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Bemis Company, Inc. (NYSE:BMS)

Q1 2009 Earnings Call Transcript

April 28, 2009 10:00 am ET

Executives

Melanie Miller – VP and Treasurer

Gene Wulf – SVP and CFO

Henry Theisen – President and CEO

Analysts

George Staphos – Banc of America

Jason Brown – KeyBanc Capital Markets

Claudia Hueston – J.P. Morgan

Tim Thein – Citigroup

Mark Wilde of Deutsche Bank

Alton Stump – Longbow Research

Al Keabily [ph] – Macquarie Research

Mike Hamilton – RBC

Timothy Burns – Cranial Capital

Operator

Good day, everyone, and welcome to the Bemis first quarter 2009 earnings release conference call. Today’s call is being recorded. For opening remarks and introductions, I will now turn the call over to the Vice President and Treasurer for Bemis Company, Ms. Melanie Miller. Ms. Miller, please go ahead.

Melanie Miller

Thank you. Today is April 28th, 2009. A replay of this call will be available on our Web site, www.bemis.com, under the Investor Relations section. Joining me for this call today are Bemis Company's President and CEO, Henry Theisen; and, our Senior Vice President and Chief Financial Officer, Gene Wulf.

Today, Gene will begin with comments on financial details, followed by Henry who will provide additional details on operations and the market. After our comments, we will answer any questions you have. However, in order to allow everyone an opportunity to participate, we ask that you limit yourself to one question at a time with a related follow up and then fall back into the queue for any additional question.

Before we begin, I'd like to remind everyone that statements regarding future performance of the company made in this teleconference are forward-looking and are subject to certain risks and uncertainties. Actual results may differ materially from historical, expected, or projected results due to a variety of factors, including currency fluctuations, changes in raw material costs and availability, industry competition, unexpected consumer buying trends and customer order patterns, our ability to pass along increased costs in our selling prices, costs associated with the pursuit of business combinations, interest rate fluctuations, the availability and cost of bank financing, and regional economic conditions. A more complete list of risk factors is included in our regular SEC filings, including the most recently filed Form 10-K for the year ended December 31st, 2008.

Now, I'll turn the call over to Gene Wulf.

Gene Wulf

Good morning, everyone, and thank you for joining us today. This morning, Bemis reported first quarter 2009 earnings per share of $0.36. Excluding charges related to severance, and the implementation of FAS 141R, diluted earnings per share would have been $.043 cents per share, well above our guidance of $0.30 to $0.38 per share for the first quarter.

Our guidance anticipated a difficult quarter for our pressure sensitive materials business, a negative impact from foreign currency translation of profits in South America and Europe, and a potential for weaker volumes for our flexible packaging segment. We did not anticipate the magnitude of our raw material cost that extended through the first quarter. This benefit is the reflection of lower raw material cost experienced this quarter before customer contracts triggered selling price adjustments. Our broad-based manufacturing cost reductions and process improvements will continue to benefit the company in future periods.

There were several new accounting rules that impacted the financial statements this quarter, which I would like to briefly address. First, FASB staff position EIPF03-6-1, which was effective January 1, 2009, relates to the calculation of shares outstanding per share-based awards. This FASB staff position further interprets and clarifies the computation of shares outstanding for share-based awards. The impact of this change is a $0.01 decreased in basic and diluted earnings per share for each of the quarters presented. The 2008 earnings per share have been recast, reflecting impact of the new accounting guidance. We expect this new accounting guidance to have a similar impact on each of the comparable quarters presented for 2008.

We have also implemented FAS 160 effective January 1, 2009, which relates to the presentation of non-controlling interests, formerly classified as minority interest, in consolidated financial statements. Under FAS 160, non-controlling interest is now presented in the income statement as an after-tax presentation rather than the pre-tax presentation that we have used in the past. In addition, in the equity section of the balance sheet, non-controlling interest has been moved from the mezzanine section of the balance sheet, between liabilities and equities, to an amount presented as a component of the total stockholder’s equity.

Lastly, this quarter’s results include the impact of a $9.1 million charge from the January 1, 2009 implementation of statement of accounting standards number 141R. This new accounting standard for business combinations requires acquisition costs associated with a possible business combination must-be expense when incurred. These costs are principally accounting, legal, and professional fees associated with Bemis’ due diligence on the potential acquisition of a portion of the packaging business belonging to Rio Tinto PLC.

As we have stated in our press release this morning, these confidential efforts are ongoing and are consistent with our historical acquisition strategy of focusing on our core competencies while retaining an investment grade profile. No further details or comments will be made available at this time.

Now, I’d like to turn our attention to the business performance for the quarter. First quarter’s net sales of $843.4 million was 11% lower than net sales for the first quarter of 2008. Excluding the 8.3% negative impact of currency, net sales would have decreased by 2.7%. Flexible packaging net sales of $715.2 million decreased by 8.5% compared to the first quarter of 2008, reflecting the negative impact of currency effects, which reduced net sales by 8.7%. Excluding the impact of currency, net sales increased only modestly compared to the levels of 2008. While net price mix increased in nearly every market category, we experienced lower sales volume in mini-markets that are typically impacted by the economy.

In the meat and cheese market, representing almost 30% of the flexible packaging sales, lower volume for meat reflected the difficult environment, in which our customers are currently operating. Unit volume growth in North American processed meats and cheese packaging was accompanied by year-over-year improvements in price mix. While in Europe and South America, unit volumes were down, but substantially offset by price and mix.

In dairy and liquid markets, which represent about 8% of flexible packaging net sales, strong sales of liquid packaging in North America contributed to sizeable double-digit growth in net sales compared to last year. Net sales of packaging products to dry foods and bakery markets also increased compared to last year’s first quarter, principally driven by increased price mix. Dry foods and bakery markets make up about 6% and 4% of flexible packaging sales, respectively.

We recorded positive sales trends in other food categories as well, which represent a total of about 7% of flexible packaging net sales. This includes packaging sold to a variety of markets, including pizza films and frozen foods.

Sales to medical device markets increased this quarter, driven primarily by high single-digit increases in price mix. This market represents about 7% of flexible packaging sales. Compared to net sales level for the first quarter of 2008, we experienced decreased sales of packaging for markets such as confectionery and snacks, health food, health and hygiene, industrial and overwrap for multi-pack like bottled beverages.

Confectionery and snack market sales, which total about 7% of flexible packaging sales, were down about 6% for the first quarter of last year, primarily due to lower volume levels. Hygiene and health volume weaknesses that started in the fourth quarter of 2008, continued into the first quarter, resulting in the 5% decrease in net sales to these markets. This market represents about 10% of total flexible packaging sales. Much of this volume drop is the result of customers’ inventory adjustments. In this market, we see volume as rebounding in the second quarter.

Packaging sales to industrial markets represent about 4% of total packaging sales, and are more sensitive to economic conditions. Net sales to industrial markets decreased over 20% compared to the first quarter of 2008. Sales of our overwrap packaging for beverages and other food products, which we call multi-pack, declined 10% compared to the first quarter of 2008, reflecting continuous slowdown in bottled water sales that began in 2008. This market represents about 5% of our flexible packaging sales.

In our pressure sensitive material business segment, net sales of $128.2 million for the first quarter of 2009, decreased 22.6% compared to the first quarter of 2008. Excluding the impact of currency, net sales would have decreased 16.2%. This business segment primarily serves label applications for boxes; cans and bottles; fasteners replacing nails, screws, and bolts used in automotive housing and other industrial applications; and graphic applications for promotions and marketing, all of which have slowed considerably during the recent economic downturn.

Looking at the specific pressure sensitive product line, and excluding the impact of currency, net sales of our label products declined about 10% compared to last year’s first quarter. Label product represents about 63% of sales in this segment. Our graphic product sales decreased by about 25% as markets for advertising and promotions have weakened substantially in Europe, where the majority of our graphic products are sold. Graphic products represent about 27% of our pressure sensitive materials sales.

In technical products, which represent the remaining 10% of our total segment sales, net sales declined about 20% compared to the first quarter of last year, reflecting lower volumes. Unit volume in this particular product line continued to be negatively impacted by our customers’ exposures to the housing and automotive industries.

Back to the first quarter income statement, gross margin as percent of net sales was 19.4% for the first quarter of 2009, a sizeable increase from 17.2% for the first quarter of 2008. Gross margins benefited from raw materials cost declines ahead of contractual selling price adjustments, and continued broad-based improvement in production efficiencies.

We purchased a variety of raw materials, not all of which have experienced the same cost decreases in recent months. Our business model is designed to alleviate the impact of fluctuations in raw material cost over a period of time by adjusting selling prices up and down to reflect these changes in cost. In light of these factors, and assuming raw materials costs stabilize, we expect the gross margin benefit from raw material cost decreases to gradually be eliminated over the next few months.

During the quarter, we were aggressive at managing production staff levels and manufacturing costs. We produced – we reduced production staff where anticipated volumes warranted reductions. We incurred severance charges totaling $3.7 million for those staff reductions. Nearly half of our improvement in gross margin was related to improved production plants, management in plants that experienced increased volumes, reduced staffing cost in plants that experienced decreased volumes, and improvements in waste reduction and runtime efficiency. Those profitability improvements are expected to continue into the future.

Selling, general and administrative expenses during the first quarter totaled $88.8 million, which is about equal to the SG&A expense for the first quarter of 2008. As percent of net sales, SG&A was 10.5% of 2009, compared to 9.4% in the first quarter of 2008. This percentage decrease is a reflection of lower sales levels in 2009. Other cost in income included $4.7 million of financial income for the quarter, about 20% of which represents the interest income from cash balances held at non-US subsidiaries. Interest income decreased by $3 million from last year’s fourth quarter due to cash balances at US subsidiaries as a result of repatriation of cash in the last year’s fourth quarter.

The remaining 80% of the financial income reflects fiscal incentives in international locations. While it is classified as other income, the fiscal incentives relate to specific flexible packaging operations and are included in our calculation of segment-operating profit. Offsetting financial is income due to charges associated with the implementation of FAS 141R, totaling $9.1 million. These efforts are continuing and therefore, we expect additional FAS 141 charges to be incurred in the second quarter. No estimate of these charges is available, and no further detail of activity can be shared at this time.

Interest expense decreased by $3 million compared to the first quarter of 2008. This decrease is a reflection of lower debt levels and lower average interest rates. During the first quarter of 2009, the bulk of our debt was made up of $300 million of public bonds with a coupon of 4.875%, and less than $300 million of commercial paper, on which they’d be paid an average rate of about 1%.

Our income tax rate has changed only to the extent that the repositioning of non-controlling interests from pre-tax to after-tax presentation impacts the tax calculation. Excluding the change in presentation required by FAS 160, our tax rate would have been as predicted at the beginning of the year, or about 36%. Going forward, in light of the new income statement presentation, we expect the tax rate calculated as percent of income before taxes and non-controlling interest to be approximately 36.3%.

Now, I’d like to provide more color on the segment-operating profit. In our flexible packaging segment, we recorded $91.4 million of operating profit for the first quarter of 2009. This represents 12.8% of net sales. Included in this quarter result is a $1.1 million charge for severance costs in connection with our efforts to match costs with market volume levels. As shown on the Reg G schedule included in our press release, excluding the impact of severance costs, operating profit as a percent of net sales would have been 12.9%. This compares to the first quarter of 2008 when reported $78.6 million of operating profit or 10.1% of net sales.

Currently translation and transaction impacts reduced operating profit in the first quarter of 2009 by about $7.1 million. We’ve recorded an operating loss in our pressure sensitive material segment of $1.5 million compared with operating profit of $11.9 million or 7.2% of net sales for the first quarter of last year.

Currency impacts were insignificant in 2009, with translation and transaction cost reducing operating profit for the first quarter of 2009 by about $400,000. During the first quarter, we adjusted workforce levels to better match production manning with current market volume levels. Related severance charges $2.6 million reduced the operating profit. Excluding these charges, operating profit for the first quarter would have been $700,000, or 0.5% of net sales.

With regards to cash flow and liquidity, we reduced debt a little more than $69 million this quarter. Total debts of total of capitalization calculated as total debt plus deferred taxes and equity as of March 31st decreased to 29.1%. This compares to 31.5% at December 31st, 2008 when we calculated based upon the total stockholders equity balance, which has been adjusted for FAS-160.

At the end of March, we got $272 million of commercial paper outstanding with maturity spread throughout the first 60 days of the second quarter of 2009. As of march 31, 2009, our commercial paper program was supported by $625 million of backed up credit facilities. $200 million of these facilities matured today on April 28, 2009. Considering our current operating cash forecast for the rest of the year, we have determined that these amounts are in excess of our expected commercial paper needs for 2009. And we do not plan to renew this one year credit facilities as of this time. This will leaves us with a $425 million dollar multi-year credit facility due 2013, which we expect to be sufficient to support our current commercial paper backup needs.

Cash flow from operations for the second quarter of 2009 was $148.3 million. Our very strong quarterly cash flow level on almost three times the cash flow from operations of last year’s first quarter.

Working capital levels had risen significantly during 2008. Our business units have been working diligently to reduce our working capital and their efforts have provided us an additional $53 million of operating cash flow this quarter. We maintain the fine benefit pension plans in North America and Europe. In line of a reduction in funded status as of December 31, 2008, we plan to contribute $30 million per us pension plans during the second quarter of 2009.

Capital expenditures for the first quarter were $22.2 million, a bit lower than the $28.4 million spending levels of the prior year. For the total year of 2009, we continue to expect capital expenditures to be in the range of $100 million to $ 110 million dollars. Our range of earnings per share guidance for the remainder of 2009 reflects the unpredictable man levels in our market. Even in markets for which demand is historically more resilient at times like this, our customers are reluctant to build inventory levels in anticipation of future sales.

In the first quarter, we experienced more volatile or choppy order in shipment patterns. We anticipate that experience will continue for at least the next quarter. With this anticipated pattern and continued economic uncertainty, we continue to be cautious as we look into the future.

Looking towards the second quarter, we expect earning per share to be in range of $0.35 to $0.43. For the total year 2009, we continue to anticipate earnings per share to be in the range of $1.50 to $1.70 per share. This guidance excludes any charges incurred, or yet to be incurred related to FAS-141R for business combinations and any charges related to severance.

Now I’d like to turn the call over to Henry for his comments.

Henry Theisen

Thank you, Gene, and good morning to everyone. It is certainly not the norm for Bemis to spend so much time explaining details that are not comparable year-over-year because of the work force related charges and numerous new accounting rules that we have to implement this quarter. Cutting through all of those issues, you will note that over all we had excellent quarter in spite of a challenging economic environment. Our flexible packaging business achieved outstanding performance results driven by a number of factors that I am eager to talk to you about.

But first, I’d like to address the issues we are dealing with in our more challenging pressure sensitive material business. Back in the fourth quarter, we’ve talk about the weakness we were seeing in our pressure sensitive materials business. We were unfortunately right about this an operating profit is down substantially this year. The customers for our pressure sensitive materials businesses are producing labels for consumer products markets, which significantly weakened during the second half of last year. We have reacted aggressively with adjustment to workforce levels and cost management initiatives in order to reduce cost in response to this slow down. But clearly this is going to be a challenging year for this business segment.

Within our pressure sensitive material segment, it is our graphics and technical product lines related to advertising, promotion, construction, and automotive markets that have declined the most. These product lines are each over 20% below the volume levels of one year ago. The decline of profit margins is primarily result of the lack of critical volume during this recession. In Europe, volumes and margins were also impacted by currency fluctuations. We will continue to focus on cost control. And we are ready to recover quickly once the global economy begins to strengthen.

While we were prepared for a similar issue, with non-food flexible packaging business after a poor fourth quarter, we are encouraged by signs of improvement in this markets. During the first quarter, our protective display films performed better than expected as experienced the benefit of lower raw material cost over coming volumes concerns.

Now, I’d like to expand upon the strength we are seeing in our flexible packaging business. I am happy to report that our food market or our flexible packaging business delivered results above our expectations. Our teams successfully managed inventory levels and pricing in order to benefit from the temporary raw material environment we’ve experienced during the first quarter,

In addition, I am pleased to recognize our employees around the world for their successful efforts with the implementation of the world class manufacturing programs, which continue to expand most of our manufacturing plants. Our plans for clients are achieving low waste levels in the challenging production environment and streamlining processes to be able to do more with less and in less time.

Our European operations continue to improve and are expected to deliver operating margins in the high single-digits for 2009. We are optimistic that double-digit margins from this region may be as close as 2010. Performance in this region is benefiting from efforts associated with world class manufacturing and our focus on niche products and proprietary film structures. Our European customers have used our films to solve packaging needs, lower overall packaging costs, and improved their product appeal.

Our Latin American operations in both Brazil and Mexico are performing well. Offsetting some of the negative currency translation impact, these operations achieved year-over-year sales and profit growth in local currency. In the United States, we are noticing healthy growth in certain areas of the market, which seems to be benefiting in this economy. Specifically, packaging for pizza, lunch meat, and meal chips have been growing nicely coffee and liquids continued to be great markets for us as consumers appear to be trading up to single served coffee made at home and fast food restaurants deals.

Sales to private labeled customers have increased, especially in packaging for market such as health and hygiene, meat and cheese, and multi-pack overwrap for beverages. Based upon our sales and order trends, it seems that consumers are trimming budgets by eating dinner at home, bringing their lunch to work, and buying private label brands.

Although we supply both the institutional and retail markets, we have higher profit margins and larger volumes with retail markets. We are neutral to private label packaging as we supply packaging to both branded and private label customers.

As we have said before, our products are at every aisle of the grocery store and we serve large multinational food and consumer products to customers as well as regional and local customers. So transitory to grocery store, no matter what the brand or product is good for our business.

It is important to recognize the difference between Bemis and our competitors in this regard. Our competitors often specialize in one particular market per packaging like confectionary, meat, bakery, or dry goods. Bemis, on the other hand, offers flexible packaging for products in all grocery markets and a diversified customer list.

As Gene mentioned, our sales of multi-pack packaging for beverages like bottled water continued to be lower than they were a year ago. We are noticing a restacking going on now that inventories are low and the summer season is approaching.

We continue to prioritize new products and innovations through out the business, from the concrete floor and wall graphic products introduced recently by our pressure sensitive materials business, to our new flexible packaging introductions of eco-type and form-type products for meat and cheese markets. We anticipate formal FDA and USD approval of our fresh case ready meat package film in the near future.

In addition to the trials we have performed for our US customers, we have also produced fresh case films outside of the US and trial these films in our customer facilities. Once we receive formal approval, we will begin to market it to our global customers and anticipate measurable commercial sales to begin in 2010.

This quarter, we achieved record quarterly cash flow from operations. Since year end, we have increased our dividend for the 26th consecutive year, funded capital expenditures, and reduced our outstanding debt. Our strategy of focusing on material science, manufacturing excellence, and customer intimacy continues to deliver benefits in this difficult economic environment and prepares us well to benefit once the economy begins to improve.

2009 will be a difficult year for most companies. Our most optimistic outlook for 2009 is still only slightly ahead of 2008. But we expect it to be a growth year for our flexible packaging business, which will help us off set a tough year for pressure sensitive material markets.

I am pleased with the efforts of our business teams to deliver value in every aspect of our business. We are improving our cost structure, developing new products, and prudently managing working capital. Each of these efforts helps us strengthen our balance sheet and drive earnings.

Now I’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. Today’s question-and-answer session will be conducted electronically. (Operator instructions) And we’ll take our first question today from George Staphos with Banc of America.

George Staphos – Banc of America

Thanks. Hi, everyone. Good morning.

Gene Wulf

Good morning, George.

George Staphos – Banc of America

I realize you said you didn’t want to say much, but it remains the gorilla in the room. So I just want to take one quick shot at it. If we look at your comments regarding the acquisition approach that you might be taking, you mentioned that you’re focusing on core competencies while retaining investment grade profile. Are we to take from that – that you’d only focus on perhaps, acquiring a portion of the business, which hopefully would help you return on capital, and that leverage would be a key consideration here related to your investment grade profile?

Gene Wulf

George, because of the confidentiality agreements we have, today we’ve elected not too make any additional comments other than to explain where that $9.1 million charge was.

George Staphos – Banc of America

Okay, Gene. That was worth a shot. The second question then would be, just given your range of guidance, and given the performance that you had in the first quarter on operating basis, can you help us understand what your agri [ph] trends were coming out of the first quarter into the second quarter, and what the key drivers are of the low end and the high end of the range? Thank you.

Henry Theisen

And, George, as the first quarter went through, our business in the food packaging area and our flexible packing increased, and we had an excellent March. We continue to see those trends going on into the – into the second quarter and that really drives the high end of what we see. And on driving us down on the lower end is just uncertainly over what the volumes will be. We get as I – as Gene described as the choppy orders or sometimes we get days that we get excellent orders, sometimes they slow down. Everything you read about our customers in the marketplace all seem to indicate 2%, 3%, 4% reduced volume. So the real question in our guidance for the second quarter is what will be the volumes?

Operator

Thank you. And we’ll take our next question from Chris Manuel of KeyBanc Capital Markets

Jason Brown – KeyBanc Capital Markets

Good morning, this is Jason Brown for Chris Manuel.

Henry Theisen

Good morning, Jason.

Jason Brown – KeyBanc Capital Markets

Couple of quick questions on resin for you. I think you quantify that on the gross margin line saying about half of the benefit was resin half was other factors in there. Just looking at the flexible packaging segment, you had 280 basis points of margin in expansion. Would that be a fair way to characterize that as well, half of that due to resin, half due to other initiatives?

Gene Wulf

I think that’s just roughly a good comparison. It varies. We have so many different markets that are going to be more in some areas, less in some areas, but if you want to make a rough approximation that would be fine.

Jason Brown – KeyBanc Capital Markets

Okay. And then going into this the second quarter, I think some of the commodity resins have picked up a bit, some of the specialty resins have started to decline, albeit, not to the extent commodity resins. Just wondering what you’re including in the second quarter for resin kind of how you’re thinking about how that one impacted you in the second quarter?

Gene Wulf

As you mentioned, you know we had a slight increase in the some of the commodity resins to start the year out and with the number of announcements after that that have been pushed back into May and June, and we didn’t see some slight decreases in some of the specialty resins, but nowhere like the commodity resins. And as we look forward to the second quarter we just think that it will be stable through the second quarter and probably through the third quarter and waiting for some kind of a little bit of up-tech, which will hopefully happen at the end of the year.

Operator

And we’ll take our next question from Claudia Hueston of J.P. Morgan

Claudia Hueston – J.P. Morgan

Thanks very much. Good morning.

Henry Theisen

Good morning, Claudia.

Claudia Hueston – J.P. Morgan

Hi. About the really good cash flow quarter for you, and I was hoping you could comment on just what drove the working capital improvement, and how you see that going forward? I was just wondering –obviously the resin upon probably helped, but are your internal programs really driving some of the improvement there, and where can you go from here?

Gene Wulf

Claudia, this is Gene. Definitely, programs we put in place with our business units to better manage the working capital have really paid dividends for us. We’ve had a big effort in these business units to improve that working capital. And we saw the benefit of a reduction of $53 million of working capital for the quarter. Now, I’m not sure we’re going to get $53 million every quarter for the year, but it’s a major stimulus for each one of our groups in the deal.

Claudia Hueston – J.P. Morgan

Okay, and then I think – you’ve mentioned sort of a pick-up in flexible volumes as you came into April. Is there any change at all in pressure sensitive volumes? Just the trends you’re seeing there?

Gene Wulf

I don’t really see a change in that, we kind of look at the second quarter having both the same volumes on the first quarter of pressure sensitive.

Henry Theisen

It really needs an up-tick in the economy and we’re waiting for it. We oppose for it and we’re ready to go, but we really need an up-tech in the economy.

Gene Wulf

And in Europe where we’re very strong in the graphic markets, they’re economy seems to be slower to rebound than the US economy, so it will be a little while I think for pressure sensitive to see a rebound.

Operator

And we’ll take our next question from Tim Thein with Citigroup.

Tim Thein – Citigroup

Hi, good morning.

Henry Theisen

Good morning, Tim.

Tim Thein – Citigroup

Henry, your reference to private label I guess, being roughly a split from a volume standpoint on flexible packaging, if in fact that is what you said. But what’s the – what standing margin differential is there for you from a – just looking at – from a mix standpoint?

Henry Theisen

The first part. I don’t think our private label and our brands are 50-50 split – I don’t think our private label is equal to our brand volumes. But as far whether a customer of ours would buy for private label or whether they would buy for brand, it’s the same product, it contains the same margins. Really, the value at – people want the same convenience features, the same barriers, the same shelf life that the branded product would have. So for us, it makes no difference if it’s a branded product or a generic product.

Tim Thein – Citigroup

Okay. And Gene, on your operating cash flow forecast that you’d made a quick elution to Is that – can you share if that’s up versus 2008 based on what you can see today?

Gene Wulf

You mean for the total year or for the quarter?

Tim Thein – Citigroup

Yes, for the total year.

Gene Wulf

I don’t think we’ve made any kind of forecast for the total year yet, Tim.

Tim Thein – Citigroup

Okay. Well, and on that – would you expect based on – and what you saw in the first quarter, and I realized there’s a lot of moving parts here, but would you expect working capital for 2009 to be a source or use of cash?

Gene Wulf

I would expect it to be a source for the total year of 2009.

Melanie Miller

And then in 2008, it was a use of $73 million. So that would be a nice boost.

Gene Wulf

So we should have a big swing.

Operator

And we’ll take our next question from Mark Wilde of Deutsche Bank.

Mark Wilde – Deutsche Bank

Good morning.

Gene Wulf

Good morning, Mark.

Mark Wilde – Deutsche Bank

I wondered if you can talk a little bit about what all these people around us – swine flu and particularly down in Mexico might have on your business and whether any of this is imbedded in that guidance you gave us for the second quarter of the full year?

Gene Wulf

Well, I don’t know if I’m really qualified to speak about swine flu, but I don’t think that’s going to affect our business going forward. I think if it does, it’s very, very small.

Henry Theisen

Mark in Mexico, we still have a very small volume in Mexico that would be hard to make a major impact on us right now

Mark Wilde – Deutsche Bank

Okay. And then if I can just follow up. Can you talk about some of the economic weakness of receding pressure sensitive? Is there also a kind of a competitive element in that – in that we’ve had at least one of the player that’s put a lot of new capacity into the market over the last couple of years?

Henry Theisen

The pressure sensitive business, especially in our role label, is very competitive business. You have the two major players being Avery Dennison and Wrap Protech [ph] 35:22. With Wrap Protect [ph], putting in additional plans. It is very competitive, we know our strategy is not really to grow that re-label business, but to maintain our share and a number of years ago we restructured that company to consolidate the capacity and we maintained our market share through the first quarter.

Operator

And we’ll take our next question from Alton Stump with Longbow Research.

Alton Stump – Longbow Research

Thank you, and good morning.

Gene Wulf

Good morning, Alton.

Alton Stump – Longbow Research

If you could just touch on more in terms on of the competitive environment between flexible packaging business, it looks like volumes did well in a few – a few key areas. I just want to get an idea, if you think that appears to be a free rational competitive environment will continue in areas that such as meat and cheeses or if there’s any potential for pressure over the next six or twelve months?

Henry Theisen

I think you’re talking about our meat and cheese – I’m just going to expand that to include all of our really high barrier packaging where shelf life, where food protection and food safety are important. The barriers you have, the seal-abilities that you have are all very important. And I think that is driven more by the food products, the technology, the material science that’s involve in all those films rather than just competitive natures. It’s very difficult to switch those kinds of products to different suppliers and take the risks that would be associated with it. So I believe – when you talk about those kind of competitor pressures, you’re more on the candy and confectionary areas.

Alton Stump – Longbow Research

Great. I just have a quick follow up to that. About – there’s been a lot of talk about consumers trading down to either cheaper meal items or to private label. Are you seeing pressure on some of your – the more value high barrier product lines because of that trade down?

Henry Theisen

No, not at all. We see some more sales going into the generic side rather than the branded side, but we don’t – like I’ve said, these are the same films with the same margins, the same applications.

Operator

And we’ll take our next question from Al Keabily [ph] of Macquarie Research.

Al Keabily – Macquarie Research

Hi. Good morning, guys.

Gene Wulf

Good morning, Al.

Al Keabily – Macquarie Research

Just a quick question on the pressure sensitive materials business and some of the restructuring items that you did during the quarter. You’re – going forward, can you talk to us about how much savings you expect to get this year on those restructuring items? Could we feel lifting and profitability just on the cost sales understanding that volume outlooks still looks tough at least near term?

Gene Wulf

I don’t think we really did a lot of restructuring. We didn’t really close any facilities or move any assets. We really just matched up our variable costs with the – the production needs that we have and the order volumes on intakes that we’re having. Those things are really just containing the costs and putting in that line with our volumes and I don’t think you’re going to see a great big object in the kind of those things. They were not really restructurings. They’re just an alignment on our variable costs.

Henry Theisen

And then on the benefit side, a big chunk of the pressure sensitive severance was in Europe where because of their laws, they’re very substantial cost related to severing people. And it will take at least a year to get that recovered.

Al Keabily – Macquarie Research

Okay. Got it. And then switching back to the earlier question on resin, it sounds like you still think that you’ll get a positive resin benefit in the second quarter, albeit at a more moderate level, is that fair to say? And then – second half, I know it’s kind of looking at your crystal ball – hard to tell, but you think you could still see a little bit of a resin benefit in the second half of the year based on what you are seeing on pricing, thus far?

Henry Theisen

I agree with your first statement. It’s through the second quarter. We will see that benefit disappearing as our escalated, de-escalated contracts and pricing in the marketplace come in line. And basically, they're in line right now. You'll just see some inventory drift you and give us a benefit. Going out in the second half of the year, I don't think we'll have a benefit. Our pricing – our models will be in line with our cost structures and hopefully we'll have a little bit of stability.

Operator

Thank you. We'll take our next question from Mike Hamilton with RBC.

Mike Hamilton – RBC

Good morning.

Henry Theisen

Good morning, Mike.

Mike Hamilton – RBC

Wondering if you could comment a little bit in major areas where you think you're taking market share given that – prior to the economy on hinging that have been a fairly major element of focus that has kind of disappeared in importance of issues here.

Henry Theisen

Yes, I think one of the first things I want to comment as far as gaining market shares is really our customers have looked at ways that they can grow their markets.

You see, our whole PET platform, like in the rigid bacon, the rigid slice luncheon meats really attacking the deli. So they're growing their base of operations, not just taking from themselves. So they're taking volume from the delis and our technology is for easy-open, anti-fog rigid containers, snap-on packaging convenience helps us to gain that market share.

Another example of that we pointed out was the coffee area with the single-serve coffees. People are moving from buying from a Starbucks to getting a single-serve where they can have a premium coffee at home. And that is adding in our barriers, in our thermo-forming, in our PET and our technologies around nylon, polyester, and barrier – give us an advantage there and we grow our markets with our customers who take from people like Starbucks or from the delis. So that's where we really seen our good growth.

Mike Hamilton – RBC

Thanks.

Henry Theisen

One other comment I'd like to make along those lines, our PET technology also is allowing us to grow our proprietary film business in Europe. And you're starting to see some of those results in our live-stocks and our extended shelf life in that area also.

Operator

Mr. Hamilton, was there anything further, sir?

Mike Hamilton – RBC

No follow-up. Thanks.

Operator

Okay. Thank you. And we'll take our next question from Timothy Burns of Cranial Capital.

Timothy Burns – Cranial Capital

Good morning, Gene, Henry, Melanie.

Henry Theisen

Hi, Tim.

Timothy Burns – Cranial Capital

Hey, just a quick question for you. I've been hearing in the marketplace that there's been a significant increase in those dastardly e-bids and auctions online. Is that true? And then I guess, what I would ask is because of your strong technology, aren't we dealing with apples and oranges?

Henry Theisen

Well, I think we are dealing with apples and oranges. I think our material science business really separates us from a lot of those things. You know, as far as these reverse auctions and e-bids, I don't see that any different than it was two or three years ago.

Timothy Burns – Cranial Capital

Okay. Okay. And the other thing, I don't know what these products are that you mentioned, Henry but the eco-type and form-type, what markets are they aimed at?

Henry Theisen

They really aimed at the fresh meat market. The eco-typed is really the replacement of PVDC and the use of less material. So it's more of a fix more of the sustainability drive to use less raw materials to provide – to get rid of PVDC and provide better barrier.

The form-type is the new packaging concept to compete with shrimp [ph] bags rather than have me – buying a bag, you would actually buy a thermo-forming machine and use much similar films to a bag only you don't have to make a bag. The thermo-form deprived it and seals the lid. It's a very cost-effective program versus buying a pre-made bag.

Operator

(Operator instructions) We'll go next to George Staphos with Banc of America.

George Staphos – Banc of America

Hi, guys.

Gene Wulf

Hello.

George Staphos – Banc of America

Couple of quick questions related in – if we look at the pressure sensitive material business, Henry, realizing that you're looking for and hoping for an economic recovery at some point. When we look at the longer term trends of the businesses, it's obviously in a trend of declining peaks because of the increased competition, increased capacity, and the maturation in the business over the last five or ten years as an industry. What else can you do to improve the performance in PSM such that the next recovery we get, we don’t get to a 5% or 6% or 7% operating margin, but perhaps even better than that and then have a more follow-on.

Henry Theisen

You know I think we continue the strategy we've had since the failed attempt to sell our precious sensitive business to UPM a number of years ago. And that was to consolidate our label business and continue to just try to maintain our market share. We went forward and invest it in the business to try and expand our graphics program.

As you know our graphics program is a very good program for us in Europe. We want to expand in North America. We want to get in a more technical applications and technical coatings and take advantage of the expertise we have in the materials again, the adhesive materials and move out of those more competitive areas in to more technical products. And that's what we're going to continue to do with the business.

George Staphos – Banc of America

Gene, actually, Henry, would it lead to higher margin what you already saw in the last upturn now? Do you think–?

Henry Theisen

Well, I think both the graphics and the technical are higher margin business than real label.

George Staphos – Banc of America

Okay. The other question I have in flexible packaging, the balance you made great strides and continue to get back on Tim’s earlier question within processed meats and cheeses and fresh meats and cheeses. In the markets where there’s been perhaps a share loss in leakage and profitability because of competition, how are you addressing those markets? What's your strategy there to make sense that you can talk about that on this kind of form?

Henry Theisen

Well, I don't see those really applying to the processed meat and cheese or our medical type business. Those are more in the candy confection type areas and we're really addressing that to our world class manufacturing operations. And I think you'll really see the benefits as the volume comes back in some of those areas.

Operator

(Operator instructions). We will go to Timothy Burns with Cranial Capital.

Timothy Burns – Cranial Capital

There are some folks – who knows, but the opponents who say we could bounce back in the second half and there's those that believe this is a longer term, painful recession. And you talked to some CEOs and they basically say it's difficult to know what to do over the next couple three years if the customers aren't going to – I guess the customers and consumers are not going to increase their spending, but – the real question is how do you gain share in profits in a down market? I guess what I was wondering, with your technology machine, can you at towards cost reduction and re-designing packs that don't look crappy, if you will, and gain share that way?

Henry Theisen

You know, our customers really recognized that, a differentiator on the shelf is the packaging and we do two things. One is try to deliver new packages, new innovations, new ways to approach the market. We tried to do it by extending shelf life and providing product protection, food safety, which is in very important issue. And as far as using technology to try to take cost out and be the low cost producer, we do that day in and day out in all of our businesses.

Timothy Burns – Cranial Capital

Got you. Thanks, Henry.

Operator

And we do have a follow-up question from George Staphos of Banc of America.

George Staphos – Banc of America

Thanks. Last one here, guys. You might have comment on it earlier, but I've missed it. To the degree that your customers – it would appear in flexible packaging has seen some pick-up in the second quarter early on. What are they attributing, their pick-up and demand? Is the consumer just restocking their pantry or their refrigerator in the garage or we're seeing a real pick-up again in consumer spending and appreciation for those products which have your demand? Thanks. Good luck in the quarter.

Gene Wulf

George, let me take that one. I think in the markets, we talked about where we see an uptake or a rebound, it's really the manufacturer is starting to restock that distribution chain. They've been kind of nervous as to what products are going to sell and now that they're starting to get a handle on it, they're starting to restock their distribution.

George Staphos – Banc of America

Okay. Thanks very much.

Operator

And we have no further questions. At this time, Miss Melanie, I will turn the call back to you for any additional or closing remarks.

Melanie Miller

Thank you very much, and thank you to everyone for joining us today. We look forward to talking to you again in the future.

Operator

Thank you. And that does conclude today's conference call. Thank you for your participation.

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