Sealed Air Corp. Q4 2008 Earnings Call Transcript

Jan.26.09 | About: Sealed Air (SEE)

Sealed Air Corp. (NYSE:SEE)

Q4 2008 Earnings Call

Jan 26, 2009 11:00 am ET

Executives

Amanda Butler - Director of Investor Relations

William V. Hickey - President and Chief Executive Officer

David H. Kelsey - Senior Vice President and Chief Financial Officer

Analysts

Ghansham Panjabi - Wachovia Capital

George Staphos - Banc of America Securities

Rosemarie Morbelli - Ingalls & Snyder

Richard Skidmore - Goldman Sachs

Claudia Hueston - J.P. Morgan

Reik Read - Robert W. Baird & Co.

Peter Rushmire - Barclays Capital.

Joseph Naya - UBS

John McNulty - Credit Suisse

Fritz Boncart - Sage Asset Management

Operator

Good morning, everyone, and welcome to the Sealed Air conference call discussing the Company’s Fourth Quarter and Full Year 2008 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) We do ask that you please limit yourself to one question and a brief related follow-up question per caller, so that others will have a chance to ask their questions. And now at this time, I would like to turn the conference over to Ms. Amanda Butler, Director of Investor Relations. Please go ahead.

Amanda Butler

Thank you Justin, and good morning, everyone. Before we begin our call today, I would like to remind you that statements made during this call stating management’s outlook or predictions for the future are forward-looking statements. These statements are made solely on information that is now available to us. Our future performance may be different due to a number of factors. Many of these factors are listed in our most recent annual report on to form 10-K or quarterly report on form 10-Q.

We have 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 quarterly results. At this time, I will turn it over to Bill Hickey, our CEO.

William Hickey

Thank you, Amanda. 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 fourth quarter and full year 2008 as well as discuss our 2009 guidance. Dave will then review select details of our financial results. After Dave’s remarks, we will take your questions.

2008 was clearly a challenging and unpredictable year. Despite the volatility in commodity prices, weakening economic conditions, shifting buyer behavior, and de-stocking among industrial customers, we finished the year with earnings within our updated guidance and also continued to generate cash.

By the fourth quarter, our margins reflected the benefits of the proactive actions we took earlier in the year to counter the challenges we tried to anticipate. These actions included our pricing initiatives, which we held through the fourth quarter and allowed us to recover approximately 95% of our incremental resin costs for the year, but they also included our cost savings programs and our expanded focus on operational efficiency.

Here we completed our transition to the SAP enterprise system worldwide. We completed a three-year construction phase of our global manufacturing strategy. We applied stringent cost controls that reduced our full year operating expense ratio, and we implemented a broader cost reduction and productivity program in the third quarter.

Despite these positive actions, unit volume sales declined as economic conditions weakened through the end of the year. With the greatest decline occurring in the fourth quarter and largely within our North American Protective Packaging business. This decline was due to lower manufacturing and retail activity as well as inventory de-stocking, not a shift in our market position.

Overall, our 3% increase in product price mix or $120 million of incremental revenue drove the majority of our revenue growth in both the full year and the fourth quarter. This price mix growth was primarily in our food business in the Americas and in Europe. Looking at the business geographically for the full year 2008, if we exclude the impact of foreign currency translation, all regions posted positive revenue growth and in developing regions we achieved double-digit revenue growth in Russia 13%, China 14%, and 9% growth in Latin America, excluding Brazil.

As economic conditions weakened late in the year, the growth rate slowed and by the fourth quarter, we saw flat year-over-year growth in North America and slight year-over-year decline in Europe and Latin America.

Moving onto EPS, in the fourth quarter diluted earnings per share were $0.39 excluding the special items mentioned in our press release earlier this morning. For the full year, our diluted earnings per share were $1.40, again excluding the charges mentioned earlier which was within our October outlook. Looking at performance by business area, our food packaging business finished the year with positive revenue growth excluding the favorable impact of foreign exchange.

Within the fourth quarter, unit volume growth rates declined to negative 3% driven largely by reduced processing rates in Brazil. Our North American volumes declined by 1% in the quarter, which was slightly better than the regional meat processing rates, which also declined in the quarter reflecting the strength of our own applications and positions in the market.

On a bright note, the business saw solid equipment placements worldwide through the fourth quarter as customers showed strong demand for automation and improved sanitation in their processes. As an example, we started our biggest equipment installation in Eastern Europe, which will yield volume growth over the next five years, and we are in the process of signing an equipment agreement with one of the largest meat processors in Europe.

Also, the business continued to manage pricing through the fourth quarter as seen by the $60 million in price mix we generated for the full year. This largely reflected price mix growth in North and South America. Additionally, we saw benefit as the business strategically pruned products and accounts to protect margins and manage regional currency devaluations.

Looking ahead to the first half of 2009, we anticipate North American volumes to track meat processing rates, which are expected to decline slightly in the period before an anticipated mild recovery in mid-2009.

In Latin America, we anticipate growth in all areas except Brazil. Although the majority of Brazilian cattle breeders have now complied with European trade regulations, European demand has now slumped due to economic conditions in that region.

And finally, in Australia we expect a flat to slight decrease in volume growth for the year based on their estimated processing rates. Moving onto food solutions, the business remained relatively solid through the year in all regions excluding Europe and the North American volume decline, which was related to one retailer who switched their packaging format in late 2007.

In fact, the business showed strength through the fourth quarter across all products in the United States in Case-Ready in Australia and even the Pizza segment in Europe. Additionally, product price mix was positive for the full year contributing $30 million primarily from North America and showed exceptional strength in the fourth quarter reflective of the various pricing initiatives and strategic product and customer pruning applied through the year.

In the United States, we’re continuing to see more meat move to Case-Ready rather than back of the store for packaging due to the cost savings opportunities that Case-Ready offers. Additionally, in this economic environment, the demand for ground meats increases and this meat category is largely packaged in Case-Ready format.

These trends combine with ongoing product development and successful regional launches of new formats like Mirabella, increased Case-Ready’s full year revenue to approximately $480 million.

Additionally, as consumers choose to eat at home and quick-service restaurants in this recessionary period, demand for vertical pouch packaging solutions has benefited. Revenues have grown at a double-digit rate of over 13% to $145 million for the full year 2008.

The weakness we experienced in food solutions occurred late in the third and fourth quarter and was largely in Southern Europe. Here, revenue was unfavorably impacted by a decline in fresh red meat consumption and consumer buying trends shifted to discount retailers who have limited use of Case-Ready formats.

Additionally, we saw a slowdown in our growth rates in developing regions of the world as recessionary conditions spread and customer’s access to credit slowed new customer adoptions. Anticipating 2009 trends is challenging in this segment, as consumer buying behavior has been unpredictable and has created caution among our customers. Nonetheless, we’re anticipating business trends to be solid in North America and Australia based on current processing conditions and our position within these regional markets.

In these regions, we anticipate moderate growth in our ready meals, Case-Ready, and new tray, display tray formats in the year ahead and expect potential for flat to slight decline in equipment placements as customers conserve cash in the near term.

Moving onto the Protective Packaging segment, this segment reflects the sharp downturn in economic conditions. Revenues slowed considerably in the fourth quarter across all product lines and geographies, as unit volumes declined due to customers reducing their manufacturing output, experiencing lower retail activity, or aggressively reducing their inventory.

The business was successful with managing price for the end of the year, and we strategically managed volume loss from more price sensitive accounts. This resulted in $21 million of product price mix for the full year with approximately a little over half of that from North America.

The first half of 2009 is anticipated to be challenging in this segment, as a result of market conditions. Our North America region [investment] and equipment demand will be relatively stable. However, we do anticipate a year-over-year decline in unit volumes of our packaging materials. Lastly, our other category finished the year with double-digit growth in both specialty materials and the medical applications business primarily attributable to our acquisitions in the third and fourth quarters of 2007.

Looking at the fourth quarter of 2008, however, unit volume growth declined significantly in our specialty materials business, as demand was unfavorably impacted by economic conditions most notably in Europe and North America. This volume decline in the quarter was partially offset by strong double-digit product price mix growth in those same regions, as well as a 6% volume growth in our medical applications business, which still saw areas of strength despite some slowing in Asia due to regional economic weakness.

One additional item I would like to mention received a commitment for a total of $300 million of senior notes in a private placement. As you know, the regular credit markets have essentially been closed for all but a few borrowers with no clear sign as to when conditions will improve.

Based on our financial obligations over the next year, we considered it prudent to provide financing for these obligations earlier and to provide certainty to the availability of funds in the event that traditional financial markets continue to be closed to most borrowers.

Before I hand it over to Dave, I would like to touch upon 2009 and our guidance. We would like to believe that 2008 was our most challenging year. However, as I’ve already mentioned, we remain cautious about the recessionary conditions and unpredictable demand that we expect to face in the year ahead, at least through the first half of 2009.

As a result, we expect our full year 2009 diluted earnings per common share to be in the range of $1.17 to $1.37, which includes charges of $20 million net of taxes or $0.08 per share expected to be incurred related to our global manufacturing strategy. Excluding these charges, we expect our 2009 earnings to be in the range of $1.25 to $1.45 per common share, which includes the incremental expense on the $300 million financing commitment that I mentioned earlier.

Looking at our guidance in more detail, we have assumed that our full year average raw material costs will decrease compared with 2008 and we expect it to be higher in the second half of the year than in the first half.

As a basis for resin price assumptions, we assume the full year average price of oil at $57, and we are anticipating oil prices to be above that average in the second half of the year.

We have also assumed a low single-digit percent decline in our unit volume growth rates in 2009, which is in line with our expectations for trends and customer demand. We have also assumed ongoing positive product price mix as we continue to manage costs recovery and return to a consolidated 30% gross margin over time.

We have estimated operating expenses of approximately 16% or less of sales and a full year effective tax rate of 27.7%. Our capital expenditures range is now $100 million to $125 million. As for foreign exchange, we have assumed a stronger U.S. dollar will reduce the revenue and earnings contribution of our international operations. We’re estimating a full year average U.S. dollar to euro foreign exchange rate of $1.29 versus an average of $1.47 for the full year 2008.

During our third quarter earnings call, we discussed our expectation of generating $115 million of benefit in 2009 from a combination of benefits from our cost reduction and productivity program, our global manufacturing strategy, lower resin prices, and favorable price mix.

We expect to generate those benefits in 2009, despite being substantially offset by unit volume declines and unfavorable foreign exchange. These benefits will enable us to hold and potentially improve our earnings in the face of another challenging year and certainly, if conditions continue to deteriorate, we have contingencies in place to respond.

As a result, we are anticipating 2009 conditions to remain challenging and we remain cautious, but we will continue to manage our business for continued margin recovery that we expect from our ongoing cost control measures, favorable product price mix, supply chain initiatives, and we will focus on continued cash flow generation.

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

David Kelsey

As Bill mentioned, our sales were $11,168,000,000 for the quarter. For those participating in the call who would like additional details, tables posted on our website sealedair.com present the components of the change in net sales by business segment and by geography, the impact of foreign currency translation on sales, by geographic region and the percentage of sales by geographic region.

As you saw in our financial statements, gross profit decreased $36 million in the fourth quarter compared to the prior year. Our lower sales volume, particularly in the Protective Packaging segment was the primary contributing factor. A second factor responsible for approximately one-third of the decrease was foreign currency translation.

Marketing, administrative and development expenses decreased $25 million in the fourth quarter compared to the prior year. Approximately one-third of the decrease was attributable to foreign currency translation. Lower accruals from incentive compensation, lower travel expense, and some initial savings from our cost reduction and productivity program also contributed to the year-over-year decrease in spending.

Bad debt expense, which gets recorded in this section was approximately $5 million for the quarter, higher than in prior periods, but still manageable. Operating profit was $114 million or 9.8% of revenue, adding back restructuring and other charges of $21 million increases operating profit to 11.6% of revenue. The decline of $11 million from the fourth quarter of 2007 is explained primarily by lower unit sales volumes in our Protective Packaging segment.

Interest expense decreased $3 million in 2008 as compared to 2007, primarily reflecting the April retirement of our 5 and 3/8% notes. In the fourth quarter of 2008, we recorded an additional $20 million pre-tax charge to recognize the impairment related to a decline in the fair market value of all five option rate securities we hold. Three of the five option rate securities are directly or indirectly impacted by the credit worthiness of Ambac and accounted for the majority of the impairment. Our current net book value is $11 million compared to our original cost of $45 million.

I will conclude with some key cash flow and balance sheet items. Our accounts receivable declined $107 million from December 31, 2007, primarily reflecting the sale of $80 million of receivables under our accounts receivable securitization facility. Excluding this sale, compared to December of last year, customer receivables balances would have decreased $27 million or 3%. On a constant dollar basis, after adding back the impact of the sale of receivables, accounts receivable would have increased approximately 4% compared to December of last year.

We consider ourselves to be well prepared to manage our receivables balances in the current economic climate. Over the past two years, we have strengthened our organization, and we consider our current customer credit metrics to be within historic parameters.

Inventory investment at December 31st declined to $71 million during the quarter. This decline is attributable to a decrease in inventory held outside the United States primarily due to foreign currency translation. Further contributing to the decline since the start of the fourth quarter has been a successful effort to reduce inventories in the United States, food segments, subsequent to the July 1st go-live of SAP in those businesses. Compared to December 31st of last year, inventory investment was down $17 million but up $24 million after adjusting for foreign currency translation.

Total borrowings including the funds received from the sale of securities at December 31st were $1,559,000,000 billion down $237 million from the end of September or $182 million after adjusting for the sale of receivables in both periods.

In April, we retired $300 million of 5 and 3/8% notes when they matured in. In December, we retired $91 million of 6.95% notes due May 15, 2009 as a result of our tender offer. We expect to retire the remaining 6.95% notes when they come due in May using available cash.

Given the unsettled situation in the credit markets, it seems appropriate to comment on Sealed Air’s liquidity position. We have access to over $600 million of committed borrowing capacity. We ended December with approximately $129 million of cash and cash equivalents, which excludes the net book value of our investments in auction rate securities.

Operating cash flow, one of our key metrics as a management team gets close attention. As I stated previously, our accounts receivable in inventory investment levels are within historic ranges. Capital investment will be lower in 2009 as work is completed on our three new plants in emerging markets.

As Bill already commented, we currently expect 2009 capital spending to be in the range of $100 million to $125 million. This will return capital investment to the levels that we made annually in the earlier part of this decade. Prior to commencing investments for our global manufacturing strategy and represent a combination of maintenance and growth projects.

Our cash flow projections suggests that we have sufficient liquidity to fund operations and the Grace settlement should have become payable later this year. However, as Bill mentioned, we nonetheless have opted to raise $300 million in a private placement of five-year notes that while adding to our interest expense will provide added flexibility to address our future funding needs in an uncertain time for global Capital Markets. Now, I will turn the call back to Bill and to your questions.

William Hickey

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first questions comes from Ghansham Panjabi - Wachovia Capital.

Ghansham Panjabi - Wachovia Capital

In terms of your volume assumptions for ‘09, looking at ‘08 looks like volumes were down a couple percent, but the fourth quarter was down 7%. Why is it realistic to assume volumes will be down low single digits in 2009 when the global economy seems to be getting worse, not better?

William Hickey

Well, Ghansham, we sort of have taken two shots, maybe three shots at our budget and we’ve essentially brought some of the numbers down earlier to where we are now. Our assumption on low single-digit declines in 2009 are based on continued slowing through the first half of ‘09 with a gradual but tepid recovery beginning in the second half of ‘09.

Looking at the volume for the fourth quarter, I think I mentioned it twice during my prepared comments, and Dave may have covered just briefly is that, we have sensed fair amount of de-stocking on the part of customers as they’ve reduced their inventories.

We’ve actually seen inventory replacements at some of our customers not dramatically, but clearly the channel had gotten very low on inventory as they ended 2008.

Ghansham Panjabi - Wachovia Capital

Okay. And just as a follow-up question, looking at your U.S. business versus the international business and just the phase of the business cycle if you will, where do you think we are internationally including Europe, but referring more specifically to Asia-Pacific and Latin America?

William Hickey

I will give you sort of the quick summary is that the U.S. is still declining. In Europe, I actually bifurcate England and the rest of Europe. England, I actually think is sliding faster than the U.S. Europe is catching up to the U.S. pretty quickly, pretty dramatically.

In Asia, you are seeing spill over from the U.S. You’re seeing spill over in Latin America. The numbers for the year in both China and Latin America as you heard me say except for Brazil and Latin America were still up, and their numbers through the fourth quarter were still positive, but not by much.

Operator

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

George Staphos - Banc of America Securities

I just wanted to piggyback on Ghansham’s question regarding volume trends. What assumption do you have built into North American red meat consumption for 2009, Bill? It would seem from some of the data we have seen that there is a bit of a slowing here and with the consumer perhaps pinched more than they were even in 2008 that we might see something worse than a low single-digit decline within red meat within North America as a follow-on?

William Hickey

George, the projections for the first part of ‘09 are looking at slaughter down depending on who you look at. I have seen numbers 1%, 3%, down 5% for the first half of 2009, flattening and maybe a slight up tick in the latter half of ‘09. Pretty much the same with in terms of pork we saw pork flat in ‘09 versus ‘08, so you got to remember our mix is not just beef. You got the pork component and you’ve got the poultry component, and our food business represents the composite of all three of those, but if I look at the mix, the beef will be down more, pork will be more flat, and probably poultry will be pretty close to flat. So that’s sort of how we get to the food numbers, George, for ‘09.

George Staphos - Banc of America Securities

Okay. And as far as we’ll call it the Berkshire notes go, do you have an ability to prepay those notes early should you find that ultimately you didn’t need the capital for whatever reason, and is the operating assumption that the convertible notes for 2010 that you won’t get any further financing because your operating cash flow will be able to handle that?

William Hickey

I will ask Dave to take that one, George.

David Kelsey

George, the notes have a five-year term to them, and there is no ability to prepay them. So, we are entering into a five-year agreement with the lenders. Regarding the outlook sort of into the dark depths of our crystal ball in June of 2010, we think that with this $300 million borrowing that we have a reasonable liquidity projection both from operations and borrowing sources to address that when it comes to, but there are a number of other options as well that we’re currently working on and we’ll continue to work on for the balance of this year to make sure that liquidity, which is not an issue for us today does not become an issue for us in the future.

Operator

Your next question comes from Rosemarie Morbelli - Ingalls & Snyder.

Rosemarie Morbelli - Ingalls & Snyder

Could you give us a little more detail on the positive price mix in both categories and is it more price? Is it more mix? Is it bit of more or less balance version of both of them, and then as a follow-up, how confident are you that you will be able to hold onto the price increases and will not have to give them up in 2009, particularly as your raw material costs starts coming down?

William Hickey

Rosemary, let me go back and say that most of the price mix is price consistent with the comments we have made on our last couple of quarterly calls that we have been raising prices to offset and to try to get ahead of the volatile increases we saw in resin prices in 2008.

We expect to retain most of those price increases. If you look at the pattern Sealed Air has over various other cycles, there is a [catch up] on the upside, and the recovery on the downside essentially the results in margin expansion, which we are beginning to see now.

Rosemarie Morbelli - Ingalls & Snyder

Regardless of what happens to the volume you still expect your operating margin to improve ‘09 versus ‘08?

William Hickey

I think if you do the numbers in my guidance for the year, you will reach a similar conclusion.

Rosemarie Morbelli - Ingalls & Snyder

Even at the $1.25?

William Hickey

Yeah. I am not going to go granular on the range, Rosemary. You will have to do that yourself.

Operator

Your next question comes from Richard Skidmore - Goldman Sachs.

Richard Skidmore - Goldman Sachs

Just to follow-up a little bit on the 2009 guidance a little bit versus 2008. Just trying to bridge between the two ‘08 to ‘09 and just to make sure I understood correctly, it sounds like you have 50 to 60 million of cost saves and benefit from GMS offset by currency, and you’re going to benefit from price and mix. Is the negative delta then just primarily related to volume and the volume impact is going to be something like $50 million or $60 million negative in 2009?

William Hickey

You have done a good job. The biggest impact is probably FX. If you look at the range in foreign exchange, I think in our guidance in the press release we used $300 million to $400 million impact on the top line, and the remainder is volume, and of course the FX is just our assumption now. I am not willing to tell you what the euro will actually be at the end of ‘08-’09.

Operator

Your next question comes from Claudia Hueston - J.P. Morgan.

Claudia Hueston - J.P. Morgan

I thought the result in food solutions was a little bit better than I expected, the operating margin in particular was a lot stronger than we had forecasted, and I wondered if you could just talk a little about what drove that and how sustainable you think this kind of operating margin is?

William Hickey

Yeah Claudia on just food solutions. That’s a business that primarily focuses on away from home eating, it is sort of our away from home version, and I think what the business has done is focus on QSRs, focus on ready meals, and it really has had some good improvement in Case-Ready, which is also part of that business. I didn’t mention a number exactly, but despite the loss of over $50 million in volume at one retailer in 2007, we did end up positive in case ready at 7.4%.

As that business reduces its dependence on outsourced trays, which has been a factor in that business. If you recall, several hundred million dollars of the volume in food solutions is outsourced products on which we obtain only a small margin. As we leverage the rest of the business, primarily manufactured products, we should continue to see stability and perhaps improvement over the longer term in food solutions margins.

Claudia Hueston - J.P. Morgan

That’s very helpful. A quick question on the protective side of the business. I just wondered if you could comment a little bit about demand trends over the course of the fourth quarter and if you have any information just on the first couple of weeks of January. Are things getting materially worse in that business, particularly North America or is it sort of stabilized?

William Hickey

Let me sort of go and say that fourth quarter was sort of up down, and up kind of thing. You could tell by watching the channel that customers were carefully managing their inventory. The one thing which we typically see in holiday seasons is you will see a re-buy, generally you will get a re-buy between the fifth and the tenth of December for those that didn’t buy enough material for their holiday packing and holiday shipping. There is a one last look, particularly for the online retailers. That didn’t happen this year. That didn’t happen, so the normal pick-up in December consistent happen, but we saw continued inventory shrinking. I’d rather not comment on the first week in January yet.

Operator

Your next question comes from Reik Read - Robert W. Baird & Co.

Reik Read - Robert W. Baird & Co.

I wanted to see if you guys could comment a little bit more on the operating expense side of things. When I look at things sequentially, revenue was down a little bit, but the operating expenses exceeded that pretty nicely. Can you talk about how much of that was one-time in nature, i.e. just good cost discipline in a difficult environment, and how much of that is sustainable based on the things that you have been doing?

David Kelsey

As Bill mentioned, we are expecting for the total year 2009 that expenses will be no greater than 16%, so it is not expected that we’re going to sustain the fourth quarter spending levels as a percent of revenue of below 15%. We are starting to see some benefit in the fourth quarter from the cost reduction program that we announced back in July.

We also had some benefit from foreign exchange as we translate the expenses of our overseas operations back into U.S. dollars, and then we had other savings that we have put into the belt-tightening category, particularly as it relates to travel and meetings and we would expect those to be sustainable into the New Year. So, I wouldn’t say there are any big one-time charges with the one exception of annual incentive compensation, we tend to true that up as we go through the year, and given the fall-off in the performance of the business in the second half, we did reduce our accruals in the second half of the year, so that did have some impact on the fourth quarter expenses.

Reik Read - Robert W. Baird & Co.

Okay. And then, Dave, can you just comment on what you think as you get into the 2009 timeframe, expectations for working capital?

David Kelsey

As I mentioned in my comments, the inventory and receivables balances we think have tracked well with the performance of the business. We don’t see any adverse performance developing in those areas. As foreign currency has an impact there, something in the order of $300 million or $400 million potentially on our top line, that will get reflected in the reported balances of inventory and receivables on our books, but it is tough for me to say that translates into cash flow, because it is just a translation impact.

The cash flow from operations, we think as a percent of sales will continue to track well. We have reduced costs as Bill mentioned. We expect margins to continue to be respectable in 2009, so no big issues in terms of the company being able to continue to live up to its reputation as a reliable generator of cash in good times and bad.

Reik Read - Robert W. Baird & Co.

And would you expect the first half though to be a little bit more positive just given the slowing you’re talking about in terms of cash flow from working capital?

David Kelsey

Certainly on the working capital side we would expect impact in the first half of the year and cash from operations does tend to be more loaded into the second and third quarters of the year.

Operator

Your next question comes from Peter Rushmire - Barclays Capital.

Peter Rushmire - Barclays Capital.

I was hoping you could help us to quantify the resin inflation that you faced for all of ‘08 and if oil is in fact $57 in ‘09, what does that imply the resin costs relief is for ‘09?

William Hickey

Let me comment on your number. I think we have said through the year 2008 as we went through quarter-by-quarter. The impact for the year was something over $120 million as additional costs in 2008 over 2007. And if you then take that back the other way in terms of 2008 to 2009, we’re looking at something in the $100 million range.

Peter Rushmire - Barclays Capital.

On a related point, if we were to look at the annualized run rate from the fourth quarter given the stickiness of some of the resins, how much would the run rate be down already from the fourth quarter versus how much is still ahead of us?

William Hickey

I am not sure I understand or prepared to answer that right now. Our assumption I will tell you is that we’re using the fourth quarter as a going-in point to 2009. We’re looking at that being in that sort of general range through the second quarter, and then the likelihood that there will be an up tick in the second half of the year ending up where our 57 average, and the oil is now averaging under 50 for the first three weeks of January. So, obviously our assumption of 57 takes us to some number over 60 by the end of the year.

Peter Rushmire - Barclays Capital.

If I could ask just a quick financial question, maybe for Dave. Is it possible to comment on the performance of the pension in ‘08, your outlook for the funding status, whether you plan to contribute or not, and whether you can provide guidance on the non-cash pension impact on the income statement?

David Kelsey

Pension is a very modest liability for us. Frankly, it is so modest it is not the kind of question we prepare for these earnings calls. We’re talking about a funding requirement that’s significantly less than $20 million, maybe less than $10 million a year. Most of the programs we have except for ones that is are government mandated are frozen. So, as we look at 2009, sources and uses of cash, pension is nothing more than a footnote.

William Hickey

Operator, let me just take a couple of questions that have come in from the Internet, which I will just take right now. The first question that came in on the call is; what is the approximate amount of Sealed Air’s equipment sales in 2008 and how does this compare to 2007 replacement cycle and years? Equipment has always been less than 10% of our business. We have always liked to characterize our model as razor and razor blade, and the 90% business is the consumable which is used over and over again. Equipment placements are up slightly in 2008 over 2007 and as I believe I said during my prepared comments, most of that was in the first three quarters of the year. The equipment life cycle, it is very different depending on the business we’re in.

On the protective side, some of the packaging systems we place at customers generally run three to four years. Some of the more expensive food packaging equipment runs kind of seven to ten years. So there is a mix and the price tag on those ranges anywhere from $1,500 to close to $1 million again depending on the type of equipment. So, I can’t put it into a simple couple of points, but it is a relatively small part of the business, but it does drive use of consumables.

Next question quickly off the Internet. 2009 will be clearly reflected by the economy, longer term, we are still committed to the business segment performance that we outlined earlier in 2008, and I won’t predict how quickly we’ll get back to that because the best economists in the world have yet to figure out how we’re going to get out of the slump we’re in right now, but our expectations have not changed.

There is a comment about, will we expanded the liquidity from $300 million note. We think we purchased shares in 2009 versus 2008, I just will not comment on that right now. Let me move down here. What percentage of our 2008 European sales are in the U.K. versus continental Europe? Europe is about 26% to 28% of our overall business, and the U.K. is probably less than 10% of our total business, so I didn’t do the math, but the U.K. had something less than a third of the European part of the business.

Next question is, is there any equity component to the $300 million notes issued to Davis and Berkshire? No. It is straight debt as Dave said, five-year no call straight debt. And another question on the Internet. What is management’s assumption for resin price reductions for Sealed Air in 2008 excluding volume declines? I think I mentioned that answering the past call is something in the $100 million range, probably just under that number. Let me go back to the next call on the telephone, operator.

Operator

Your next question comes from Joseph Naya - UBS.

Joseph Naya - UBS

When you were talking about volume trends you saw through 2008, you mentioned that part of it was kind of customer de-stocking and part of it was weaker demand. I know it is tough to quantify, but I was just wondering if you could offer any color as to kind of how you saw the break-up between those two components and if you see the de-stocking gaining as you go forward.

William Hickey

Joseph, that’s a tough call. I really can’t give you any color because different customers have different issues, but I will say credit markets have focused customers. Our customers on their inventory levels so they’re both a factor. I just wouldn’t venture to say how much was de-stocking versus how much was ultimate measure customer demand.

Joseph Naya - UBS

The one large customer switch that you had, are we past that at this point? Is it anniversaries or will we see continued issues in the comparison going forward?

William Hickey

It anniversaried at the end of November, so Case-Ready will not have that drag going forward into 2009.

Operator

Your next question comes from John McNulty - Credit Suisse.

John McNulty - Credit Suisse

Two quick questions; the first one with regard to the softer economy, have you seen your customers start to downshift yet toward slightly lower value say protective products or even on the food side or is that something that you don’t expect quite as much of this time around given that they may have already done it when resin prices were spiking and really pinching them in the first place?

William Hickey

We haven’t seen much on that. I will say I know of two customers in Europe who are actually looking at switching down, but that’s the only quantitative reference I had. I think your point is a lot of customers have already done that as we went through the price increases of 2008.

John McNulty - Credit Suisse

And then just the other question on the working capital side just to dig in maybe a little bit deeper, looking back to the past two recessions, Sealed Air has seen pretty significant increases or seen their working capital as a real source of cash for them in the past couple of recessions. With that in mind, and the idea that you finally got the SAP systems fully implemented and you’ve got raw materials dropping off the way that you have. Should we be expecting similar type improvements in working capital in ‘09 as we have seen in the past recessions?

David Kelsey

John, I think it is reasonable to conclude that working capital given our assumptions for 2009 is going to be a source of funds and not a use of funds. I am going to leave it up to your own modeling capabilities to decide exactly how large a source of funds it will be, but you’re headed in the right direction.

Operator

Your next question comes from Fritz Boncart - Sage Asset Management.

Fritz Boncart - Sage Asset Management

My questions have been asked and answered. Thank you.

Operator

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

George Staphos - Banc of America Securities

Bill, can you give us a bit more detail on the equipment installation that’s occurring in Eastern Europe? I think you said it was for a food customer, but I wanted to verify that and if that was the case what type of product, what type of customer, and I had a follow-up question on that.

William Hickey

It is a food packaging customer. It is a food packaging customer that is processing pork.

George Staphos - Banc of America Securities

And what kind of revenue increment could this wind up being say middle of the five-year program?

William Hickey

I am not sure I can kind of go there, but they will be processing roughly 10 million plus barrier bags.

George Staphos - Banc of America Securities

Okay. So not a lot of effect early on.

William Hickey

No.

George Staphos - Banc of America Securities Fair enough.

Fair enough. Back to CapEx, in the environment that we have going into 2009, Dave, why would you spend anything on growth CapEx right now?

David Kelsey

Well, as Bill tried to give you in his flavor, there are in fact parts of the business that are growing. As customers focus on those solutions that we have that add value for them, we see growth opportunities in ready meals and our vertical pouch packaging business to name a couple. There are opportunities potentially in the medical area that would also warrant additional spending, but that’s the budget or the forecast if you will or the guidance. It is not anything that we have committed to spend. There is in that 120 to 125 some roll over of growth projects that were approved in the last two years, so if you…

George Staphos - Banc of America Securities

100 to 125, right?

David Kelsey

Yes. So the maintenance I think we have said has tended to run in the $70 million range, so it is not a lot in there for growth, but we do expect there to be some opportunities that have good paybacks that we will do to support some of the growth areas of the business.

George Staphos - Banc of America Securities

I think that last point you made if customers are coming to you in an uncertain environment to put capital into the business, hopefully they’re willing to pay a sufficiently higher return and price for that given the environment. Anyway I will turn it over.

William Hickey

Let me take another question here from the Internet. I have a question, is the revolving credit facility secured? How much security is available? Let me just sort of go right to the answer here, is that all of Sealed Air’s borrowings are unsecured. Let me move onto the next question. A question about of the 300 million commitment what’s the commitment amount of Davis Berkshire. I’m not prepared to disclose that. I think that’s all we have on the Internet. Do we have any questions left on the telephone, operator?

Operator

Your last question comes from Rosemarie Morbelli - Ingalls & Snyder

Rosemarie Morbelli - Ingalls & Snyder

In the other category you are now doing the production and distribution of Ethafoam internally. I would have presumed that that would have impacted your margins positively. Why is it part of the negative factors on the other? This is how I read the press release?

William Hickey

Let me just go through the chronology with you. When we bought the Ethafoam business on November 16, 2007, it came with essentially the product line, customer list; it did not include any manufacturing facilities. For all of 2008 or just about all of 2008, we bought all of the product that we sold as Ethafoam from the seller of the business who is the Dow Chemical Company.

We immediately began to build a factory in Louisville, Kentucky, and one in [Ostrava], Poland where we will self-manufacture the Ethafoam product line. Between getting the buildings up, getting the equipment ordered, getting everything installed and started up. We really are only beginning to self-manufacture within weeks, so the impact year-over-year in the fourth quarter where you essentially had no Ethafoam sales except for December which was not a very big month versus 2008 where we bought the full quarter’s supply at a transfer price, which really gave Sealed Air a relatively modest margin for selling the product. In 2009, we will be manufacturing it ourselves, but through 2008 including the fourth quarter we were not.

Rosemarie Morbelli - Ingalls & Snyder

In 2009, the margin should actually improve as it has to be more efficient for you to do it than buy it via someone else?

William Hickey

Absolutely Rosemary, absolutely. Okay. Operator, I think that wraps up our questions. I really want to thank everyone for participating in the call today. For those of you who do not know it, today is the Ninth Annual Celebration of Bubble Wrap Appreciation Day. It is that time the middle of winter when we commemorate and we celebrate the favorite pop of people around the world. So if you haven’t sent out your Bubble Wrap Appreciation Day cards, there is still some time.

I would also like to thank all of our employees and partners around the world for all of your effort and hard work in a very, very difficult year. As a team, we continue to believing and remain committed to our long-term growth strategies that capitalize on our strong global footprint, diverse product portfolio, and strong customer service levels.

We will stay the course on innovation. We will continue to capitalize on growth opportunities in emerging markets. We will invest wisely in our core businesses, and we will improve efficiency and productivity to optimize our cost structure and most importantly, we will stay focused on our customers, combined with maintaining a strong balance sheet, healthy cash flows, and a solid liquidity position to meet our financial obligations. We are well-positioned for growth once market conditions improve. Thank you all for taking the time to listen to us today.

Operator

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

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