Pactiv Corporation Q4 2008 Earnings Call Transcript

Pactiv Corporation (PTV)

Q4 2008 Earnings Call Transcript

January 27, 2009 8:30 am ET

Executives

Christine Hanneman – VP, IR

Richard Wambold – Chairman & CEO

Ed Walters – SVP & CFO

Analysts

Ghansham Panjabi – Wachovia Securities

George Staphos – Banc of America Securities and Merrill

Claudia Hueston – J.P. Morgan

Mark Wilde – Deutsche Bank

Peter Ruschmeier – Barclays

Chris Manuel – KeyBanc Capital Markets

Alton Stump – Longbow Research

Tim Thein – Citigroup

Richard Skidmore – Goldman Sachs

Abraham Kuzniecky – Guggenheim Partners

Presentation

Operator

Good morning, and welcome to Pactiv’s fourth quarter and full year 2008 earnings release call. This call is being recorded at the request of Pactiv. (Operator instructions)

Beginning this morning’s call is Ms. Christine Hanneman, Vice President Investor Relations of Pactiv Corporation. Ma’am, you may begin.

Christine Hanneman

Good morning. I am Christine Hanneman. Joining me today are Richard Wambold, Chairman and CEO; and, Ed Walters, our CFO. Welcome to our discussion of Pactiv’s fourth quarter and full year 2008 earnings.

In the course of reviewing our financial results some of our comments today may include forward-looking statements. Please keep in mind that actual results could differ materially from those projected. Also in our press release and this conference call, we discuss our earnings results using some non-GAAP financial measures. Reconciliation of those non-GAAP numbers to GAAP numbers can be found on Pactiv’s Web site at www.pactiv.com under the Investor Relations section, under Financial Press Releases. Richard?

Richard Wambold

Good morning, everyone. In the fourth quarter, excluding the restructuring charge, our earnings per share were $0.53. We posted a strong increase versus last year largely as a result of favorable spread. As I’m sure you’re aware, resin costs decreased during the quarter after having risen to unprecedented highs earlier during last year. We benefited from that decline in both of our business segments. I’m going to cut back to that topic later when we talk about our outlook for 2009.

In general, I think our businesses performed pretty much as we expected them too. Our pricing was up 6% year-over-year, and our volume was down about 4%. Both segments posted modest line declines driven by the economic conditions that we see around us since some of this (inaudible). And again in the quarter, our cups growth was strong.

I’ll now talk a little about each segment, and I’ll start with the consumer business. In the fourth quarter, in our Hefty consumer segment, we saw growth in cups and private label plates, which was partially offset by softness in waste bags. From an industry perspective, in the measure channels, all of our categories, in which we participate, noticed some decline in the fourth quarter.

We saw a continuation of what occurred in the third quarter as customers are more value driven and are increasing their purchases of private label products. We also think that the consumer has been using (inaudible) inventory and buying only what is necessary. Let me remind you that the – that with the exception of waste bags, we participate in private label products. So those sales are also helping us with our volume. Our margins have held up very well, and are also benefiting from lower interest costs.

In waste bags, we are continuing to launch our new Hefty Unscented – Hefty Odor Block line. This product provides more value to customers because by controlling odors the bag can be replaced less often. By mid February, it will be available in all of our planned retail distribution outlets. And we will continue our advertising program to support the launch.

Let me move on to food service. In this segment, we posted a slight decline in sales as a 5% volume decline in unfavorable foreign exchange offset, 6% favorable year-over-year pricing. While there is no definitive source for industry data on food service markets, our best estimate is that our decline is in line with the industry. Perhaps it’s a little better. Our business has held up well in this difficult environment. And we believe we are taking market share in several key product lines. We expect that trend to continue as we move into 2009.

In early January, we purchased the polypropylene business of WinCup for about $20 million. This business operates one manufacturing facility in North Carolina, with approximately 100 employees. As you may recall, we have a cup plant in North Carolina from our acquisition a few years ago of Prairie. These plants are 15 miles apart ,which allows us to take advantage of overhead, logistics, and in technical service (inaudible). We have already begun moving equipment from the newly purchased facility to our plant and vice versa. And we would expect this acquisition to do well, which should be neutral EPS this year and accreted next year.

To some degree, this is a replacement of some of our longer term capital expenditures. But it comes with a very positive added benefit. The purchase of WinCup includes the assumption of customer contracts with a major retailer of specialty coffee as well as from sizeable multi-unit quick service restaurants. That also gives us our first entry into major convenience stores with a chain on the West Coast. We estimate that this acquisition will add about $40 million in sales to 2009, which is included in our forecast. I believe this is a great strategic bid for us, especially in this market.

Ed will take you through all the details of our fourth quarter performance and our outlook in a few minutes. And now, what I’d like to do is focus on what we’re seeing as we enter the first quarter in terms of the economy as well as our outlook for raw materials.

Oil dropped sharply in the fourth quarter of 2008 resulting in the decline of resin costs that is carrying over into the first quarter of 2009. We have incorporated a Chemical Manufacturers Association Index forecast for resin costs into our outlook this year. The CMAI forecast assumes resin costs’ gradual increase throughout the year. Some of you may think that assuming that resin prices will increase in a tough economy might be conservative. I believe that it is a reasonable call considering the rebound that oil has made in the first quarter and the fact that benzene costs should move up with gasoline production for the dry [ph] this season.

Our forecast also assumes a slight volume decline, with price reduction it is necessary to remain competitive. This is a normal price erosion in this kind of a market and always occurs as resin costs fall. All in all, we expect our margins in 2009 to show this improvement.

In summary, our businesses performed quite well in this soft economic environment, but demand is difficult to predict. As we get in the fourth quarter, we will manage our inventory levels closely this year and adjust our production levels as necessary to ascertain that we’re not carrying too much inventory. While we see many storm clouds out there, we expect to have a good year in 2009. Our market should expand from lower year-over-year resin costs, and our focus on cost reduction. Our earnings per share and free cash flow are expected to increase as well. We remain confident that, as in the past, we will be successful in doing what it takes to optimize our long term growth.

Now, let me turn it over to Ed to review the fourth quarter, our 2009 outlook, and some comments on pension funding. Then we’ll take your questions. Hi, Ed.

Ed Walters

Thanks, Rich. Sales for the fourth quarter were $883 million, up 1% from last year on the strength of 6% higher pricing, but offset of 4% volume decline, and 1% unfavorable foreign exchange. Earnings per share from continuing operations were $0.52, compared with $0.45 in ’07. Excluding a charge of $0.01 per share related to the restructuring program we announced in January ’08, fourth quarter earnings per share were $0.53. We have essentially completed that restructuring program. The year-over-year EPS increase of 18%, primarily reflect an improvement in the spread between selling prices and raw material costs, which offset lower volume and higher advertising and promotion expense.

Gross margin was 29.4%, up from 27.3% in ’07. Operating margin, excluding the restructuring charge, was 15.6%, up 200 basis points. SG&A expense was $73 million for the quarter, essentially even with ’07, despite higher advertising and promotional expense, largely in support of our Hefty Odor Block waste bag launch. During the quarter we continued our focus on cost reduction, and this will continue to be a key strategy throughout ’09.

The effective tax rate was 36.5% in the quarter, compared with 34.5% in ’07. Free cash flow in the quarter was $120 million, compared with $117 million in ’07. CapEx was $27 million in the quarter, compared with $48 million in ’07. There were no share repurchases during the quarter. The average number of diluted shares outstanding at the end of the quarter was 132.6 million, slightly higher than a year ago.

At year-end, $130 million was drawn down under the company’s accounts receivable securitization facility even with the end of the third quarter. At the end of the quarter, gross and net debt totaled $1.3 billion. Net debt to Cap was 66%, compared with 54.4% at the end of ’07, reflecting the pension related equity charge.

Since the acquisition of Prairie in June of ’07, we have repaid $355 million of debt, including $80 million in the fourth quarter. Our year-end leverage, which is debt EBITDA, was 2.1 times. Interest coverage for EBITDA as a multiple of interest expense was 6.1 times. We are in full compliance with our debt covenants.

With respect to liquidity, we are in excellent shape. We fund our day-to-day cash flow needs through cash on hand; use of the asset securitization program; and, through our revolver, which offers same day borrowing. At year-end we had $70 million outstanding on our $750 million bank revolver.

Depreciation and amortization of $44 million, essentially even with last year. EBITDA for the quarter was $182 million or 20.6% of sales, compared with $166 million or 18.9% of sales a year ago.

Now we’ll review the company’s outlook for the first quarter and full year ’09. We anticipate that earnings per share for the first quarter will be in a range of $0.44 to $0.48 and $1.80 to $2.00 for full year. Pension income for the full year is expected to be $36 million pre-tax or $0.17 per share. And the effective tax rate will be approximately 36.5%. As Richard mentioned, we have incorporated the CMAI resin forecast into our outlook. That forecast assumes resin costs increase gradually throughout this year.

On the sales side, we expect to see a decline in a range of 12% to 15%. This outlook incorporates a 3% to 4% volume decline, and a 9% to 11% price decrease based on normal price reduction to reflect year-over-year lower resin cost. We expect year-over-year margin improvements.

We anticipate SG&A expenses will be approximately $305 million to $315 million.

Free cash flow for ’09 is conservatively anticipated to be in a range of $240 million to $260 million, reflecting depreciation and amortization of $190 million, CapEx of $120 million, and a cash tax rate at 27%. The improvement in the outlook for free cash flow versus ’08 reflects higher cash earnings, a lower outlook for CapEx, and lower usage of working capital.

Now let me discuss the pension plan. To reflect the funded status of the pension plan at year-end, we recorded a fourth quarter non-cash, non-earnings related charge to equity of $831 million net of tax. With respect to funding, technically, we are not required to make the contribution in ’09, but that would mean a larger contribution in ’10. Pension relief legislation passed in December ’08. And the bill is currently being considered to provide some relief on timing, but not on the amount of cash contributions. As such, we have decided that it’s prudent to make a $200 million pre-tax contribution to the plan this year. Because this contribution is tax deductible, $200 million pre-tax is approximately $130 million after tax, close to the estimate we gave you last October. Our judgment is that it’s best to phase in our funding. We expect to contribute half of the planned contribution in the first quarter.

I assume many of you are wondering what the 2010 contribution could be. We don’t know that answer because it will depend on market performance and interest rates, and the plan will be measured at year-end. But I’ll give you a couple of examples. If the actual return on plant assets in ’09 is our assumed rate of return of 9% and the discount rate doesn’t change from year-end ’08 to year-end ’09, we would be required to contribute approximately another $35 million after tax in 2010. If the actual return on plant assets is zero in ’09 and the discount rate doesn’t change from year-end ’08 to year-end ’09, we would be required to contribute approximately an additional $170 million after tax in 2010.

To summarize, this is a manageable issue for us. We have plenty of liquidity. Our free cash flow is more than adequate to fund growth, to fund the pension plan, and for debt repayment. Richard, back to you.

Richard Wambold

With that, we’ll be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) Our first question is coming from the line of Ghansham Panjabi. Please state your company name before you proceed with your question.

Ghansham Panjabi – Wachovia Securities

Hi, guys. Good morning. Wachovia Securities.

Richard Wambold

Good morning, Ghansham.

Ghansham Panjabi – Wachovia Securities

Hi. Could you give us some color on the specific sub segments within food service packaging from a volume perspective grocery, fast food, institutional, or however you care to break it out?

Richard Wambold

Well, we don’t typically break it out. But let me give you a sense of what’s going on. If you looked at – if you look at the fourth quarter, the fourth quarter saw the classic distributor type business, what we call food service distributor type business, was weaker than some of our other areas. And I think that’s principally because that’s where you would tend to find the lost inventory. That’s where de-stocking will tend to affect you the most.

In fact, if you look at the Technomic forecast for 2009 and look at what they’re saying, they actually think that will be a stronger segment 2009. They’re saying it ought to be 2.5% negative in real terms. So I think what we saw really in that figure segment was a more active de-stocking program that you would find in the others. Because typically, they don’t buy ahead and they don’t stock.

Supermarket was strong. And many of our – which we would think of as our multi-service restaurants, were also pretty strong in the fourth quarter. So most of the decline that we saw – the strongest decline that we saw was really where the inventories were high.

Ghansham Panjabi -Wachovia Securities

Okay. And just as a follow up, looking at guidance for 2009, from a volume perspective, the 24% decline you’re assuming, does that imply that the end markets are probably worse than that given that you’re taking shares in those areas?

Richard Wambold

Yes. I think it does imply that. And we tend to take into account in our business that, well, the food service market itself has been pretty decent. It tends to fluctuate with unemployment levels. And so, as this recession matures and we start to see peak unemployment levels, we think it would be impacted somewhat more. And that’s where we tend to be a little bit more negative in – perhaps conservative, but a little bit more negative in terms of the volume aspects. We still think we’re ahead of the game. We still think we’re in market share gain position. But we do believe that that segment usually will tend to reflect what’s going on in employment. And the papers haven’t been given that regard as play.

Ghansham Panjabi -Wachovia Securities

Okay. Thanks so much.

Richard Wambold

You’re welcome.

Operator

Thank you. Our next question is coming from the line of George Staphos. Please state your company name before you proceed with your question.

George Staphos – Banc of America and Merrill

Hi, folks. Good morning. Thank you. Banc of America and Merrill.

Richard Wambold

Good morning, George.

George Staphos – Banc of America and Merrill

Just a quick question or two on free cash flow at the start. I think as you’d mentioned that you expected your guidance to be conservatively within $240 million to $260 million. Can you give us – If I heard that correctly, what gives you confidence and your range being somewhat conservative? And another thing, I just want to ask, to the point of clarification, should we expect that the pension funding after tax is included in that or not included in that? Thanks.

Ed Walters

Okay. George. First of, the pension contribution of $130 million after tax would be deducted from that $240 million to $260 million. The reason that the – that I think that the $240 million to $260 million is conservative is that you work off of the $201 million that we generated in ’08 and you make the adjustments for higher cash earnings and lower CapEx, you get to about $240 million. And then, you look at what’s changing in working capital behavior year-over-year. And we’ve got a couple of positives. One is that we won’t have the one-time cups and cutlery inventory bill that we had in ’08. We also have lower pricing rolling in, which means lower receivables. So receivables ought to be a positive.

The negative is that resin prices are increasing going through the year, which will cost an increase investment on the inventory side. And then there’s a small negative in that the WinCup acquisition, we didn’t buy any working capital so there’ll be a little bit of working capital requirements for that. But net, where we baked in on the working capital, improvement side versus ’08, is $0 to $20 million. But we’re hoping that we could do better than that, and particularly, as we work on our lien programs.

George Staphos – Banc of America and Merrill

Yes. Just to the point of clarification, I mean, since pension isn’t normally included in the operating cash flow, I would suggest just maybe footnote at the back of the press release should, in fact, specify that you’re excluding it, if you are in fact excluding. In other words, free cash flow this year would be $240 million, $260 million, unless another – if I’m hearing you right, $130 million for pension. Would that be fair?

Richard Wambold

Well George, the reason we didn’t reflect it that way is that we thought it would be best to discuss the full pension situation on the call. And in the earnings release, we didn’t discuss our intentions relative to pension contributions. So certainly, we will be doing that in the 8K that we normally file after this call.

George Staphos – Banc of America and Merrill

Okay. I’ll turn it over. Thanks, guys.

Richard Wambold

Thanks, George.

Operator

Thank you. Our next question is coming from the line of Claudia Hueston. Please state your company name before proceeding with your question.

Claudia Hueston – J.P. Morgan

Hi. It’s J.P. Morgan. Good morning.

Richard Wambold

Hi, Claudia.

Claudia Hueston – J.P. Morgan

I was hoping you could just talk a little bit about priorities for cash and how you’re thinking about your debt reduction goals post-op period year. Thanks.

Richard Wambold

Obviously, our priorities for cash are somewhat different this year than they were last year. We made these steps. I think it’s the right decision for us to make – to fund. As we really analyze the current bill that was passed in December of – as well as frankly, there’s another bill that’s on the hill right now that may or may not pass. And looking at what they do, a simple way to kind of think about that is the – under the current or under the legislation that has been passed, you have seven years to make up your funding. Essentially what happened in the plan that was passed in December is – think of it as simple to terms and added an eighth year. And likewise, the plan that’s being viewed right now might in fact add a ninth year. All of it giving us more time for the market to work on our behalf, ultimately allowing us to put in less money and less funding.

And we will look at that and try to use that to the best of whatever the bill’s availability is. But when we look at – when we model it and looking at where we are and we look at the probability of how much we would have to fund, it kind of came in to the conclusion that no matter what, $200 million would not put us in a position where we had to put more money in than what we thought was necessary or actually than what was necessary.

And at this point, interest rates are low. We think we’re going to have a good free cash flow year. So in our view, it’s prudent to start that funding. So with a $100 million today, that would obviously be our first use of cash. We would anticipate, sometime during this year, making another $100 million contribution to it. Beyond that, free cash flow would go back to the normal pattern that we’ve established. So therefore, we’d be looking at reducing debt. And a lot of this will, frankly, be funded out of free cash flow as we go. We may temporarily incur some debt in order to make a payment, but a lot of it will happen with free cash flow.

And after that, I would anticipate that we would be, in fact, paying down some more debt. And then, look into other opportunities we have.

Claudia Hueston – J.P. Morgan

Okay. And then if I remember right, you had some pension funding credits. And I guess I’m just trying to understand why you would or wouldn’t want to use those pension funding credits.

Richard Wambold

They are fully used, and coming up with the calculation that we would have to fund a couple of $100 million.

Claudia Hueston – J.P. Morgan

Okay. Thanks very much.

Richard Wambold

Welcome.

Operator

Thank you. Our next question is coming from the line of Mark Wilde. Please state your company name before asking your question.

Mark Wilde – Deutsche Bank

Deutsche Bank. Richard, I wondered if we can just go a little bit deeper perhaps on both the price and volume assumption. But I think that you said, in both of the businesses in the fourth quarter, that you’re up about 6% year-on-year. But when you’ve mentioned the pricing assumption for next year, you talked about it being down 9% to 11%. So I wondered if you could just help us understand how that may play it self out, and if there’s an significant difference between the two businesses.

Richard Wambold

I’m going to give you a theory, and then I’m going to turn you over to Ed for practice.

Mark Wilde – Deutsche Bank

Okay.

Richard Wambold

Okay. But in general, what happens in a period like this is when resin goes down over a period of time, it depends on how fast it goes down, how steep it is, competition generally will bring that decline back into the marketplace in the form of lower prices. Not to mention the fact that since about 30% of our business today is contractually obligated, then so usually about a four-month lag, that will also bring the price down.

And so the simple math of all of this is we went through the year and we included our view that – CMAI view that resin’s going to go up as we go though the year. When we looked at how far it’s gone down and what is expected to be going forward, and we ran basically a model around what price – what the marketplace is likely to do with price, is that revenue decline is simply just a passing back of lower – some of the resin reduction into the marketplace. It doesn’t have anything to do with volume. It doesn’t have anything to do with – it does have something to do with margin, in fact, because – in fact our margin should get a little bit better because we do pass it all back.

Now let’s – Ed, anything you want to add to that?

Ed Walters

Well I think we’ve talked quite often about the fact that we are in a competitive marketplace, and we have smaller entrepreneurial competitors in both segments. And we typically – what we’ve seen in the past when resin has fallen is that there is some margin expansion. But once the margin expansion gets to be 300 to 400 basis points, then you start to see competition pass lower resin cost back into the marketplace in the form of price. And that’s–

Richard Wambold

Particularly if volume is hard to come by.

Ed Walters

Right.

Richard Wambold

Particularly if you’re in a recessionary environment.

Ed Walters

So our outlook for ’09 just reflects that reality.

Mark Wilde – Deutsche Bank

Okay. Can you also do the same thing with the volume because you set down 3% or 4%. But I think I heard you say you were going to be picking up a percent or roughly a percent of about $40 million from that cup acquisition you just made. And I think you should be doing some more business in ’09 versus ’08 in the food service area with some of the food distributors. So it sounds like the real volume that you’re assuming on an ongoing basis is maybe quite a bit lower.

Richard Wambold

In the industry volume?

Mark Wilde – Deutsche Bank

Yes.

Richard Wambold

Yes. It’s what I was answering earlier. It’s a point of view at this stage. I mean, we’re in January and we’re trying to give you our best view of much way out in front of us that we can’t really get our arms around now. But this looks like it’s a pretty steeper recession. And if it’s as steep as it looks like, then the unemployment levels also continue to grow. And I don’t know where they maxed out, but let’s assume they start to max out somewhat close to the end of the year. They certainly haven’t maxed out yet. And that unemployment tends to have a negative impact on two terms volume. There’s no doubt about it. If you’re not going to work, you’re probably not going out to eat.

And the first effect, of course, is full service restaurants take that hit. And the numbers are vivid in the forecast for full service restaurants is that they’ll be down almost 8% next year. What we would anticipate that beginning to move into the quick serve restaurant and so on is a little bit more. Put a little bit regulars as the year goes on, yes, yes, the unemployment goes up. And that’s how we – that’s how we’ve come to the assumption that the overall volume in the industry should be down more than the numbers that we’ve given you ourselves. We think we’ll pick up some share, maybe a point, point and a half, two points a share.

Mark Wilde – Deutsche Bank

Okay. Thanks, Richard.

Operator

Thank you. Our next question is coming from the line of Peter Ruschmeier. Please state your company’s name before asking your question.

Peter Ruschmeier – Barclays

Thanks. Good morning. Barclays.

Richard Wambold

Hi, Peter.

Peter Ruschmeier – Barclays

Hi. I want to follow up on the resin costs and price spread answer that you provided. Historically, you have a four-month lag on contract pricing for 30% of your business. I would assume that with the decline in resins, margins are up more than 300 to 400 basis points. So does that suggest we have less than a four-month lag on the contract price?

Ed Walters

Well, I think your – what you’re going to see is this is going to phase in over time. The reason the first quarter EPS forecast is $0.44 to $0.48 is that we’re going to have some temporary benefits here from lower resin prices that aren’t fully reflected all the way through with pricing. But that will change as we move through the year and move into the second quarter.

Richard Wambold

It’s the same. It’s the reverse of the impact that we had in the first half last year when it appears that as though we couldn’t get our pricing up, which was true because the same contracts we’re talking about then actually were advantaged. During that period of time, we were actually paying a higher price for resin that we were able to pass through to the customer. So it just reverses itself, it evens itself out over time. It’s the exact same phenomenon.

Peter Ruschmeier – Barclays

Okay. And I guess related to that, if we’re assuming some smoothing of your contract resin prices, would the first – would you be fully caught up with the decline in resin cost in the first quarter or would there still be some follow through based on the way the contracts roll further out in the first quarter?

Ed Walters

Yes, it would. There’d still be some in the second quarter.

Richard Wambold

Assuming the price of resin, of course, is a constant this year.

Peter Ruschmeier – Barclays

Okay. That’s helpful. On WinCup, I think you mentioned neutral to earnings in ’09. Should we assume it’s a modest negative cash flow given the working capital – lack of working capital?

Ed Walters

Yes. It’s slightly negative on working capital.

Richard Wambold

It certainly is a start up facility right now, to be honest with you. So contracts are signed, the plant is running. But really for the most part, you think of it as a start up facility.

Peter Ruschmeier – Barclays

Okay. And then just lastly, I guess in the environment we’re in, with capital markets, obviously, where someone opportunistic perhaps with WinCup, how do you think about other opportunities going forward? Are you in the mood of being opportunistic or not? In other words, are you looking for other types of WinCup opportunities or do you have your plate full at this point?

Richard Wambold

I will answer that one, and then at the same time, we’ll move on to the next questioner. In general, Peter, we’ll always be opportunistic. I mean if the right thing comes our way. This happened to be the right thing for a variety of reasons. One is polypropylene, and we want to go in that area. Second is they had some great customers that came with it. Third, it happened to be 52 miles away from another plant. So just the way we run some of our other facilities, we run kind of a campus atmosphere. And it allows us to consolidate. For instance, we could put printing in one building and not have it in two.

So there are a variety of things we can do that ultimately improve the economics in manufacturing of products. So it happened that this particular facility was for sale, and it happened that it did us really well. Assuming other opportunities like that come along that are small bolt-ons that will help us grow our strategic businesses, we would be opportunistic in going after them. I don’t know how many that will be during the year, but of course we’d look for opportunities like that through the extent that they exist.

Peter Ruschmeier – Barclays

Thanks very much.

Operator

Thank you. Our next question is coming from the line of Chris Manuel. Please state your company name before proceeding with your question.

Chris Manuel – KeyBanc Capital Markets

KeyBanc Capital Markets. Good morning and congratulations on a very good fourth quarter.

Richard Wambold

Thanks, Chris.

Chris Manuel – KeyBanc Capital Markets

A couple of questions for you. First, let me start with a couple on the pension side. I know you’re going to be following your case and you have all of these assumptions in there but can you run us through what your – if you made any changes to your discount rates, return rates, things of that nature in your pension plan?

Ed Walters

Well, I assume you’re talking about pension income assumptions here?

Chris Manuel – KeyBanc Capital Markets

What your change in the discount rate was, what your change in return rate assumption, if you did any of that kind of stuff.

Ed Walters

We haven’t changed. Our long term rate of return assumption is 9%. The discount rate at the end of ’08 6.74%

Chris Manuel – KeyBanc Capital Markets

Okay. So was that, refresh my memory, is that up – that’s up 50 basis points or so?

Ed Walters

I think it was 6.39% or something like that at the end of ’07. It’s up from the end of ’07. It’s significantly down from where we were in October.

Chris Manuel – KeyBanc Capital Markets

Okay, that’s helpful. And then, Richard, if you could help a little bit with – you’ve given us some color as to what pricing might look like next year but it seems to me one of the areas that’s more challenging is in the consumer side because you typically lock down prices roughly once a year. Is there any thought moving into ’09 that you could change prices say a couple times a year or make it more – better match in case resin jumps again, if oil jumps mid year or vice versa?

Richard Wambold

Well, we’ve done it in the past. If the situation arises such that we feel we have to, we would. The way we actually do manage it on an ongoing basis though is the following. We typically locate pricing and adjust it to where we think it’s a reasonable level and in fact, have already done so on most of our products in September already. And we tend to put a fair amount of that in our ANT bucket, if you will. So what we’ll do is we may be priced a bit high for where we want to be against private label. If you look at the everyday shelf price, we will tend to have more promotional events during the year to buy that price down so that it is competitive. That way, we don’t necessarily change pricing. We don’t have to go back and do all that work multiple times but we are effective in terms of driving the price to the appropriate points at the key points of the year. That’s typically how we’ll do it.

Chris Manuel – KeyBanc Capital Markets

That’s helpful. And then the last thing I’m going to ask was a little more color on the WinCup issue. You’ve given us some detail but could you talk a little bit about – you said it add the customers, it’s a new type of cup. Could you give us a little more color there as to potentially who that customer is? What makes this cup different?

Richard Wambold

Okay. Let’s talk about the cup. It doesn’t necessarily make the cup different from something else we’re making. We already have introduced polypropylene cups. polypropylene cups are a bit lighter, they’re certainly a lot tougher, and they make an ideal drink cup. And it’s an area that’s going to see some growth going forward and one that–

Chris Manuel – KeyBanc Capital Markets

Better for cold, right?

Richard Wambold

Yes, for cold. That’s an area we want to be in. This plant came up for sale. Principally, if for two reasons. One, I think they had some problems running it, to be honest with you and so we had to spend a fair amount of time trying to figure out what we’d do differently which we did. We have a very good game plan for being able to manage the technology. The second thing is they were in a – it really isn’t second.

The first thing is they were in a liquidity crunch and they needed to raise the cash. And so from our standpoint, buying the facility, we think we got it at a good price and it came with, as I’ve said, some good, really topnotch customers. Some of which we already serve and we’ll serve them more and some of which we did not have in the past and so it adds to our customer list. And as with all customers, they don’t like their name abused by me over this so I won’t.

Chris Manuel – KeyBanc Capital Markets

I understand. Thank you.

Richard Wambold

Thank you, Chris.

Operator

Thank you. Our next question is coming from the line of Alton Stump. Please state your company name before proceeding with your question.

Alton Stump – Longbow Research

Thank you. It’s Alton from Longbow Research. Just a quick question on the guidance, obviously a fairly wide range, I’m sure, a big portion of that wide range is with the uncertainty in the economy. Could you give me an idea though if there’s any range within that that maybe assumes different resin prices or is that a straight fall through that you’re talking about with the gradual increase over the course of the year.

Ed Walters

Yes. Which end of the range you’re on depends on what kind of assumptions you want to make about how the economy is going to perform and what happens with energy prices. So we just think that with the uncertainty that’s out there on probably both those fronts, that a range of this magnitude is appropriate at this time.

Alton Stump – Longbow Research

Okay. And then just one quick follow up. Within the consumer business, obviously, if it’s a different pricing environment in a – versus the food service or packaging segment, if you could maybe just give me an update on what you’re seeing from a competitive standpoint so far this year with the consumer segment, whether it looks like the competitors are being rationale or not.

Richard Wambold

It would appear at this stage in the game, we’ve been doing a lot of self-checks. We’re doing the best we can to look at things. The – it looks rationale to us. There were a number of price increases that were out there in the fourth quarter, early fourth quarter, late third quarter – actually, late third quarter that actually went through and they were all based on resin prices tied to a $140 barrel oil.

And as we got into late in the fourth quarter and certainly as we got into the beginning of the first quarter, those prices were not realistic in terms of the current cost of the product. And as a result that, adjustments began to be made impacted quite – to see exactly where those prices came out and we’ve adjusted our prices to be competitive. Hopefully, competitive in the group. We’ve seen no initial movement and the pricing at this stage of the game is good. So I think it’s – I think you used the word rationale, I think it is rationale. I think it’s competitive and I think it’s fair at the end of the day because the customer is served.

Alton Stump – Longbow Research

Okay, great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Richard Skidmore. Please state your company name before proceeding with your question.

In that, next question comes from Tim Thein. Please state your question – your company name before proceeding with your question.

Tim Thein – Citigroup

Okay. Ed, I wanted to just come back just so I’m clear on this if we could. Can you – we’re just walking through some of those assumptions you laid out in terms of the free cash flow for ’09, having a little difficulty here trying to – reconciling what you’ve said versus relative to what’s here in the release from last night. If you can just bear with me here and go through, maybe walkthrough maybe the five or six lines because you’re – I believe you’re starting with net income adjusted for pension of Cot 215 [ph] adding to that the roughly $70 million gap between cutbacks and DNA. I thought you said and obviously for cash tax, is it going to be lower, I’m sorry, you get a deferred tax benefit of call it – you get to $35 million or $40 million, there’s a positive. Now which – and then you have the pension contribution which you mentioned. Is working capital going to be a big use of cash again in order to get to this 120 number?

Ed Walters

It’s going to be a significant use of cash but it’s not going to be as a significant use of cash as in ’08 and that one of the reasons for that is that the outlook cost for resin prices to increase throughout the year. It’s a little trick to – I think what you’re trying to do is work with your model. It gets a little tricky here with the way that pension contributions flow through the cash flow statement and I’d be happy to give you some help with that, to think through how that affects the cash flow statement, if you want to setup a call with Christine.

Tim Thein – Citigroup

Okay. All right, thanks a lot.

Operator

Thank you. Our next question is coming from Richard Skidmore. Please state your company name before proceeding with your question.

Richard Skidmore – Goldman Sachs

Thank you. From Goldman Sachs. Just wanted to spend a few minutes on the consumer segment if possible and the scanner data would suggest that waste bag volumes was down pretty sharply in the fourth quarter. Is that what you’re seeing in your numbers and can you give us a sense of what waste bags were down in the quarter?

Richard Wambold

Well, waste bags were down in the quarter? Let me pull up the sheet here. I’ll just look at where it was. Okay. Waste bags in total as a – we’re down – okay. Waste bags in total for the twelve weeks in the quarter were down 2.4% versus the same period a year ago.

Richard Skidmore – Goldman Sachs

Okay, thank you. And then just maybe shifting still on consumer. Can you give us a sense of how much of your business is private label and consumer versus branded and what the relative margin difference between those?

Richard Wambold

We haven’t broken out that. Let me try to get through there a different way. In our tableware business, as an example, we are much larger in the private labels than we are in branded. It is principally – not by design, it is principally a private labels business. And the margins are somewhat different. But remember, you don’t promote and you don’t spend A and C dollars on private labels. So consequently, the margins maybe different, but they’re still very, very good margins, and well above reinvestment economics to do that.

Our waste bag business is the only business that we don’t have private labeling. And it’s principally a margin issue there, and it’s very difficult to make what we would consider to be adequate investment – reinvestment economics in the private label waste bag business. If we could figure out how to do it whereas we have surplus capacity, so we weren’t doing that, we would entertain the idea. But in reality is we haven’t come across much business in our history in the private labels side that would say we put in capital to do that.

Our food bag business, which is our third largest segment is, again, both private labels and under the Hefty brand. And it tends to be the zipper product, it’s only the zipper product. Well actually we have bags, which is principally the zipper product and the zipper type closure commands good margins on both sides, whether be private label or branded. Obviously branded is a little bit better, but we have to spend to support.

So in total, going through that, you can see that – I don’t know if the number is half, but it’s got to be somewhere in that neighborhood of our business. And we like the margins on it quite a bit.

Richard Skidmore – Goldman Sachs

Okay. And then just to clarify, the order that you just gave, tableware, waste bags, food bags, is that sort of the order of size in the consumer business, consumer – or tableware bringing in the largest revenue–?

Richard Wambold

Yes, yes. That’s pretty right.

Richard Skidmore – Goldman Sachs

Great. Thank you.

Richard Wambold

Welcome.

Operator

Thank you. Our next question is coming from the line of Abraham Kuzniecky. Please state your company name before proceeding with your question.

Abraham Kuzniecky – Guggenheim Partners

Hi, I’m with Guggenheim Partners. Thanks for taking my question. First question is, if possible, could you quantify the gross margin assumptions for 2009. And in terms of the SEC, as a follow up, what are your plans for stock buybacks? And if so, are they built into the EPS guidance? Because I was looking to see if flat – if share count should stay flat, for (inaudible) purposes. Thanks.

Ed Walters

The range on gross margin you should think of, for the full year, somewhere between 31.5% to 33.5%, probably, for more on that range in the first half of the year and following in the second half of the year. You should think about share count as being roughly the same.

Richard Wambold

It’s 32.6%.

Abraham Kuzniecky – Guggenheim Partners

Thank you.

Operator

Thank you. Our last question is a follow up question from the line of George Staphos. Please state your company name before proceeding with your question.

George Staphos – Bank of America and Merrill

Thanks. Banc of America and Merrill. Hi, Guys.

Richard Wambold

Hi, George.

George Staphos – Banc of America and Merrill

I just want to go back to the casual question. When we look at where you’d wind up given net income, and midpoint of guidance, and depreciation, and get back for cash taxes or the book taxes. You’d start at something close to $480 million or $500 million relative to whatever your guidance is for CFO. Now, perhaps it’s tricky to enumerate the specific numbers to the line items. But can you give us a feel for what the largest consumers of casual be to get to that CFO guidance range that you’re providing. The related question, will restructuring be part of what drives the CFO towards your guided range? Thank you.

Ed Walters

No. It’s not a restructuring. The thing is items I think that are going to be in the taxes, taxes payable, and also the inventory assessment because of rising – rising resin prices.

George Staphos – Banc of America and Merrill

Why would taxes payable be so high, Ed?

Ed Walters

Well, we’re looking at – we’re looking at a higher cash tax rate. The reason the cash taxes are going to be higher is because of the depreciation – bonus depreciations going away. That was a 2000 – 2008 one-time item. We also had some favorable timing on the way taxes were paid between ’07 and ’08. That does not recur.

George Staphos – Banc of America and Merrill

Okay. But it’s still – you saw the lower cash tax rate than a book tax rate. So presumably that’s – everything you’ve just said is incorporated in your guidance. So I guess we’ll have to wait to bridge to that line item.

Ed Walters

Yes. I’d make the same offer to you, George, as I made to Tim, is we can help you with that offline.

George Staphos – Banc of America and Merrill

Okay. How many of your customers have you signed up because of Prairie in the last several months, brand numbers?

Ed Walters

I don’t really know. I haven’t thought of it that way. I thought about it more in terms of the capital bill that we did and the number of dollars of sales that we’re generating out of it. We simply had to expand the business such that we could take on, I think, George, maybe $200 million more worth of business with the capital spend. And our run rate now is over $150 million.

And so we’re doing exactly what we said we’d do last year. When you look at how many customers, less is more. The fewer customers you have, the bigger they are, the smoother the operation runs. And therefore, the lower the cost and the higher the profitability. So I don’t really know. If you ask me, I’d say, maybe 15 or 20 majors, something like that.

George Staphos – Banc of America and Merrill

Okay. That’s helpful. Thanks, guys.

Ed Walters

You’re welcome.

Operator

Ladies and gentlemen, we do have the – another question from the line of Abraham Kuzniecky. Please state your company name before proceeding with your question.

Abraham Kuzniecky – Guggenheim Partners

I have a quick follow up, just running through the free cash flow assumptions for 2009. Earlier in the call, you said that you had a $29 million working capital used. Could you confirm that?

Ed Walters

Yes, $0 to $20 million, but that was an improvement relative to the ’08 usage.

Abraham Kuzniecky – Guggenheim Partners

Okay. Okay, thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Richard Wambold

Very well, thank you very much. Thanks for participating in this call. Obviously, we appreciate your interest in following the company. And we’re looking forward to performing well this year. And frankly, in strengthening our market position. It’s an odd year. It’s a tough year for people, but we think we will exit 2009 on a stronger base than we entered in. I think our outlook is appropriately conservative given the uncertainty that we have out there in the economy. And we look forward to working hard to perform at least as good as that, perhaps, we can do better. And we’ll talk to you again in 90 days. Thanks, everyone.

Operator

And this concludes the E-teleconference. You may disconnect your lines at this time. Thank you for your participation.

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