing efforts. As those of you have seen some of our presentations in the last couple of months, Dave Kelsey has put up a chart on recycling and we have increased the use of our own materials back into our own processes as a continuing effort to bring costs down.

We have reduced the amount of scrap we dispose of from 50% of the waste down to 35% of the waste. And we find other uses for the 65% we now keep. Rosemarie, we have a variety of programs all aimed at bringing this spiral of raw material costs under control. On the other hand, to be in business today you have to be an optimist. I do believe we're at or close to the peak. We did not see the increase in commodity resins occur in the first quarter that was on everybody's radar screen. We see kind of softness in the resin market going into the second quarter. It's still unpredictable, as you know and there is always that sort of ubiquitous China factor that people talk about it. By and large, if resins stay at this level, and we continue to flow through our price increases that you heard us say on the first-quarter call we announced in January for implementation in February and March, those will flow through. We are doing some pretty bold steps in Europe. I mean, I think it's important to point out to you that part of the reason why our volumes in Europe are slow is we are walking away from some customers who were not prepared to pay the prices we need to earn. And I think that's a factor that we all have to look at.

And we are continuing to look for ways to bring innovative new products to market because the easiest and most effective way of getting higher prices for innovation, and to the extent that we can bring innovation, whether it's through the Priority Pak system in our industrial business or the continuous foam tubes or the new Shanklin Omni Wrapper, we are bringing something new that we can put a new price on and that price can be higher than maybe the product it replaces because it will give our customer many more benefits.

All that is part of an ongoing process. In the meantime, I just received a report this morning out of Washington. I'm sure all of you have seen it. It said, "Durable goods orders plunge in March." And it said that orders for U.S. factories for big-ticket goods plunged 2.8% in March, the biggest setback into two and one half years and the third straight decline.

I think that's part of what -- I think a number of people have seen at the end of March, maybe the last week or so of March was a little bit soft. But I think April, in our business, has come back bit. So I still feel pretty good about our numbers for the year and still feel pretty good about that, our business. And, kind of resin prices, we will take them as they go, but I would anticipate, at this point, not being an expert in the field, that I'm looking for some degree of stability through the rest of this year. You know, you could see pennies either way, but I think we're at or close to the peak.

And that, Rosemarie, we will work our way back on margin and I can't give you an exact number where we will be next year; but it will be better than today. Is that comprehensive enough?

Yes. Is there a particular market where you are seeing a slowdown more than in other areas?

No, I would say the slowest part of our business this quarter was in Europe. It was for a variety of reasons. One of which was our own kind of willingness to walk away from some business.

And you're not seeing any slowdown anywhere in North America?

No, actually, it's interesting. If you go back to our numbers for the fourth quarter. Fourth quarter, we reported growth in the U.S. excluding currency of 2%. This quarter, we're looking at growth in the U.S., excluding currency, of 4%. So other than that possibly week or weak and a half at the end of March, and despite this news announcement on durable goods orders, we have not seen too much on the softness side. As I said in my comments, we have seen pretty good business in both e-commerce and retail. So that's an encouraging sign.

George Staphos with Banc of America Securities.

Piggybacking on Rosemarie's questions and your comments. You gave a U.S. number FX (ph). But can you help us understand how perhaps protective -- you said e-commerce did well. I think you also said inflatables did well. But was the trend strengthening through the quarter for U.S. protective or was it flat or declining as you exited? And then I had some follow-ons.

Well, U.S. protective, was actually, I know it was up single digits. I don't remember the exact number off-hand. U.S. protective was up in the probably 5, 6% range. And (indiscernible) Europe protective was actually slightly down and that reflects kind of a deliberate -- part of it is deliberate and part of it is the economy and the environment. But overall, I wouldn't say that protective, other than perhaps that week and a half at the end of March, we have seen the come-back in April.

Bill, in the past, when you have gotten into tougher periods. It has always been, typically anyway, the Company's case to really squeeze more and more cash out of the business. We have already seen you lower your CapEx guidance, which we view positively. Can you give us a little bit more feel for what you could do on supply chain? I realize that's not really going to help the results necessarily this year to a too great of a degree. But what should we be thinking about in terms of benefits to your longer-term and perhaps what you get this year?

Well, I think in terms of cash, we are, I mean we do have some targets internally, which I'm not necessarily prepared to share this point but maybe at some point we will. We have kind of a cash to cash cycle, which is the whole process from when we pay $1 to a supplier for our materials to when we get $1 from our customers for goods. And we've got some targets to take a certain number of days out of that process, which does free up a reasonable amount of cash if you look at what $1 of cash cycle is in Sealed Air's business. But as I say, at this point, I'd rather not put a number on it other than to say we have a metric that we are beginning to work on.

Last question real quick. Resin, why, aside from some softness that you have seen recently and maybe continuing into 2Q, what else tells you that you're our of peak other than you're at a high price? But that would have been true probably each of the last four quarters as well.

That's why I say we're either at or near. One is -- a couple of signs, George is -- one is that the sort of first-quarter price increase kept getting pushed out. It gets pushed out and actually going into the second quarter, you actually saw a couple of pennies fall off. So that's not saying it can't come back; but that suggests there is a coming in the balance here in terms of supply and demand. And you've got -- as everyone likes to say, the China factor. But the theories in the first quarter that the reason why the price increase didn't go through was because the Chinese New Year and slowing and therefore them being out of the market. It doesn't seem to have come back in the second quarter. So stay tuned.

Edings Thibault with Morgan Stanley.

Just following up on that thought, Bill. Wouldn't it be fair to say that one of the reasons the price increases didn't go through in the first quarter is because volumes at companies like yours weren't as robust as perhaps people thought they might be? And I was wondering if you could sort of comment on -- you talked about protective, what your volumes might be for North America on a total company perspective?

Well, total company perspective, North American volumes up about kind of 4%. I think that puts food up 2 or 3% in North America, which kind of still is suffering. I mean, we were all anticipating, in fact we told you on the phone conversation three months ago, that we were looking forward to the Canadian border opening on March 7. And that hasn't happened and now it's tied up in the 9th Circuit or District Court. I guess it's the 9th Circuit Court for an appeal hearing at some point in the future.

So on the food side of our business, North America has still got a fair amount of headwind. And actually, beef processing, I think was down 2 or 3% in the first quarter on top of the lack of the Canadian border opening. So in terms of the domestic market, domestic consumption, or at least domestic processing, was down 2 to 3% in the first quarter. So our coming up with 2 to 3% growth I think is a pretty good achievement.

I would echo that. I think 4% is better than GDP. And I was hoping you could perhaps address two other small questions. Number one, can we assume from your progress on the inflatable side, that you have resolved some of the operating issues that you had in your inflatable issues? I remember when we toured the plant last year, you were pretty frank about saying that you hadn't quite gotten that or had some struggles getting that really up to snuff.

Those are out and they are done. I was actually at a sales meeting during March and we introduced it to the sales force and it ran well.

Good to hear.

So the bugs have been worked out. The inflatable numbers for the quarter came in over 11%.

Just a final question. Can you talk about what you're not going to build this year in terms of that reduction in your capital spending? Either geographically or are there particular projects that you are delaying? Where'd you find the incremental 25 million?

I'll sort of back into that one for you, Edings. I did say there were international projects and it's safe to assume given how we have been discussing the business activity in Europe and that is the center of our restructuring activity, that we are not looking to invest a lot of additional capital in Europe currently.

So South America and Asia-Pacific have been growing nicely. And in fact, since no one has asked about inventory, I will point out that one of the reasons our inventory balances are up among several reasons, is that we are shipping more product around the world to satisfy demand in Asia-Pacific and in South America. And these investments are intended to be a long-term effort to address what we see as a continued strong demand in those regions.

I think it's interesting, Edings, to point out that as Australia and Latin America have picked up a lot of the U.S. export, beef business, we've been using some of the U.S. capacity to supply those markets because the increase in exports out of those countries is running ahead of our production. So we're supplementing that with U.S. production.

When do you have to make the call on that, Bill? Because presumably, that's not the optimal way to supply that. But on the other hand, it's hard to believe that when the Japanese market reopens, that U.S. guys won't get back significant marketshare there.

I mean, I think that's where we are sort of on the fence, Edings, as to whether to put additional capacity in those markets on the basis that it would be a longer-term demand from Latin America or whether some of that will ship back to the U.S. And we're just holding that decision as long as we can.

Just one final circle up on the European issue, David. I think you guys had been basically relocating some manufacturing capacity or you have been putting in additional manufacturing capacity in Eastern Europe, Poland and, if memory serves, potentially Russia as well. Is that still going on? Your -- I won't say disinvestment -- but you're not -- spending less capital in Western Europe? Or have you put some of these restructuring or geographical moves on hold?

The two primary sites we have been investing in Eastern Europe, Edings, have been in Hungary, where we opened a greenfield site and have been expanding it on an ongoing basis to address markets in geographic proximity to Hungary. We have had a long-term operation in Russia that we continue to expand.

In Western Europe, we have seen a good demand for product in Spain and we have continued to invest in support of that growing part of the business. But in those parts of Western Europe, where the economies aren't growing, the investment that we will be making will be focused more on productivity enhancements and maintenance and be relatively modest in size.

(OPERATOR INSTRUCTIONS). Gonshop Ajabi (ph) with Lehman Brothers.

Hey, Gonshop, we should ask you about resin prices.

Bill, can you help me figure out how much of the downward EPS revision is being driven by the continuing ban of Canadian beef? Is it half of it? Is it all of it?

Let me try to get at it anecdotally. Is that, in the first quarter, when we gave you our guide we clarified that it was based on reasonably stable resin prices. It was based on the Canadian border opening as scheduled. And it was based on exports resuming in the second half. Okay?

Now, in terms of what's happened. The commodity resins have basically held onto that. They have been pretty stable for the first quarter. We have had some kind of bump-ups, and you probably know these as well as anyone else, is EVA is really up in the quarter. And kind of nylon is up in the quarter, both of which don't fall in the category of commodity resins and have, as you know, prices per pound and kind of the $1 and higher range. So those were two things that sort of changed on the resin front.

On the opportunity front, on the market front, the Canadian border being held up now in the court system, I mean, depending on who you talk to, it's third quarter, fourth quarter, or I saw one pessimistic report this morning, indefinitely. As a result, we're taking that sort of out of our expectations for the rest of the year. And we're also becoming a little more cautious on the Japan border reopening. Although, I think Taiwan has just received its first shipment of U.S. beef and a couple of other parts of the world have agreed to take U.S. beef. Kind of the biggest markets still have not.

And at this point, despite a lot of pressure from the White House and from trade groups, Japan still hasn't taken the step to import the first containerload of beef. So we're much more cautious on when that is opening up. So if I would say where I am on kind of the bringing down the number? It's probably half cost, half market, is about probably the easiest way to pick it.

Are you revisiting your growth assumptions on protective packaging for the year?

No, no. I'm much more optimistic on the sales side. I think our sales numbers are doing reasonably well in the environment that we are in. I mean, if you look at corrugated box shipments in the first-quarter, up 0.2%. If you look at FedEx and UPS shipments, I've personally believe FedEx has taken share from UPS because UPS numbers were up pretty modestly and FedEx was up about 12%. But if you average them, it's probably in the 5 to 6% range, which is about right where our protective business was.

So looking at all of the benchmarks, we are kind of keeping our share of kind of growth in the market and we're actually exceeding the corrugated box shipment indicators. And if you sort of peel back the U.S. numbers, as I said earlier. Even though the U.S. growth was kind of 4% overall, that's kind of six plus percent on the protective side, with a 2, 3% on the food side.

And the pipeline, the pipeline for some of the new things we're doing, as you heard me mention in response to Edings, the inflatable product is sort of back on track after having some issues in terms of performance but that's back out there. The Priority Pak, continuous foam tubes, we've got six or seven new products that have been shown to the sales force in the first quarter. I'm really optimistic on hitting the volume numbers.

Amanda Tepper with JP Morgan.

On the volume side in food and protective both, you in the fourth quarter had much better volumes than I think people were generally expecting and now they really fell off in the first quarter. Do you think there was some pre-buying going on, especially on the food side?

That has come up with a couple of people, Amanda, that there were some -- I don't have any hard evidence that people pre-bought for price increases. That's a possibility; but I don't have any hard evidence to suggest that. But you are right, in looking at our business in terms of the food segment and the overall pages we have posted on our website, is about a 1% growth in the first quarter versus 2.5 % in the fourth quarter. And protective was about 1% in the first quarter versus about 5% in the fourth quarter. So that could be a factor. But as I say, I don't have any hard evidence to confirm that for you, Amanda.

Back in food, Canada versus Japan, can you just refresh us on which is going to have a bigger impact on you? The foreign, the -- Asia really reopening the U.S. beef or Canada?

My personal opinion is Canada. Because bringing more beef in from Canada will lower the retail price of beef in the U.S. and will increase consumption. And if you look at the U.S. beef industry, 91% of the U.S. beef is consumed at home. 9 or 10% of it is exported. So you really see the benefit on that kind of 91% by the additional cattle coming in from Canada.

On the Russian Ukraine restrictions what exactly happened there and wouldn't that have already been built into your guidance that you gave last quarter?

Well, it's an unusual thing. I mean, Russia and the Ukraine had long-term trading relationships with most of the Eastern Bloc. And one of their reactions to a number of the Eastern Bloc countries joining the EU was to impose export restrictions, or I say, import restrictions is to close their borders to primarily processed meats and cheeses coming in from Poland and Hungary and the Czech Republic and Slovakia and required all of their former trading partners to get licenses to bring products into the CIS.

We had hoped that those licenses would be pretty easily granted and perfunctory but it has not been. And they are resuming at a very gradual basis. And that's really had an impact upon our customers in the Eastern Bloc which had lost part of their market in the CIS. And that's coming back. But it has taken longer.

And then on the cash flow side, you had previously said in your guidance there should be room for some opportunistic share repurchases all year. Is that something you're trying to protect by cutting back your CapEx for the year or should we look for maybe a lower level of cash flow? And can you also address cash flow in the quarter?

Yeah, well, I'll let Dave address cash flow in the quarter but we are in no way cutting back CapEx to buy shares. We have got lots of room to buy shares and my personal opinion is a buying opportunity and we will still fund, I mean, in terms of investing in the business that is still our highest priority. And we will fund CapEx as we need to.

To echo Bill's sentiments there, Amanda, we are sitting with over $400 million of cash and cash equivalents. While we did have a downturn in margins in the first-quarter compared to a year ago, we are talking about a $10 million variation which hardly puts a dent in the magnitude of cash flow that we generate as a company on an annual basis.

So it's business as usual on capital spending. It's just a question of funding those projects when all of the homework has been done. And as far as share buybacks go we have said many times that that's something we approach opportunistically. We have over 5 million shares remaining under a prior board authorization so that is certainly one use of cash that we will consider going forward.

Next we'll hear from Craig Gilbert (ph) with Linden Advisors.

Good morning. Can you give us your outlook on the pending asbestos legislation and if you have any sense on the probability of it passing the Senate and the House?

I can tell you I really don't have -- I'm not prepared to handicap what the House and Senate will do on asbestos. I mean, I think it's anyone's guess. And I don't have a better crystal ball than anyone else. But overall, I mean, we would support any bill that will compensate kind of the truly sick and that is fair to business.

John McNulty with Credit Suisse First Boston.

Just one quick question. On the equipment sales business in food, you said you saw volumes up or sales up there 20%. Is that a decent proxy for kind of what we can expect, not obviously 20%, but is that a good kind of leading indicator as to the strength of your food business maybe going forward and maybe give us a little bit of light out there?

I think, John, that it is an indication that customers are willing to invest in their businesses. I can't give you a breakdown of how much of that is replacement versus new capacity; but I think compared to a year, 18 months ago, it is positive to see our customers willing to invest capital in their businesses. And that should, over the future quarters, have benefit for Sealed Air.

Also, actually just one other one too. On your food business, the volumes definitely were late (ph). It sounds like some of it again was tied to this Russian border issue. I mean, how much of your volumes dipped off because of that? I know you did ramp up a couple of new plants in the food business. If anything, we would have been expecting maybe you to be selling product out of those plants and to see volumes actually up reasonably decent.

Well, a portion of the plants that we added -- we have added the plant in Arkansas. It was primarily focused on the poultry business and that wasn't as much going after a new market. The poultry market is relatively mature and stable in North America; but rather to consolidate a good chunk of our North American production in a facility designed for that specific type of packaging, which would allow us to have greater focus in other non-poultry packaging at our other North American facilities.

The medical facility really has no bearing obviously on food. It is reported in the food business and that business, while it's a relatively small piece of our overall results, has performed very well in terms of growing sales to support growing demand for non-PVC IV bags.

And the investment in Hungary has supported growth in the growing part of Europe. So I think we are pleased with the level of production that we're seeing in all three of those new investments.

You heard me say in response to one of the earlier questions, the U.S. beef consumption was down 2 to 3% in the quarter and that's the 800 pound gorilla in the mix of products.

Would you say that we've at this point, because I think the original issues that popped up in December of '03 and then I know it dragged a little bit into the first quarter. Would you say that we are through kind of or have annualized some of the problems that we have seen on the U.S., or the consumption of U.S. beef at that this point?

That's hard to say. I know the first quarter was down a little bit. The prices for beef are still pretty high. Primarily because of Canadian border being closed and supply-side concern so that consumers have been reluctant to purchase beef. And pork and chicken have become very competitive and the American consumer will switch pretty quickly between the three different types of protein. I'd like to think we're at the trough. Cattle processing, in the United States, is probably in its fifth year of decline, and generally, there are early signs of the herd starting to rebuild which is a positive sign for the future. But I can't tell you, it's the second or third quarter, but there will be a turnaround in volumes kind of going forward. I'm not ready to predict whether that starts next quarter or the quarter after. But there should be, given the way this business historically operates as herds start to build, you will begin to see more cattle coming to market.

Mark Wilde with Deutsche Bank.

I wondered if you could talk just a little bit more on Europe. It sounds like you said you had to walk away from some business. That is similar to what another player in the business suggested. I wondered whether you think that's just a function of things being slower in Europe or whether it's a function of a more fragmented industry? It just sounds to me, in general, that Europe has been even slower than the U.S. to pass these cost increases through.

Yes. Europe and I like to sort of divide Europe into Western Europe and Eastern Europe because in Eastern Europe business is still good. Business is still up in most of the East -- Eastern Europe market.

In Western Europe, you are primarily -- I actually wrote down three things for the change in European growth from the 6% in the fourth quarter of '04 to 1% in the first quarter of '05. The first, you heard me explain earlier, in the CIS export ban or import ban on processed meats and cheeses coming in from their former Eastern Bloc trading partners that are now part of the EU (ph) and the requirement that they go through a license process. So that took some amount out of the food business in Western Europe.

The second item is on the protective side, as we have rolled out these price increases with a higher cost of resin, we have just taken a certain number of the lower tier customers who have always essentially been kind of marginal and concluded that those customers are not profitable over the long-term at these cost levels and have walked away from some business. And that's primarily in Western Europe, primarily in France, Germany, Italy and England.

And I guess the third is what you have heard me say on a number of occasions is the European economies show little if any signs of growth, show tremendous kind of structural impediments to growth, show high social cost and, as Dave mentioned, part of our $33 million restructuring cost in the fourth quarter was to essentially close two plants in Western Europe. So I think, if I remember the numbers right, Germany reported another decline in GDP. It's just a tough market, not a lot of growth. I think the strength of the euro has hurt it even further. It's just a challenge to find volume and price opportunities that get to be where we need to be in our business. That's kind of a simple way of saying it.

Just one follow-on. You talked about volume and beef being up out of Latin America and Australia. Do you have just a sense proportionally of how much of the damage that offsets that we have seen in the U.S.?

This is a rough anecdotal number. I think Japan's beef consumption is down around 13 to 15% as a result of the mad cow, which would suggest that Australia and Latin America have picked up somewhere between half and three quarters of what's available. It used to be split 50-50. It used to be split 50% U.S., 50% Australia. So if you look at 50% of Australia already had, you have got 13 to 15% down. So if index, prior at 100, you are at 85 roughly, and that 35% that the Australia didn't have has kind of been divided between Australia and Latin America.

Are those sales out of those regions that you pick up, are they as profitable as U.S. sales or not?

They generally are as profitable. Now, as you heard Dave say, we're actually supplying some of that material out of the U.S. So as a result, we do have the transportation costs to get the product from the U.S. factory to our Latin American organization to sell to our Latin American and Australian customers. So there is a little more cost in doing it the way we are doing it now; but we're taking a cautious look at whether to expand capacity depending on how long the situation is going to last.

Stewart Scharf of Standard & Poor's Equity Group.

Most of my questions have been answered. What do you see for your Sarbanes-Oxley costs this year?

I think if you read our proxy, I'll let Dave handle it. It's in our audit fee table in our proxy. Dave.

I don't have the exact number in front me but I believe it was around $5 million. So our payments to our outside auditor more than doubled largely as a result of Sarbanes-Oxley. In fact, it looks like there is little over $5 million and it looks like it was probably more 125 to 140% year-over-year increase. So that was significant and that doesn't reflect the hours that people throughout all the functions in Sealed Air devoted to documenting our internal controls. But I think, Steve, if it improves the confidence investors have in the American corporate system; I think that is money well spent.

Could you quantify the change in resin costs to earnings per share? The prices rose by $0.01.

I don't think we've got that number. You may have heard me answer one of the earlier questions. I think in the first quarter we looked at a kind of a $40 million cost increase, only 10 of it sort of came through the gross profit. So you can make your own assumptions.

Operator, before we go around, I think we had some people coming around for the second time. Let me take a couple of questions off of the webcast.

I have already answered what's the outlook on resin costs? A question on the webcast is what are the latest products being introduced in protective? I think I said some of that in my opening comments. We have a variety of inflatable products coming in. We have got the new Fill-Air systems. We have got a new product called New Air, which is the next generation of inflatable bubble. We have got the Priority Pak, which is an automated system for small package packaging. We have continued further rollout of the continuous foam tubes and on the shrink film side, we have got the Shanklin Omni Wrapper; all of which are in one stage or another of being rolled out across the country, and at some point, around the world.

Have you or would you consider hedging activities to better contain resin costs? The answer -- we always consider it. We have never found it to work yet. The option premiums in those are pretty high. And the market has been pretty thin. I know the LME, the London Metal Exchange, is I guess beginning trading in May. We will watch that and see if it does provide a deeper, broader market opportunity. But I am also reluctant to hedge when you may be at or near a peak. The best time to hedge is when you're at a trough. So the answer is we have considered it, we do consider it, and we are particularly interested in how broad the trading market will be when the London Metal Exchange starts in May.

Next item, (indiscernible) someone has been in and out of the call. I wish you would have stayed on the whole time, but what was the large increase and other current liabilities? Dave.

Actually, I think the balance has come down from the beginning of the year.

Actually, I think it's been decreased in other current liabilities.

The balance is up year-over-year from March of 2004, about $40 million, but a good piece of that is the restructuring reserve that we set up in the fourth quarter.

It's actually come down, and as Dave mentioned, we've paid out about half of the severance payments, which came out of the other current liabilities. And I believe the other part of it is we make our annual contribution to our profit-sharing plan in the first quarter of the year. That comes out of other current liabilities from the end of the year. Okay?

Next item was protective packaging, price increases have been announced for several of your answers. Right, three quarters. 3% was realized in the quarter. I think Dave alluded to it in his comments. I don't have any hard evidence but anecdotally some analysis we've done suggest that price increase is about 7%; but what you have had, as Dave has said, customers in reaction to higher prices have kind of traded down. And so the mix change has been unfavorable because that number we report as price mix of 3% is really the net of the price increases plus the changes in mix. So you can suggest that really the price number is higher than 3 and I know on a couple of products that as much as 20% of the offering has kind of shifted to the alternative with less features and therefore less cost. So eyeball numbers -- about kind of seven offset by say three or so in unfavorable mix.

Last item on the Web site is -- are there pending or outstanding challenges at this time to the asbestos settlement? We are not aware of any outstanding or pending challenges to our asbestos settlement.

Okay. Operator, we can go back to the back to the call now.

George Staphos with Banc of America Securities.

I'll make it quick, obviously. It's late in the quarter where (ph) the call. You know, Bill, with all the macro data being mixed to negative, even to some degree with resin prices backing up that reflects, I think as somebody else said, volumes haven't been particularly strong. Is your optimism for the North American protective business more a function of the new products and your existing offering? Or really some of the signs you're now starting to see in the market overall exclusive of what ever you're doing from a marketing standpoint? And do you think, looking back we were talking about this a few weeks ago, do you think your protective business is more coincidence, leading, lagging, and has the changed? Thanks.

I think my optimism is as much maybe more so in terms of the things we are doing as opposed to overall trends in the economy, which I still think are okay. I mean, the orders for factory -- U.S. factories this morning that came out of Washington, showed a drop. But you know they said it was the third straight drop and yet we still had single digit mid-single digit growth in our protective business. And I think as I responded to Edings question, the inflatable offering is I think back on track and doing extremely well. I think some of the new things we are doing in protective are particularly exciting. I think the innovation gives us a chance to put a new price point in the marketplace; as opposed to taking an older product and trying to ratchet a price up. So I think my optimism is probably two-thirds us, one-third the economy, overall.

And will you lead, lag or be coincident, Bill?

I still think we're very close to a coincident indicator. Packaging is generally the end of any production process. Most of our customers will buy their raw materials, schedule their own factories, and then sometime in that cycle, they will bring in packaging materials. And when you are providing materials on an early as one to three day lead-time, it doesn't take long to turn it on or off. So I still think we're pretty coincident.

Good luck in the quarter.

Last call, last question here. One more.

Chris Cash (ph) of Black Diamond Research.

You have mentioned the trends in the equipment business on the Cryovac side. I'm just wondering if you could talk about equipment demand, trends, and protective packaging? How have the sales been? How is the quoting activity been and how do you see that dynamic looking forward?

It's been pretty flat on the protective side. But again, equipment is not as big a component of protective as it is of kind of the food side. I will say on the shrink equipment side, it has been pretty flat. On the inflatable side, the book looks pretty good. And on the foam and place (ph) side, I think it looks okay. That's probably a fair statement.

Do those equipment sales affect your mix at all to any degree?

Yes, to a degree but I don't think it's at the margin that the margin you know it's kind of noise level. I mean, equipment is 10% of the business. And although, generally, equipment has a lower margin than the consumable, being that it's only 10% overall of the company, the impact is kind of muted when you get to the consolidation.

Thank you all for participating in the call today. While we're being more cautious with our outlook for the remainder of the year, with respect to raw materials and the timing of recovering the U.S. beef market. I'm confident we're doing the right things to proactively position our business for the long-term. Our restructuring initiatives and our supply chain efforts are expected to deliver measurable savings for the Company as we move through the year. Our solid and consistent cash flow generation capabilities combined with cash and short-term investment balances in excess of $400 million, will enable us to consider repurchasing our common stock and further reducing our debt levels.

As always, I am optimistic and remain confident in our ability to develop new and innovative packaging solutions and deliver increasing value to our shareholders over the long-term. It is for these and many more reasons that I'm personally glad to be a Sealed Air shareholder. Thank you for listening today.

And that concludes today's teleconference. We thank you all for joining us.