Pactiv Corporation. Q3 2009 Earnings Conference Call

Pactiv Corporation (PTV)

Q3 2009 Earnings Call

October 22, 2009 8:30 a.m. ET

Executives

Christine Hanneman - VP of IR

Richard Wambold - Chairman and CEO

Edward Walters - CFO

Analysts

George Staphos - Banc of America Securities/Merrill Lynch Research

Al Kabili - Macquarie Capital

Pete Ruschmeier - Barclays Capital

Mark Wilde - Deutsche Bank

Richard Skidmore - Goldman Sachs

Chris Manuel - KeyBanc Capital Markets

Chip Dillon -Credit Suisse

Claudia Hueston - J.P. Morgan

Tim Thein - Citigroup

Ghansham Panjabi - Robert W. Baird & Co

Presentation

Operator

Good morning and welcome to Pactiv Third Quarter 2009 Earnings Release Call. This call is being recorded at the request of Pactiv. If you have any objections please disconnect at this time.

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

Christine Hanneman

Good morning, I’m Christine Hanneman. Joining me today are Richard Wambold, Chairman and CEO; and Ed Walters, our CFO. Welcome to our discussion of Pactiv’s third quarter 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 will 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 website at www.pactiv.com under the Investor Relations section, under Financial Press Releases. Richard.

Richard Wambold

Good morning, everyone. Obliviously from our report we have another great quarter. We posted earnings per share of $0.54, it’s up 35% versus where we were at last year same quarter. Increase for the combination of lower cost, favorable spread and higher volume. Our volume is up 2% and our productivity cost reduction programs again were strong contributors to our earnings growth. We continue to make excellent progress in positioning our company to do relative competitive environment. We also had another very strong quarter of cash generation; Ed will cover the details in a few minutes. But before I will picture contributions, our free cash flow for nine months was $436 million. During the year, we have used the strength of our cash flow to substantially reduce the risk associated with our pension fund. The fair market value of our assets increased by more than $800 million so far, a decline in discount rate of a 135 basis points is masking some of the progress we made. But as rates climb and recovered economy average debt to fund ratio to reflect this whole improvement that we’ve made.

Now let me turn to each of the business segments. I will begin with Hefty® Consumer Products business where we had sort of 1% volume decrease. As we mentioned last quarter, we expect business faced tough comparisons versus where we were at last year. In retrospect, the business faced greater headwinds than we expected. Waste bag volume was down due to a decline in the overall waste bag market as well as substantially less converted volume than we had a year ago. Our shipments reflected this reduced retail activity. As we look at the fourth quarter we believe we are on track to improve our performance to a more normal level, which would equate to double digit increase over the fourth quarter 2008.

As we mentioned, in July, the Hefty Odor Block®, our new unscented odor control capability, has now been added to our entire kitchen CinchSak® waste bag line and it continues to sell well. We continue to support it with advertising and promotional pricing in the fourth quarter. We continue to see good growth in tableware, particularly in cups and cutlery and plate product lines. In fact if we exclude our waste bags, all other products in the consumer business were actually up around 5%.

Third quarter consumers segment profits and margins were up substantially. Overall material costs, lower operating costs, obviously, made the way to the bottom line. All in all, we anticipate that we will see a good increase in the volume and solid margins in the fourth quarter in our consumer segment.

Let me move now to food service and food packaging business. In this segment, our volume increased 4% and continued to see good growth in cups and cutlery from expanded business with our current customers as well as business gain with our acquisition of WinCup polypropylene business earlier this year. In addition, we saw an improvement in the variety of other product lines, particularly in polypropylene and paper-based items. Strong growth in these areas offset continued softness for some food service markets, which we anticipate they show signs of improvement as unemployment levels decrease and hopefully that will be some time in next year. Again in the segment, operating profits were up strong as a result of higher volume and lower operating cost.

Overall our business is doing well but we will be coming up against more difficult comparisons as we saw in the dramatic slide in raw material cost begins in the fourth quarter 2008. The economy is showing signs of recovery; however, we are not anticipating their robust upturn in consumer spending given the high unemployment levels. Resin cost remain unpredictable but we can have net-net, in the fourth quarter there will be neutral compared to where we were at third quarter. While this is a change from our previous outlook which anticipated that resin cost woud decline somewhat in the fourth quarter. We think we addressed the resin cost in a further way in earnings guidance for the fourth quarter.

Now let me turn it over to Ed, and we’ll come back with questions.

Ed Walters

Thank you, Richard. Third quarter EPS from continuing operations was $0.54, a 35% increase over last year. The increase primarily reflect the improvement and the spread between selling prices and raw material cost, productivity and cost reduction gains, as well as higher volumes and lower energy related costs, offset to a lesser degree by higher SG&A expense. Sales were $839 million down 9% from last year, as 2% higher volume was offset by 11% lower pricing. Gross margin was 31.7% up significantly from 23.1% last year, operating margin was 16.3% compared with 11% on a reported basis in 10.8% excluding the restructuring credit in 2008. SG&A expense was $83 million, $16 million higher than last year, primarily as a result of more normal levels of advertising expense and bonus accruals compared with last year, as well as lower pension income.

The effective tax rate was 36.3% in the quarter compared with 31.5% in 2008 when we had some one-time tax credits. After $200 million pretax contribution to the pension plan and related favorable cash tax effects, free cash flow in the quarter was a use of $31 million compared with a source of $88 million in 2008. Excluding the pension contribution free cash flow would have been a $139 million.

Let me take a minute and update you on where we stand on the pension front. We had contributed $400 million pretax this year, a $100 million in February and $100 million in April and $200 million in July all of which was funded out of free cash flow. Due to the allocation of the contributions between past years 2008, 2009 approximately $50 million of the cash tax benefit fell under the first quarter, $20 million benefit occurred in the second quarter and $30 million benefit occurred in the third quarter. The remaining $40 million should be spread evenly between the fourth quarter of 2009 and next year. As you know, we officially measured the pension plan at year end only, but want to give you a rough estimate of where we stand currently, where the caveats at market could change the things by the end of the year.

As of October 20, the year-to-date return on plan assets was approximately 25%. The funding discount rate at the end of September was 5.6%, behind roughly a 135 basis points from December ’08. That has increased the measurement of liabilities by approximately $500 million. You will recall at year end 2008, our US pension plan was under funded by $1.1 billion, but the $400 million and contributions we have made this year handling good returns year-to-date our under funded has improved by roughly $350 million and the funded ratio was a little over 18%. As the economy recovers and interest rates rise, our funded ratios should show further improvement. CapEx was $29 million in the quarter compared with $23 million last year there were no share repurchases during the quarter. At the end of the third quarter, a $110 million was drawn under the company’s accounts receivable securitization facility, they are up from a $129 million at the end second quarter. We repaid $70 million of bank revolver debt in the third quarter. At the end of the quarter, gross debt was $1.28 billion and net debt totaled $1.18 billion. Net debt to cap was 54.7% compared with 56.3% at the end second quarter. Leverage which is debt to EBITDA was 1.6 times interest coverage or EBITDA as the multiple of interest expense was 8.4 times. We are in full compliance with our debt covenants.

In August S&P affirmed our BBB debt rating and upgraded the outlook to stable from negative. With respect to liquidity we are in excellent shape at the end of the third quarter. We had nothing outstanding on our $750 million revolver. We have an improved pension funding situation, a very solid balance sheet and strong cash generation. We anticipate being in a position to deploy our cash to multiple users, whether be to take care of the pension fund, grow the business through acquisitions or return it to share holder through share repurchase, or a potential dividend. Depreciation and amortization in the third quarter was $46 million, even with last year, EBITDA for the quarter was $198 million dollars were 23.6% of sales compared with $151 million or 16.3% of sales a year ago. You may have noticed that we record $15 million of net income from discontinued operations during the quarter. This income related to the exploration of a statute of limitation on a 2005 tax year, for tax liabilities which have been recorded in conjunction with divested businesses.

Now we will review the company’s outlook for the fourth quarter and full year. We anticipate that EPS for the fourth quarter will be in a range of $0.48 to $0.52, we raise our full-year EPS outlook to a range of $2.44 to $2.48 from a range of $2.37 to $2.45. Pension income for the full year is expected to be $37 million pre-tax or $0.17 per share, the effective tax rate will be approximately 37%. We expect to see a decline in full-year sales in the range of 6% to 7%. This outlook incorporates a 2% to 3% volume increase, 8% to 9% lower pricing and unfavorable foreign exchange of approximately 1%. We anticipate SG&A trends this will be approximately $340 million for the year. Before pension contributions, our outlook for free cash flow is $480 to $490 million up from a range of $450 to $470 million. Taking into account $400 million of pretax pension contribution or $300 million after-tax. The outlook for free cash flow for 2009 has been increased to a range of $200 to $210 million from a range of $170 to $190 million. The increase from our prior estimate is due to a higher earnings and a lower usage of working capital. The outlook reflects appreciation and amortization expense of a $185 million and capital expenditures of $130 million. Richard, I will turn it back to you.

Richard Wambold

And, you can go ahead. Let’s begin taking questions, please.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator Instructions) One moment, please, while we hold for questions. Thank you. Our first question is coming from George Staphos. Please state your company name.

George Staphos - Banc of America Securities/Merrill Lynch Research

Question on food service and pricing to start, from what we recall your earlier price increase in food service was resented as I kind of understood it from our trade contact is because, it wasn’t required because of resin pricing and trends there. Nonetheless in the guidance for fourth quarterly, you are saying that resin now looks like it could be a little bit more of a burden and perhaps you were thinking a few months ago. So, how are you handling that with your pricing g strategy and food service? Thanks.

Richard Wambold

Just remember now, food service that a substantial amount of our food service business over half now is actually on contract pricing, so on that path so we are really talking about, less then half of that George is really subject to a price increase anyway. And, yes, we had a price increase out there, as did, there is I can tell many of the other people that participate the industry as it look like resin prices were backing down or certainly it wasn’t looking like they are not going to increase anymore. You could say, we rescinded the price increase but I think another way of looking at it is, but I think another way of looking at it, realized that the price increase really wouldn’t be effective at that stage of the game and so we just took it off the cable.

Obviously, as prices go up assuming they do go up, we will adjust our pricing accordingly going forward. And, not really, we were looking at now on, in terms of net-net pricing when we look at all resins combined that we buy. Really they are not net-net going up. We forecasted that resin prices for the fourth quarter going to be more or less equal to what we saw in the third quarter, it would be nice for them to drop a bit we had hope that they would, maybe they still will George, I don’t know. But nevertheless being equal to third quarter I think we still made the right decision in terms of rescinding the price increase. Now if we do see resin go up we won’t hesitate to adjust our pricing accordingly.

Operator

Our next question is coming from Ghansham Panjabi; please state your company name before proceeding with your question.

Ghansham Panjabi - Robert W. Baird & Co.

Robert W. Baird.

Richard Wambold

Hi Ghansham.

Ghansham Panjabi - Robert W. Baird & Co

Obviously ’09 has been a terrific year for you guys, by your own words comps do get tougher. I know it’s early but what are the major drivers we should think about for earnings as related to the outlook for ‘010? Is it volume improvement, productivity, new products, what should we look forward to?

Richard Wambold

I think there is going to be volume improvement, comfortable that we are going to continue to gain share and I think we are going to do some things in the consumer side of the business. I’m hopeful that we’ll do some things in the fourth quarter that we are working on right now but aren’t far enough along to discuss that we’ll end up with a greater volume for us the next year. Second, really in both businesses, but particularly in the food service business, we’ve had a good year as you said and we said but it’s been a mixed bag to be truthful with you, we’ve had. Some businesses where gaining share really offset decline in other areas and those declines are really being driven principally by a weak economy and by a weak consumer.

So one of the things that we have to take into account is that if the economy improves and I’d like to think of that in terms of unemployment levels improving but as the economy improves, in general, we ought to see some of those other businesses that have been contributing negatively to the scorecard here. We will see some of those begin to pick up contribute in a positive way going forward. So there is kind of a hidden growth factor in the base business. It also affects us frankly in the consumer side but it effects us even more so in the future side. I am hopeful that volume next year, a combination of our own additions to get the business coupled with just greater volume from the base business gives us a good volume here going forward. I don’t know what resin’s going to do, nobody does. Obliviously as we look at next year, some of the forecast we’re seeing, if you were to look at CMAI, CMAI really kind of reflects more or less a flat year, I don’t know if that’s what’s really going to happen or not. But there will be a favorable environment for us to do business and hopefully that’s the exact one that we’ll see

Operator

Our next question coming from Tim Thein. Please state your company before asking the question.

Tim Thein - Citigroup

Citigroup. Good morning. Richard just to come back and then make sure I am clear on that and the last point in terms of the food and food service you are talking about, did you mention there, that’s where you think the impact of further share gains are likely to come in 2010, you weren’t talking about consumers, correct?

Richard Wambold

No actually I was talking a little bit about both, but I think there is an opportunity. I don’t think there is an opportunity for us to improve our overall position with consumer, that’s what I am saying is, it’s a little early for me to have a discussion with you about the statement again. But I am hopeful if that’s the case in which case we would actually see share gain in both businesses. And in the food service side I was expecting to see hopefully some rebound in terms of base volume as we get into that latter half of next year. I don’t think it’s going to be a big thing in the first half, what my expectations are that’s going to be there previously in the second half?

Tim Thein - Citigroup

Okay and quickly can you, I think you kind of hinted that earlier, but the trends between…

Richard Wambold

We are going to try and stay with one question.

Tim Thein - Citigroup

Okay. Fair enough. Thanks.

Operator

Our next question is coming from Claudia Hueston. Please state your company before asking your questions.

Claudia Hueston - J.P. Morgan

It’s J.P. Morgan.

Richard Wambold

Good morning Claudia.

Claudia Hueston - J.P. Morgan

I was hoping you could just talk about the contribution from your productivity programs in the quarter, and how you are thinking about potential contributions from those programs in 2010.

Richard Wambold

Let me let Ed go through that with you, Claudia.

Claudia Hueston - J.P. Morgan

Okay.

Ed Walters

Claudia, we have been talking about the annual benefits from lean from a perfect cube and from procurement initiative is around $55 million for the year, we had a ratable gain in the third quarter from those initiatives. Nice thing is that we are not seening a lot of inflation right now, so, it has fallen right to the bottom line, and in fact, we also got to pick up from energy costing lower than last year.

Claudia Hueston - J.P. Morgan

And anything about 2010?

Ed Walters

We have a reason why it is going to change Claudia and I think in general, programs are pretty strong. The unknown factor of course is, well general cost go up, my sense is that in this economy we’re probably not going to see a lot of inflation going to the capital for a while. So I think we’ll do well in 2010.

Operator

Our next question is coming from Chip Dillon. Please state your company before asking your question.

Chip Dillon -Credit Suisse

A little bit out of left field, but could you talk a little bit about competition and how you think about in the food service area, you go into a Whole Foods and some of the trades there they use I guess some kind of recycled material that obviously is not resin based and as people get greener is that something that you could see having the material impact on your business or put it another way are you involved in those types of product.

Richard Wambold

I can’t comment of Whole Foods, I don’t shop there so, it is just not because that I’m against it, so I don’t really know what they are using. And in general I think we are seeing growth in many of our more sustainable product lines, let me give you some examples. Polypropylene for instance, because polypropylene actually has a lower specific gravity, it’s a lighter product, it is viewed by many, many people as being a better type of plastic for the sustainability standpoint than others. And its one that we have been installing, investing and we’re seeing good growth because of this. We are also seeing growth in our paper-based products particularly in our press ware business which is for frozen food primarily but also we are seeing it our molded fiber business and I’ve mentioned it to several people that we have some new technology in molded fiber.

A project we call project matrix which is a new machine we have created ourselves and actually allows us to do some rather intricate molding of paper fibers, tick them up with containers like a hinge lid containers, those happen to be growing very quickly. And in fact we are investing a fair amount of capital at this moment to grow that product line because we think that has a lot of legs on it in total and its not only a food service product but frankly we could also do other things in the plate business and so on with that same capability on the consumer side of the business. So we are addressing that issue, we are also addressing it on a longer term basis with R&D, we are very much involved with a lot of the new plastics that are going on that are from renewable sources.

At this stage of the game they are not quite ready for the real market yet, they are things we were selling some of but the reality is they are not drop ins at this stage, you have to handle and start differently. And some times their cost is prohibitive and not very many customers really want to buy them. So I believe we look at out Whole Foods as an example. They are probably, I don’t know this, but they are probably paying a higher price for those products but their customer base is probably willing to pay for that product as well. So we are in fact investing and preparing ourselves to be stronger in that area and we’re seeing some of the growth from particular material prize right now.

Chip Dillon -Credit Suisse

Could you just do a quick follow up, I mean lets say, is there a right sort of a rough goal as to what you think this could make up in five years?

Richard Wambold

We are going to ask everybody to please just ask one question, but I don’t have a view on a five year. I think the question is when the materials are there, just state one question everybody.

Operator

And next question is coming from Chris Manuel. Please state your company before asking your question.

Chris Manuel - KeyBanc Capital Markets

It’s KeyBanc Capital Markets, thank you. I promise I am just going to ask one question Richard.

Richard Wambold

Ask a really good one now.

Chris Manuel - KeyBanc Capital Markets

In some ways it’s a follow-up to Ghansham’s question earlier and he asked about what 2010 sort of looks like from an earnings standpoint, and I’m going to try and ask you what you think about free cash flow over next couple of years, you have probably see a lot of noise this year between different components of pension funding and things of that nature, resin costs, material costs moving up and down. But you’ve made some material improvements, at least in my view to the business, What would you view as kind of an ongoing or a more normalized free cash generation ability for Pactiv?

Richard Wambold

I’ll answer that question, but I want to make sure that what I am not answering is what is 2010. The answer to the question was, well, I think, would contribute to growth next year and I would try to highlight that, but, yes, I am really not giving the 2010 number yet. But if you look at where we really are and sort of back out the one time things like reductions in working capital and things like that. This business is generating probably in the neighborhood of $300 million free cash flow. And, as you start to think about what is the company going to do, I put up three probably down as a starting point and we will have to get more specific as we get into our 2010 estimates. But I think that, that is what is the current capability of the company.

Operator

Our next caller is Richard Skidmore. Please tell your company before asking your question.

Richard Skidmore - Goldman Sachs

From Goldman Sachs. Thank you. Good morning, Richard.

Richard Wambold

Good morning.

Richard Skidmore - Goldman Sachs

Could you just amplify your comments regarding the growth you are seeing in the custom cutlery, specifically is it related to the food service segment in the fast food channel.

Richard Wambold

What I don’t want to do is I don’t want to break out every product line we have, but let me mention that if you look at custom cutlery those are share gains. I mean there is growth in that business as well, I mean that is, that’s an area where there is probably some growth still going on even in this kind of economy, but in principal what we are seeing there is Pactiv with a strong product line and strong operating cost and access to distribution to some of our competitors that we have, but you are really seeing is share gains there. So, I think what you are really getting at is, how much growth that we see here if I am seeing a decline or negative growth in some of the businesses, how much growth do we really see in it? And, the custom cutlery and a few other products line and it is going to be clearly greater than 4%, I mean obviously it is greater than 4%. We could double that, it could be in that range. But, again I think as we look out in the 2010 I think we are going to continue to see some pretty good growth in those products line part for packing.

Richard Skidmore - Goldman Sachs

Okay. Thank you.

Operator

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

Mark Wilde - Deutsche Bank

It’s Deutsche Bank.

Richard Wambold

Hi Mark.

Mark Wilde - Deutsche Bank

Hi Richard. Richard, with the economy kind of in recovery but in pretty slow recovery, and a lot of people talking about sort of more growth in private label, are you kind of re-thinking your strategy about sort of the proportion of private label in the consumer products business or maybe moving in that private level and things like thrash bags where I don’t think you are right now?

Richard Wambold

Well, I think to answer the first effort, they are going to thrash bags. We are aggressively in private labels, in every other products and so absolutely, we are not re-thinking anything we are just trying to do it, we are trying to grow the business as well as we possibly can and we are doing I think pretty doing a good job. In waste bags, it’s an area where frankly we haven’t been in it, but it is an area that we are having second thoughts about it to be honest with you. It’s an area that we think we can compete with quite well. And we are looking at opportunities where we can get the value out of our business by doing that. We are not looking at the low end, we are not looking at opening price point kinds of products but we are looking at a potential for supplying people who want to create a real brand, store brand, a high quality product where we can get a decent return on our investment on it. So I that is a very real possibility going forward.

Mark Wilde - Deutsche Bank

I think that’s a good answer. Thank you.

Operator

Our next question coming from Pete Ruschmeier. Please state your company before asking your question.

Pete Ruschmeier -Barclays Capital

Barclays Capital

Richard Wambold

Good morning Peter.

Pete Ruschmeier -Barclays Capital

I wanted to ask you a question coming back on volume, 2% to 3% of volume overall for the year I know you are not giving volume guidance yet for next year. With the composition clearly in the latest quarter was from food service was 4% versus consumer at 1%. I’m curious if you can share with us going forward whether there is going to be any convergence on that? And I guess related to that I’ve been seeing more advertising on Hefty, I don’t know if that’s a new initiative that you are putting more dollars into advertising but may be you could shed light on that initiative as well.

Richard Wambold

That was tricky. That was tricky. I think it’s a too hard question. I think in general I think you will see convergence, but I think the convergence isn’t by one tricking the other one growing to it. I think the convergence here is that consumer is going to catch up. If you really look at this quarter a word not to waste bags they are pretty much in line on all of the products. And so therefore we had some interesting things happen, I will just say that in the third quarter in terms of waste bags, a number of things happened that frankly surprised us and didn’t go our way and the net effect of that was to give us a bad quarter and a part of that was thatwe guessed wrong in terms of how strong the market was, but I think that market will come back. We were not to that, we would have had pretty near convergence, if you look at the fourth quarter, we kind of calling for convergence, so we are looking forward to see some pretty decent growth in the fourth quarter.. Admittedly as you look at fourth quarter, the comps last year were not that strong that was sort of the beginning of the real tailspin in terms of volume in the industry and there is a lot of, inventory reduction going on as you recall, and nevertheless, I think we are going to see some pretty decent growth as we enter the fourth quarter and I would help to continue that next year.

Operator

Next question is coming from Al Kabili. Please state your company before asking your question.

Al Kabili - Macquarie Capital

It is Macquarie. Just wanted to, Richard, talk about, what you are seeing in terms of the acquisition pipeline and then if you do see something larger come along that’s attractive, with the contributions you have made to the pension plan this year, do you feel you are in a position from the capital structure to be able to do something larger.

Richard Wambold

Well I think the market right now for acquisitions is, I think we have gone from cloudy to partly cloudy to partly sunny. Climate is pretty good right now, there are businesses beginning to be marketed, people are seeing their business get a little bit better and as a result of that they are beginning to think about selling it, so I think the possibility of an acquisition is pretty good. I thought we did a good job in covering the balance sheet and our position right now, we’ve done a lot on pension, we may or may not do a little bit more on pension but we’ve done a lot on pension on the asset side already.

It’s not going to be long, as we don’t believe it is going to be a long-term source of major investment for us which means when we start to look at our cash flow, we are in a good position to support a fairly sizable acquisition if the right one were to come along, its got to be the right one that’s the key. And so as we look at 2010, the only unfortunate piece of that is that I can’t make those kinds of projections. We know don’t do deal to make a year, we do deals because they fit with our business and then help us grow it and earn great returns over a longer period of time. So unfortunately that one never works and we will not do that just because we want to make a statement or because we are trying to make a number in a given year. But I do think that possibility is there for us to do the right acquisition or acquisitions as we go forward in the next 12 months or so.

Operator

(Operator Instructions) Our next question is coming from George Staphos. Please state your company before asking your question.

George Staphos - Banc of America Securities/Merrill Lynch Research

Thanks. Hi guys.

Richard Wambold

Hello, Mr. Staples, how are you?

George Staphos - Banc of America Securities/Merrill Lynch Research

Doing well, Richard. I guess the question if we consider the existing portfolio as it is today and where you stand relative to your longer term productivity initiatives on the one hand and your opportunities for share gain. You know how long do you think you can on the one hand grow quicker in the markets that you are in and continue to grow productivity at $50 million when do you reach a practical limitation either from capital or some other factor as you look out the next couple of years in line. Thanks.

Richard Wambold

That’s a heck of a great question. I really wish I knew the answer to it. I can hold a few bars for you I guess, but the reality is that what we see is a lot of opportunity out there and continue to make improvements. Sometimes, those improvements show up as margin improvement, frankly sometimes, that just shows up as the competitive edge, that allows us to get the growth and how we use it, how we use it will be sort of key to managing the business, because sometimes it's better to, sometimes it's better from a market standpoint to put it to the bottom line and sometimes it is better from a total standpoint to use it to grow and that's a tough call. I am glad, we can do it. I think we have multiple years in front of us, but I would like you to again think of lien ultimately, the ultimate goal of lien is to help us create free capacity. Ultimately, more pounds per machine, per man hour is the same thing as installing a new machine without capital. Therefore, when you start to look at the ultimate goal of liens, the ultimate goal of liens is to allow us to produce incremental talents at essentially variable costs. And so you do really get growth for free and you really do get margin improvements. It may just not really be in the sense of cost reductions, you will make the margin improvement that is because we are doing incremental balance out of the same capacity. That’s really what we are trying to do over the long haul George which is why I believe that this program has significant likes to it.

George Staphos - Banc of America Securities/Merrill Lynch Research

Thanks

Operator

(Operator Instructions). Thank you. We have a follow up question coming from George Staphos.

George Staphos - Banc of America Securities/Merrill Lynch Research

Just trying to live by the rules here. Rich, There are two parts and I will finish up. One, what do you think that pick up in productivity and capacity is then on average the next two or three years from the lien and then may be try to tie a bow on Ghansham's and Chris' questions from earlier, if we hold resin constant we consider the volumes are looking up for next year and the productivity realizing the target got for 2010, do you think there's a chance that, 2010 can look similar to 2009, obviously very, very tough comparison this year. Thanks guys good luck in the quarter.

Richard Wambold

Well, I will get on that. Try to get at the second question first, I think George. Do I think that 2010 can look similar to 2009? In many ways, yes. Do I think we are going to have the same spread improvement that we had in 2009 and the second shore both in earnings and in cash flow, the answer to that is no, I don’t. Honestly, I do see growth. I do see cost improvements. There is a number of factors that I believe are going to contribute to a good, healthy year of performance in 2010. I'm not in a position, at this stage of the game to try to make a projection as to whether it’s going to be less than, equal to or greater than. But I think the odds are that it's not going to, if it’s greater than and I am sure there is going to be a lot greater than. It's going to be a real effort to get an equal to.

George Staphos - Banc of America Securities/Merrill Lynch Research

And you have to run the business for the right reason?

Richard Wambold

And we have to run the business for the right reason exactly, we are not going to do things that are down, just squeeze earnings out for one period at a time to say we did it. We are really trying to grow the business over the long haul and do it the right way. So that's a true statement. I will also point out that if you look at 2009 and I believe this to be true, I think there are two things that frankly you count for those our performance in terms of the market value of our company in 2009. One of them was obviously taking risks was a big issue and it deserved to be viewed as a big issue at the beginning of the year. And I think with prudent use of our cash flow this year and improvement in the marketplace that when you really look at the asset side we did a terrific job in terms of improving our position.

Unfortunately, interest rates have fallen and so as I’d mentioned in my comments, and Ed mentioned in his that's kind of masked at this stage, but remember one point of interest rate change is $350 million dollars in terms of liability reduction assuming it goes up, okay and so my feeling is I don’t think its over yet but my feeling is that the taking risks issue has a deduct from share price ought to start to come off the table now, not next year but now. I mean the reality is we've done a lot and if one takes a good look at what interest rates are likely to do over the next 24 to 36 months, the reality is that the discount that we have baked into our stock is one that I would expect to come out as a result of those things.

The second thing is George I don’t think we ever got full credit for the incremental earnings that were driven by the reduction in commodity cost issue. I think the reality is most people look at us and say that’s a nice thing but I couldn’t find it on our stock price. Not fully valued anyway and so my sense is that the more normal we appear next year, still a good year but a more normalized year next year. Once that sets us in place and people understand what it’s going to be and why its going to be my view is that from a stock price standpoint that’s how we get rewarded because at this stage of the game I think people don’t really know where the stock is. What the stock should be valued at. And as a result of that I think it's probably not valued where it will be.

George Staphos - Banc of America Securities/Merrill Lynch Research

I appreciate it. And just on that capacity increase.

Richard Wambold

Ask the question again George I am sorry.

George Staphos - Banc of America Securities/Merrill Lynch Research

What does lien allow you to grow the capacity by overtime rough number?

Richard Wambold

2%, 3%, 5%. It never really translated into that but…

George Staphos - Banc of America Securities/Merrill Lynch Research

Okay.

Richard Wambold

That is either probably ballpark somewhere 2% to 3% it’s probably not what it is but the trouble with it is that it kind of comes in as lumpy. Just now you look at it as 3% that’s probably okay and average but the reality is that in great lien projects its also is implemented everywhere, it may give us a 5% or 6% capacity increase or 10% capacity increase in a particular area which will then go out itself. So it really kind of happens that way. And we are trying to focus it by the way. We are trying to focus it where we want the capacity.

George Staphos - Banc of America Securities/Merrill Lynch Research

Thanks Richard. Good luck on the quarter.

Operator

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

Mark Wilde - Deutsche Bank

Deutsche. Richard, just a clear fact around the kind of growth and acquisition. Can you just help us think about how you weigh, sort of growing share and broadening kind of product line here in Northern America, versus maybe going offshore and getting into some markets that have some of the same trends going on that we've had here in terms of kind of consumer demands and also higher growth rates over time?

Richard Wambold

Yeah, I can do that, I mean it, I think, I do think that international growth could be a valuable thing for us. So I don’t discount the fact that we could go and do that and have higher growth rate in certain markets. What I really understand though and what our company really understands is that we actually create value for our existing customers when we add a product to the truck that we are sending there already. So when we have the opportunity to add a product to our portfolio that’s a good return for us and has some decent growth aspects to it, particularly if it’s a product we don’t have and therefore we can gain share in the process of doing it. If getting the incremental growth for us is obviously, you can see with, with the Prairie acquisition is a very doable things. So you start to look at the synergies involved in growing here, those synergies don’t exist somewhere else.

So you really have to have a very, very strong view that you can grow well in another marketplace and have a good cost structure to do that. In order to want to spend the money to go somewhere other than home, it's just lower risk and I think usually higher reward at this stage of the game. And there's going to come a point where you have look at and say, well may be we can’t grow. But if we look at the markets for all of our products we count all of the various substrates are going to market though both channels. I mean the marketplace today is somewhere in the neighborhood of you know, take a midpoint that may be $18 billion in North America in the US and so when you really look at it on a share basis, we are a fairly, we are a good player, we are the biggest player I guess but the reality is there's a lot more share to go get it.

Mark Wilde - Deutsche Bank

Okay, fair enough.

Operator

Our next question is coming from Chip Dillon. Please state your company before asking your question.

Chip Dillon -Credit Suisse

Yes. Credit Suisse and I will be sure to keep to the rules thanks to Richard.

Richard Wambold

Sorry Chip.

Chip Dillon -Credit Suisse

No.

Richard Wambold

First violator always gets first. But at this stage of the game we are coming towards the end of it so I will let you have one and a half.

Richard Wambold

Well, as my parents told me a lesson early is the lesson learned good. So listen, I was going to ask you about the pension, could you get a review for us, my understanding is that most of that liability is fixed in stone, and that it wouldn’t be unreasonable therefore if the market continues to be healthy that, that we could see you know a point where you may not really need to put hardly any money into that plan in future years obviously depending on the interplay of long-term interest rates going up and the stock market going up. Could you just talk about sort of what you see as a sort of a steady state situation there in the future possibly?

Richard Wambold

Well, I hate to say you answered your own question, but you did a better job than I would. I mean the reality is that’s exactly that, it is for all pension purposes in present plan. So therefore the real cash liability of this plan is the changing. The only thing that’s changing is the measurement of that cash liability as a result of changes in discount rates which means changes in corporate bonds, AA corporate bonds interest rates. So when you start to look at it, when you really focus on this thing what you want to do is the asset side of the equation that you pay attention too because everything else is going to change over time. So here we are at very low interest rates. One way or another, I am hopeful interest rates when they do climb, they climb because the economy is doing well, they’ll climb because of inflationary reasons, but one way or another interest rates, rising interest rates are packed to spread. And it is going to reduce the measurement of that liability. Likewise, as our investments which are 70% in stocks and 30% essentially in bonds as that improves, we have another reason to look at it and say we are probably not going to have to put a lot of money in it. But things can change, we don’t really know what the future is and so our view has been especially this year it has been to be conservative and to put a fair amount of money away and we may still put some more but we kind of think the same way you do that this is not going to be a big use of cash as we go forward. It may take some but it shouldn’t be a big use of cash.

Ed Walters

Chip, this is Ed. To put an explanation point on that if you consider the fact that if interest rates had not moved this year our liabilities would be $500 million less and our funded ratio would be significantly north of 90% right now. So that gives an indication that that's how true your statement looks.

Richard Wambold

Pure a measurement right now and as long as we are in a position of being funded enough that we don’t have to put cash in because of the recent (Inaudible) we are really in pretty good shape.

Chip Dillon -Credit Suisse

Got you. Thank you. 

Richard Wambold

Thanks for the question.

Operator

(Operator Instructions). Thank you. There are no further questions at this time. I would like to hand the floor back over to management for any closing comments.

Richard Wambold

Well, again thank you for your participation and your questions and your limiting them to one. We are going to try to do that on an ongoing basis. But I know it’s a little difficult to get on, in the first question. If everybody gets to ask as many as they want upfront, this has been our, by the way this has been our 40th earnings conference call. We keep a book that we look at per (Inaudible) we use Roman numerals. So this is number XL, extra large and we badly beat our numbers in the past and we’ll talk to you in about 90 days. Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!