希悅爾 (SEE) 2008 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Sealed Air conference call discussing the Company's first quarter '08 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. After management's prepared comments, they will be taking questions. (OPERATOR INSTRUCTIONS) Now at this time I would like to turn the call over to Ms. Amanda Butler Director of invest or Investor Relations. Please go ahead, Ms. Butler.

Thank you, and good morning, everyone. Before we begin our call today I would like to remind you statements made during this call stating management's outlook and 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. Many of these factors are listed in our most recent annual report on Form 10-K or quarterly report on Form 10-Q. We've also posted supplemental financial information and reconciliation of non-U.S. GAAP measures that we expect to discuss on our website at SealedAir.com in the investor information section under reports and filings. At this time I will now turn it over to Bill Hickey, our CEO. Bill.

Thank you, Amanda, and good morning, everyone. I am Bill Hickey, President and CEO of Sealed Air Corporation. With me on the call today in addition to Amanda we have Dave Kelsey, our Chief Financial Officer. As an introduction, I will provide a few highlights of our business for the first quarter of 2008. Dave will then review select details of our financial results and after Dave's remarks, we will take your questions.

As you saw by our press release issued earlier today, we expected that the first quarter would be challenging due to rising raw material and energy costs and continuing sluggish growth in the North American economy. In spite of this, we generated a modest increase in product price and mix and held volumes steady with the help of new product sales and the recent acquisition of the Ethafoam and related product lines. We also achieved double-digit growth in our vertical pouch packaging portfolio in our medical application business, and in various emerging regional markets. In the first quarter our diluted earnings per share were $0.35, excluding the special items mentioned in our press release earlier this morning. We accomplished this earnings performance while absorbing raw material costs for the first quarter that were $37 million higher than the first quarter of 2007 and $11 million higher than the fourth quarter of 2007.

During the quarter we anticipated continuing weak economic conditions in North America and higher input costs for the duration of the year. As a result, we focused on the following initiatives to mitigate the impact. First, we recently announced an operational change at one of our facilities in the U.K. which will improve our performance by moving certain equipment to other locations while reducing headcount at that location. We also announced a closure of a facility in New Jersey shifting production to other existing facilities in the United States. We have implemented additional price increases in various businesses and regions of the world, and we have targeted cost savings opportunities in SG&A and manufacturing for the year.

Looking ahead to the rest of the year, we plan on mitigating higher costs through a combination of efforts, focusing on certain items in more detail. First, we are implementing additional price increases. We're on track to complete our conversion onto the SAP platform mid-year in North America which will enhance efficiencies across our global platform. Having brought all of our major European sites live on SAP last year, we will be simplifying our business processes in Europe in an effort to streamline that region's operations to increase efficiencies and support profitable growth. We are on track with our global manufacturing investments and are investing in the final expansions of our new facility in Mexico and the opening of our new facility in Poland later this year. And of course we will continue to stringently control headcount and spending. Finally, we're diligently focusing our spending dollars on profitable growth opportunities for 2008.

Let's take a look at our performance for the first quarter and review our sales results in more detail. Our first quarter sales increased 8% to set another record of $1.2 billion. Excluding the favorable effect of foreign currency translation, our sales growth was largely driven by a combination of the benefits from the recent acquisitions of the Ethafoam product lines and Alga Plastics, both of which are reported in the Other category and increases in product price and mix. We did see a combined 16% sales increase in the brick countries of the world as well as double-digit sales growth in the developing regions overall.

Taking a closer look at our reportable segments in the Other category, our food packaging business showed steady performance in the first quarter. Net sales grew at 7% or if excluding the favorable effect of foreign currency at 2%. Product price mix had a 1% growth reflecting the benefits of our December 2007 price increase which were not fully realized in the first quarter. Overall, volume growth grew just under 1%. We saw solid volume growth in the United States, Europe, and Asia, which all performed above slaughter rates. These results were offset by volume declines in Australia, New Zealand and Latin America. Australia was impacted by unfavorable weather conditions, and Latin America was impacted by the EU embargo on Brazilian meat imports. Operationally we continued the ramp up phase of our new greenfield site in Shanghai, China, and Monterey, Mexico, and added new production lines in Latin America.

Looking ahead, we anticipate continued strength in our European and U.S. food packaging businesses. We expect stronger year-over-year meat production across all meat categories in the United States, and we expect processing to increase in Australia in the second half of the year. Additionally, we expect that the recent trade agreement to reopen the full export of U.S. beef to South Korea will have a favorable impact on this segment starting mid-year. We do expect, however, the current meat supply constraints in China and Brazil to persist.

In food solutions we increased our sales by 10% in the first quarter or 3% excluding the favorable effect of foreign currency translation. Product price mix increased by 3% in the quarter due to the benefits again of our December 2007 price increase. Unit volume growth was relatively steady on a year-over-year basis with a 0.4% increase. Although we achieved over 20% volume growth in Asia and midsingle-digit volume growth in Latin America and Australia and New Zealand, volume growth was offset by a decline in unit volume in the United States. This was due primarily to a decline in the case-ready portfolio as one large retailer has opted to use an alternative packaging format for a portion of their fresh meats. We are participating in this alternate format, however, the results of those sales are reported in the Food Packaging segment.

Excluding the slowdown in our North American Case-Ready results, the Case-Ready portfolio grew by over 10% outside the United States in the first quarter. Additionally, we have made good progress among other large U.S. retailers and are currently piloting the Case-Ready format with a large multinational retailer in Shanghai as we continue to expand Case-Ready's presence in the marketplace. Also, another retailer in the United States is piloting our newest Case-Ready for matted, Mirabella in the next few weeks. The vertical pouch packaging portfolio did continue to grow at double-digit rates during the quarter with particularly strong sales in North America. Lastly, our Ready Meal solutions continue to expand with Simple Steps, our microwavable heat and eat system increasing nearly 20% year-over-year. Looking ahead, assuming economic conditions conditions it conditions continue to soften, we feel well-positioned in participating in the packaging of fresh prepared meals that are accessible to many people at an affordable price.

Moving on to our protected active packaging segment, first quarter net sales were 0.6%, excluding the impact of foreign currency translation and the unfavorable impact from the sale of a small product line, first quarter sales decreased slightly by 2%. We experienced moderate growth in product price mix, again reflecting our recent December 2007 price increases. This was offset by volume declines in all regions except Asia which had a 7% volume increase. Volume was negatively impacted by the continuing weakness in the North American and European economies. Looking ahead, we anticipate continued slow growth rates in both our North American and European Protective Packaging business due to regional economic conditions which we expect to partial partially offset with sales of new products.

Lastly, our Other category increased net sales by 39% or 33% excluding the favorable effect of foreign currency translation. The primary growth driver in the first quarter were the acquisitions of Alga Plastics and medical packaging in August and the acquisition of Ethafoam products in November. Volume increased 6% primarily due to strong sales in Europe and Asia in our medical business. This was slightly offset by declining sales volumes in North America in the specialty materials business.

Looking ahead, we will continue to focus on integrating and scaling our recent acquisitions. Our manufacturing teams are focused on establishing the internal manufacturing assets for Ethafoam product lines to transition production inhouse and improving operating margins.

Before I hand it over to Dave, I would like to discuss our updated full year 2008 guidance. Based on the market conditions that we see today, as well as the other items I just reviewed, we now expect our full year 2008 diluted earnings per common share to be at the lower end of our previously announced range of $1.64 to $1.74. This range of course includes charges of approximately $21 million or $0.11 per share which are expected to be incurred related to the implementation of our global manufacturing strategy. Excluding these charges, we now expect our 2008 earnings to be at the lower end of our previously announced range of $1.75 to $1.85 per share.

The change in our guidance reflects the following updated assumptions. We now expect full year average raw material costs to be considerably higher than initially anticipated earlier this year. Additional price increases to recover these higher costs are planned. Our consolidated unit volume growth rate in 2008 will be lower than we initially expected which is consistent with expectations for slow growth in the global economy. We're also assuming a lower full year effective tax rate of 29.6%, and we expect to maintain operating expenses of less than 16% of net sales. Combined with being disciplined in our spending, mitigating rising costs in an efficient manner and investing wisely in our growth programs, I expect that our efforts will position Sealed Air as a more efficient, more profitable, and more nimble organization as the global economy recovers in late 2008. Now I am 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 $1.177 billion for the quarter, more than 80% of our $83 million of revenue growth or $69 million came from our international operations. Favorable foreign currency translation contributed $57 million while international volume grew 3% or $3 million or five-tenths of a percent. For the quarter approximately 56% of our revenue came from outside the United States. The net revenue impact from acquiring and divesting businesses was $14 million or 1.3% for the quarter.

Two acquired businesses contributed $20 million to 2008 revenue in our other category, and we also netted out $6 million of first quarter 2007 revenue contributed by the small Protective Packaging product line that was sold last year. 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 $305 million for the first quarter, compared with $314 million in the first quarter of 2007. For the total Company resin costs in the quarter were $37 million higher compared to the prices paid for resins in the first quarter of 2007. The selling price increases that we announced late last year and in the first quarter lagged our increased costs for resins and thus the benefits were not fully realized in the first quarter of 2008. Costs related to our global manufacturing strategy did not have a meaningful impact on our first quarter gross profit comparison to 2007.

Marketing, administrative, and development expenses were $186 million compared to $178 million in the first quarter of 2007. As percent of revenue these overhead expenses declined to 15.8% compared to 16.3% in the first quarter of 2007. Excluding foreign currency translation of $9 million, marketing, administrative and development expenses were flat compared to the first quarter of 2007. Cost containment efforts were implemented early in the first quarter as we assessed that economic conditions were likely to compare unfavorably to our earlier outlook for 2008.

Operating profit was $117 million for the first quarter, a decline of $19 million from the first quarter of 2007. The combination of price and mix contributed $13 million to offset only partially $37 million of higher resin costs. Operating profit as a percent of sales was 9.9%. Food packaging operating profit was flat compared to the prior year, and Food Solutions reported a modest year-over-year decline in operating profit. Protective Packaging operating profit was $12 million below 2007 due to unfavorable sales volume and resin costs that also impacted gross profit.

The Other category which includes specialty materials, medical applications, and our investments in new ventures, namely Nanopore and Biosphere reported a year-over-year decline of $3 million of operating profit during the quarter. This decline was attributed to the more pronounced impact of resin cost increases on our specialty foams business. Interest expense was $35 million, essentially unchanged from 2007. Other income for the quarter was $200,000, a decrease of $4 million compared to last year. The Company expensed an additional $1 million in the quarter for services performed by third parties on a transaction for which work has now ceased.

Foreign currency exchange losses were $2 million unfavorable in the first quarter of 2008 compared to 2007. Interest income was $4 million this year compared to $5 million in last year's first quarter, in part reflecting the movement of funds to prepare for the repayment of debt in April. Income tax expense for the quarter was $21 million, and resulted in an effective income tax rate of 25.4%. The lower tax rate for the quarter resulted from a favorable mix of earnings as well as benefits associated with the repatriation of certain foreign earnings. For 2008 our total effective income tax rate is estimated to be 29.6%. This rate is lower than the 31% rate that we guided at the end of January due primarily to a more favorable mix of earnings as well as benefits associated with the repatriation of certain foreign earnings.

Diluted earnings per common share were $0.33 for the quarter compared to $0.67 in the prior year. Excluding those items detailed in our supplemental information available on our website, SealedAir.com, diluted earnings per common share were $0.35 compared to $0.39 for 2007, a decline of 10%. As stated in today's earnings press release, this EPS is consistent with achieving the low end of the EPS guidance range we provided in our January press release.

I will conclude with some key cash flow and balance sheet items. Our combined balance of cash and short-term investments at March 31, was $431 million. Some noteworthy sources and uses of cash during the quarter were EBITDA of $162 million, capital expenditures of $41 million, share buybacks of $27 million, and a dividend payment of $19 million. Our quarter end accounts receivable totaled $796 million, up a nominal $6 million from December 31. Compared to March of last year, receivables investment increased $92 million or 13% while our quarter over quarter sales increased $83 million or 8%.

Customer receivables balances outside North America were up double-digits with foreign currency translation contributing $60 million or 80% to the year-over-year increase. Also representative of our international business VAT receivables were up $11 million year-over-year. Inventory investment March 31, was $642 million, up $61 million during the quarter. This higher investment is attributed to acquisitions, foreign exchange, and normal seasonal increases. Compared to March 31, of last year inventory investment was up $97 million or 18%. Inventories in the U.S. were up $20 million year-over-year. The increased investment in inventories outside the U.S. was attributable to $50 million of foreign currency translation and $22 million primarily to support our sales growth internationally.

Total borrowings at the end of March were $1.882 billion, an increase of only $10 million, primarily due to an increase in short-term borrowings related to our greenfield plant startup in China. The outstanding balance of $300 million related to a debt issue maturing on April 15, 2008, is recorded in current liabilities at March 31. As planned, we used our available committed borrowing capacity including both our accounts receivable securitization program and our credit facility to retire these notes when they matured on April 15. Capital expenditures were $41 million for the quarter. Of this spending $9 million was incurred on projects undertaken as part of our global manufacturing strategy.

Looking ahead, our guidance continues to be for 2008 capital spending to be in the range of 175 million to $200 million. This outlook includes $70 million necessary to complete the first phase of our global manufacturing strategy.

In concluding my comments on our financial performance, I would like to summarize the status of our global manufacturing strategy. The expected $70 million of capital investment in 2008 will bring our cumulative capital investment from 2006 through 2008 to $143 million. This will essentially complete the first phase of our global manufacturing strategy within our expected range of 130 million to $150 million. We are producing and selling product from our greenfield plant in China and our new location in Mexico. By this time next year we expect to be producing and selling product from our new site in Poland. In addition to our capital investment, we have previously estimated that other costs associated with with expanding our global manufacturing base and establishing centers of excellence would be $30 million in 2008, bringing our total costs -- our total for other costs to $58 million, well below our original range of 90 million to $100 million.

In summary we're currently estimating that our benefits from these projects will be approximately $45 million starting in 2009 and increasing to $55 million in 2010. Now I will turn the call back to Bill and your questions.

Thank you very much. (OPERATOR INSTRUCTIONS) Yes, sir, our first question today will come from Ghansham Panjabi from Wachovia Securities. Please go ahead.

Hey, guys, good morning.

Good morning.

Bill, you noted in your opening comments that you expected the first quarter weakness. Are you suggesting that your first quarter earnings were in line with your forecast back from late January or was it somewhat lower than what you were thinking?

Our actual first quarter was a little bit lower than we anticipated. If you remember, Ghansham, when we talked about costs this year, we anticipated kind of a mirror image of 2007, where essentially your peak input costs would be the first quarter versus the fourth quarter of 2007. Remember the fourth quarter of 2007 input costs were down quite a bit. We expected the first quarter to peak input costs and then sort a flatten out and then decline theoretically on a parallel basis with the lower ethylene prices. That doesn't look like it is happening right now, but our view was that the first quarter even as we expected would be the weakest quarter of the year. It just was a little bit less than we thought it was, Ghansham.

Okay. In terms of your protective packaging, the environment there, obviously cost has been an issue for awhile now, but it also looks like demand is an incremental issue as well. What's your strategy to sort of go out there and raise prices in the weak top line and high cost environment? Is it fair to say that you're willing to walk away from business if you have to as you try to push pricing through?

Yes. Ghansham, let me sort of go back a second on the first part of your question. On the protected active side, some of the sort of declines that we've seen is our consumer sales which are those consumer wrap of bubbles that sell in the big box stores, meaning the first quarter those were down 23% primarily because a lot of the super stores have been cutting their inventories. In fact, one of the office supply stores announced this morning that their sales were down 7 to 12%. Products going to the housing industry are down about 10%, products going into the automotive industry are down about 5. Products going into RV, boats, sports, recreation are about 10, and those that go to the luxury end, and you see Bubble Wrap at a lot of luxury products, and that's down about 5%, so clearly that segment of the economy, the consumer-based segment is as weak as I have seen it in a long time. The 2001 slowdown was primarily a tech slowdown. This seems to be more consumer based.

Now get back to the second part of your question is yes we will put through price increases. We are prepared to walk away from low margin business, and our view is that with input costs being at the state they're in, there may not be opportunities for marginal competitors to hold onto lower prices and still survive. That's what happens.

That's very helpful. Thank you.

Moving on, our next question will come of Banc of America Securities George Staphos, your line is open. Please go ahead.

Good morning. I will try to stay to the one question format here. Could you cover it all a bit more in detail, the shift that you saw in Case-Ready both in terms again what your large customer is doing in terms of their format or material, why that made for a shift in your segments, and I didn't hear this, if you mention it, did you actually lose share with this customer where you sole sourced before and now no longer? Thanks.

George, let me go back to the Case-Ready. First is outside the U.S. the numbers are still extremely positive, 10% plus outside the U.S. As I say, down 3% in the U.S., 3.5. That is primarily due to one large retailer taking a certain number of cuts of their case, meat cuts, and putting them into what is called an over wrap package. An over wrap package is very traditional polystyrene tray with PVC overwrap film much as it was done in the back of the store, and then those individual packages are put in a large barrier bag, and that large barrier bag is then filled with a gas to extend shelf life. Then that bag is shipped from the supplier through the distribution center to the retailer, and then the retailer opens that bag, and when the retailer opens that bag, essentially they have got 72-hour shelf life.

That's what they've gone to. There has been a change in the merchandise management at this particular retailer. They were looking for a way to drive up their beef sales, and they thought maybe a change back to the original in store format would work, kind of the negatives of that, it is a higher cost format. It has got sort of a negative environmental impact in terms of the additional truckloads of meat that have to be delivered, in terms of the PVC film, in terms of the spoilage that occurs on the meat because you only have a three-day shelf life when you open the package. I understand that that retailer has been now open to considering alternatives that may have a better environmental footprint, so there are various studies looking at alternative packaging, and, George, if you remember, and I have said this for a number of years, I think the ultimate Case-Ready format has yet to be developed. I think this is another step in the process, and we are participating in this overwrap bag. There may be one or two other people participating in it. There is not a lot of technology in the overwrap bag. It is basically a large polyethylene type barrier bag that all it has to do is hold the gas for a couple of days, so it is not really a high tech format, and that's why we sort of put it in the food packaging, and we'll see how it turns out.

Thanks, Bill, I will be back.

We'll now move onto our next question which comes from Ross Gilardi from Merrill Lynch. Your line is open. Please go ahead.

Good morning. Thanks, guys. Can you talk a little bit more about what you're seeing in emerging markets, seems like the core revenue growth in Latin America and Asia was quite a bit lower than we've seen in some time. I think you touched on some of the trends, but if you could elaborate a little bit more there and what you expect for the balance of the year?

Sure. Let me do two things in Latin America. The two biggest markets are Brazil and New Mexico -- Mexico, actually our business long kind of Machiadores, which is that area right on the border between U.S. and Mexico, most of that manufacturing ends up going to the United States, and in Mexico where the growth was hurt in effect was the area where the Machiadores are where the products are essentially being manufactured in Mexico and sold to the U.S., so the U.S. slowdown has really affected our protective sales in Mexico.

The other part of Latin America is Brazil, and Brazil, the EU has imposed an embargo on Brazilian meat and it really has to do with a recent EU policy regarding food safety and traceability standards which essentially requires the Brazilian exporters to have a track and trace system for all of their exports to Europe, and as a result I think there are 9,000 exporters of meat in Brazil, and I think at this point 300 of them have been qualified under the new EU rules. So the combination of the industrial effect in Mexico on the protective side and the EU meat embargo on the Brazilian side were the primary factors in the lower growth in Latin America.

The rest of the business in Latin America is pretty healthy. Particularly in Brazil the Food Solutions business was up, the Protective business was up in Latin America, so overall there are two impacts in Latin America. Coming to Asia, there is a meat supply issue in China. Meat prices are up 40%, pork prices are up 40% plus. They have had an animal disease which is a new one on me called blue ear. It started late last year. It has resulted in a sizable number of animal deaths which also has contributed to the higher prices, and again in China, if you look at the other segments of our business, our growth is still quite good, but the meat sector particularly pork has had a negative impact on the business in China. Hopefully that takes the two pieces together, but overall I think both Dave and I said our comments, we're still pretty upbeat on the brick markets, on the emerging markets, and so far this year even including those factors of the park supply problem in China and the EU exports Brazil and the negative impact of the U.S. economy on some of the Mexican manufacturing we still manage to produce 15% plus growth overall in the brick countries.

So is it higher pork prices means lower park -- higher pork prices mean lower consumption in China or is there something else to understand there?

No. I would say that pork consumption is probably down, interestingly enough one of our U.S. customers has received an order from China for X million pounds. I had the number. I just don't remember it right offhand, has received an order to export X million pounds of U.S. pork to China to supplement the pork supply. That material is going over frozen, so we will not see any really effect of those sales on our business in China since that pork is coming out of the U.S.

Okay. Thanks very much.

We'll now take our next question from Rosemarie Morbelli from Ingalls & Snyder.

Good morning. Bill, could you give us some details on the additional cost reduction programs that you are just starting now on both the manufacturing side and the overhead expenses?

Sure. I can go through kind of a laundry list of them, but they are the obvious ones is one holding control of head count in terms of any open positions, two, doing a better job at managing our travel, the Company spends about $80 million a year on travel. When you're a global organization, that's a pretty big number. To the extent we can save 10% of that, it has a meaningful impact when it flows to the bottom line. On our manufacturing operations, we are primarily focused on reducing scrap despite all of the efforts we've made, we still generate something like 10% of our production ends up being scrap because of change overs and again taking 1% out of that is a pretty sizable amount to bring right to the bottom line. Those are the biggest items, Rosemarie on the list, but Dave Kelsey and I went over the list a couple of days ago. It is probably two pages long, but 80% of the dollars are in the items I just covered.

Do you have a dollar amount of additional savings coming from these new program, I am -- I mean, translating this as being in addition to the $45 million savings to be generated by the current program under way?

Rosemarie, we do have it. It is in our guidance number. It is how we get to the low end of the guidance.

Okay. Okay. And what if I may, what would happen -- well, what would need to happen in the current environment for you to actually not reach that low end estimate?

Well, we're doing everything we can in terms of reaching the low end, and that's based on the assumptions I have made which is considerably higher input costs, the price increases, and the cost savings, all of which I think are very achievable. Just didn't want to put a little color on the price increase. Essentially we're looking to bring down to the bottom line something in the range of 2 to 3% price increase to close the gap basically to get to our earnings number, and if you look at the 2005 and 2006 year year end P&L statements, you'll see that that 2% price number is a number we have achieved twice before, so I am very, very confident that we will achieve the price impact, so I am at this point comfortable that we've covered as many bases as we probably can to possibly get to where we said we would be this year.

Thank you.

Our next question we will hear from Deutsche Bank's Mark Wilde. Please go ahead.

Good morning, Bill.

Good morning.

Just a question about the protein markets, and I wonder if you can just explain to us how you think about this right now. Sounds to me like these very high feed costs are leading farmers to push a lot more livestock to market right now, which I think is dampening price, but at some point I guess we're going to see the other side of that, which is less livestock going to market and higher prices. Can you talk about how that is going to affect your business in the short-term and then a couple of quarters out here?

Sure, Mark, you've hit upon one of the complexities of the protein chain that I have talked about on numerous occasions and in the interest of time I won't go through the whole thing. But there are really three levels in the protein chain, and they're all affected very differently by what's happened. For example, in the beef business in the U.S. they're basically the cow calf people who essentially are those that breed and raise calves. Then there is the feed lot operators who essentially take them to maturity and fatten them up, and then there are the processors which take the animal and convert it to meat. Our customers are the last of those three. Depending on the leverage and the channel, rising feed prices affect different people, and rising or falling selling prices affect different people, so there is not a simple answer to say what the long-term impact is going to be.

You are correct in that there will be more animals coming to market this year than we had previously anticipated because of the high feed prices, but beef prices had been high, and they had been high, and they've just come down a little bit because the herd size has gotten so bad as the operators held cattle off the market to maintain higher prices, the people who are our customers, the processors who buy from the feed lots, are negatively impacted in this entire process because they're paying higher prices for animals and getting lower prices from consumers. So it is a continually changing environment, but are you right, go back ahead, in the short-term it will result in more cattle coming to market. You may see this slowing up next year because at some point they have to hold back some animals to breed to rebuild the herds for the future. When that occurs is anyone's guess.

You think that could be, nine to twelve months out yet before we see the flip side of this?

Right, right, you're looking at probably at least twelve months out.

Okay. All right. That's the answer I was looking for.

We'll now hear our next question from Claudia Hueston from JPMorgan. Please go ahead, ma'am.

Thanks very much. Good morning.

Good morning.

I appreciate all the color you gave on U.S. consumer trends, and I was just hoping you could provide a little bit more detail on trends in Europe and then maybe more broadly just wondering if trends have started to stabilize at all in either the U.S. or in Europe?

Let me comment in Europe you're seeing -- Europe consumer trends are not as negative as the U.S. Some interesting comments in both France and in Italy, we have seen more of a slow down in France and Italy than we've seen in other parts of Europe. Eastern Europe, though, continues to do well. Our business in Russia which is part of our brick business is up 20, 28% for the first quarter, so the European consumer appears to be in better condition than the U.S. consumer. And as far as consumers outside the U.S. and Europe, haven't seen any significant change in either the Latin American consumer or the Asian consumer yet.

Okay. Then just in terms of have trends stabilized at all or do you get a sense there still is maybe more room for weakness?

That's a tough question. Because we're kind of a coincident indicator so to speak, so we really don't have a lot of longer term visibility on the market. Usually the packaging end of our customers is the last thing that they do, so that to the extent there are any changes going out we're generally more coincident than leading, but our April numbers seem to be okay. I have seen no further deterioration among the month of April where we have been, so I guess we'll wait and see, Claudia.

Okay. Thank you very much.

Our next question will come from Mr. [Bob Trout] from Goldman Sachs. Please go ahead.

Thanks. Good morning, guys.

Good morning.

At the low end of your guidance range what is your assumption for resin for the second half? Is it consistent with the consultants expecting like a 5, 6% drop in polyethylene?

Let me answer it. That had been our earlier estimate in the beginning of the year. In fact, I was going to mention that when Ghansham asked the first question where I said our expectation was that the first quarter would be the highest input cost of the year and it would gradually flatten out beyond that. Ethylene has actually come down, and ethylene is one of the components of polyethylene, but what we're seeing, we're seeing now, and maybe your consultants are better than ours. Maybe I should talk to yours, but we're actually seeing somewhere in the low single-digit cents per pound increases going forward from here through at least the third quarter. Whether it falls off in the fourth quarter, we don't have that in our guidance right now, but you should know that our guidance is based on another several cents increase input costs through the rest of this year.

Okay. Just a follow-up on resin. With the new Mideast capacity for polyethylene and the others supposed to come online, can you substitute any of your current resin buys or can you substitute some of the new resin that's coming online in the Mideast for which you currently buy or is the formula strict enough where the new resin that's coming on you might not be able to use it anyway?

No, no, we are able to use anything coming out of the Middle East. We actually do buy resins from different parts of the world. There is capacity in India and Korea and some coming on in other parts of the world. The Mideast resin capacity expansions have been something we've all been waiting for. They've been delayed now for at least a year. I understand part of that delay is kind of steel shortages and engineering shortages, and what had been 2008 capacity additions are now looking like late 2008, early 2009, and there is a fair amount of capacity coming on stream, and we are able to use it, and we look forward to it.

Okay. And then just lastly on pricing, you said 2 to 3% I guess is your expectation for, or your hope for the rest of the year. Is that across every business unit?

That's Company overall.

Okay.

And actually it breaks out differently by business unit, depends on what components they have in their particular product mix, but the number is company overall.

Okay. How much did you take in the first quarter or how much did you announce that may not have fully benefited the result?

In terms of price increases?

Yes.

We had various increases, again, depending on the business, there were 4 to 6% in one business, 6 to 8% in another business, and one of our businesses has as high as 10%, and they were different dates from late December, January 1, to February 15, April 15, so each of our businesses has raised prices in different amounts at different times in both the end of '07 and early '08 in response to the particular input costs in their particular business, and the $13 million that rolled through the first quarter is not all of what we should get based on the announced price increases, so when my earlier comments saying the ability to recover sort of overall 2% by the end of the year is still the range we're looking at and reasonably consistent with our price increases in 2005 and 2006.

I have a couple of others, but I will hop back in queue.

We'll now hear from Credit Suisse, John McNulty for our next question. Please go ahead.

Good morning. With regard to the food businesses, it does seem like there is a lot of puts and takes right now between Europe shutting down Brazil and looks like South Korea is opening up. When we look at the volumes going forward, how should all of this net out? Should we be thinking that the volumes that you put up throughout the rest of the year are similar to that you saw this quarter? Should they get a bit better than this? Can you give us help on that?

My overall view, John, is they will get a bit better later in the year. First of all, the first quarter tends to be the lowest quarter in terms of the food business. It follows all the eatings, the holidays, all of the both poultry and beef and pork that are brought to market in the last quarter of the year. The summer sort of BBQ cookout, outdoor eating, hasn't started. It is generally in a lot of parts of developed world it is winter so that it generally is the lowest quarter of the year in terms of meat production, in terms of what we see at our customers and in our own business so even just seasonally we will see increases through the second, third and fourth quarter and as I said in response to an earlier question, we expect more animals to be brought to market this year than we had originally thought because of the high feed costs. So overall my feeling is that production and our growth in the food packaging side of our business should improve as we go through the year.

One last question with regard to WR Grace now looking like they're going to be coming out of bankruptcy finally, can you give us just a reminder as to what that means for you in terms of the timing of when you make your payments out, the stock, that type of thing?

Sure, John. I was expecting that question from someone. As everyone knows, WR Grace announced in early April and it has reached an agreement in principle with the Asbestos Personal Injury Claimants Committee and the Future Claimants Representatives and the Equity Holders Committee on terms for present and future asbestos related personal injury claims. Graces term sheet which they published after their announcement states that the plan of reorganization will comply with Sealed Air's settlement agreement, and the way the mechanics of the process will work is that at such time as Grace's reorganization plan is submitted to the courts, and then approved by the courts, when it is approved and when Grace comes out of bankruptcy on that day Sealed Air will make the payments under a settlement agreement which is $512.5 million in cash plus accrued interest and 18 million shares of common stock, 9 million prior to the split, and we in return will receive all of the indemnities that we bargained for as part of our settlement agreement, and we will have all of the benefits of being cleared of any and all liabilities relating to the Grace Asbestos liabilities.

And my feeling is you're still months and months away. I mean, I know there is an agreement in principle but there is not necessarily, at least I am not aware of a plan actually having been prepared and submitted, and of course approvals are required from a variety of other parties in the bankruptcy proceedings including the property damage claimants and zonal claimants as well as the Committee of Unsecured Creditors. By the time all that gets done we used to say it is at least a year away. Now I might change it and say it is probably under a year but probably not much under a year. I saw one of the Grace comments. They expected to have their plan approved by the end of '08, early '09, and that's probably not bad planning, but in my opinion and solely my opinion it is likely to drag out a little bit beyond that.

One question tied to that. With regard to the 18 million shares, is there some sort of a lockup period for the creditors or the party that's going to hold them so they don't just come right out to the market or what have you?

They have registration rights. They have registration rights so the shares they get cannot really just come right out to the market, and so I expect they will come to us sometime shortly after then to go through the registration process and we'll just see that how that develops, John.

Thanks for the update.

Now we will hear from Rajul Aggarwal from Marathon Asset Management. Please go ahead.

Thanks for taking my question. It's a quick follow-up to the previous one actually. In terms of the cash payment can you give us idea what the total cash outflow may be as expected today? And second, how do you plan to fund it?

I will ask Dave Kelsey to answer that.

The total cash outflow it's a combination of the $512 million that Bill just cited plus accrued interest which by year end will be approximately $200 million, so we're looking at roughly $700 million in cash if the settlement were to occur late this year. We have a cash balance on hand as well as available committed borrowing capacity sufficient to make that payment when it comes due. We also expect to have sufficient lead time to consider a capital markets transaction to raise some of that funding in a longer term fashion, but that's a decision we'll make as the date gets a little bit closer. Also wanted to elaborate on the previous question on the 18 million shares. For those of you who haven't followed us throughout this process, point out that we do include those shares in the calculation of our fully diluted EPS.

Thanks.

Thank you, Dave. Operator, I am going to take a question from the Internet. We have a couple of here I just wanted to respond to. First question coming over the Internet says although the Company is a leader in the packaging sector, do you see continued increasing competition affecting medium to long-term growth prospects for Sealed Air?

Thank you for acknowledging our leadership in the packaging sector. I do appreciate that. Competition is a factor, but I generally look at competition as a stimulus to get better to work harder to be smarter. I think the impact is less on growth than our ability to continue to achieve the premium valuations we get on our products but I really do not necessarily see it as an impact on our growth prospects going forward.

Next question from the Internet, since 2001 your sales have increased from about $3 billion to $4.7 billion or 54%, but EBITDA has only grown about 2.5% over the same period resulting in almost an 800 basis point decline in EBITDA margins. Do you think that margins can get back to the 20% level in the long-term or has your cost structure or competitive environment changed permanently?

That's a good question. Something we have talked about on a number of occasions. The principle factor in that 800 basis point decline in EBITDA, the margins, is the $300 million plus of input costs as we watched oil go from $40 a barrel to $117 a barrel, and the impact that has had on all of the raw materials that we buy. As I said on numerous occasions, we've spent a fair amount of our time chasing price increases to recover those costs, and our ability to get back in the margins will occur when there is a more stable pricing environment. I don't necessarily say it has to be lower. If we can just have a stable environment, we will work our way back to those higher EBITDA margins, but to clarify our guidance has been 18 to 20% EBITDA margins, so we may have come off of that a little bit, but I do think 20% is a desirable target, and I think there is nothing fundamental in our business that would prevent us from doing that once we work all of these cost increases over the last several years through the channels and get our margins back up over time.

Third question from the Internet, sounds like you have decided to retire the April '08 notes with a draw on bank facilities. Is there a plan to refinance the borrowing with longer term debt issues? What are your thoughts then about issuing something, an equity component given where the stock is now?

Actually, I have already paid off the April notes. Those are done. Most of it as Dave indicated in his comments were done with both cash on hand and borrowings under existing credit agreements. We have no plans, no even concept of anything with an equity component at this time, but let me let Dave comment on how we will work through this debt repayment over a little longer term.

Probably three things worth commenting on here. First, we do have a convertible debt issuance out there that goes back to 2003, so that is in the market today for those of you who like to invest in convertible securities, we have one available. Secondly, the expectation is on the short-term borrowings that we have incurred to retire the note in mid-April, that cash from operations over the coming year will be sufficient to reduce those borrowings, so there is nothing we're contemplating today as Bill reiterated to go to the capital markets to term out, as they say, those short-term borrowings.

As we get closer to the settlement date on Grace and that $700 million cash payment, we'll evaluate a number of different funding sources, and make the selection based on what we think will be the most effective cost of capital over future period of time, and I will throw in a comment as well that the settlement is a tax deductible event for us. We've reflected that tax benefit as best we could estimate it when we booked the settlement back in 2002 so there there will be some netting down of our cash obligation as we flow that event through our tax returns.

Thank you, Dave. Let me take -- I have two questions on the Internet before I go back to the telephone. One is it sounds like additional potential PE cost increases are primary driver for the guidance change rather than specialty resin changes.

I will just say it is overall input costs. I won't necessarily attribute it to either PE or specialty. I will just say that that applies to our basic petrochemical input costs, both PE and specialty.

Last item on the Internet, how will you characterize your appetite with respect to making acquisitions for the remainder of the year?

Sealed Air has always been an acquirer as we said early earlier. We acquired the Ethafoam business from Dow Chemical Company back in November. We acquired Alga Plastics back in August of 2007. So we are always interested in the right fit both from a technology standpoint, product standpoint, or a market standpoint, and I would think that as market valuations and purchase multiples have come down over the last couple of months that there might be an opportunity sometime in the remainder of the year but clearly we have nothing in the works at this time. Okay. Operator, can I go back to the telephone questions?

Most certainly, sir. We do have three questions remaining in the queue. We'll hear from Jim Stanley from Merrill Lynch for the next question. Please go ahead.

Hi. I just had a follow-up on your last comment for one, meaning that you said as a response to the Internet question, that the updated guidance has a lot to do with all raw material costs going up more than you originally thought. Maybe you already spoke to this and I missed it, but as I look at the first quarter and I am not sure exactly what you said about for the year as far as volumes are concerned, seemed to me that the big disappointment here is more volume related especially on the food packaging side, and so I just was curious as to what maybe you already said this, but what you were expecting volume wise through the rest of the year and has that been significantly altered versus what you thought a month or two ago?

I did say before I handed the phone over to Dave, I highlight what had our guidance assumptions were at this point in time.

Okay.

I will just highlight quickly. Our full year average raw material costs to be considerably higher, additional price increases to recover the higher costs, consolidated unit volume growth in 2008 lower than we initially expected.

I am sorry.

And I think our expectations were somewhere in the midsingle-digits and probably in the low single digits in terms of volume growth. That's I think the answer you were looking for.

Okay. Thanks.

We will take our next question from Mark Wilde from Deutsche Bank. Please go ahead.

Just as a follow-on, Bill, seems like freight and logistics issues around the world are getting bigger all the time. Can you just talk about what effect this has on your business both now and in terms of kind of thinking about this global footprint manufacturing footprint?

Sure. Actually, the combination of freight costs and container availability has been actually in the news of late. Our own freight costs are really up in the single digits quarter over quarter, year-over-year because we try to manage how we run our freight operations. We do move product across the oceans, and we do move product across the hemispheres. We are finding that we have to schedule more carefully, but we have had really no issues with doing that. Costs have gone up, but the places where we are locating our capacity, the places where we're adding investment in equipment and bricks and mortar are China, Russia, and Brazil and when that capacity comes on stream, it is actually less freight intensive and less dependent on the shipping channels because in effect we'll be manufacturing where the markets are growing. Right now, as I said earlier as we make product in the U.S. and Western Europe and we ship it to Latin America and we ship it to Eastern Europe and we ship it to Asia, I have said numerous times that we've been currently supplying the meat business in China from the U.S. and Australia.

Now with our plant there we'll take X amount of containers out of our network by putting in two new productions lines in Latin America, we'll take Y number of containers out of our network, and by expanding production in Poland and Russia we'll take X number of truckloads out of our network. I would like to think that where we're planning our global footprint is not only where the markets are but our net reduction in both transportation and logistics costs as well as environmental footprint because we'll be generating less greenhouse gas by moving less material kind of shorter distances, so overall Mark, it is a great question. I think it it positions us exactly where we want to be and I think that will be right place to be in the long-term.

In the near term, Bill, are you having to raise inventories in some of those emerging markets to kind of cover yourself?

Dave talks about inventory a lot. The answer is yes. The answer is yes. We do. It is interesting. Again, the net result of this ought to be lower inventories when this model is put into place. I just know from our experience that from the time we get a product made in the U.S. to go to a customer in Brazil, it is 105 days. It's average 105 days. X number of those days are in our inventory on the water or in one of our warehouses, but to the extent that in a year from now or six months from now or two years from now, that customer will get product right in Brazil it will be 15 days or 10 days instead of 105. Inventory will go done. Transportation will go down. We'll have a happier customer. I will have a happier CFO, and we'll all win.

At this time we do have one question remaining in the queue. That comes from a follow-up question from Goldman Sachs Bob Trout. Please go ahead, sir.

Thanks again, guys. What's your assumption for foreign exchange in your full year guidance?

Dave?

It is pretty much in line with what we saw in the first quarter. We're not really in the business of projecting where the dollar is going to go versus the euro. That's clearly the one relationship that has the biggest impact on our translation adjustments, but we do have significant sales in Brazil, in Australia, in the U.K., so those currencies versus the dollar also have an impact. For the time being we tend to take the view that current exchange rates will stay in effect for the balance of the year. I am sure I will be proven wrong, but I am not sure in which direction.

Okay.

If have you any insight, tell us.

Unfortunately I I am not in the business of forecasting that either.

No.

Just lastly as a follow-up to that earlier question on protective, I know there was a pretty significant decline in year-over-year volumes there this quarter, and I know you said consumer is weak. Are you seeing any indication that people are just trading down towards some of the imitation, cheaper imitation products for Bubble Wrap or just different types of insulation?

I don't think we've seen that, Bob. I think primarily I have seen just declining in consumption, I mean, I have highlights that have been actually absolutely interesting. For example, one of the big Bubble Wrap customers in Mexico that's located along the border and they ship to the U.S., I mean, they do blinds for windows. Their volume is down 41%. We haven't lost any share, we haven't lost a customer, but essentially this particular customer's business is down 41%. We have another customer that does automotive lighting whose volume in the first quarter is down 29%. I don't feel we've lost much in the way of share. You probably always have somebody switching, there's always a give and take in industry in any business but by and large I would attribute the quarter to perhaps the weakish consumer economic environment we have seen and probably we as a country have seen in probably the last ten to fifteen years.

Someone asked me if I thought it was over yet. Our April numbers don't seem to suggest it is. I am personally optimistic that by the time we get through the third quarter things will look a lot better, but I am not good at forecasting the economy either. But in the meantime we are going to do the best we can. We're going to sell as much as we can at the highest price we can. We're going to keep every customer we can, we're going to find as many new customers as we can, and if I look back over the recessions, if I go back over the recessions, if I look at our protective business as being the one that's most exposed to that, the protective business worst trough that I think I have seen in the last fifteen plus years has been in the and 3.5 to 4% volume range, not really dramatic because we're so widespread. I think we had 2.5 or so in the first quarter, so the worst it has ever been in fifteen years is 4. I don't expect us to get there. We'll have to see how the economy turns out.

Hopefully everyone will go spend their rebate checks and we'll have a good third quarter, but do appreciate the question. Economy is fascinating right now because I am listening to different industries report quarterly earnings, and I guess this is the quarter you want to be a commodity producer. This is not the quarter you want to be a manufacturer. I hope it turns around next couple of quarters.

Okay. Thanks very much.

Okay. Are there any more questions, operator.

No further question from the phone audience at this time, sir.

I really want to thank everybody for participating in the call. It has been a challenging quarter, but I hope you heard us prepared comments as well as answering our questions we're focused on the long-term. We're not going to let the short-term disruptions in the economy dramatically change how we want to be. We're going to stick to our growth initiatives. We're going to increase our efficiencies. We're going to reduce our costs because we truly believe being a global player in the world economy is a place where we want to be, we'll continue to capitalize on that global footprint. Our diverse portfolio, we'll drive for lower costs, and we'll continue to invest in innovation. Long-term we want to deliver superior results to all of you.

You've heard me say this before and I'll say it again. We have navigated through these challenging environments before, and we continue to steadily expand our business. We have continued to build on these strengths, and I think they'll serve us well through 2008 and beyond. I am still very happy and proud to be a Sealed Air shareholder. Thank you all very much.

That does conclude today's teleconference. We would like to thank everyone for their participation, and wish everyone a great day.