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Executives

Christine Hanneman - VP, IR

Edward Walters - Chief Financial Officer and Senior Vice President

Richard Wambold - Chief Executive Officer and President

Analysts

Claudia Hueston - JP Morgan Chase & Co

Ghansham Panjabi - Robert W. Baird & Co. Incorporated

Albert Kabili - Macquarie Research

Alton Stump - Longbow Research LLC

Jason Brown - Keybanc Capital Markets

Richard Skidmore - Goldman Sachs Group Inc.

George Staphos

Chip Dillon - Crédit Suisse AG

Timothy Thein - Citigroup Inc

Pactiv (PTV) Q2 2010 Earnings Call July 30, 2010 8:30 AM ET

Operator

Good morning, and welcome to Pactiv's Second Quarter 2010 Earnings Release Call. [Operator Instructions] Beginning this morning's call is Ms. Christine Hanneman, Vice President, Investor Relations for Pactiv Corporation. Ma'am, you may 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 second 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. In our press release and this conference call, we discuss our earnings results using some non-GAAP financial measures. Reconciliation of those non-GAAP numbers to GAAP numbers can be found on Pactiv's website at www.pactiv.com under the Investor Relations section under Financial Press Releases. Richard?

Richard Wambold

Good morning, everyone. In the second quarter, our earnings were $0.56, and our volume grew at 7%. 2% of that was organic, and 5% came as a result of the acquisition of PWP. We have now posted five quarters in a row of volume growth despite markets that are still on decline as a result of recession. We expect our growth to continue in the second half, with approximately 9% to 10% volume growth, half of that being organic, the remainder of it coming from PWP.

Like many businesses reporting in the quarter, we did well from a financial point of view, but we were surprised that the market momentum we saw in the first quarter showed signs of slowing. We also believe that resin costs would increase as we move forward in the year, and we took a number of steps early in the quarter to make sure that we wouldn't fall behind on pricing. As it turns out, resin went the other way on us and actually began to decline in the quarter. And this mystery caused us some volume, particularly in our Consumer segment, where pricing and promotional adjustments, even those where you're trying to reduce the price, can take a quarter or even longer to implement.

In the quarter, our Hefty Consumer segment saw a 1% volume gain, which was lower than what we expected, and market continues to be difficult. And just as we saw in the first quarter, the markets for each of our product categories continue to show declines in the second quarter. Our new Great Value Waste Bag business at Wal-Mart contributed most of the growth we saw.

During the quarter, our strategy was to position our Consumer products for price increases that we thought we would need to offset rising material costs throughout the year. Raw material costs, as I mentioned a moment ago, actually started to decline about in the middle of the quarter, and most of our competitors maintain their aggressive first quarter pricing and promotional positions. As a result, because we had locked in higher promotional price points, we lost the volume. This is particularly apparent in Hefty waste bags. In the third quarter, we are increasing our support and anticipate regaining momentum there.

Hefty OneZip food bags did not return to the shelf at Wal-Mart until mid-May. As you remember, we expected this to happen in mid-April. We anticipated that we were going to have somewhat lower volume versus last year because of the Wal-Mart relaunch, but the delay in the implementation exacerbated the situation. We expect to see OneZip sales at Wal-Mart ramp back up in the third quarter, but it will take a few quarters to regain our share after having been out of distribution there for about six months.

We are very pleased with the Consumer segment operating profit, and margin in the second quarter was fairly modestly below where we were last year's. We remember that was very, very difficult comps.

In the Foodservice business, our overall performance continues to be very good. We saw a 2% increase in organic volume, and 8% coming through the PWP acquisition. We continue to experience good growth in cups, cutlery, processor trays, produce packaging and paper-based items. Our oriented polystyrene containers continue to decline in volume, in part because they're used for carry-out applications for delis and small restaurants, which have been the hardest hit by the recession.

In addition, there is a substitution going on between OPS and APET. The substitution trend will be offset by the APET expansion that we will have as a result of the PWP acquisition. As employment levels recover, we would expect to see cyclical growth to offset the decline that we had experienced due to takeout component of OPS.

Operating profit in this segment was down somewhat from last year's very strong performance. Spread has returned to more normal levels. Integration of PWP is going extremely well. We're very pleased with our progress and with the performance of that business and with the people that came as a part of it. The potential it gives us to participate in the growth of the APET market is exactly what we were looking for.

In the second quarter, we're going to start ramping up a new business, and that's the Consumer Packaged Goods manufacturing that we've been talking about. One of our new customers is Dannon. Half of the Dannon have an exclusive multi-year supply contract for containers that will be used to package yogurt. This is Pactiv's first foray into the dairy section of the grocery store, and we see it as a great opportunity for continued growth with low capital intensity. Moving ahead, we have several additional customers between now and January 2011.

Now I'd like to turn to the economy, as well as our outlook for raw material costs. Overall, our businesses are doing well. As I mentioned earlier, the markets we participate in continue to be sluggish. The new Great Value business at Wal-Mart, along with new business wins in Foodservice, will position us to see improved earnings and performance in the second half. We are on track to achieve another $50 million in savings from our productivity efforts this year. This inflation is low. Much of that cost reduction that we create here will go straight to the bottom line. Continuing to achieve our productivity goals adds to the cost advantage that we have over our competitors in this market.

As volume comes back to the marketplace, our enhanced composition will translate into strong incremental profitability. Resin costs have fallen over the past few months, and it may continue to come down somewhat as we go into later in the third quarter. We believe that in this weak market, prices will adjust somewhat faster than what we're accustomed to. Because of these, we've not built in much of the resin benefit into our second half earnings outlook.

In summary, then our outlook for volume is good. Raw material costs appear to be stable to slightly down, which could help us potentially somewhat, more than what we put in our numbers. But right now, I feel comfortable with where we are, and our productivity programs are on track. We anticipate in total a solid second half performance.

Now let me turn it over Ed to review the second quarter and then our outlook, and then we'll take your questions.

Edward Walters

Thanks, Richard. Earnings per share from continuing operations were $0.56 in the quarter compared with $0.61 in 2009. The year-over-year EPS decrease primarily reflected lower spread, partially offset by lower SG&A expense. Sales were $973 million, up 8% from last year based on 7% volume growth and 1% higher pricing. Approximately 5% of volume growth came from the PWP acquisition, and 2% was organic.

Gross margin was 28.2% compared with 33.3% in 2009 as unfavorable spread offset higher volume. Operating margin was 14.5% compared with 17%. SG&A expense was $83 million compared with $100 million last year, primarily due to lower incentive compensation accruals.

The effective tax rate was 35.4% in the quarter. That compared with 37.9% last year. Free cash flow in the quarter was $45 million compared with $62 million in 2009. The decline mainly was due to a higher investment in working capital, partially offset by not making a pension contribution as we did a year ago. The higher investment in working capital was driven by higher raw material costs compared with last year.

CapEx for the quarter was $36 million compared with $26 million in '09. There were no share repurchases during the quarter. The average number of diluted shares outstanding at the end of the quarter was 134.1 million. That compares with 132.5 million a year ago.

At the end of the quarter, gross debt was $1.53 billion, and net debt totaled $1.48 billion. On a comparable basis, net debt to cap was 56.4% compared with 57.2% at the end of the year.

At the end of the second quarter, leverage, which is debt to EBITDA, was 2.1x. Interest coverage, or EBITDA as a multiple of interest expense, was 7.4x. We are on full compliance with our debt covenants.

Depreciation and amortization expense was $50 million compared with $46 million last year due to the PWP acquisition. EBITDA for the quarter was $191 million or 19.6% of sales, compared with $198 million or 22% of sales a year ago.

Now I'll review the company's outlook for the third quarter and the full year. We anticipate that earnings per share for the third quarter will be in a range of $0.56 to $0.60. This outlook incorporates increased advertising and promotional spending for the Consumer segment.

We've narrowed our full year EPS outlook to a range of $2.15 to $2.30 from a range of $2.10 to $2.30. The midrange of our outlook assumes raw material costs will be essentially flat with July levels for the remainder of the year.

On the sales side, we expect to see an increase for the full year in a range of 8% to 9%, all coming from volume growth, as pricing is anticipated to be flat with last year. Approximately 4% of the volume growth comes from PWP.

Pension income for the full year is expected to be $48 million pre-tax or $0.23 per share. The effective tax rate will be approximately 36.5%. We anticipate SG&A expenses will be approximately $305 million to $315 million.

Free cash flow for the year is anticipated to be in a range of $330 million to $350 million, reflecting depreciation and amortization expense of $195 million, CapEx of $130 million and a cash tax rate of approximately 16% as a result of carryover benefits from last year's pension contributions. We intend to use our free cash flow for acquisitions, share repurchases and other value-added activities. Richard, I'll turn it back to you.

Richard Wambold

We'll be happy to take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Ghansham Panjabi. [Robert W. Baird]

Ghansham Panjabi - Robert W. Baird & Co. Incorporated

Richard, you had a share loss in Hefty bags. Was that primarily to private label? Or was it to some of the other brands that are in the category? And also was it apparent to you at the beginning of the quarter? Or did it sort of accelerate throughout the quarter?

Richard Wambold

Well, it kind of went everywhere, to be honest with you. We just had pure loss pretty much across the board, all the participants, as I recall the numbers. Was it apparent to us at the beginning of the quarter? It was heavier in the beginning of the quarter than it was at the end of the quarter because some pricing actually did adjust upward. Some of the promotions that were going on by competition were over before the quarter ended and as a result of that, we did somewhat better towards the end. I mean, the point of the matter, in fact, is, Ghansham, is we were just -- this is a reasonably elastic business. And we were just priced ahead of the market.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated

So just to clarify, your Private Label business, did that benefit you in the quarter?

Richard Wambold

Private label grew everywhere, I mean, whether it's ours or not. Yes, it did. But I mean, we didn't cannibalize ourselves, if that's what you're -- I mean, we definitely insist that we're in the Private Label business, but we being in the Private Label business at Wal-Mart did not cause the decline in our Waste Bag business. But in the greater side, what caused it was the fact that we were priced well too high. What had happened is rollback had been, I'd make it simple, but on the average of $5.98 at Wal-Mart. And we went up to $6.46, I believe. And the competitive sets stayed at $5.98 for much of the quarter. So the net result of it was that when you're priced that much, you should know about where the competition is, that's going to hit you. And there's no way to unravel that. I mean, there's just nothing you can do about it except go through the remainder of the quarter and take it out on the chin. There's just nothing you can do to get the price back down, so that's what happened to us. Unfortunate, but simple to understand and hard to take.

Operator

Our next question is coming from Claudia Hueston. [JPMorgan]

Claudia Hueston - JP Morgan Chase & Co

Just sort of following up on Ghansham's question. Just broadly speaking, you talked about a slower pace of recovery in demand. I was hoping you could just elaborate on how demand trended over the course of the quarter, and then if there are any markets where you think demand trends had changed meaningfully from what you saw earlier this year?

Richard Wambold

If you look at Consumer business and this is -- forget about us. It was weaker, measurably weaker in the second quarter in every product line that we're in than it was in the first quarter. You can guess what the cause for that. Was it restocking in the first quarter or was it just a better consumer feeling in the first quarter? Or is this some combination of the two? I think it's a combination of the two, to be honest with you. Looking back at it now, I think maybe the first quarter was stronger because people had been out in the market a little while, and they went back into the market because they felt good and restock. And I think the second quarter, to some degree, had some volume taken from it because of that. But I also think that the general feeling in the marketplace was more negative in the second quarter, and volume retreated as a result of that. I'm not so sure if there's anything really different in the Foodservice side. The data is easy to obtain, as you know. And so we don't have really good measurements product by product to really understand that, but it's kind of our feeling that the market wasn't as strong in the second quarter either. Well, the second quarter in Foodservice typically is a seasonally better quarter. But in my sense, there wasn't a strong of an attitude of going out to restaurants or buying consumer goods. And we will have to wait and see whether that fixes itself as we go further in the year, but it was clearly a weaker quarter. The numbers show it.

Operator

Our next question is coming from Tim Thein. [Citigroup]

Timothy Thein - Citigroup Inc

Just a quick question, Richard. I was hoping to kind of drill down into the guidance a bit more. And if you kind of -- taking the midpoint, the variance from the third to the fourth does imply a pretty significant improvement, and presumably, seasonality is less of a benefit, I would think, in the fourth versus the third. So can you already help us? I know you mentioned earlier that you don't expect spread to be a big benefit in the second half of the year. What are kind of the drivers as you look from 3Q to 4Q embedded in that guidance?

Edward Walters

Well, Tim, it's Ed. Actually, there is some seasonal uplift in Q4 versus Q3, particularly in the Consumer segment, due to the way the holidays fall and the offerings there. As well, I would remind you that we are ramping up our Consumer Packaged Goods business as we move to the year, so that will strengthen some things. We will continue to see some contract pricing adjusting for some of the longer-term contracts in Foodservice. With a flat resin assumption, we would expect to see some improvement there as well.

Timothy Thein - Citigroup Inc

Is there a meaningful shift by quarter in terms of the add in promotion spending that goes -- hits in the third quarter than -- is there a big delta for 3Q, 4Q there in Consumer?

Edward Walters

There is some shift. I wouldn't say it's huge, but it's a little heavier in the third quarter.

Operator

Our next question is coming from George Staphos. [Bank of America Merrill Lynch]

George Staphos

I wanted to ask you a question. I know it's always difficult to ask longer-term questions based on shorter-term trend. But do you sense that you may need to reassess the overall Foodservice business and product launch you're in, manufacturing, et cetera, based on what might be a structural decline or sticking it in the employment and the unemployment rate, respectively?

Richard Wambold

I think we're looking at a recovery in employment. Let's just go through that for a second. This is a great question, to be honest with you. If you look at unemployment and you assume, we've seen numbers that say that unemployment levels don't get back to normal until 2015. I don't know if that's true or not, but let's pretend it is for a moment. Then in that case, I think your question really does come into play. Structurally, you're going to start to look at this industry and you say who, when and where because there's going to be -- it's going to be an opportunity to consolidate the industry. I mean, to me, I think of it as an opportunity as opposed to an issue. We may have some opportunities ourselves internally to do that. But I think the bigger issue is with us, doing the job that we're doing on the cost side and productivity. We're probably not the capacity that comes out of the market, to be truthful. There is a lot of people out there that have a lot higher costs than we do. And certainly, if we decided to, we can get tighter on costs if we needed to. If we were in survival mode, we're not in survival mode. We're still growing. So my feeling is that if we were to go that way, then there probably is some fallout, and there probably is some opportunity for us to pick up some additional business as a result of that. But I would think they're net plus to us as opposed to a negative.

George Staphos

Richard, just quick a follow-on. You don't have to go into the specifics. But as soon as that happens, does your product portfolio shift at all within Foodservice?

Richard Wambold

No, it's shifting a little bit already, but it's not shifting because of that so much, okay? I mentioned in my comments that oriented polystyrene is shifting. It has been hurt because -- for two reasons, okay? One of them is there's a shift in certain markets because of our preference for APET. Freezer-friendly, so on and so forth, perception of being better for the environment, a number of different things. And so with the acquisition of PWP, plus the addition of our own APET business to that portfolio, it puts us in a perfect position to be the catcher's mitt for that business, and we would expect to get a lot of it going forward. So we think we're positioned extremely well there to get it. The market may not come back on OPS soon, as you suggest. For that part, it's just simply down because of less restaurant business. That might be an opportunity to consolidate. Although we're not the only OPS player. There are several OPS players out there that are significantly less financially strong than we are. And my feeling is that, that might be the capacity that ultimately that comes out. But if it looks to us like we could run the business more effectively ourselves with less capacity, then we would consider that. As of this minute, that's not in the cards, but we will certainly consider that.

Operator

Our next question is coming from Chip Dillon. [Credit Suisse]

Chip Dillon - Crédit Suisse AG

Question is, you mentioned the new move into some of the Consumer Packaged Goods, primary packaging like the Dannon contract. Then again, that continued down on a real long-term outlook. But where could we see that new line of business for you grow in, say, the next two to three years? Could it be -- what kind of percentage of the overall Foodservice, Food Packaging segment could that become?

Richard Wambold

Well, we're looking at this for a long time. And really those markets that we've been trying to really understand and how to approach it and what we bring to the marketplace and what makes us different. And I think what makes us different is that we have some material ties, some skills that, frankly, will allow us to go in with a very differentiated product line. And I think our engineering capabilities, the ability to go in and quickly respond to new products and so on gives us a real leg up in terms of being able to grow there. When we look at that business, we think there's probably not a reason for us to be less than $300 million in sales there. It could be more. When one looks at it, it's possible that we could be $0.5 billion of sales. We haven't put a date directly on that. But this is one of those businesses that you have to get your foot in the door and as you get your foot in the door and become known as a consistent and reliable and high-quality supplier, you'll get more and more business given to you. And so we're at the early stages of it right now. As I mentioned earlier, in the last quarter's call, we have four major customers that we'll be bringing on, really, in the fourth quarter and maybe at least into January, but in the fourth quarter this year. All of which have the capability of giving us really millions of pounds of business over time. So we're getting a start with four major customers. And we would anticipate if we do a good job for them, then we're going to get more and more business, so that the ramp in 2011 would look pretty good. But I think, certainly, $300 million in incremental sales coming out of that business is a good goal for us to have.

Operator

Our next question is coming from Rick Skidmore. [Goldman Sachs]

Richard Skidmore - Goldman Sachs Group Inc.

Maybe just touching on use of free cash flow, just a couple of quick questions around that. Just given your recent share price performance, would you expect to be more biased towards acquisitions? And have you seen, on the acquisition front, multiples change that suggest it might be more difficult to make those acquisitions that meet your return criteria?

Richard Wambold

I think, with the share price where it is, probably acquisitions look better to us at this stage of the game. But I'll remind you, we purchased shares in the high 20s and low 30s before, so I'm not saying that's out. But right now, based on what's out there and available in the marketplace, I think it's that, more than anything else, that drives us towards the acquisition feeling. There are several opportunities out there. Pricing, you never really understand pricing until you're done, right? The idea that you know what the prices at the beginning, you use them. You don't know the pricing until you finally get a deal done. Well, my sense is that prices are fair, considering the kind of synergies that we believe that we can bring to it and therefore, the returns that we would expect to get out of the acquisition meet our criteria. So I would say that's where we'd go.

Richard Skidmore - Goldman Sachs Group Inc.

Maybe just a follow-on to that. I thought at a recent conference, there may have been a statement about -- considering dividend. Did I mishear that? Or was there some thought to a dividend as well?

Richard Wambold

No, you didn't mishear that. I mean, I think we're getting to that stage in terms of free cash flow. Keep in mind that we already talked a lot about this, but as we look at the progress we made on generating free cash flow, one of the hidden factors that people don't really look at is the fact that we, in the early days of generating cash, we were taxpayer. We had a lot of NOLs that came from Tenneco at the time of our spinoff, and the result was we generated pretty good cash, but we were really insulated from paying taxes in the process. Today, we're a taxpayer and a full taxpayer. So now we're really seeing our growth translate into free cash. And the whole point of that is that we think as we go forward that we have enough cash flow in this company to chew down the market at the same time, so we can make acquisitions and we could fund the dividends. So obviously, that's something that's being discussed at the board level, and it's a strategic decision as to whether we do that or don't do that and when we do that, but it certainly is something that's on the table.

Operator

Our next question is coming from Al Kabili. [Macquarie Research]

Albert Kabili - Macquarie Research

I just wanted to drill down a little more into the guidance. And as far as your volume outlook goes for the remainder of the year, is that more ramping up? Is that more back-half loaded, given the sluggish end markets you talked about? And does that assume any kind of pickup? Or are you assuming kind of a stable environment right now?

Richard Wambold

Let me pass that one off to Ed here.

Edward Walters

No, I think it assumes a very, very slight market improvement, and it's mainly based on business wins.

Albert Kabili - Macquarie Research

And if you could just quantify the SG&A impact and the variance in 3Q '10 versus 3Q '09 because I think you're guiding to kind of flattish there. Some of that's resin, but how much of that is SG&A? Is that a meaningful impact?

Edward Walters

I'm sorry, could you...

Richard Wambold

Earnings.

Edward Walters

In earnings?

Richard Wambold

Yes. You're talking about SG&A in fact in earnings, right?

Albert Kabili - Macquarie Research

Yes. You talked about higher promotional activity to support the Consumer business in the third quarter, and I'm wondering how much of a year-over-year variance that would be because third quarter is a bit weaker than I would have expected. Now some of that, at least your outlook, is that some of that I understand is just resin impact. But I also wanted to understand kind of the promotional spending in Consumer and how meaningful of an impact that is on a year-over-year basis.

Edward Walters

Well, we don't really like to talk about our promotional programs in Consumer in any detail. Some of it shows up in sales, and some of it shows up in SG&A so...

Richard Wambold

The point is, it's competitive information. That's why we don't do it. But if you're asking is it going up? Yes, third quarter as I mentioned in my comments, that we intend -- we're not trying at all to be the price leader here. We're not trying to be lower priced, but we were at equal price, and we need to be competitive with the other fellows on the shelf. So that's really what we're trying to do, not get ahead of them but just be competitive. And that means that our third quarter is going to be somewhat heavier from a promotion and think of it as net pricing, but it's promotions and that sort of thing.

Edward Walters

Some of that will show up in SG&A, and some of it will show up in the sales line.

Operator

[Operator Instructions] Our next question is coming from George Staphos. [Bank of America Merrill Lynch]

George Staphos

One follow-on sort of intermediate terms, the bigger picture. Obviously, there's been no headlines around Pactiv, and I think the company and the management team should be commended for the performance that you put up so far year-to-date. Has it been difficult to keep the team and the whole company focused, given the potential distractions? How do you keep everyone focused on the objective of ultimately keeping the growth going and generating cash flow for your constituencies?

Richard Wambold

Is that sort of a, George, like beat-my-wife kind of question?

George Staphos

No, it's not.

Richard Wambold

I think the people at Pactiv are just -- one of the things that's great about this company is, really, people are pretty enthusiastic about being here. They love this business, and I like being around them because of that. And the fact of the matter is that people here come here because if you're going to be in this industry, this is the place to be. And it's the place to come and win, and I think that's what keeps people going. I don't have answered a question any better than that.

Operator

Our next question is coming from Chris Manuel. [KeyBanc Capital]

Jason Brown - Keybanc Capital Markets

This is Jason Brown on for Chris. A quick question in the Foodservice business. Could you give a little more detail about trends within the different channels there? And I would assume the Institutional business is taking a little bit more of a disproportionate hit, but if you could give a little color around the different channels?

Richard Wambold

In the Foodservice side?

Jason Brown - Keybanc Capital Markets

Yes.

Richard Wambold

I think that's probably right. I mean, by definition, that's where the restaurants -- if you're talking about institutional being the classic foodservice distributor business, I think that's probably the more challenging business right now because that's where the economy is putting its foot down the hardest. Obviously, the good part about our business is that we were in lot of different channels and when one's weak, another usually strengthens. So the two that are kind of getting the benefit from that are supermarket and fast food. And so the Supermarket business, we provide a lot of packaging, both for prepared foods in supermarkets but also for basic foodstuffs like meat tray isn't -- and produce containers and bakery products and a variety of things all the way around the stores. So the net result as people shop more at grocery stores, we're picking some of that up, and that's a great offset. The second one is, people are going sort of down the ladder, if you will, so they're not eating at the white tablecloth restaurants as much or they may not be eating at the corner deli as much, but they're eating at fast food where they can get an inexpensive meal and certainly, involve a $1 meal programs are going on, and fast food have been a real plus to bringing traffic that way. And we're a major supplier now. So obviously, that's one of the reasons our Cup business is doing quite well is that we're recipients of that. So into those two channels are pretty positive and the new and that we're entering, which is Consumer Packaged Goods area, again that's basic foodstuffs on the shelf. So that's one that as we grow in, that we'd be benefiting. I wish we're bigger in it now, we'd be doing better. But I think if you look at it, that's pretty much a breakdown for what it looks like.

Operator

Our next question is coming from Andrew Stern [ph] (48:06). [Well Management [ph] (48:09)]

Unidentified Analyst

Just a quick follow-on to one of the previous caller's question. With respect to the speculation and press about a potential acquisition, understand that you can't comment specifically. But can you tell us your general thoughts towards the transaction?

Richard Wambold

No comments, whatsoever. We don't comment on anything or speculate on those kinds of things.

Operator

Our next question is coming from Tim Burns [ph] (48:40).

Unidentified Analyst

It sounds like you're doing what you're doing, which is to work with up and coming in both materials, continue to exercise out your technology and machinery down the right channel to the right retail or distribution environment and then down the hatch. And it sounds like the consumer packaging section you're going into really is just another way to maximize what you do well and diversify by end market, is that the way to look at it?

Richard Wambold

Yes, it is, and it's also -- we're not trying to do something outside of our world. So we're not getting into beverage bottles, and we're not getting into cans, glass and those kinds of things. We're getting into the plastic side of things, and we're principally focused. I think there's a variety of things we can do and will do. But I think what's real house really is single-served containers, frozen food and shelf stable single service items and so on. And I think those products, they're made on the same machines with the same kind of tool that we make other products. And if you're going to say, "What do you have to do that you don't know how to do?" Well, the answer is nothing. We'll probably have to get a little -- we have to maybe invest in some printing technology that we don't have enough of. We've shown you plenty of printing because we print cups all the time. But it's basically these things are basically cups. I mean, sometimes it's a container, but a lot of it is just certainly different-shaped cup with printed in a lid. So I mean, the bottom line is it kind of fits with what we know how to do. It's a big market, and it's a logical extension for us to go there next.

Unidentified Analyst

The other question I had is you've long been working on some precision-molded paper products. I saw some information on a new hinge that's been talked about recently. And clearly, like a little more paper in your product portfolio. Is that coming along well? And is it something that's still a priority?

Richard Wambold

Yes, it is. In fact, we're in the midst of installing a tank of machines right now. That's a fairly big part, good-sized part of our capital program this year. And we're at test market on a number of products on a couple of machines that we do have in. And so we're trying to decide which of the product lines are we going to go after and in what order as we get the machines installed. The machines can do basically, they don't care what they're making. We'll just have to make a different tools and make the products, and so what we're trying to figure out right now is where is the revenue and margin stream going to be the best for us in terms of order of launch. We're quite enthusiastic about it, and the more we see about it, in fact, the more we like it.

Operator

[Operator Instructions] Our next question is coming from Alton Stump. [Longbow Research]

Alton Stump - Longbow Research LLC

As I look at your SG&A guidance, and I think you mentioned, Ed, that you're not expecting much benefit, and in fact, from lower resin cost. Is that a factor of your plan to spend that benefit in promotional dollars? Or is it just being conservative?

Richard Wambold

Well, let me just throw out what we think. There's a combination of things. Yes, we're going to spend some more promotional dollars, that's one. Two, we've been emphasizing that we don't think this market is a very strong market right now. And if you have a strong market, competitors' machines are full and resin prices go down, then the tendency is to put that in your pocket. Anything that happens with resin, you put in your pocket. If machines are empty, the tendency is to take that resin and lower your price a bit and try to fill up your machines. And so in this kind of a marketplace, we think that, that will be a stronger tendency in the Foodservice business than putting it in your pocket. So we're not, obviously from our second quarter performance, we're not always accurate predicting what's going to go on with resin. But to the extent that resin does decline, our feeling here is that it's probably not going to stay in our pocket as long as it normally does. We'll still benefit from it, but we're now projecting that we're going to hang on to it for six to nine months. And so that's largely combined with some incremental promotional spending.

Operator

That concludes the question-and-answer session. I'd like to hand the floor back over to management for any closing comments.

Richard Wambold

Well, again, we'd like to thank everybody for tuning into our call this morning, and we appreciate the support that we get from all of you in the marketplace. And we're back out trying to make our numbers for the next quarter, so we'll talk to you after it's finished. Thanks very much.

Operator

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

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