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Executives

Jeffrey M. O’Connell - Vice President, Secretary and Treasurer

Kenneth M. Roessler - President and Chief Executive Officer

Kevin C. Kern - Chief Financial Officer

Analysts

Claudia Hueston - J.P. Morgan

George Staphos - Banc of America Securities

Mark Wilde - Deutsche Bank Securities

Bob Franklin - Prudential Financial

BWAY Holding Company (BWY) F4Q08 Earnings Call December 10, 2008 10:00 AM ET

Operator

Welcome to the fourth quarter 2008 BWAY Holding Company earnings conference call. My name is Jasmine and I will be the operator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Jeff O’Connell, Vice President, Treasurer, and Secretary.

Jeffrey M. O'Connell

Thanks to all who have joined us today for BWAY Holding Company’s fourth quarter fiscal 2008 earnings call. I have with me today Ken Roessler, BWAY’s President and Chief Executive Officer, and Kevin Kern, Vice President of Administration and Chief Financial Officer.

Before we begin the call I would like to point out that certain statements made on today’s conference call may be forward-looking statements. These forward-looking statements are made based on management’s expectations and beliefs concerning future events that may affect the company and the company’s performance and therefore involve uncertainties and risks including, but not limited to, those risks and uncertainties described in the company’s filings with the Securities and Exchange Commission. You are cautioned that actual results of operations or financial condition of the company could differ from those expressed in any forward-looking statements. We do not take any duty to update any such forward-looking statements as information and events develop.

In addition, certain numbers used during today’s discussion represent non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted net income, and adjusted net income per diluted share. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our fourth quarter fiscal 2008 earnings release. We advise you to consider these non-GAAP financial measures along with our financial statements filed with the Securities and Exchange Commission.

I would now like to turn the call over to Ken Roessler.

Kenneth M. Roessler

Thanks again for joining us on today’s call. I will start this morning by giving you a brief overview of our financial results for the fourth quarter and full fiscal year and then spend a few minutes discussing our liquidity position and our debt agreements, which I believe are at the forefront of investors’ minds, given the state of the credit market. Next I will provide a high-level overview of our business segment performance. I will conclude with remarks on the actions management has taken to effectively address the downturn in the general economy and more specifically, the continued weakness in our core markets and then turn the call over to Kevin Kern who will walk you through a more detailed summary of the financial results. We will wrap up our prepared remarks with our earnings guidance and then open the call up to questions.

Despite a difficult macroeconomic environment we were pleased to report adjusted net income per diluted share that exceeded 2007 results, both on a quarterly and annual basis. For the quarter, adjusted EPS of $0.33, which was in line with our guidance, was up from a net loss per diluted share of $0.06 last year, and a full fiscal year adjusted EPS increase from $0.68 last year to $0.71 in 2008, which was also in line with our guidance.

Fourth quarter adjusted EBITDA increased to $31.5 million compared to $25.6 million for the fourth quarter last year. Full year EBITDA declined to $104.6 million from $110.8 million last year, in part due to an expected increase in stock-based compensation expense. Excluding stock-based compensation, full-year adjusted EBITDA declined by 2.3%, or $2.6 million, to $110.9 million.

We feel very good about our earnings results, particularly in light of what BWAY, like many other companies, is experiencing in the market place. Moreover, our efforts to offset weaker demand, right size our business, and implement cost containment initiatives positively impacted our results during the quarter and year.

For example, during the year we successfully closed the Franklin Park, Illinois, Metal Packaging and Cleveland, Ohio, Plastic Packaging facilities, effectively adjusted operating schedules to match demand, took the initiative to reduce costs and increase productivity, and managed through a volatile period for our primary raw material inputs.

As I will discuss later in the call, we believe significant opportunities to streamline our cost structure still remain and I believe that the positive momentum following our successes during fiscal 2008 will allow us to capitalize on them.

Another significant achievement during the year was our strong free cash flow of $39.8 million. This was up 12% compared to $35.5 million reported in the year-earlier period and also came in above our previous guidance range of $32.0 million to $34.0 million.

As we discussed during previous calls, management embarked on a working capital reduction program during the second half of fiscal 2007. To date, we estimate that we have made sustainable reductions totaling approximately $20.0 million, $13.0 million of which was achieved in fiscal 2008.

These initiatives allowed the company to make $34.0 million in capital expenditures during fiscal 2008 while still generating significant free cash flow and providing additional liquidity.

While 2008 planned capital expenditures were above our baseline of $20.0 million to $22.0 million, due to increased investment in our new plastic products, we expect spending to return to the baseline level for fiscal 2009.

Although we have seen real success with working capital reductions over the past year and a half, we believe there are still opportunities present to further working capital, particularly with regard to inventories and payment terms. This will remain a key focus for the management team during fiscal 2009.

During this first quarter of fiscal 2009, the company has made an $18.4 million debt repayment on its terms loans as required under the terms of our credit agreement’s annual excess cash flow sweep provision.

Our liquidity position remains very strong. In addition to a strong cash position, our revolvers in the U.S. and Canada, totaling approximately $48.0 million, remain undrawn. Together, our cash and revolver availability will exceed our expected day-to-day operating cash needs.

Let me also point out that our revolvers are backed by commitments of financially-solid banks.

At the end of fiscal 2008 we were in full compliance with all of our debt covenants and based on our fiscal 2009 earnings and cash flow guidance, which we will share with you shortly, we expect a comfortable margin under our covenants for fiscal 2009.

Let me now spend a few moments reviewing the quarterly results of our two business segments, beginning with Metal Packaging. Volume results for our Metal Packaging segment were down approximately 3% for the quarter compared to the same period last year, due to weaker demand. However, we believe market demand was down slightly more than 3%, therefore we gained market share during the quarter and full year.

Metal Packaging segment net sales for the quarter were $161.6 million, up 7.2% compared to prior year, as a result of passing through higher steel costs to customers.

Metal Packaging segment earnings were $26.5 million for the fourth quarter, were 16.4% of sales compared to $17.5 million, or 11.6% of sales, for the same quarter last year. If you recall, our fourth quarter fiscal 2007 earnings results were negatively impacted by a temporary imbalance between steel cost and selling prices, which was favorably resolved on January 1, 2008, with selling price increases.

More positively, we saw our metal business improve productivity for the year, particularly during the fourth quarter.

Moving on to Plastic Packaging results, the net sales for the segment during the quarter were $122.4 million compared to $102.1 million for the prior period, representing a 20% increase.

We realized volume growth of approximately 1.9% as a result of increased market share, driven largely by our recently developed new products, specifically our innovative twin-shot pail, and continued benefits from our company-wide cross-selling efforts.

Plastic Packaging segment earnings were $8.2 million for the fourth quarter compared to $11.4 million for the same quarter last year. The decrease resulted from a spike in non-resin-related inflation and poor productivity. However, we believe both of these areas have been addressed through changes in purchasing practices, our recently launched cost-reduction program, and changes in management.

In conclusion, let me say while we are pleased with our financial results for the quarter and fiscal year, we realize there is significant work to be done and we will continue to address our cost base in light of the current market and economic conditions. Given the current environment, we are reducing costs to stay ahead of the curve, just as we did successfully in fiscal 2008.

Early in this first quarter we began a company-wide effort to identify opportunities to reduce our costs and improve productivity. All areas of cost, and the way we do business, have been reviewed and I am very encouraged by the level of opportunity identified and the pace at which our divisional leadership is implementing actions to achieve potential benefits.

In addition, product schedules at all of our manufacturing facilities have been adjusted to assure we maintain high levels of productivity during the hours we schedule our facilities to operate. We believe that these actions will not only act to mitigate the impact of weaker volumes today, but will position the company for stronger financial results when the markets rebound.

Also, our liquidity position remains solid and the actions we are taking to further reduce working capital and capital expenditures will only improve our standing. We expect the cost-reduction program that we began implementing during our first quarter to allow us to grow earnings during fiscal 2009, even in a down market, and better position the company for longer-term sales and earnings growth.

I will now turn the call over to Kevin Kern for a review of the fourth quarter and fiscal 2008 financial results.

Kevin C. Kern

Net sales for the fourth quarter of fiscal 2008 increased 12.3% to $284.0 million, up from $252.8 million in the year-earlier period. Full year sales eclipses the $1.0 billion mark for the first time in the company’s history, gaining 6.3% from $959.0 million in fiscal 2007. The increase in net sales for both the quarter and full year resulted largely from higher raw-material-driven selling prices.

Overall, volumes declined approximately 1% for the quarter and 2.2% for the full year of fiscal 2008. Volume declines were a function of market demand and do not reflect the loss of business or market share. In fact, we believe that we have gained market share in each of our core products.

Gross margin before depreciation and amortization for the fourth quarter was $37.2 million, or 13.1%. This compares to $31.0 million, or 12.3%, gross margin for the fourth quarter of fiscal 2007.

Higher Metal Packaging statement earnings, which Ken described earlier, more than offset lower Plastic Packaging segment earnings.

Full year gross margin was $130.0 million, or 12.8% of sales, compared to $128.9 million, or 13.4% of sales, last year.

I note that the fiscal 2004 gross margin included $4.3 million of IPO-related expenses.

Selling and administrative expenses for the quarter was $6.7 million compared to $5.3 million, the increase resulting primarily from higher bonus expense and a bad debt write-off, offset by lower stock-based compensation and lower spending.

Full year selling and administrative expenses were $24.9 million compared to $37.2 million last year, which included $15.8 million of IPO-related expenses.

Excluding IPO-related expenses, selling and administrative expenses increased $3.5 million for the year, due to higher bonus expense and public company expenses, including insurance, legal, and accounting fees.

Restructuring charges were $3.9 million for the fourth quarter and $9.6 million for the full year of fiscal 2008. The charges were primarily associated with the fiscal 2008 closures of the company’s Franklin Park, Illinois, and Cleveland, Ohio, manufacturing facilities.

We also recorded additional depreciation of approximately $1.3 million for the full year of fiscal 2008 related to equipment taken out of service as the result of the plant closures.

We expect to record additional restructuring charges of $0.6 million during the first quarter of fiscal 2009 and $1.5 million for the full year associated with the fiscal 2008 restructuring.

Interest expense for the quarter was $8.2 million compared to $9.6 million for the year-earlier period and $35.3 million for the full year of fiscal 2008 compared to $38.0 million for fiscal 2007. This reduction for both the quarter and full year was primarily the result of lower average borrowings as well as lower LIBOR-based borrowing rates.

The provision for income taxes for fiscal 2008 was $1.3 million on pre-tax income of $13.2 million for an effective rate of 10%. This low effective rate was driven by certain favorable adjustments related to tax settlements on the 2004 acquisition of Nampac and certain statutory state and Canadian tax rates. These adjustments reduced our effective tax rate by approximately 8% and were included in our full-year guidance.

The effective rate was also reduced by certain corrections to our beginning deferred tax balances. These favorable corrections of $2.3 million reduced the effective rate by approximately 17%. These were not included in our full-year guidance and as such, we specifically excluded in the adjusted earnings per share numbers included in the press release.

We expect our effective tax rate to return to a normalized level of 38.5% in fiscal 2009.

We believe we have successfully weathered the difficult markets of the past 18 months. Productivity initiatives, including the two plant closures completed in fiscal 2008, coupled with the recently implemented company-wide cost-reduction program, will enable us to grow earnings and free cash flow in fiscal 2009.

With regard to specific guidance, we expect an adjusted net loss per diluted share for the first quarter of fiscal 2009, which is typically our seasonally weakest quarter, to be in the range of $0.12 to $0.16 compared to an adjusted net loss per diluted share of $0.18 for the first quarter of fiscal 2008.

We expect adjusted EBITDA for the first quarter to be in the range of $14.0 million to $16.0 million compared to $14.5 million for the first quarter last year.

Adjusted net income will exclude restructuring charges associated with the fiscal 2008 plant closures in Illinois and Ohio of $0.6 million, or $0.02 per diluted share, for the first quarter.

For full year fiscal 2009 we expect adjusted net income per diluted share to be in the range of $0.85 to $0.90 compared to $0.71 for fiscal 2008, and adjusted EBITDA for the full year to be in the range of $112.0 million to $114.0 million, including stock-based compensation, compared to $104.6 million for fiscal 2008.

Adjusted net income will exclude restructuring charges associated with the fiscal 2008 plant closures in Illinois and Ohio of $1.5 million, or $0.04 per diluted share.

Fiscal 2008 adjusted net income included $6.3 million of stock-based compensation while we expect fiscal 2009 to include $2.4 million in stock-based compensation.

And finally, we are projecting free cash flow for fiscal 2009 to be in the range of $42.0 million to $44.0 million compared to $39. 8 million in fiscal 2008.

We expect our cash taxes for fiscal 2009 to be approximately $15.0 million.

That concludes our prepared comments. I will now open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Claudia Hueston - J.P. Morgan.

Claudia Hueston - J.P. Morgan

On the guidance for next year, I was wondering if you could comment briefly on your expectations for market demand in both Metal Packaging and Plastic Packaging.

Kenneth M. Roessler

I will give you the run down the way we have typically done it. We believe in 2009 metal paint can volumes to be down in the range of 3% to 5%, aerosol and injection molding pails to be flat, and blow-molded plastic containers to be up 2% to 4%.

Now let me temper that by saying the expert that has provided us with forecasts on architectural coatings in the past calls for negative growth for the first half of 2009 and then slight positive growth during the second half. We have not really baked that optimism, if you will, in, but that where her forecast, as we lie today, that’s where it sits.

Claudia Hueston - J.P. Morgan

But your expectation is just kind of weakness throughout the year?

Kenneth M. Roessler

It’s kind of a continuation of where we are. We look at it that we’ve been in kind of the doldrums for the last 18 months. It started about mid-2007 and frankly, I think we have shown pretty good resilience in coping with lower demand. And I think the cost-reduction program and other initiatives we made over the 18 months really positioned us well for 2009, in spite of weaker demand.

Claudia Hueston - J.P. Morgan

And I was wondering if you could just elaborate a little bit on the Plastic Packaging business. You mentioned non-resin-related costs. Just maybe some color there. And you also talked about poor productivity. Where does that stand now and how are the plants running at this point?

Kenneth M. Roessler

I will take each of those separately. On the non-raw-material inflation, what had happened is over the year, as you know, resin, or plastic, costs and metal costs, not so much for tin plate but hot-rolled bands, went up pretty dramatically earlier in the year through the summer and then both of them dropped like a stone later in the year. We were able to fend off a lot of the cost increases for our components, like handles, fittings, and gaskets during those run ups and then in our fiscal fourth quarter we had to bear some of those cost increases and we took them, in many cases, cumulatively.

So the short fall in numbers year-over-year is about 50% related to those. So we took those. Now that those things have abated, resin has dropped precipitously, plastic has dropped precipitously, steel, hot-rolled bands, has dropped. We will now be getting the benefits of those things, but getting them a little slower because we were delayed in taking the cost increases.

So we have changed the way we purchase a little bit. The way we’re doing things between Canada and the U.S. We have done a number of things to really be a little more nimble in the way we buy a lot of these components. So that’s on that side of it.

With respect to productivity, there are a couple of things. One of we have consolidated all the Cleveland volume into three different plants. Two of the plants handled it very well, one of them struggled a bit with it in the fourth quarter. That hurt us a little bit, there is no doubt about it. We proactively made some management changes in October to more actively address our productivity issues, but it really was more related to that and it just wasn’t a particularly good quarter as volume kind of trailed down. We didn’t flex as well as we should have in plastic. We believe we have addressed both of those issues.

Claudia Hueston - J.P. Morgan

On the bad debt expense, could you provide more color on that and how should we be thinking of that going forward?

Kenneth M. Roessler

We had one customer that dissolved their business. They just liquidated all their assets and we got stuck with about $600,000 to $700,000 of bad debts.

What we have subsequently done with that, we have reviewed all our credit files, we have had discussions with customers, our sales folks, just to be alert to that, with the general economy, to stay on the forefront and make sure we don’t have any other bad debts.

So really just one customer.

Claudia Hueston - J.P. Morgan

Was that on the plastic side or the metal side?

Kevin C. Kern

It was on the metal side.

Operator

Your next question comes from George Staphos - Banc of America Securities.

George Staphos - Banc of America Securities

I just wanted to get back to the way your purchasing handles and some of the other components more nimbly. Can you describe exactly what that means and had you changed the way you were purchasing those this year and are now going back? If you could give us a little more color that would be helpful.

Kenneth M. Roessler

We had not changed the way we were doing it this year. We found we had some opportunity from buying more regionally. We pay the inbound freight. We found we could use one supplier in our West Coast plants as well as our Western Canada plant. We could use another supplier in our Eastern plants, as well as our Eastern Canada plant. And we could also use a little bit of float on where the exchange rate was favoring us, to do that as well. So that’s a way we have addressed it.

We have addressed a number of other components, just in overall purchasing vigilance in terms of we are in a period of pretty dramatic deflation in costs, after a pretty dramatic run up. So we are just making sure that we are benchmarking things like metal, for example. Where was the hot-rolled band price at a point in time, where is it today? That tells us [what] we need to be getting in our handle price. Where was plastic earlier in the year, just on polyprophelene or polyethylene? Where is it today? We should be getting that reflected clearly in our costs for components such as fittings, gaskets, that are more plastic-related. On gaskets, which are primarily a petrochemical derivative, where was gas and where is it today? And that should be reflected.

So it’s not one thing. I think it’s more, and it’s somewhat related to this comprehensive cost-reduction program we are doing, we are doing things more as a company, not as a division, and we are tying things back to indices that make it easier to know whether we are getting a good deal or not getting a good deal, and if we’re not at the time, responding very quickly to make sure we are getting a good deal.

George Staphos - Banc of America Securities

So to some degree you are saying that had you spread out the purchases you would have been able to do a better job than having them somewhat consolidated and baked into one portion of the year?

Kenneth M. Roessler

Truth be told, I think we did a pretty good job in delaying them in one portion of the year. Hot-rolled bands had gone up dramatically all the way over the summer. It got to where it was $200 a ton more expensive than tin plate. And we were able to hold off these things through the summer, but at some point the suppliers needed relief and we had to give them relief, for them to stay in the game. So we took a lot of it at once, and we will probably see some of that as well carrying over into the first quarter on the plastic side as well.

But I think we did a pretty good job of managing it. We delayed it for a period of time. It all kind of hit at once and now we will see it bake down, a little slower than you would see steel dropping, but we will ultimately get it.

George Staphos - Banc of America Securities

It sounds like inflation really was the issue here. The changes you made maybe would have been able to shave some portion of the maybe $1.5 million hit you got from this, probably taken a portion of that sting away but not the whole amount, right?

Kenneth M. Roessler

Truthfully, it would have probably turned it backwards. If the $1.5 million, we probably would have only taken $800,000 or $900,000, and taken the other part in a previous quarter. So while we delayed it, it was a big sting in the fourth quarter.

George Staphos - Banc of America Securities

In terms of last year in the fiscal first quarter you were maybe a bit behind on steel. Can you update us on roughly where tin plate and steel in general have gone for you and what kind of price increases you’re out to your customers with and whether you expect to be a little bit behind in the fiscal first quarter or whether you expect to be even or better?

Kenneth M. Roessler

As you have heard from our competitors and other people that buy tin plate, the steel suppliers have been very aggressive in raising prices of tin plate in 2009. I don’t want to be specific about that because we are still in negotiations and don’t want to tie our hands, but the numbers are pretty dramatic.

We have announced and will implement price increases January 1 to offset those increases. Our competitors, as you have heard, and as we are seeing, are being very, very responsible in the market. I think they have stated and we have stated parts of our business are not generating the returns that we think are appropriate and we are taking action to address those.

But clearly, you will absolutely not see a shortfall like you say in 2007, in 2009. It simply isn’t going to happen.

George Staphos - Banc of America Securities

If you have announced what your price increases are, realizing there is going to be some flex in these as well, based on whatever tin plate does, can you state what you have gone out to the market with thus far?

Kenneth M. Roessler

I will put it this way. We have gone out with the exact same number as our competitors have.

George Staphos - Banc of America Securities

So fiscal first quarter there might be a little bit of compression because the price increases don’t get implemented until January 1, but then from there you are at least recovered .

Kenneth M. Roessler

I think the fiscal first quarter, which ends in December, will be unaffected by that. I mean, the steel that we buy now is at today’s price, we will adjust for it at January 1. So fiscal first quarter is going to be in line, slightly better than last year at the midpoint of our guidance. As we move into the second quarter you will have the price versus cost equation moving in there. And as I say, I believe strongly we will be on the right side of it.

George Staphos - Banc of America Securities

From what you hear from your customers, can you comment on how inventories are, especially on coatings, through the supply chain? Are we almost through the tail end of this de-stocking? Do you think that more inventory reduction has to happen through the supply chain? What is your view?

Kenneth M. Roessler

My view is that there is still a little bit of de-stocking to do and I think their intention is to continue to do it through the end of the year. We look at it that we are seeing our customers take down time at the end of the year, where usually it’s the week before Christmas and New Year, we’re seeing a lot of customers close down on the 19th, which is that Friday, and not coming back up until January. So I think that’s their way of de-stocking.

They’re doing what we’re doing, which is shutting down production, keeping shipping to get inventories down, and most of those customers are on calendar year end. So they tend to want to drop their inventories just for their year end. We’re on a fiscal so it’s a slightly different case for us.

But we are seeing some more of it. Also, it’s really a mixed bag because if you are packaging product in a five-gallon pail with resin dropping pretty dramatically, you are probably better off waiting until January, until it bottoms out, and not package anything you don’t have to in plastic at the moment.

Steel is a bit of a different case, although the mills aren’t allowing us to pre-buy so there’s not much run-ahead we can do.

So I think the demand will become a lot clearer in January when people get through taking a couple of weeks of down time and then come back and come up with the conclusion, which I believe they will, that they need to start packaging product and they need to buy cans and pails.

Operator

Your next question comes from Mark Wilde - Deutsche Bank Securities.

Mark Wilde - Deutsche Bank Securities

I just want to follow up, if possible, on inventories from a couple of different perspectives. First of all, can you talk about what you have seen the customers do over the last couple of months, and how many steps down the chain you have visibility to? And I just want to go back on the issue of whether you can do any kind of pre-buying in tin plate. You are in the fiscal first quarter and can get ahead of that price increase.

Kenneth M. Roessler

What we have visibility to simply is customer orders. And what we have seen customers do, particularly related to coatings, which is a somewhat seasonal business, is after September, which is typically August, September is the end of the push season, if you will, into October, November, we saw a number of customers taking more down days, not running weekends, running four ten-hour days and not running Fridays.

Some of that is related to demand, some of it is related to de-stocking ahead of the year end. So we don’t have visibility to their other raw materials, latex, etc. But I would have to believe they’re seeing the same things that we do.

And participating in industry associations like the NPCA and others, we hear the exact same thing from other large suppliers, the paint and coatings market, that they’re just taking more down time, reducing their production schedules, trying to bring down their inventories, and address, too, slightly weaker demand and seasonal changes.

We have also seen some of our customers announce plant closures and consolidations, which is not dissimilar to what we’ve done. Major companies have moved production back east and consolidated operations, so that has also had an impact.

But I think what we see is a microcosm of what we are seeing in any industry. It is not that paint is so much worse than petroleum or food or janitorial. I think that everybody is tightening their belt and we are seeing it both in operating schedules as well as inventory reductions.

With respect to the pre-buy question, the mills are being pretty vigilant, as you can imagine, with getting a big increase January 1, of not exactly allowing much pre-buy. At the end of the day, they are not going to allow much. The truth is that we have a little bit of inventory because business has been slower, but there is no pre-buy that is a big project that we would have done in the past. The mills simply aren’t allowing it given what they know the price is going to be January 1.

Mark Wilde - Deutsche Bank Securities

And how much of an impact do you think in the fiscal first quarter this issue of both the customers wanting to take down inventories, but particularly in your plastics business, perhaps people waiting until the new year to try to get the advantage of the lower raw material costs?

Kenneth M. Roessler

It’s having a noticeable impact, there is no doubt about it. When we look at our first fiscal quarter, you have got really two distinct upsides and two distinct downsides. The upsides are related to productivity and this cost-reduction program we have put in. And when I say productivity I also mean the impact of the two plants that we closed during 2008. So productivity as a cost-reduction program, we believe really has a lot of legs and is taking effect immediately. So they are going to be the upsides.

The downsides, year-over-year, are our volume, because of the reason you stated and because I think there is still a general jitteriness in our market. And the other is non-raw-material inflation. We are going to see some hangover of the impacts of prices going up. By fiscal second quarter we should see that all gone down and in fact, start going the other way. But I think they’re the two downsides, are the volume and the non-raw-material inflation.

If you add those up and put them in a basket and throw them up, we are still going to be at the midpoint slightly better than last year. But really it’s a distinct story. Volume and cost on one, cost reduction and productivity on the upside.

Mark Wilde - Deutsche Bank Securities

And it looks to me pretty much like all the secondary raw material markets, the scrap markets, have just completely tanked here. And I wondered if there is any opportunity for you to use more recycled plastics, through products like that double-shot pail, to try to take advantage of very, very weak recycled material markets?

Kenneth M. Roessler

It’s a funny thing because the virgin price has dropped so fast. You are talking in the order of magnitude of 55% in three or four months, it’s dropped by, whether it be polyprophelene or polyethylene. So in fact, virgin is cheaper than recycled for the moment because the recycle market doesn’t move up or down very quickly and because you are really getting refuse to reprocess, so it doesn’t move up or down.

So right now, our twin-shot pail is still a good product because once the markets stop, which I believe will be once the bottoming out of resin occurs, which is probably in December, there is going to be availability because the resin suppliers are struggling for demand themselves. There is going to be availability to buy lower cost resin for our twin-shot, whether it be reprocessed or an off-spec, wide-spec type material that we can easily use in that process.

Mark Wilde - Deutsche Bank Securities

Could you talk about what you would see as the biggest risks to your forecast as you think about 2009? We are clearly going into an environment that most of us have never seen the likes of before and where do you think the real risk elements are for your business?

Kenneth M. Roessler

I think it’s worth pointing out what I said to Claudia earlier. To some degree we have been in this for a year and a half. It may get worse and we are projecting volume to be a little less, but we think that we have really gotten ahead of the curve in the last 6 to 12 months in terms of closing facilities, taking on a comprehensive cost-reduction program, gaining very significant productivity in our metal business, so I think we are pretty well poised.

The downside, as we see it, is volume. We don’t know where volume can go but with this cost-reduction program I think it is important to note, it’s not just a flavor-of-the-day, it is a comprehensive review of every area of cost in the company.

And we have addressed what I will call flexing and we have made sure that each of the divisions has flexing in a way that is more, I will use the word modular, that if revenue doesn’t go down 5% and it goes down 10% that we are right on with that 10%. That 10% not only costs us so much in margin but so much in absorption and we are able to move to that quickly. If it were to stay flat and we do better than we think, it can ramp up quickly. If it gets worse, we can move out even more actively.

So it is a much different way of looking at the business and you think you look at it always that way. You do, but when you run 24/7 you can make some modest changes. You can go from continuous to conventional schedules. This is really a significant change to way we do business, in terms of really making it malleable in that way. It moves pretty easily.

So we think we are out in front of it. That’s why in spite of lower volumes we think that we can grow earnings. And sitting here today not knowing what is going to happen with volume, we think we have developed some nice upsides for next year as well.

Operator

Your next question is a follow-up from George Staphos - Banc of America Securities.

George Staphos - Banc of America Securities

You said that you should be comfortably in line with your covenants for next year. Can you remind us, where do you have, realizing it’s still a comfortable gap, where you have the most pressure from a covenant standpoint?

Kevin C. Kern

The two main covenants are interest coverage and leverage. And probably the most pressure is in the first two quarters, which I guess is the good news because it is all done on a trailing 12-month basis. We have got about a 15% spread on EBITDA, on a trailing 12 months, which equates to something more than 50% in a quarter, so we feel very comfortable about that. And then as the quarters move on, the third and fourth quarter, the covenants essentially are set. For the rest of the credit agreement, they don’t change. And the gap widens even further.

So at this point in time we feel very comfortable about it. And of course we will update things as we move forward.

George Staphos - Banc of America Securities

And with the dollar versus the C-dollar changing pretty rapidly here in the last few months, has that had any effect in terms of how you want to produce relative to your customer base? Has it given you any issues to consider from a manufacturing standpoint? I realize you are addressing it in your firm-wide review right now, but could you give us any color on that?

Kenneth M. Roessler

We have looked at where we ship in Canada into the States and vice-versa. We are addressing some of that by moving business around. We also are addressing, we buy our resin in U.S. dollars so we are being very, very careful in Canada as the perception that their resin is dropping precipitously, we are being very careful that we are taking into account, our customers understand, that they didn’t see it on one side because we bought in U.S. dollars, that we don’t expect to be hurt by that as well.

So it’s more just being prudent. No radical changes, but just some prudence in the way we do things between where we sell and our raw material pass throughs.

Kevin C. Kern

And our foreign currency expense was less than $800,000 for the full year.

George Staphos - Banc of America Securities

You said the restructuring charges were going to be $600,000 in the quarter and $1.5 million or $1.9 million for the full year. Can you go through the details there again, and what is the cash outlay behind those? Obviously not that much but nonetheless I want to have that detail.

Kevin C. Kern

That’s about what the cash outlay is going to be. Those two numbers.

George Staphos - Banc of America Securities

And that’s $0.6 million and $1.5 million?

Kevin C. Kern

And $1.5 million for the full year, yes.

Operator

Your next question comes from Bob Franklin – Prudential Financial.

Bob Franklin – Prudential Financial

On the topic of your eating some cumulative cost increases, could that have helped you pick up the market share that you did?

Kenneth M. Roessler

I don’t think that really had much effect. We are speaking more on the plastics side. The vast preponderance of our business is under contract related to resin. So we move up and down with an index and I don’t think it really had much to do with it.

Unfortunately, non-raw-material inflation, we have kind of, because the pass throughs are related to resin, we have kind of benefited sometimes and taken the hit the other times. This is a time where we are taking the hit a bit cumulatively.

I would say, without question, the market share we gained had more to do with the new products, the twin-shot pail as well as the eco pail that we have rolled out to customers, and our cross-selling efforts, which is a well in place management practice of focusing our three divisions on picking up sales and selling more to the customers where we have existing relationships.

Bob Franklin – Prudential Financial

On the cash flow sweep, is that half of excess cash flow?

Kenneth M. Roessler

Right now, based on where our leverage is, the excess cash flow sweep is at 50%. Once we drop below 3%, it goes to three times.

Bob Franklin – Prudential Financial

Is there a way I can get from your guidance to trying to figure out what debt you would pay down from the cash flow sweep next year?

Kevin C. Kern

No, you can’t do that. Because it depends on where cash is used during the year. But I think it would be fair to say that if nothing else changes from 2008, it is going to move from 50% sweep down to 25%, so all other things being equal it would drop about in half.

Bob Franklin – Prudential Financial

Is there any benefit to paying down the debt anyway?

Kevin C. Kern

That’s a good question. At this point in time, we are holding on to cash, we’re not going to make any further voluntary repayments on debt. We will re-evaluate that as the year develops and we will see what happens in the capital markets, but we are taking a position at this point in time to hold the cash.

Operator

There are no further questions in the queue.

Jeffrey M. O'Connell

Thanks to everyone for your participation today and we look forward to speaking with you again on our first quarter fiscal 2009 call.

Operator

This concludes today’s conference call.

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