希悅爾 (SEE) 2007 Q2 法說會逐字稿

Welcome to this Sealed Air conference call discussing Sealed Airs second quarter 2007 results. 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. (OPERATOR INSTRUCTIONS) Now at this time I would like to turn the call over to Miss Amanda Butler, Director of Investor Relations. Please go ahead, Ms. Butler.

Good morning. Before we begin our call today, I would like to remind you that statements made during this call stating management's outlook or predictions for the future are forward-looking statements. These statements are made solely on information that is now available to us. Our future performance may be different due to a number of factors. (inaudible) factors are listed in our most recent annual report on Form 10-Q -- 10-K, excuse me. We've also posted supplemental financial information and reconciliation of non-GAAP metrics that we expect to discuss on our website at www.Sealed Air.com in the investor information section under reports filed. Now I'll turn it over to Bill Hickey, our CEO. Bill?

Thank you, Amanda, and good morning to everyone. I'm Bill Hickey, President and CEO of Sealed Air. With me on the call today, in addition to Amanda, we have Dave Kelsey, our Chief Financial Officer. As an introduction, I will first provide a few highlights of our business for the second quarter and the first half of 2007. Dave will then review select details of our financial results. After Dave's remarks, we will take your questions. But before we get into the quarterly results, I would like to discuss our segment for growth strategies and bring you up to date on our expanded reporting structure, both of which are driven by sustainable long-term trends.

As you know, Sealed Air has a proud history of innovating and developing new technologies to meet changing customer needs, as needs expand we continue to look ahead to trends that can guide our growth in our core business and new business opportunities. The growth trends which we have focused on include increased standards of living in emerging economies and the resulting shift towards greater protein consumption, safety and hygiene, and Western retail formats. We see this trend driving and reinforcing our expanded international presence and global manufacturing strategy.

Secondly, the continued demand for dining convenience, whether by eating out or opting to dine in, using prepared meals in the heat and eat category. We see this trend driving continued technology and production advancements as meal times continue to evolve worldwide.

The third trend is increasing global trade, driven by global supply chain and the continuous movement of component and finished good through our diversity of markets around the world, all of which require enhanced and efficient packaging options to ensure the lowest total cost, lightest weight, and highest production speed.

Fourth, as demand for products that are considered environmentally responsible or that improve energy efficiency rise, opportunities exist to minimize the impact on the environment. Innovation drawing from renewable materials and the development of emerging technologies offers real opportunity and speaks to the developments and investments that we are making and have been making.

Lastly, people around the world are living longer and healthier, which is driven by enhancements in medicine and the focus on safety and hygiene in healthcare. These trends are helping to create opportunities for the continuous improvement of packaging and delivery of medical applications worldwide. For each of these trends Sealed Air offers a solution and will continue to build toward the future by developing new products and services and by expanding our global footprint in each of our businesses.

Earlier this month, we announced the expansion of our reportable segment to three segments and an other category. We believe the new structure will better reflect our growth strategies and the way we manage our business and make operating decisions. Additionally, the new format provides greater insight into our business for our shareholders and the investment community.

The three new segments include food packaging, which is largely focused on industrial food packaging solutions, and now represents 40% of our sales. The food solutions segment, for consumer and foodservice packaging solutions, represents 21% of our sale and a new protective packaging segment for cushioning and (inaudible) fill systems that represent 32% of our net sales. The remainder of our business will be reported as part of an other category. This includes special materials for non-packaging applications, our medical application solution and packaging products source from renewable materials. Today, the business in the other category represents 7% of our net sales.

Before I go into some more detail on the quarter, as I looked through the results myself, I saw evidence of clear good news, which I wanted to share with you. First, you see the new organization, which is focused on segments that address clear trends in the global economy. I'm particularly pleased our international growth was 11% for the quarter. We improved our gross profit excluding GMS manufacturing cost strategy by 20 basis points in the slower U.S. industrial economy and higher input costs.

We introduced two new products in the second quarter. Our nature tray material made from renewable resources and our PackTiger system for protective packaging.

Our food packaging sales were unit volume was up 3.1% in a quarter when beef and poultry production were both down. We improved our operating margin in protective packaging by 30 basis points, despite higher input resin costs. We decreased the number of shares outstanding by 1.3 million shares since the second quarter of 2006.

We piloted our first aseptic vertical pouch machine during the quarter, which presents opportunities for shelf stable products in the future. Our global manufacturing strategy is moving forward with our plant in China scheduled to be onstream by the end of this year and our plant in Mexico scaling up to benchmark productivity standards. Our food solutions business introduced a new patented case-ready format in Europe.

So as I wrap this together, my key message for the quarter is we're managing to maintain a balance of improving current sales and profitability and investing in initiatives for the future. On that note, our second quarter sales did increase to $1.15 billion. Our growth represents 6% over the prior year, or 2% if we exclude the favorable impact of foreign currency translation. While our North American sales reflected slower economic growth in the region, as I mentioned earlier, our international sales increased by 11%. We achieved 31% sales growth in the brick economies in the second quarter, with Brazil and China each growing at greater than 30%.

Our improved sales performance was driven by favorable foreign exchange led by strong double-digit growth in Latin America and Asia. Year to date our consolidated sales increased 7%, or 3% if you exclude the impact of foreign currency translation to a record $2.2 billion. Our sales growth in developing markets continues to reinforce the strategic value of our global manufacturing strategy. We continue to invest in broadening our capabilities and technologies and enhancing our leadership growth, leadership in key growth markets. Our strong performance in this quarter outside of the United States now representing 54% of our revenue versus 45% five years ago reaffirms that we are on the right course to capitalize on expansion in new geographies and new markets.

The goals of our multiyear global manufacturing strategy remain essentially on track, although we have adjusted our previously estimated annual 2007 charges from $30 million to $15 million due to shifts in the timing of certain of our projects. It is important to note, however, that we continue to expect to achieve our estimated annual savings guidance of 55 to $65 million with full amounts expected to be realized starting in 2009.

For the second quarter we reported 29% growth in diluted earnings per share to $0.40 a share, excluding the charges associated with the implementation of our global manufacturing strategy, our diluted earnings per share would have been $0.41 a 17% increase over the second quarter 2006. Diluted earnings per common share of $0.35. Looking at our full year 2007 diluted earnings per common share, we are reaffirming our guidance of $1.65 to $1.75 after adjusting for a 2 for 1 stock split that became effective in March, and excluding previously disclosed items in the first quarter and the charges expected to be incurred with our global manufacturing strategies.

Taking a closer look at our performance by area, our revised food packaging segment net sales increased 8% during the second quarter, or 4% excluding the favorable effect of foreign currency translation. Year to date, segment sales increased 7%, or 5% excluding currency. Food packaging's quarterly strong performance was largely due to double-digit growth in Latin America, led by the continued strength of Brazil's domestic and export meat markets, as well as favorable product price mix in North America and Europe.

During the second quarter, our food packaging business launched their first foam PLA tray and nature tray made from renewable corn-based resin that delivers all of the benefits of traditional polystyrene foam trays, but is compostable in any industrial compost facility. This development is in line with our focus on creating performance solutions that have a positive impact on the world, as well as helping our customers achieve their own environmental objectives. Our food solution segment net sales increased 11%, both during the second quarter and year to date, or 6% excluding foreign currency translation in each period. Overall, quarterly growth was driven by strong unit volume in Asia-Pacific and favorable product price mix in North America. Both our case-ready business, which grew at 12% plus for the quarter and our vertical pouch business which grew at 10% plus for the quarter continued to show growth at double-digit rates.

In the second quarter we also launched our case-ready line in China to capitalize on the growing local demand for packaged food, convenience shopping in Western-style supermarkets and increasing concern about food safety. We continued to increase our focus on vertical pouch packaging systems, including, as I indicated a few moments ago, our recent introduction of our aseptic vertical pouch system.

Our revised protective packaging segment sales increased 2% during the quarter, reflecting modest growth in the North American economy. I use a benchmark there, the indicator of corrugated box shipments, which are really down 2% year-over-year, we're up 2 in April, we're down 1.7% in May, and we're down almost 1% in June. And I look at that as a good corollary for our industrial packaging business. We did experience sustained demand for our inflatable products in North America and saw a favorable price mix in Europe.

Additionally, as I mentioned previously, we did launch our PackTiger, which is really a superb paper cushioning system for customers who prefer a paper-based packaging alternative. Excluding the effect of a smaller product line that was sold during the quarter and the favorable impact of a foreign exchange translation, we achieved 1% sales growth in the quarter. Our other categories net sales increased 1% during the quarter, largely due to growth in unit volume in Europe and Asia. Excluding the favorable effect of foreign currency translation, and a year-over-year decline in reported sales through the integration of acquired business, net sales increased 3% for the quarter. Year to date, sales on our other category increased 13%, with both specialty materials and medical applications growing at double-digit rates in the period. Excluding the favorable effect of foreign currency translation, other category -- the other category increased 8% during the quarter, reflecting our focus on two new expanding opportunities in non-packaging applications, and healthcare applications.

Now I'm going to turn the call over to Dave Kelsey to review some additional details of our financial performance. Dave?

Thank you, Bill. As Bill mentioned, our sales were a record $1.145 billion for the quarter. Slightly more than 85% of our $64 million of revenue growth, or $55 million, came from our international operations. Volume grew internationally $22 million, or 4%, and favorable foreign currency translation contributed $39 million. For the quarter, approximately 54% of our revenue came from outside the United States.

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 components of the change in net sales by business segment, and by geography and the impact of foreign currency translation on sales by geographic region.

Moving through our statement of operations, the Company's gross profit was $323 million for the second quarter compared with $307 million in the second quarter of 2006. All three of our segments contributed to the year-over-year increase of $16 million, or 5%. Resin costs for the quarter were essentially flat compared to the prior year. Costs associated with implementing our global manufacturing strategy were $3.3 million in the quarter. Gross profit margin was 28.2%, or 28.5% excluding our global manufacturing strategy costs, compared with 28.4% in the second quarter of 2006.

Sequentially, the decline in our gross profit margin to 28.2% from 28.7% is wholly attributable to higher costs for resins in the second quarter compared to the first quarter. For the total year, we continue to expect 2007 average resin prices to be equivalent to 2006 average resin prices. Marketing, administrative, and development expenses were $189 million compared to $176 million in the second quarter of 2006. As a percent of revenue, these overhead expenses were 16.5% compared with 16.3% in the second quarter of 2006. Foreign currency translation contributed $6 million to the $13 million year-over-year increase, but had no impact on these expenses when calculated as a percent of revenue.

Also in the quarter, spending related to specific initiatives to introduce new packaging solutions, like the ones Bill has just described, and to introduce a new North American customer service center cost approximately $2.7 million. Lastly, we increased our provision for bad debt by $2.4 million to reflect our collection experience with several European customers. Operating profit was $134 million. Operating profit as a percent of sales was 11.7% compared to 11% in the second quarter of 2006. As noted in our earnings press release, after excluding charges attributable to restructuring and our global manufacturing strategy, operating profit margin would have been essentially flat at 12% this year compared to 12.1% in the second quarter last year. In keeping with our change in segment reporting, we now disclose operating profit for each of our three segments, as well as for the "other" category. Please refer to our recently filed 8-K for a detailed description of our revised segment reporting structure.

Our revised food packaging segment contributed $54 million of operating profit, an increase of $6 million, or 11% from the prior year. The food packaging segment operating profit margin was 11.6%, up compared to 11.2% in the comparable period last year. Our revised protective packaging segment contributed $50 million, an increase of $2 million, or 5% compared to the second quarter of 2006. As a percent of sales, protective packaging operating profit was 13.5%. The combination of improved price and product mix contributed to our improved margin and protective packaging.

Both the food solutions segment and the other category reported year-over-year declines in operating profits. Food solutions operating profit was 9.2%, down compared to 11.2% in the comparable period last year. The "other" category, which includes specialty materials, medical applications, and our investments in NanoPore and Biosphere reported a year-over-year decline of $2 million of operating profit. Interest expense was $35 million compared to $39 million in 2006.

Other income for the quarter was $8.5 million, an increase of 3.4 million compared to last year. Before the end of the quarter, the Company closed out interest rate hedges, entered into earlier in the quarter and recognized a gain of $3.7 million. Interest income in the quarter was $5.1 million compared to $4.9 million in last year's second quarter.

Income tax expense for the quarter was $34 million. Our guidance for the total year income tax rate remains at 31.5%. As the reconciliation table in our earnings press release states, this rate excludes the impact of the reversal of tax accruals and related interest in the gain on the sale of an equity method investment, both of which occurred in the first quarter.

Diluted earnings per common share were $0.40 for the quarter compared to $0.31 in the prior year. As stated in our earnings press release, this diluted EPS for the quarter includes $0.01 per share related to costs this quarter for our global manufacturing strategy, which has been recorded in cost of sales. Our global manufacturing strategy charges were $0.04 in the second quarter of 2006 and these charges were recorded as restructuring charges. Factors impacting our six months year to date earnings per share include the gain on sale of PolyMask of $0.11 per share and the reversal of tax accruals and related interest of $0.18 per share and global manufacturing charges of $0.02 per share for the six months year to date 2007.

I'll conclude with some key cash flow and balance sheet items. Our combined balance of cash and short-term investments at June 30, was $419 million, down $37 million for the quarter. Some noteworthy sources and uses of cash during the quarter were capital expenditures of $58 million, a dividend payment of $16.2 million, and the repurchase of 140,000 shares of common stock for $4.5 million. Our quarter end accounts receivables totaled $748 million, up $44 million from March 31. Compared to June of last year, receivables investment increased $75 million, or 11%, while our quarter over quarter sales increased $64 million. Receivables balances in North America were down slightly year-over-year, while customer receivables balances in Latin America and Asia-Pacific were up double digits, reflecting our growth in these regions. Also representative of our international business, VAT receivables were up $16 million year-over-year. Lastly, foreign currency translation contributed $34 million, or 5% to the year-over-year increase in receivables.

Inventory investment at June 30, was $573 million, up $27 million during the quarter, reflecting $7 million related to foreign exchange, and higher balances to support growth in emerging markets. Compared to June 30, of last year, inventory investment was up $132 million, or 30%, reflecting the $40 million related to the SAB 108 adjustment we made at year end 2006.

Inventories in the U.S. were up only $10 million year-over-year. The increased investment in inventories outside the U.S. was attributable to $35 million of foreign currency translation and to higher balances to support our sales growth internationally. Total borrowings at the end of June were $1.866 billion, up $17 million during the quarter. The outstanding balance of $300 million related to a debt issue that matures in April of 2008 has been moved into current liabilities during the second quarter. Capital expenditures were $58 million for the quarter. Of this spending, $15 million was incurred on projects undertaken as part of our global manufacturing strategy.

Looking ahead, our guidance for 2007 capital spending is expected to be at the upper end of our guidance of $175 million to $200 million. The projected range is expected to cover our investment in 2007 related to the first phase of our global manufacturing strategy.

In finishing my comments on our financial performance, I would like to summarize the status of our global manufacturing strategy. As Bill mentioned, we are well under way with new facilities in China and Mexico. The $15 million invested in the second quarter brings our year to date investment to $27 million. We continue to expect our 2007 investment to total approximately $80 million, primarily related to these new facilities in China and Latin America. In 2006, the first year of this multiyear program, we invested $14 million, thus additional investment in 2008 of $36 million to [$56] million will bring capital investment to the first phase of our global manufacturing strategy to our expected range of $130 million to $150 million.

We have also estimated that other costs associated with expanding our global manufacturing base in establishing centers of excellence, will total $90 million to $100 million and will be charged to our P&L over the period from 2006 to 2008. Last year, we incurred expenses of $16 million and this year, we expect to spend an additional $15 million, down from our earlier estimate of $30 million. This change to our 2007 estimate represents revised timing, as we still expect total costs to be $90 million to $100 million. On the completion of this first phase, we continue to project our savings in 2009 will range between $55 million and $65 million. Now I would like to turn the call back to Bill and to your questions.

Thank you, Dave. Operator, we would now like to open up the call to any questions from the participants.

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to George Staphos with Banc of America Securities.

Hi. This is Michael Pak for George Staphos. Good morning.

Good morning, Michael.

Good morning, Michael.

Just in looking at the, in the balance sheet and your comments for cash flow, it seemed like cash generation was a little bit below normal. Were there any other special outlays that we needed to consider or can you just comment, if working capital was a use or not?

I think if you look at the exhibit in our press release, we do show a fairly sizable year-over-year growth in EBITDA, so in terms of the cash, using that as a proxy for cash generated from operations, I think that was in line with our recent performance. You do point out correctly that our accounts receivable and inventory balances were up in the quarter, both sequentially and compared to last year. As I just mentioned in my comments, those increases were primarily outside the U.S., and primarily related to the growth that we're seeing, the double-digit growth that we're seeing in Latin America, Eastern Europe, and Asia. And I also commented that VAT has gone up $15 million as part of that receivables growth. So I think it's -- the growth in accounts receivable inventory has had an impact on our net cash flow, if you will.

And, Dave, just real quick, the 25% effective tax rate is including the accruals and other special items, right?

Yes, so I think there is a table attached to the earnings press release that shows the impact of those two items, or events that occurred in the first quarter, one being the sale of our equity method investment and the second being a reversal of tax accruals. When you factor in those, we have a 25% effective tax rate. If you leave those out of the calculation and just look at the tax we're paying on our earnings from our ongoing business, we still expect that number to be approximately 31.5%.

Okay. So that's what you're guiding for for the full year?

Yes, back in January, our guidance was 31.5 and we're sticking by it.

Okay, great. Thanks, guys.

We'll go next to Ghansham Panjabi.

Hey, guys. Good morning.

Good morning.

You mentioned in your press release that Latin America and Asia were very strong. I think you said that on the first quarter, too. Could you comment on what you're seeing in Europe across your various businesses?

Europe numbers, Ghansham, if I can -- usually there's a page on our website that sort of does our geography and our geography in terms of Europe, if you go to that page, Europe was actually ex currency, essentially flat.

Yes, I was hoping by business.

Yes, I don't -- I don't have it by business, but essentially flat and I would say that was -- I would say probably food solutions was probably up and the others were essentially flat, protective may have been slightly down, but of the business units the one I know that was actually up in Europe was food solutions.

Okay, and did you see any meaningful change between 1Q and 2Q in protective in Europe?

No. Well, no, no, I -- let me just say no, but I, I don't have the first quarter numbers here, but we can check if it was different and get back to you then.

Okay, yes, thank you very much.

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

Thanks very much. And Bill, I was hoping you could comment on the food packaging business and just wanted to kind of make sure I understand what's going on. Positive volumes, no profit growth. Can you square that circle for us, please?

Food, food solutions -- you're talking food solutions or food packaging?

Food packaging.

Food packaging. Food packaging, well, it did have modest profit growth at about 8% profit growth. I'm looking at 53.5--.

You know what? I apologize. I was -- I did mean food solutions. I apologize.

Food solutions. Food solutions, it's a new business and it's intended to go in places where we haven't been before. It's ready meals, it's foodservice, and it's a vertical pouch, and we really invested a fair amount. In fact, you really set the stage, Edings for me to explain in terms of our segments. The two businesses that we're investing for the future are the food solutions business, where we really have a relatively small footprint in foodservice and ready meals and aseptic, we haven't had an offering in that space at all, and the other is the other category, which is three -- there were three businesses.

One is specialty materials, which is a non-packaging applications for our technology, where we've invested about $1 million in expense. We also have our medical business. Where we're continuing to see good growth and looking for investment opportunities there. And the third is the new recent acquisitions in the last year, Biosphere and NanoPore both of which are late stage start-ups as I've indicated earlier. So their expenses have flowed into 2007 numbers, but we really haven't gone to market with the products yet. So you see food solutions and other being two of the parts of our business where we're making investments both in expense dollars and in people to grow those businesses, and that's how you get those numbers.

And how do you -- how should we think about, given the fairly new segment, of all the segments are new, how should we think about the timing of when you make those investments, particularly these sort of, if you will income statement investments, those sort of people and processes that are in place? And when you expect those to be accretive to earnings? I mean is that a three-month, six-month, is that a year?

My sort of guidance to you would be food solutions, we're probably looking at a couple of quarters, because that's an up and running business. We've invested in the people and the infrastructure and we've got a steady stream of products going to market.

The -- some of the others, the NanoPore and the Biosphere, both of those, they have a relatively low burn rate, but you're talking [$600,000 ] to, $1 million on a quarterly basis in total for those investments, that probably are longer term, as we mentioned when we announced the Biosphere investment late last year, we plan to have product in the marketplace by the fourth quarter of 2007. We are still on track to have a product in the marketplace by fourth quarter of 2007, but volumes this year will be relatively small. That, and NanoPore, which we are in the market on a very small scale today, both of which are very interesting technologies. I think present very good opportunities, one in sustainable packaging and the other in insulation and specialty materials, and those are probably a year or more out. But I thought one of the ways by doing the segments the way we've done it, you can actually see how we're managing the businesses that we're investing in for the future versus how we're managing our core business for current profitability and performance.

Yes.

Hope that gets you there, Edings.

There will be many more.

Okay.

We'll go next to Tyler Langton with JPMorgan. Mr. Langton, your line is open. We'll move on to Ross Gilardi with Merrill Lynch.

Good morning, thanks a lot.

Good morning.

I was just curious, you guys went through a lot of numbers on your global manufacturing strategy. It sounded kind -- it sounded like you're on track, but I was confused by, you're cutting back your expense expectations for this year a little bit by about, looks like by about $15 million. Are you on track with everything, or is anything proceeding more slowly than you had originally anticipated?

Dave had all the numbers, so let me let him respond.

No, I, I -- if you were listening in a year ago when we were first introducing this, we did explain that the timing, particularly on the expenses, was going to be subject to change. It's a sequential process with a lot of linkages between when new capacity comes online, which allows us then to implement some of the improvements to our existing capacity. So it's simply a question of some expenses that we thought were going to be incurred before year end, now looking more likely that they will slip into 2008. So the underlying strategy is very much intact and we're still confident that the $55 million to $65 million of savings that we would expect to achieve in 2009 is achievable.

Okay, but just given what you just said, explaining that, thanks for that. Is it taking you longer to bring on some of this new capacity and therefore the expenses aren't ramping up as anticipated?

Yes, let me just put a little color on Dave's comment. I mean one of the principle reasons for pushing some of the costs out to next year is it took a lot longer to close one of the real estate transactions that we needed to do to get the new capacity up. It's a rather complicated real estate transaction that took several months longer and that's probably enough to push it into 2008.

Okay. Thanks a lot for clarifying that.

We'll go next to Claudia Shank with JPMorgan.

Hi, thanks very much. I just had a question really on sort of regional pricing trends. It seems that pricing's doing better in the U.S. than internationally with price mix up 2.3% in the second quarter, but that's down 4.4% internationally. I was just wondering, is the international shift more a reflection of mix, or is it sort of competitive pressure? What's driving the difference there?

I have to say it's more a question of product mix around the, around the world. The product mix does change by different parts of the world and we can do some homework on it, but looking at the list that I have here, it's pretty much a product mix effect, as you go around the geography.

Okay, thanks.

We'll go next to Mark Wilde with Deutsche Bank.

Good morning, Bill, good morning, Dave.

Good morning.

I wonder, just taking a step back in the protective packaging business, as you mentioned, we've all kind of watched box shipments very weak and you said that correlates with your business. I'm just curious though, the ISM numbers for manufacturing have been quite strong over the last three months. The industrial production numbers out of the Fed have been pretty strong. Any thoughts on why the disconnect?

Yes, well, let me just make a couple of comments, because I, when I looked at the box numbers, I sort of said that wasn't the only thing. Actually, if you look at some of the more macro numbers, kind of UPS reported essentially flat volume, flat ground volume kind of, FedEx reported couple of percent up. Some of that was probably share gain, so that -- and the numbers I have for durable sales were really 1.5% increase in June and actually down 2.4 in May. So I don't get how that jives either, Mark. All the numbers I look at, whether it's the shipments by FedEx and UPS, whether it's durable sales numbers or whether it's the box shipments, they were all down in that low single digits. So if there's a disconnect, I tend to agree with you, but I don't know why.

Okay, thanks, Bill.

And we'll take a follow-up from George Staphos with Banc of America Securities.

Hi, everyone. Good morning.

Hi, George.

Doing conference call ping-pong again today. You might have covered this already, so I apologize in advance. But a couple of monitor types of questions, how are machinery sales in the quarter? What are you seeing here in the third quarter? How were sales of pizza films kind of the same question, what are you seeing in the third quarter?

Let me go through the first one. Machinery sales, there were actually, I believe, up in the quarter. They were up in the quarter. They were actually more up, they were up in the second quarter. They were not up in the first quarter.

Right.

So that looks okay. I got no indications on the pizza film in terms of any change in -- any change in trends.

Okay.

But food price inflation seems to be taking its bite out of the foodservice side of the industry and putting more back at home, so that's one of the benefits we can look at between having food solutions and food packaging. You can kind of separate the at-home and away from home, so to speak.

Sure. And machinery sales in the third quarter, Bill, and any comment at all, if you haven't already discussed, what your run rate on volumes looks like and the more economically sensitive areas, protective obviously.

Yes, well, we as we say, when I -- actually I was hoping one of your colleagues would remind me of a comment I made on the first quarter call, is that our first quarter was pretty good. Our second quarter was a little bit, a little bit slower, which we anticipated. We sort of told everyone that on our April call, and then we expected the second half to kind of ease back up and I don't have anything obviously to change that at this point in time. Again, I don't have a crystal ball as to whether subprime market overflows or whether there's a hurricane issue this fall, but on kind of a steady state, we're looking at kind of balancing the second half with the first half.

Okay. Fair enough, Bill. Two last questions, can you give us some sense on how the film and plates business has been doing for you over the last two or three quarters year on year?

It's up slightly. I don't have the numbers here. I looked at it actually this morning. It's probably low single digits in terms of overall, probably, probably just about flat, say, for the second quarter.

Okay. And has that business grown, Bill, do you think over the last two, three, four years?

That business has grown, but it's growth has been in the single digits probably for the last two years, yes.

Okay. So maybe a little bit lower than you would have liked?

Yes, and one of the challenges with that business is it uses the different raw material stream, which relies on benzene and benzene has been pretty volatile in the last two years.

Sure. Last question, Bill and I'll turn it over. I know Mike had asked you one swag on this question. The cash flow, as we add up all the sources that you had in the quarter, including taking a little bit of additional debt, it was around $55 million. The cash declined about $36 million sequentially, it was a pretty big swing. I know you said working capital was up, but were there any other big cash items in the quarter either related to GMS? Well, it sounds like that wouldn't have been the case in answering, I guess Ross' question. Are there any other items on the cash side that would have taken the cash flow down that we might not have missed -- might not have seen in the financials that you presented ?

No, I think cash is coming in well. Dave wanted to add a little more color too it, I'm not sure of the math. You might want to check the math offline, but in terms of -- in terms of operating, our EBITDA's 187 million for the quarter, so that runs about a 700 million, 720 million rate, which is pretty consistent with where we were expected to be for the year. Capital was 58 million. I'm sure if you had that number, a fair amount of which was was DMS. Dave talked about working capital. You got currency. Maybe one of the rubs is a lot of the cash is in U.S. dollars and the receivables and inventory are in kind of euros and other. I don't know whether that effects the math. Dave, do you want to answer that?

Well, it certainly affects the year-over-year balance increases, so when you look at the cash that we've used in building our investments in working capital and inventory, those combined are about $70 million of cash absorption on a dollar basis in the second quarter.

So some of that was currency?

Yes, yes.

Is that where your number comes in, George, 70 million?

Yes.

Okay.

That's helpful.

Yes.

All right, guys. Thank you. Good luck in the quarter.

Okay.

Thanks.

Next question?

You have a follow-up from Edings Thibault with Morgan Stanley.

Told you I would be back. Yes, I was just hoping, as you talked about some of the -- you were talking a little bit about the outlook for the second half in terms of your overall business. I was hoping, again, given sort of the new disclosure you might talk about seasonal patterns, if any. I assume that the protective packaging segments would still largely follow the historical protective packaging segments is that accurate? And is there anything else in terms of seasonality that we should keep an eye out for in either other, solutions?

Let me talk a minute about food because I should have covered it on the last question, I was more focused on protective. On food, actually we should see a little better numbers out of food packaging in terms of where the, where our customers are. As I mentioned in the sort of opening comments, both beef and poultry production were down in the second quarter, but we expect both of those should be up in the second half. So we should see positive kind of tail winds on the food packaging side from both the beef and the poultry industry for the second half of the year.

For protective, actually we're doing very well with our introduction on PackTiger and we expect to have several hundred of those installed by the end of the year. So that could give you a modest uptrend from protective's first half performance. Food solutions continues to grow on the basis of case-ready and vertical pouch, and I don't see any particular seasonal patterns on that, and both the other businesses, the three components and other, especially materials, medical or Biosphere should not have any seasonal patterns, other than my earlier comment is we hope to introduce a Biosphere product to the marketplace by the fourth quarter, but I wouldn't expect it to be much of an impact in the fourth quarter.

Okay.

That's a little color on the mix.

Yes, I appreciate that. And I was hoping I could ask Dave to follow-up on the SG&A. I mean it did tick up a little bit as a percentage of sales, and it sounds as if that's one of the areas of investment of the Company. Would you expect SG&A to run in that 16% range, or -- or let me just leave it at that.

Dave?

I think our guidance still is at 16% for the year, despite the investment that we've talked about in some of these new product introductions.

Got it. Thank you.

You're welcome.

We'll go next to Bruce Babcock with Saber Capital.

Yes, thank you. A question on your savings number that you're using from 2009. I'm wondering what the implication is. Assuming decent economies and the Company grows in '08 and grows again in '09, are we talking about because of that savings a really noticeable bump in earnings from the traditional, more traditional growth rate?

I'm not sure how to -- what characterizes a bump in earnings. We're not going to go from no savings from these investments in 2008 to the 55 million to 65 million in 2009.

The savings start in '08.

Yes, we actually have some benefits from those programs already this year, but that's been factored into the guidance that we've given for the year. And we're focusing instead on, in terms of this as a multiyear program, what the annualized savings will be at the end of the program. But there won't -- no, there won't be a $55 million to $65 million immediate increase in our operating profits.

So then it's more smooth, but is it still reasonable to think over the two or three-year period from, say, '07 through '09 that, again, assuming decent economies that you get some acceleration because of these savings?

I think that's, that's reasonable to think that these will, investments are intended to be accretive to our results. One of the things we have talked about on our international business is that we are still fairly reliant on supporting growth in Asia and Latin America and Eastern Europe by exporting from our existing facilities in the U.S. and Western Europe. That results in additional transportation costs, warehousing costs, import duties and the like. So the -- as we start increasing production in the regions where we're seeing double-digit sales growth, that will have a beneficial impact on our margins in those countries.

Okay, and one last point, you said China and Mexico. Have you announced other places where you're doing these expansions?

We're doing three projects. We have a project under way in Eastern Europe as well.

Okay. Thanks a lot.

Okay. Operator, I'm going to take one question from the Internet. The question on the Internet is can you remind us of -- can you remind us FX has an impact on the results of the EBIT or the net income, or only the sales line? The way foreign exchange works is it effects all lines of the P&L. Some of what you see in sales are positive. When you get the costs, they are negative. So at the end of the day, to the extent that the net income number is positive, it is positively impacted by foreign exchange. Okay. Operator, do you want to take the next question from the phone?

Sure. We'll go next to Ross Gilardi with Merrill Lynch.

Hey, thanks. Bill, I was just wondering if you could elaborate on your brief comments related to the impact of the food inflation. And then just more broadly, what, if anything, does it mean for your developing market businesses, which of course have been your biggest source of growth over the next several years?

That's a good, yes, that's a very good question, Ross. I was actually in China about three and a half weeks ago, and food inflation in China is running about 40%. That's particularly, pork is up about 40%, which clearly has the concern of the authorities there. And it was interesting. The group I was with, were talking about what is that going to, impact is that going to have.

Couple of things, is one, interestingly enough, it's made the meat much more valuable, so there is a concern that every bit of it be used and be sold and be maintained, and actually one of our customers said, gee, I'll have to pay more attention to packaging it, because now I'm packaging something worth X plus Y instead of X. So I think that's generally positive. The other part is people will trade down to lower cost, lower quality cuts and that's kind of the margin -- that's neutral and to the extent that maybe people may eat more at home, eat less out, which I think a comment I made a little earlier, is that will, again, benefit our business on the food packaging side, where we have a much bigger footprint on eat at home versus food solutions, where our footprint there is still relatively small. So on balance, food inflation is probably kind of neutral to slightly positive.

All right, great. That's interesting. Thank you.

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

Yes, good morning, just one or two quick questions. On the nature tray, on that new product line that you've launched--?

Yes, I'm glad you're asking, John. I was waiting for somebody to ask it.

One of the things I'm curious about, is what's the cost of one of those trays, versus a regular, I guess Styrofoam tray, and is cost going to be an issue that helps to drive people to this, or is it really the environmentally friendly side of it?

It does have a premium cost and it does have a premium price, John. That's clear, and there are those segments of the population who are willing to incur that higher cost for what they believe are environmental reasons and waste stream issues and CO2 emissions. So it is -- do we hope someday to get it more economical? Yes. Do we see it being competitively priced to styrene in the short-term? Probably no. But is there a market segment that's willing to step up? The answer seems to be clearly yes.

And if over time this actually gets a decent adoption rate, which I would imagine over time it will, should we assume that this will actually start to firm up the margins in your food packaging business, just because if I remember correctly, your case-ready business, the margins are a little bit light because you're essentially buying trays and you're passing through that cost, whereas these would actually be produced by you.

Yes, that's a good, a good observation, John. I was actually waiting for someone to ask that question also. If you look at, look at the effects of our sort of outsource trays, that's had about 100-basis point impact on our margin in the quarter, where as if we make a proprietary kind of sustainable tray that we manufacture in-house, that should be positive to margins.

Is there any other, is there -- is this kind of your foray into trays, but we may actually see further tray development from you, also, so that this is just one step and it tends to be the environmentally friendly one that you may push for other different types of tray applications as well so that that 100-basis point margin, we can actually start to plan on it coming back?

Well, the other part, John, one of the -- one of the opportunities in the Biosphere acquisition, which is to use the Biosphere technology, which is another starch technology, but not made from corn, as also an entry into a sustainable tray. So we've got a couple of areas going on in trays, most of which are still in the development or early introduction stage and to the extent we go into it, it will be to the extent we have a proprietary product with very good margins.

Okay, great. And then on a different topic on the medical side, I know there had been a lot of hope of getting some of the medical bag material really to kind of explode in China as opposed to using glass holders for resins, or excuse me, for solutions, that type of thing. Can you give us an update as to where that progression may be at this point?

That progression has actually gone quite well, John. In terms of China, we are growing -- I would say triple digits over last year. So it's been, it's been very well accepted. You do it on a provincial basis and you continually deal with the authorities, the Chinese equivalent of the FDA, but the business has done quite well in the last year.

Okay, great. Thanks for the update.

We'll go next to Mark Wilde with Deutsche Bank.

Yes, Bill, I would like to just come back to the impact of FX for a couple of minutes. I seem to recall last quarter or the quarter before you mentioned that it was having an effect on in Brazil the strength of the reality we're seeing kind of more packaging materials imported into Brazil and you were having to compete against them. If you use that as a backdrop, can you just talk about sort of other places where you might be seeing an impact from foreign exchange moves on your business or on your customers?

I guess the only -- the other place in the world where you might see a little bit of an impact, and it's been relatively modest, we didn't go through the geography terms of growth, but Australia and New Zealand, both of whom are net exporters of protein. New Zealand is a very large exporter of lamb and Australia has been an exporter of beef and to a lesser degree, lamb. Growth in those markets has slowed down a little bit. I think the growth in the quarter was kind of mid-single digit in both Australia and New Zealand. That includes currency. Because of the strength of the Australian dollar and the New Zealand dollar, that their protein has lost some of its competitive pricing advantage. In other words, it costs a lot more to buy a New Zealand sheep than it did a year ago. So that has had an effect in that part of the world, but that's the one that comes to mind.

Okay, thanks.

We'll go next to George Staphos with Banc of America Securities.

Hey, Bill. Two last quick ones. I know it's late in the call. First of all, as far as food inflation goes, what are your people in the market telling you in terms of consumption of poultry versus beef the rest of the year? And in an environment where we have more inflation in general, might we see, as you suggested, a shift more to poultry, how does that effect your margins? The second question, my guess is it would be maybe more of a negative. Second thing is, one of the other companies out there has talked about having a new case-ready entry. Have you seen much of anything in the market from them thus far and/or for that matter the expectations from your customers for 2008? Thanks again.

Yes, I haven't seen any, any other, any other offers. I've heard about it, but I have yet to see it. In terms of your first question about the beef and poultry. As I said earlier, I don't know if you were on the call, or you were kind of switching between calls, but beef and poultry were both down in the second quarter. They were both down about 2% in beef and about 0.3% in poultry. But both are looking essentially to have better second halves. Second half beef should be up 1.5 to 2%, resulting in a year-over-year flat, but a little down in the first half, up in the second half. So I look at that as a little bit of a tail wind.

Poultry should actually be higher year-over-year and be up, be up about 0.4% year-over-year. Pork is actually doing well. Pork's actually up between 2 and 4%, and real growth, and actually it's because of real soft result last year in Turkey, which is going to be up about 6% this year. And the expectation is, and I haven't seen it yet, but the expectation is the U.S. beef exports will actually be up double digits for the year, although I can't point to any particular actual experience of it yet.

Okay. So it sounds like mix certainly shouldn't change all that much from, from those trends, maybe even a little bit of a pick-up given export.

Yes, mix should be better in the second half.

Okay. Thanks again, guys.

I've got another question on the Internet, if I could take that just to be sure I give everyone a chance. One, the question is any thoughts on the outstanding convertible bond issue? We do, we think about it a lot. It's pretty inexpensive money right now. I think the coupon day's about 3% and the conversion price is 35, and it is callable at any time, so we continue to watch it and have not made any decision yet, but to answer your question, we are thinking about it.

Okay. I think that, operator, wraps up our questions. And I would just like to thank everyone for participating in the call. We really do have confidence as we look ahead to the future. Our increased sales, earnings and cash flow all support our commitment to growth and we continue to invest in our business to deliver value to our shareholders both today and in the future. As we progress our growth strategies and our core business and new business opportunities and continue our investments in both our multiyear global manufacturing strategy and operational efficiency initiatives, we look to continue to drive future growth and enhance our global leadership. Our strong growth in developing markets and investments in new geographies, new products, and new technology should be good indicators of future opportunities we will have in new solutions that address sustainable long-term global trends. I am confident we have the right strategy and the right people in place to successfully execute our plans and deliver enhanced profitability in growth, sales, earnings, and cash flow for many years to come. It is for this and many more reasons that I am particularly glad and proud to be a Sealed Air shareholder. Thanks for taking the time to spend with us this morning.

And that does conclude today's conference. We would like to thank everyone for your participation, and you may disconnect at this time.