Executives
Joel Mostrom - Senior Vice President and Chief Financial Officer
Andrew J. Kohut - President and Chief Executive Officer
Analysts
Benjamin Long - Bank of America Securities
Rob Madnisen - Goldman Sachs
Richard Baldwin - Garwin Investment
Harry Sugarito – ICT
Glenn Swanson - SNC Asset Management
Chesapeake Corporation (CSK) Q4 2007 Earnings Call March 5, 2008 10:00 AM ET
Operator
Good day everyone and welcome to the Chesapeake Corporation fourth quarter 2007 earnings conference call. Today, a call has been recorded. At this time, I would like to turn the call over to the Senior Vice President and Chief Financial Officer, Mr. Joel Mostrom, please go ahead sir.
Joel Mostrom
Thank you and good morning and welcome to Chesapeake Corporation's fourth quarter conference call. I'm Joel Mostrom and joining me today is Andy Kohut, our president and chief executive officer.
Andy will begin with some overall comments on our business. I will then provide a financial review of the results for the fourth quarter and full year. After that we will be available for questions.
Before we get started, I want to advise all participants that this call is being recorded by Chesapeake Corporation and is copyrighted material. It cannot be recorded or rebroadcast without Chesapeake's express permission. Furthermore, the comments on this call may include "forward-looking statements" as defined in the Private Securities Litigation Reform Act. The accuracy of which fast forward-looking statements is subject to a number of risks, uncertainties and assumptions that may cause Chesapeake's actual results to differ materially from those expressed in the forward-looking statements. Certain of those risks, uncertainties and assumptions are set forth in the summary of this conference call, which will be posted on the Company's web site at the conclusion of this call. Additionally, during this call there may be references to certain non-GAAP financial information. This information has been reconciled to GAAP in the Company's earnings release which will also be posted on the Company's website at the conclusion of this call. Now I will turn the call over to Andy.
Andrew J. Kohut
Thanks Joel.
2007 was a challenging year for Chesapeake, but it was also a year when much was accomplished and the groundwork was laid for further growth and improvement in our business. Our operating income, excluding special items, for 2007 was down about 9 %, and the market values of our publicly traded bonds and equity were down significantly. I believe that both values have been discounted because of our high amount of debt and refinancing uncertainty in today's credit environment. I am pleased to report that we continue to make progress on refinancing our existing $250-million credit facility. In addition, Joel will tell you about an amendment to our credit facility we have signed today.
We are looking at various options for ways to lower our debt. We continually evaluate all our operations based on performance and on strategic fit with our business. We target revenue growth of 8 % per annum or EBITDA margins of 15 % for our businesses. If we have businesses that are not at those levels or do not have a path to getting there, we will consider alternatives for such businesses. Two small examples recently completed were the sale of our Bremen tobacco facility and the joint venture for our food-related tube business. You should also note that our annual incentive plans are tied to these same two growths and return targets.
During 2007 we absorbed the impact of a significant reduction in our tobacco packaging business while continuing to broaden our capabilities from being predominately a Western European manufacturer to one with operations also located in developing countries such as China and Hungary. However, these growth initiatives, rationalization activities and other requirements for cash, such as pension funding obligations, put pressure on our balance sheet.
We experienced some service level issues in our paperboard segment that impacted our fourth quarter results. I believe that these issues have now been resolved, and, as a result of improved service and a renewed emphasis on customers, we have secured greater than $75 million of annualized new sales with several of our top customers over the past four months. Late last year we initiated an internal project that focused on improving the fundamentals of our business at the factory and customer level. The results achieved at four pilot sites are encouraging. One thing that we have learned from our prior cost savings program is that longer term fundamental change is better and more sustainable than quick headline numbers.
I believe that we are taking the right steps to improve our operating performance and our balance sheet. However, the benefits of these improvements are not expected to be realized until the last half of 2008. We expect results for the first half of 2008 to be below 2007 levels due to lower volumes and start up expenses relating to new facilities and product lines. The additional sales growth that I mentioned is also not expected to affect our earnings until the second half of 2008. I believe that the combination of an aligned team, new customer initiatives, process improvements and secure financing will enable us to achieve improved operating results for fiscal 2008.
Now I'll turn the call back over to Joel for some further analysis on our fourth quarter and full year results.
Joel Mostrom
Thanks Andy.
This morning we reported a fourth-quarter net loss from continuing operations of $6.7 million, or $0.34 per share, and we reported a full-year net loss from continuing operations of $13.8 million, or $0.71 per share. These results compared to a net loss from continuing operations of $33.3 million, or $1.72 per share, for the fourth quarter of 2006 and $32.4 million, or $1.67 per share, for the full year 2006. In all these periods we incurred charges for special items.
Special items include goodwill impairments, restructuring expenses, asset impairments and gains or losses related to divestitures.
Our operating income, exclusive of special items, for the fourth quarter of 2007 was $3.5 million, compared to $12.1 million for the fourth quarter of 2006. The full-year results on this measure were $41.0 million in 2007, compared to $44.9 million in 2006.
Operating income for the fourth quarter and full year 2007 was favorably impacted by changes in foreign currency exchange rates. Changes in foreign currency exchange rates increased operating income, exclusive of special items, approximately $1.0 million for the fourth quarter and $4.5 million for the full year 2007 when compared to the comparable periods of 2006. I'll now review our operating results starting with the Paperboard Packaging segment. My discussion of segment operating income excludes the effects of special items.
Fourth quarter net sales of $223 million for the Paperboard Packaging segment were up 2 % compared to net sales for the fourth quarter of 2006. Full-year net sales of $880 million were up 5 % compared to net sales for 2006. Excluding changes in foreign currency exchange rates, net sales were down 6 % for the quarter and down 3 % for the full year compared to 2006. Sales in both branded products and pharmaceutical and healthcare packaging were down for both the fourth quarter and full year. Within the branded products packaging market, the sales declines for the quarter and year were largely related to decreased sales of tobacco packaging resulting from the loss of business with British American Tobacco. In addition, sales of U.K. confectionery and food and household packaging were down about 6 % for the full year, but were relatively flat quarter-over-quarter. These decreases were partially offset by strong sales growth in German confectionery packaging. Sales in German confectionery packaging were up 40 % for the fourth quarter and 18 % for the full year. Within the pharmaceutical and healthcare packaging market, sales were down about 7 % for the fourth quarter and about 2 % for the year. The decline in sales was the result of competitive market conditions and some service level disruption. More recently our service levels are back on track, and as Andy mentioned, we have recently secured or renewed significant new business in this area.
The Paperboard Packaging segment's operating income for the fourth quarter of 2007 was $3.4 million, a decrease of $7.3 million, compared to the fourth quarter of 2006, and operating income for the full year 2007 was $36.9 million, a decrease of $6.0 million, compared to the full year 2006. Changes in foreign currency exchange rates increased segment operating income by $600,000 for the quarter and $3.3 million for the year. The decrease in operating income for the fourth quarter and full year was partly due to the decreased sales of tobacco packaging. This loss of sales accounted for about 25 - 30 % of the operating income decline for the Paperboard Packaging for both the fourth quarter and full year. The start-up problems with the multi-shaped tubes had a similar impact on operating earnings with the remaining decline in pharmaceutical and healthcare due to costs associated with process improvement initiatives and reduced operating margins.
The Plastic Packaging segment had sales of $48 million in the fourth quarter of 2007, up 20 % from the fourth quarter of 2006. Full-year net sales of $180 million were up 16 % compared to net sales for 2006. Excluding both the changes in foreign currency exchange rates and the impact of business acquisitions and divestitures, net sales were up 9 % for the quarter and up 17 % for the year when compared to 2006. The increase in sales for both the fourth quarter and full year was due to both increased volume and the partial pass-through of higher raw material prices. Both our beverage packaging operation in Africa and our specialty chemicals operation experienced strong demand during 2007.
The Plastic Packaging segment's operating income was $4.3 million for the fourth quarter 2007, a decrease of $1.7 million, from the fourth quarter of 2006, and operating income for the full year 2007 was $20.4 million, an increase of $2.5 million, compared to 2006. Changes in foreign currency exchange rates increased segment operating income $400,000 for the quarter and $1.2 million for the year. The decrease in operating income for the fourth quarter was primarily due to weakness in the beverage packaging operation in Africa, which resulted partly from pricing pressure and under-recovery of increased raw material costs. The increase in operating income for the full-year 2007 was primarily due to the increased sales of specialty chemical packaging.
Now, back to our consolidated results, net cash generated by operating activities was $24.1 million for the full year 2007, an increase of $2.4 million over 2006. The increase in operating cash flow primarily reflected a decrease in operating cash flow spending associated with our global cost savings program of $4.9 million and reduced pension funding of $4.6 million, partly offset by increased working capital usage. Excluding cash used for restructuring, net cash provided by operating activities was $35.5 million for the full-year 2007, compared to $38.0 million for 2006.
Total debt at the end of 2007 was $515.3 million compared to $467.8 million at the end of 2006. Changes in foreign currency exchange rates increased total debt at the end of 2007 by approximately $18.0 million. Likewise, foreign exchange rates increased interest expense approximately $600,000 for the fourth quarter of 2007 and $2.3 million for the full year when compared to 2006.
Effective December 28, 2007 and March 5, 2008 the company agreed with its lenders to amend certain covenants of its Senior Revolving Credit Facility. Among other things the amendment increased the total leverage ratio and decreased the interest coverage ratio for all quarters through the end of 2008 in order to provide sufficient liquidity to the company to execute its 2008 business plan.
Our two-year cost savings program is now complete. Over the course of the program we recorded net charges for divestitures and restructuring, asset impairment and other exit costs of $32.7 million, of which $7.7 million is included in discontinued operations. We made cash payments related to program initiatives of $32.0 million, but we also recovered $26.7 million in cash proceeds for operations and other assets divested under the program. Over the course of 2006 and 2007 we realized annual cost savings in excess of our $25-million goal. Unfortunately, those savings have been masked in 2007 by the loss of tobacco volumes with BAT, start-up costs associated with a new line of multi-shaped tube products and competitive market conditions. As we look to 2008 we expect to have another challenging year. The tobacco volume we expected to lose has transferred out of our facilities as of the end of 2007, so we will have a full-year impact of the loss of tobacco volumes in 2008. However, we expect to have significantly lower pension expense, and we also expect some improvements in operating performance, particularly related to multi-shaped tubes, the recent contract wins that Andy mentioned, and continued strong growth in German confectionery. We will also continue to evaluate the possible closure, downsizing, consolidation or sale of additional facilities and additional cost savings and process improvement measures. Now at this time we would be happy to take your questions.
Now this time, I would be happy to take your questions.
Question-and-Answer Session
Operator
Thank you sir. Today’s question and answer session will be conducted electronically. If you like to ask a question please visit our website
(Operator Instructions)
And we will go first to Benjamin Long of Bank of America Securities.
Benjamin Long - Bank of America Securities
Hi good morning. I just want to touch upon f4 margin for the fourth quarter like they were down significantly now and I think you touched upon that kind of that there is service level issues though that has been resolved. I am kind of going forward to how are you going to recover some of those lost tobacco volumes. I think you supposed to be perhaps pension and some of the strong growth in German confectionery sales so kind of what can we expect marginalized in first quarter of 2008 for the full year overall.
Andrew J. Kohut
This is Andy. Good question. I think that we will feel the full impact of the tobacco loss in 2008 particularly in the early part of the year because the volume started to tail off towards the end of 2007. The first quarter and even the second quarter of 2007 were relatively strong. Those will be gone in 2008. We also have some start-up cost in the first quarter, related to new operations and product lines that we mentioned. Off-setting that is the new business that I discussed. It significant it is not one customer to broad array of customers, particularly in the pharmaceutical and healthcare area. As that business transitions to us we will start to feel the effect but as I mentioned it really does not have an economic impact of significance until the second half of the year. So we expect the first half of 2008 to be below 2007 levels and particularly in the first quarter we see challenges most likely saw on the fourth quarter.
Benjamin Long - Bank of America Securities
Okay, thanks Andy and that is helpful and is safe to assume that the new businesses in form is that business is fairly recessionary proof you know given the weak network environment?
Andrew J. Kohut
Yes, I think that it is not related to one product. It is not related to one customer. The amount of drugs and other products used by that industry continues to see growth. We continue just as in any part of packaging, we have to be mindful that there are competitive pressures in the market place. Our customers face pressures by governments throughout the world to lower healthcare cost that in turn put pressure on all suppliers to that industry, but overall as the demographic profile changes as developing markets continue to require and request the same levels of healthcare. There is organic growth in those respective areas that make this overall at a very attractive sector to be in that is last affected by changes in economic activity. It is more resilient in my opinion.
Benjamin Long - Bank of America Securities
Okay, thanks. Just kind of one final question in housekeeping I think you touched upon 8% growth rate that is for the entire of 2008 and that is going to be kind of weighted towards the second half of the year correct?
Joel Mostrom
A couple of things that the target that we put for our businesses are… we want either a faster growing business and we target 8 % or we believed a specialty packaging business reflected EBITDA margins at 15 %. We have that in a number of our businesses. Indeed, our overall plastic segment achieves that level on a segment basis, but below the segment level there are parts of our businesses that are at either that growth rate or at that margin. We do, however, have others that are not. We are working to either improve those or as we said look towards ways or a path of achieving that. If we cannot do that we will look at alternatives for such businesses and what we have done to reinforce that at the business level is our incentives from myself down through the operation or tied to those types of margin or growth initiatives because we believed that is consistent with what these types of markets in businesses should be able to achieve and we think that likewise consistent with the performance that our shareholders and bondholders need to see as well.
Benjamin Long - Bank of America Securities
Okay, thanks Joel.
Joel Mostrom
But it is not an overall growth or margin target for the overall business for 2008. It is how we look at it on an individual business basis. It is where we obviously would like to get overall but we are not going to get there in 2008.
Benjamin Long - Bank of America Securities
Right, I understand. Okay thanks I will be back.
Operator
(Operator Instructions)
And we do have a question from Rob Mandisen of Goldman Sachs
Rob Madnisen - Goldman Sachs
Hi guys, I was just wondering, can you disclose what the…, I guess broad line covenant adjustments are for 2008 in terms of max leverage and in coverage?
Joel Mostrom
Yes, Rob I can, in fact we expect that most likely tomorrow we will file an 8K that will include a copy of the actual bank amendment itself but in broad level form we have increased total leverage coverage for most of 2008 to just about six times and we’ve reduced our interest coverage requirement for 2008 to the area 1.65 to 1.75 times.
Rob Madnisen - Goldman Sachs
Okay and I guess is that for the full year? Then we have step ups or step downs to ramp to the six times?
Joel Mostrom
That covers a good portion of the year with some tailing down or increasing in the fourth quarter time frame. You will see the particulars in the amendment but I what I’ve just described broadly is that leverage covenant and the interest coverage covenant.
Rob Madnisen - Goldman Sachs
Okay and I guess it is kind of back to the business outside of the tobacco business, have you noticed or can you say if you’ve lost share in any segments with customer in the last year? Given service issues and some other moving parts?
Joel Mostrom
Actual demands are fairly robust right now starting the year we feel that as we go through the different part of our business. We did have some service issues in our pharmaceutical and healthcare area in the early part of 2007. And as we said that did recover in the latter part of the year which enabled us achieve this sales growth that I talked about in excess of $75.0 million. Did we lose some share? We probably lost some selected business but the $75.0 million goes well beyond that. The tubes business we believe we did not lose any share, we just incurred some significant costs as we brought on a very complex product line at the peak of the season and as a result of that we scrambled to meet customer requirements which we did but it really tested our ability and it certainly costs us a great deal of money to meet those customer requirement.
Rob Madnisen - Goldman Sachs
And is it broadly the cost in the four quarter related to the tube start-up costs?
Joel Mostrom
It was about $2.5 million in the four quarter.
Rob Madnisen - Goldman Sachs
Okay. Just finally in 2008 do you have any expectations for pending assets issues that you are expecting for 2008?
Joel Mostrom
We certainly cannot talk specifically but you know the focus of my management team is to try to reduce debt as we said. Also to focus our investments were we need to…from the strategic standpoint to grow with customers and also to reduce the complexity in the company and stay focus on certain elements so we can control businesses that aren’t hitting the growth and margin targets that I spoke about earlier or certainly being reviewed but we are very diligent on focusing on lowering our debt as well as focusing our resources in the most appropriate way.
Rob Madnisen - Goldman Sachs
Is there any owned idle or non-operating land that is currently on the bound sheet?
Joel Mostrom
No, Chesapeake in the past had land that we had sold off for special-use purposes. What we have done recently is if we have plant sites that we do redundancy activities we then sell off the real property and building as a way to mitigate the cost of restructuring. That has worked very well. There is not a lot of excess land in the company.
Andrew J. Kohut
Rob the only thing I would to that is, as part of our restructuring activities of past, we do still have one facility that we closed the operation of, in the past that we are looking to monetize hopefully sometime in 2008.
Rob Madnisen - Goldman Sachs
Okay, thank you and good luck.
Andrew J. Kohut
Thank you.
Operator
(Operator Instructions)
And we will go first to Harry Sugarito of ICT.
Harry Sugarito - ICT
Hi, I have a couple of questions. You mentioned in previous releases that you sold the Bremen facility but you haven’t disclosed the proceeds. Are you able to disclose that now?
Andrew J. Kohut
That will be in our 10K which we expect to file shortly.
Harry Sugarito - ICT
And in sense of the revolving credit facility, do the amendments you have made allow you to fully draw on the $50.0 million or have the banks restricted the availability under the revolver?
Andrew J. Kohut
The covenants, is am sure you are well aware of, a leverage covenant is a function of your trailing EBITDA figures so the expectation would be is, that we do have the ability to utilize the facility if necessary if we execute the 2008 business plan.
Harry Sugarito - ICT
And in terms of, I guess the cost outlook into 2008, you have mentioned low of pension cost, you’ve also mentioned under recovering on revolving cost features. How do you see your materials developing going forward as part of you business plan and your ability to recover that but it costs an increase in 2008?
Andrew J. Kohut
Well let us just say first I can talk about what we have seen in the market place in terms of material cost increases of recent from a paperboard side or primary sub stray the more recent increases we have seen were during the summer just last year they were on the order of magnitude of 5 %. In more cases than not on the paperboard side we have the ability to have passed through all of those material cost. There are may be some lag in the time you know which we can pass it through and it is dependent on many cases or linked to index, publishes of indexes. On the plastic side to a lesser degree we have passed through protection. In resin we have seen in the fourth quarter resin prices increase on the order of magnitude of 7 to 10 % and when I mentioned in my remarks in the case of South Africa where we do not have as many of our contracts we have passed through protection. More recently we have not been able to achieve some of the pass-through that we have experienced or enjoyed in the past. With respect to the future I would not want to speculate on what resin prices might be in the future.
Harry Sugarito - ICT
Are you saying that you will be able to recover the full amount?
Andrew J. Kohut
Resin price?
Harry Sugarito - ICT
Yes.
Andrew J. Kohut
What I just said is in fact more recently we have not been able to recover that especially in our South African business operations and it varies, it is all a function of, you know the competitive market place and what type of price competition will be receiving from our competitors. Certainly it has a direct correlation on bearing on this contracts which where we do not have pass-through protection. It is a function of the marketplace.
Harry Sugarito - ICT
Final question, are you able to disclose CapEx on 2008?
Andrew J. Kohut
The only thing I’d say at this stages we would expect certainly our CapEx stand for 2008 will be below 2007 levels.
Harry Sugarito - ICT
Alright thank you.
Operator
And we will take our next question from Richard Baldwin of Garwin Investments.
Richard Baldwin - Garwin Investments
Good morning gentleman, I wonder if you could just talk a little bit more please about the US $250 million bank loan maturity, I believe it matures in probably 2009. Can you just update me on where you are with that please, you are currently in negotiations with the bank, and will you be addressing that in the second half?
Andrew J. Kohut
The first thing I’ve indicated is we that do have and obtained by this recent amendment if you will, sufficient amendment to the covenants to provide liquidity for us to execute the 2008 business plan and as you rightly pointed out that kind of facility matures in February 2009. With respect to our plans moving forward I am sure everybody in this call knows the credit market is currently very challenging.
Having said that we believe we are making good progress towards refinancing that existing credit facility matures in February 2009. The only thing I would point it out and I think many of you already know this that our senior credit ratios are relatively low and we also have quality asset base that is available to pledge as security in order to facilitate a replacement of that credit facility. So, with that said we continue to make progress and we certainly hope to be able to tell you more about that shortly.
Richard Baldwin of Garwin Investment
Okay thanks. So just for a clarification on the existing bank loan, that is partially secured or what is the security behind that one?
Andrew J. Kohut
The present status of that facility is that it does not have tangible. It has limited tangible asset pledges but certainly in the limited fashion.
Richard Baldwin of Garwin Investment
Okay that is great. Thank you very much indeed.
Operator
And we have a follow up question from Benjamin Long of Bank of America Securities.
Benjamin Long - Bank of America Securities
Again, I just want to follow up on the resin pass-through question, is some of your I guess outlook for 2008 does that take in a full recovery of resin pricing , I know you mentioned that it is partially recovered but as your 2008 improvement is that a factor for full restoration?
Andrew J. Kohut
Let me just clarify it, we have in our plastic segment about half of our business is tied to an index that we have pass-through protection. When we get more towards the beverage part of our business, which is predominantly our business in South Africa, we have less pass-through protection and it is a negotiated recovery of that price. As Joel said depending on the current competitive situation in that part of the world, our ability to get that resin price increase ultimately in our sales price is a negotiated item. We saw more difficulty in doing that in the latter part of 2007 going into 2008. It is too early to speculate but we have about half of our business tied to index as I said earlier which is our Irish Dairy as well as specialty chemical business.
Benjamin Long - Bank of America Securities
Okay and I hope finally if you can provide an update from other facilities I think there is a facility in Zhangjiang as scheduled to start up late but will be up and running?
Andrew J. Kohut
Yes, the facility is up and running, we have the opening for that facility in the fourth quarter. We are currently certifying the plan for a number of customers. We do primary packaging in that facility for plastic and we are now doing secondary packaging that includes cartons, labels and we put out of that facility primarily aimed at the pharmaceutical and healthcare market.
Benjamin Long - Bank of America Securities
Is that facility going to in turn serve tobacco market in any way?
Andrew J. Kohut
No.
Benjamin Long
Okay and then I think there is Greenfield facility in Eastern Europe for cartons facility is that still scheduled to start up in 2008?
Andrew J. Kohut
Yes it is. We have two things in Eastern Europe right now. We had an opening in the first quarter of a new joint venture in Hungary for specialty chemical business, the plastics business and as I mentioned earlier we have a facility planned for Eastern Europe for the paperboard segment that should start up in 2008. And what we have done from a cash standpoint, the joint venture that we did in plastics was a way to jointly start a new factory with a customer that we have had for many years when we go into Eastern Europe. There are certainly would be some new equipment but there is also equipment that we have from some of the redundancy activities that we’ve had in the company that we can use in that new facility. So we are trying to be very wise in the cash use, in the cash investment but on the other hand one thing we clearly learned from the tobacco situation is we need to be in certain markets for our key customers particularly in pharmaceutical and healthcare, as well as our branded division.
Benjamin Long - Bank of America Securities
Okay thanks, that’s about it.
Operator
And we will take a follow up question from Rob Madnisen of Goldman Sachs
Rob Madnisen – Goldman Sachs
I just couple of housekeeping, revolver balance and availability?
Andrew J. Kohut
The balance at the end of the year was approximately $165.0 million.
Rob Madnisen - Goldman Sachs
And any else sees offsetting that
Andrew J. Kohut
There very minor in nature.
Rob Madnisen - Goldman Sachs
Okay and the pricing or cost from the amendment facility, any shift in interest rate or points?
Andrew J. Kohut
Yes the revised pricing will be live or plus 450 basis points.
Rob Madnisen - Goldman Sachs
Okay, thank you very much.
Operator
And we have a follow up question from Harry Sugarito of ICT.
Harry Sugarito - ICT
Hi you have mentioned that… I guess with regard to the previous question that you have assets to pledge and that would be a driver for full refund. Can you elaborate on that and I guess with respect to that you have all your facilities, near or far, are on a free hold basis. If there sort of substantial I guess land value in the company.
Andrew J. Kohut
What I would say historically we had… while the current credit facility is a definitively senior secured kind of facility. The pledge or security of that present facility is limited to certain tangible assets within the United States as well as limited stock pledges of material subsidiary companies or current corporation beyond that there are today has not been any significant pledging of tangible assets and I think it as you are well aware of most of our asset base whether be it the physical operation of locations themselves, the equipment, the inventory, the receivables, the vast majority of our operations are in Europe so in that regard my comment as to the fact that we do have the ability to… if necessary pledge that asset base in order to secure any facility moving forward.
Harry Sugarito - ICT
Thank you.
Operator
And gentleman we have no further questions at this time. Mr. Mostrom I will turn the call back over to you. Oh, we do have somebody queuing up we will go to Glenn Swanson of SNC Asset Management.
Glenn Swanson - SNC Asset Management
Yes good afternoon I am just looking at your, you know the cash that you generated in the fourth quarter, I mean just looking at that as the run rate it seems that it is going to be very difficult for your company what you say ball park to clear $75.0 million in EBITDA for the year. Is there something, you know focusing on what is going in South Africa and some of the lost business in other areas. Is there something that you could do to help us to be more comfortable, what we are saying is just you know one quarter of that and it is beat going to the second half of this year.
Andrew J. Kohut
Well, our overall EBITDA for the year in 2007 was $94 million.
Glenn Swanson - SNC Asset Management
Right
Andrew J. Kohut
I did say that the first half of the year particularly the first quarter was going to be challenging similar to what we saw in the fourth quarter but I also went on the say that I expect 2008 to be ahead of 2007. The new customer that I mentioned, the process improvements, the ongoing growth in the business and the start up issues resolved that I spoke about, we would fully intend to see realized during 2008 as the year unfold.
Glenn Swanson - SNC Asset Management
Could you just give us a little bit more color and some more detail on some of these customers and the magnitude and how that translates into higher revenues.
Andrew J. Kohut
Well, it is a steady in excess of $75 million of new business primarily in the pharmaceutical and healthcare market; in addition on the branded business we have increased positions with customers like Cadbury etc. All of these is consistent with the type of business that we have done in the past but we have increased our position with these customers and it is really has kicked in over the last four months when the majority of this wins were secured.
Glenn Swanson - SNC Asset Management
Okay and just from the South African side with the raw material cost, you mentioned for that, I believe that there’s a… do not have any language in your contract that allows for the pass through of higher raw materials, is that correct?
Joel Mostrom
In that area especially the amount of coverage that we have for pass through protection are very limited but overall for the plastic segment about 50% of our business does have pass through protection.
Glenn Swanson - SNC Asset Management
And then how can this, is there anything you can give us to make us all some more comfortable that those problems that you’re sorting in South Africa are just something that just a one-time event and we are going to see that worked and sorted out in the next two or three quarters.
Joel Mostrom
We believe, I mean the market is continuing to grow quite rapidly in South Africa. Also throughout sub-Saharan Africa we have been making shipments. We have the ability to export from Cape Town. We have a large operation in South Africa that supports that blowing operation and we see the inherent growth and the shift away from glass to plastics or the shift to current as well as in overall demand. Increase of that market is still quite good. You know we just got in to a period of time with rising costs that were faster than what we could get resolved with customers in order to get the revenue for it.
Glenn Swanson - SNC Asset Management
So but if it is growing business or growing area and that is under capacity then why are you experiencing pricing pressure in relation to your contract, just you have too much business locked in for too long a period at insufficient prices?
Joel Mostrom
The one thing I would add to Andy’s comments is recently over the course of approximately the last year or so plus we have made substantial investment and a new technology to multi layer technology as they are merit, as one that are over the course of 2007 we were in the process of trialing with some of our more significant customers down there to make sure that it is in fact performed to the expectations. We do believe that this product well has in fact now been accepted by most of our customers. The importance of this product is that it extends the shelf life of a carbonated beverage product which is important to those providers in that region of the world because the distribution channels are not as sophisticated as what they are in other regions. Having said that, we do believe that there are opportunities to enhance margin now with that product has increasingly been accepted by our customers in 2007 and we are looking for opportunities to do that as we move into 2008
Glenn Swanson - SNC Asset Management
Right, for once you can just answer the question of pricing pressure or would we just expect the nature of that pricing pressure, I mean if the market is growing significantly why are you still experiencing pricing pressures?
Joel Mostrom
Because the resin moved very rapidly and in order to get that pass through it requires a negotiation with our customers because of the amount of change in the market in that amount of time we did not get that done and we had margin erosion in the fourth quarter.
Andrew J. Kohut
I think if we go back and you look at that business historically, it has been a good business and we have had some resin issues that we were dealing with. We are focused on and we are managing at present in that business. Can we sit here and guarantee you anything about margin expansion or what the price competition maybe in the market place in the future? No.
Glenn Swanson - SNC Asset Management
Just with the pricing, is there certain amount of the business that you had that is locked in at this current rate? Is there a possibility of being renegotiated? Do you have sort of plus percentage of the business in South Africa that is coming up for renewal of contract or is it everything set some back in 2007.
Andrew J. Kohut
These contracts tend not to be similar and nature to the types of contracts we have on the paperboard side of business which are multi-year, three years plus sometimes contracts we called those in the paperboard side “Evergreen” contracts. These tend to be shorter term in duration and so you are out there constantly tendering and re-bidding for work on a fairly regular basis so therein lays risks and therein lays also opportunity.
Glenn Swanson - SNC Asset Management
Okay fair enough thank you.
Operator
And gentleman I would like to turn it back over to Mr. Mostrom for any additional remarks.
Joel Mostrom
Thank you and I would like to remind everyone today's call will be available for replay on our website, www.chesapeakecorp.com or can be accessed by dialing 888-203-1112 or you can also dial 719-457-0820. The access code is 1334850.
This concludes today's call and thank you for participating.
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: transcripts@seekingalpha.com. Thank you!