Pactiv Corp. Q1 2008 Earnings Call Transcript

Pactiv Corp. (PTV)

Q1 FY08 Earnings Call

April 24, 2008, 8:30 AM ET

Executives

Christine J. Hanneman - IR

Richard L. Wambold - Chairman and CEO

Andrew A. Campbell - CFO and Sr. VP

Analysts

Ghansham Panjabi - Wachovia Securities

Tim Thein - Citigroup

George Staphos - Banc of America Securities

Chris Manuel - KeyBanc Capital Markets

Claudia Hueston - JP Morgan

Richard Skidmore - Goldman Sachs

Alton Stump - Longbow Research

Christopher Chun - Deutsche Bank

Ross Gilardi - Merrill Lynch

Robert Trout - Goldman Sachs

Mark Wilde - Deutsche Bank

Presentation

Operator

Good morning and welcome to Pactiv First Quarter 2008 Earnings Release Call. This call is being recorded by 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 of Pactiv Corporation. Ma'am, you may now begin

Christine J. Hanneman - Investor Relations

Good morning. I'm Christine Hanneman. Joining me today are Richard Wambold, Chairman and CEO, and Andy Campbell, our CFO. Welcome to discussion of Pactiv's first quarter earnings.

Please note we were informed late yesterday that our telephone service provider has been periodically experiencing outages. While we had been assured that the issue has been corrected, in the event that you are disconnected from the call please dial in again using this number, 877-407-0789, once again that number is 877-407-0789.

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.

Now I'd like to turn the call over to Richard.

Richard L. Wambold - Chairman and Chief Executive Officer

Good morning everyone. Let's start with the core earnings. Excluding a restructuring charge, our earnings per share were $0.33. This is consistent with our January projection in which we indicated we would be below last year's earnings per share because of our consumer price increase coming later in the quarter.

In general, the quarter played out very close to our plan. Prices increased as planned in both of our business segments. We added significant volumes as a result of last year's acquisition of Prairie Packaging and we were pleased to see volume increases in most of our consumer product lines.

Our foodservice and food packaging business, as you might expect, experienced a slight decline in volume, as consumers responded to a weakening economy by reducing their restaurant and prepared food item expenditures. A very important action that we took last year was the acquisition of Prairie Packaging. The acquisition sets the stage for strong organic growth and cost recovery and frankly, it's giving us more ammunition in the marketplace, exactly when we're needing it.

Andy will take you through all of the details of the first quarter in a moment. I would like to focus on what we are seeing as we enter the second quarter in terms of the economy as well as the impact of record high oil prices on raw material, on energy costs and on the logistics.

As we entered the second quarter, we are taking a cautious position with respect to the economy. The following factors are evident to us. First, our organic growth and you can read that essentially as being non- Prairie. Volume in foodservice slowed in March and thus far has been sluggish again in April. We are still above last year's levels but below where we expected to be when we talked to you last in January.

Our consumer business was good in the first quarter, but also seems to the off somewhat in April. Frankly it's too early to note for certain but we believe we are seeing some industry wide retraction driven by the most of slowdown in the economy and the reduction to disposable income because of record high fuel costs.

We have tested this belief with some of our foodservice customers and some of our resin suppliers. Both sources reported decline in their sales of packaging products. And we've said when talking to you in the past, based on what we saw in the last downturn that we were in 2001, we would expect to see some slowdown in this business. Past experience indicates something in the order of 2 to 3 percentage point deterioration and growth and that would depend of course on the magnitude and the duration of the downturn.

Second, record oil prices are putting upward pressure on plastic resin costs, as well as fuel and utility costs. During the first quarter polystyrene costs increased almost 10%. This is a single most important factor that led us to revise our forecast downward. Our oil and resin costs will play out in the months to come with anything but clear. Experts in the plastics business are calling it frankly both ways. The consensus forecast is for polyethylene to drop in the second half as Middle East capacity comes online.

Polystyrene likewise has been forecasted to fall as benzene demand decreases after the summer gasoline pre-build. It will be very tempting frankly for us to accept these numbers and make our forecast a relative one. But to my knowledge and I believe this is the risk in these forecasts, no one used $120 a barrel when they made their projections. Clearly, we did not, when we gave you our projections in January. Higher energy costs may keep resin prices firm at current levels, even if demand is weak in the marketplace for the final product.

The difficulty in giving you an outlook for the remainder for the year is projecting the magnitude and duration of rising energy and resin costs. Our ability to pinpoint how raw material costs may fluctuate puts more potential volatility in our performance. Some of you may feel we are being conservative, frankly I hope that we are. But we have decided to reflect this uncertainty by giving you a wider range of EPS than we normally do.

Excluding restructuring charges, we are introducing a second quarter earnings per share outlook in the range of $0.48 to $0.53. The full year earnings per share range has been reduced and broadened to $1.85 to $2.05 and that's from where it was before in January at $2 to $2.10.

The lower end of the range assumes that today's resin prices persist through the balance of the year. And let me again explain to you that polystyrene is already up 10% from what we were in January, so it's pretty high. We have assumed some offsetting pricing actions of our own to recoup as much of the resin as we possibly can in our foodservice business, and we would do that at the beginning of June.

Full year sales are expected to grow somewhere between 9% and 12%. Having Prairie for the full year versus seven months accounts for approximately 6% of this. Pricing is likely to add around 4%. The organic volume depending on how the consumer response will be anywhere from high end of 2% to a low end of about 1% for the full year.

The higher range end of the range assumes the same factors I just mentioned with the exception that in the second half we expect resin costs to move down in line with CMAI's forecast. The Chemical Manufacturers Association Index is projecting an average of 5 percentage point drop in both polyethylene and polystyrene in the second half. The high end also assumes some improvement in the economy, which would allow us to see growth in the second half of about 2% to 3%, that's how we get through the higher full year number.

Free cash flow is expected to be $180 million to $215 million, down from our original estimate of $200 million to $220 million due to the expected reduction in our earnings. In summary, in either case, we expect to face similar soft economic conditions during the remainder of 2008. While we hope that a break in the commodity costs will strengthen margins in the second half, we want to clearly communicate the potential for downside earnings over the short term if they do not.

We adjusted our range, particularly the low end, because we want to be conservative in the face of what we believe to be a worsening economic environment, at least as it relates to North American consumers since January. And because of the spike that we've seen in oil prices lately, we want to make sure we reflect the potential negative impact of both of these factors and how they could affect our results. We remain confident that as in the past we will be successful in doing what it takes to restore margins and we will produce solid profits again in 2008 in spite of the headwinds.

Now let me turn it over to Andy and he'll you through the financials for the first quarter.

Andrew A. Campbell - Chief Financial Officer and Senior Vice President

Good morning. Sales for the quarter totaled $808 million, up 19% from last year's fourth quarter, largely as a result of the acquisition of Prairie Packaging in June of last year. Excluding the impact of the Prairie acquisition, we saw volume growth in most of our consumer product lines while foodservice volume was down, reflecting sluggish industry demand.

Earnings per share from continuing operations were $0.26 compared with $0.43 per share in the first quarter of 2007. Excluding a charge of $0.07 a share related to the restructuring program that we announced in January, first quarter earnings per share were $0.33. The year-over-year decline primarily reflected an erosion in spread between selling prices and raw material costs, driven mostly by a sizeable increase in plastic resin costs, offset partially by the benefit of higher sales.

Our gross margin came in at 26%, down 4.4 percentage points from last year, while operating margin excluding the restructuring charge of $14 million was 11.5%, some 3.7% percentage points lower than a year ago.

Free cash flow for the quarter was $2 million compared with $18 million last year. The decrease was primarily due to higher capital expenses. CapEx in the quarter was 47 million, up 23 million from a year ago primarily reflecting the expansion of our cup and cutlery capacity. During the quarter, we repurchased 75,000 shares of our stock of $2 million. The average number of diluted shares outstanding at the end of the quarter was 132.1 million, 1.4 million less than last year.

Gross debt at the end of the period totaled $1.6 billion while net debt was $1.5 billion. As a point of interest, since the acquisition of Prairie we have reduced our borrowings by $145 million. Net to debt capitalization was 53.5%, 0.9 percentage points lower than at the end of 2007.

Leverage which is debt to EBITDA was 2.4 times, while interest coverage or EBITDA as a multiple of interest expense was 6.3 times. At the end of the quarter, amounts drawn under our accounts receivable securitization facility totaled $90 million, which was $20 million lower than at the end of '07. Such drawdowns as you know are excluded from the calculation of free cash flow.

Depreciation and amortization was $46 million in the first quarter, up $10 million from the same period last year mainly because of the acquisition of Prairie. EBITDA came in at $140 million, 17.3% of sales compared with $141 million or 20.8% of sales a year ago.

Non-cash pension income was $12 million, down $1 million from last year. SG&A expense totaled $71 million, up $5 million from last year. This increase was driven principally by costs added as a result of the acquisition of Prairie. In the quarter, the effective tax rate, excluding the restructuring charges was 34.3% versus 34.6% in 2007.

Now, I would like to revise you with the company's outlook for the second quarter and the full year. We expect to see sales growth for the year to be up between 9% and 12%, primarily reflecting continued strong performance in our cup and cutlery product lines. This is down slightly from the previous guidance primarily reflecting weaker economic conditions.

For the year 2008, we anticipate SG&A expense to be between $300 and $310 million, pension income to be $49 million pretax, which is $0.23 a share and the effective tax rate to be 36.5%. Free cash flow for the full year is anticipated to be in a range $180 million to $215 million, down from the previous guidance of between $200 million to $220 million. This reflects depreciation and amortization of $185 million, CapEx of $150 million and a cash tax rate of 27%.

Excluding charges related to our restructuring program that we announced back in January, we anticipate that earnings per share from continuing ops will be in the range of $1.85 to $2.05 for the full year and $0.48 to $0.53 for the upcoming second quarter.

The full year estimate is down for the previous guidance range of $2 to $2.10 per share, because of the impact of the increase in oil prices on raw material and other energy related costs as well as software industry conditions. The low end of the new guidance assumes the risen costs to stay at current levels and volumes remain sluggish for the balance of the year. While the high end assumes that risen costs decline over the balance of the year as reflected in CMAI's most recent forecast and that some improvement in economic conditions occurs.

Richard L. Wambold - Chairman and Chief Executive Officer

Thank you, Andy. And now, we'll take any questions that you might have.

Question And Answer

Operator

Thank you. [Operator Instructions]. Thank you. Our first question is coming from Ghansham Panjabi. Please state your company name and proceed with your question.

Ghansham Panjabi - Wachovia Securities

Hello?

Richard L. Wambold - Chairman and Chief Executive Officer

Hello, Ghansham.

Ghansham Panjabi - Wachovia Securities

Hi, good morning. In the past few years, it seems like cost has been the overwhelming variable in terms of forecasting. Obviously now we have the added uncertainty of a weak end-market as well. So, just two related questions on this. How much of your full year guidance provision is cost versus top line? Is that 80:20, 50:50, something like that? And how does this downturn Richard compare with what you saw back in '01 and '02 on the volume side? Thanks.

Richard L. Wambold - Chairman and Chief Executive Officer

Thanks, Ghansham. I would say the vast majority, as I've said in my prepared remarks of our uncertainty and therefore, our forecast adjustment has to do with the cost side of resin. And, in fact, if you look at what's out there right now, if you'll look at the Chemical Manufactures Association Index, you might very well convince yourself that our full year number from the previous forecast is a reasonable number to give you. When we look at that, and we look at the basis upon which they made that and when they made that in the oil price scenario that they had in that. Our feeling is that, that it did not include $120 of barrels, I don't know if it's going to stay at 120, but that's not the best that I like to make it live, if I like to use the facts, we have in front of us, as opposed to trying to come up with my own oil price guess.

So, it's truly as simple as this. We're using what's currently available to us to assess the remainder of the year and we're basing, the majority of our forecast based on those hard facts which are the ones we really have that we can base it on. Giving you an alternative scenario, the alternative scenario is, a lot of forecasters say, it's a bubble and it will burst, and it will come back down. Clearly and probably ethylene there is a good case for that because of the incremental capacity coming on in the Middle East. In polystyrene there is a case for it. In that the summer driving season, which trends to drive, used target lane [ph] which drives up benzene costs which ultimately are the main feedstock. And polystyrene obviously when that ends it may also come down. If those were to happen, then I think we could perform quite well on the cost side.

But, as a result of the fact that we haven't seen energy costs come down and we haven't seen big movements in those, yet, except for somewhat up in the first quarter. We're electing to make sure that our shareholders appropriately view the risk. And by adjusting our number to $1.85 on the low end and keeping the range wide, I think we're doing the best possible service that we ever can. In spite of the fact that we just don't have the visibility into what the numbers can be.

Now on the volume side, in the 2001 period of time which was the last time we saw a slowdown, we did see volume decrease in low single digits. And that would mean that what we're seeing right now is right in keeping with that kind of a decline. So, if you take where we've been and subtract 2 to 3 percentage points depending on how bad it gets that's about what we saw the last time and what we would anticipate, it is pretty clear that's what March looked like in our foodservice business as well. So again, in our low-end scenario we've projected that that's kind of what the year looks like. In our high-end scenario, what we've done is as we said that's what the first half looks like and then we come back to a more normal rate which is growth of, let's say 2% to 3% of our base business. None of these of course is including Prairie, I mean it all includes Prairie but we think based on the sales we have for Prairie will be fine there. But we do have to look at... we do have to take into account what the downside might look like.

Ghansham Panjabi - Wachovia Securities

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

Does that answer your question?

Ghansham Panjabi - Wachovia Securities

Thank you very much

Operator

Thank you. Our next question is coming from Tim Thein. Please state your company name and proceed with your question.

Tim Thein - Citigroup

The first question or the question is on the Richard, just to make sure I heard you right on the food and foodservice side, do you say that the price increase will go out in June or is that continuing on further increases in polystyrene?

Richard L. Wambold - Chairman and Chief Executive Officer

We've announced the price increase of 8% in June 1.

Tim Thein - Citigroup

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

Now, that's well out there and we have to wait and see what happens. We have to see what resin does. Obviously to the extent that resin does go up we are well positioned to go after that in an aggressive way. To the extent that resin, CMAI is right and resin falls, I wouldn't put both of those declining resin prices and a price increase in your pocket and your own model.

Tim Thein - Citigroup

Yes,

Richard L. Wambold - Chairman and Chief Executive Officer

You'll probably get one or the other.

Tim Thein - Citigroup

Okay, so with that 8% would reflect, what is the... is there any additional price increase on the table other than the $0.05, I guess $0.04 or $0.05 that went through in March. There another one?

Richard L. Wambold - Chairman and Chief Executive Officer

In polystyrene. No.

Tim Thein - Citigroup

Okay. Okay, and secondly can you breakdown the... if you look at the increasing cash cost 1Q FY08 versus 1Q FY07 axe out Prairie this spit. What I am trying to get as what the... how big that the non-resin component would be there i.e. freight and other utility costs etcetera. Is there kind of ballpark number you can give us there.

Richard L. Wambold - Chairman and Chief Executive Officer

Okay. You are exceeding your one question. I will answer it for you.

Tim Thein - Citigroup

Got it. But was related though.

Richard L. Wambold - Chairman and Chief Executive Officer

But run on question... in general, I can do it from a forecast standpoint, but I can't do the breakout for you. But if you look it in general the forecast versus where we were when we talked to you about our budget, the increased impact for the year of utility cost is fuel could be somewhere in the neighborhood of $15 million or $16 million, if we average what we averaged in the first quarter. At 120, it seems somewhat above that. I haven't calculated it yet but it would be either somewhat above that.

Tim Thein - Citigroup

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

There is a pre-tax cost.

Tim Thein - Citigroup

Yes, all right. Thanks a lot. Yes, thank you.

Operator

Thank you. Your next question is coming from George Staphos. Please state your company and then proceed with your question.

George Staphos - Banc of America Securities

Thanks. Banc of America. Hi guys. Good morning.

Richard L. Wambold - Chairman and Chief Executive Officer

Good morning George.

George Staphos - Banc of America Securities

I just want to come back to guidance. Somewhat, I mean, I appreciate all the clarity and the patience thus were on it. I guess the question I've got is the lower end of your guidance conservative because based on what I think you said it assumes resin prices stay flat from here.

Richard L. Wambold - Chairman and Chief Executive Officer

Well it assumes two things, George. I'll let you finish your question but let me give you a little bit more data. Okay, it assumes two things. If resin continues to move upwards, it assumes pricing action too. So, it assumes those pricing actions are effective and justified, which I believe they would be.

George Staphos - Banc of America Securities

Sure.

Richard L. Wambold - Chairman and Chief Executive Officer

Okay. So, you really have to take those two things into account and reconcile the effect of both of those to get to the reason we think the 185 is the right number. But go ahead and I'll give you a part two.

George Staphos - Banc of America Securities

Okay. Well, does that I mean... on the question and then I'll listen to what you have to say offline is that in your prior guidance, you suggested that resin would be flat after the first quarter. I listened to your guidance in the fourth-first quarter and you said things trended pretty much has as expected. So, back to again with Ghansham's question, I am trying to figure out where is the bigger uncertainty is, because once you came in as you expected and you are seeing resin to be flat going forward, which is what you said three months ago.

Richard L. Wambold - Chairman and Chief Executive Officer

Hangon because again let's get the fact straightened. It shows that we've got the question right. Okay, what we said in the first quarter was that we assumed, when we talked to you in January we assumed that resin prices will be flat from where we are, we're at the time that we said are, okay. So we weren't assuming that they'd be flat at the end of the first quarter, we assumed that they will flat from where we were. I just told you also in my comments that polystyrene actually went up by 10%. That was from that where we were to where we are. So, the reality is get a lot. You can calculate probably in your own head that we're talking about a substantial amount of increase in cost that came from that. That's principle difference between the original forecast and this one. So, we feel at this point that polystyrene has adjusted quite a bit. We think that polystyrene producers are profitable. We think that they have restored their margins. I'm not saying that benzene can't go up and I am not saying that it will go up. I am saying that from the standpoint of that industry, it's more likely at this point to stay flat or go down, in my opinion. Or if it does go up, it goes up in such a way that we can offset it with additional pricing. Does that help?

George Staphos - Banc of America Securities

Yes, thanks guys.

Richard L. Wambold - Chairman and Chief Executive Officer

Thanks for giving me the chance to clarify that.

Operator

Thank you. Your next question is coming from Chris Manuel. Please state your company and then ask your question.

Chris Manuel - KeyBanc Capital Markets

KeyBanc Capital Markets. Thank you.

Richard L. Wambold - Chairman and Chief Executive Officer

Good morning Chris.

Chris Manuel - KeyBanc Capital Markets

Good morning. Question for you, I guess one question with two parts as we like to do this. With respect to, you have a significant ramp coming in Prairie and some new product that will launched there. Has there been any changes in the trajectory of that launch or is it still a... as the year progresses and '08 sort of a launch? Is the first part of my question. And the second part has the competitive landscape at all changed such that it's making it more or less difficult for you to introduce new products and get price increases?

Richard L. Wambold - Chairman and Chief Executive Officer

Well, first, I think we're still planning on having a very successful back half of our first 12 months with Prairie, if you will. So we feel, we think we're going to do a good job in terms of adding lots of new production to Prairie's business. So that's intact. I don't know if it will hit the absolute order after end of that forecast but we're going to do really fine with it. The second piece is the marketed self changing in such a way that we're going to add more difficulty. I think the market probably; the competitive slate probably is not changing. I think there is a lot of debate in the newspaper, on TV between CEOs and economists to we're in the recession or not. I think really that's debate is whether or not businesses that export in particular, industrial businesses are in recession. I doubt, seriously there is a big debate about whether or not the consumer, the average consumer out there is hurting and buying less. I think the answer to that is pretty obvious at this point, the answer is yes.

Obviously, to the extent therefore that that's reflected in lower demand, it means in fact that there is going to be more competition for that demand, Does that mean that people are going to be cutting prices to do it? I doubt it, to be honest with you because resin prices have in fact gone up and resin pricing clearly hasn't gone down. So, the fact of the matter is margins in this industry if we're sitting where we are, the average competitor in this industry is probably not doing quite as well and therefore, they don't have a lot of margin to play with. So, I suspect that we'll enforce some discipline within the industry and maintain prices pretty well.

Chris Manuel - KeyBanc Capital Markets

Such a way of thinking of that competitive landscape Richard is to say, can you see any substitution as part of the competitive landscape? In other words, from a polystyrene, a polyethylene tray to a paper based tray or something of that nature. Have you seen it that come from that angle either?

Richard L. Wambold - Chairman and Chief Executive Officer

Not really. I mean, if you look at the prices they are not exactly cheap right now and also one of the things that I think we talked about in the past, we haven't come up with it in a long time but paper has... paper is a good product but it has its limitations in terms of what it can do. It likes to be plate but it doesn't like to be ball. It doesn't like to be a container. It doesn't do well with liquids. So, consequently there is a fairly narrow window in terms of where paper substitutes. And its price is relatively up. If you look at other areas, other materials such as polypropylene, AFIT, and so on. The general trend has been upwards. Polypropylene has been up as well, so the fact is polypropylene is not under cutting from a cost standpoint right now that's going on in polystyrene. So it's really one of... unfortunately this oil and fuel costs are the tide that's floating all of the resin boats at about the same rate.

Chris Manuel - KeyBanc Capital Markets

Okay. Thank you. That's what I was looking for.

Operator

Thank you. Our next question is coming from Claudia Hueston. Please state your company and then you may ask your question.

Claudia Hueston - JP Morgan

Hi. JP Morgan. Thanks very much for all the color this morning. It's been helpful. I was hoping if you could just talk a little more specifically about the spread that you are seeing in foodservice in terms of are there any areas where there might be some notable weakness or notable strength, I think mentioned, cutlery and cup, that's driving some of the sales growth this year?

Richard L. Wambold - Chairman and Chief Executive Officer

Yes. There is some market strength there because of the expansion of... particularly on the cup side, especially drinks in the marketplace. There is a lot of interest in the restaurant business in trying to be a participant in that area. So, consequently there is real growth there. Apart from that, what I would tell you is its surprising how uniform the demand is, so we are not really seeing a big change in one versus the other. So, for instance when you look at Pactiv's bread and butter, we sell service items, a lot of which goes to distribution to small restaurants. We sell specialty items that go through large chains, meaning designed for them. And we sell packaging for prepared foods to supermarkets.

So, if you look at kind of the common denominator all of this is, for the most part has been away from home, either to be even in the location or to be taken out. And, overall what we are saying is a diminishment in demand there. Now, there is clearly a stronger cup program, than what we have witnessed to the past, but if you look at the overall container market is all somewhat down. There is some improvement in some supermarket packaging that is used for in-home preparation. So, for instance some of their office type containers that we provide, haven't seen some increase in volume, but again that's not a huge area for us. So, that's not enough to offset what we're seeing in the other areas.

Claudia Hueston - JP Morgan

Okay. Thank you very much

Richard L. Wambold - Chairman and Chief Executive Officer

You are welcome.

Operator

Thank you. Our next question is coming from Richard Skidmore. Please state your company and then you may ask your question.

Richard Skidmore - Goldman Sachs

Good morning, Goldman Sachs. I just wanted to focus on the consumer segment for a moment.

Richard L. Wambold - Chairman and Chief Executive Officer

Okay

Richard Skidmore - Goldman Sachs

The margins there have come down to levels where you were in 2005 and 2006, consumer business, is that just purely a function of what's going on with resin, or is there something else that's happening there on the consumer side?

Richard L. Wambold - Chairman and Chief Executive Officer

Well, most of its resins, I mean most of it is the fact that, lets' get really specific within the wastebag category, the industry did not take a price increase. In spite of the fact that poly-ethylene costs went up throughout 2007, industry didn't take a price increase, I think the last price increase that was when? 2006?

Unidentified Company Representative

Early 2006.

Richard L. Wambold - Chairman and Chief Executive Officer

So, early 2006 was the last time the industry moved pricing. We did move pricing in March of 2008. So, we have now moved pricing up and margins obviously from that stand point or to improve but in fact, there was a long period of time in pricing the stagnant and unfortunately resin was not. So, if you really look at 2006, 2006 was characterized as year where resin for that was somewhat down actually and it expanded margin. In 2007, it was up all year long, every single month of last year I think, we saw another stair step and because of our tendency to sort of average that out, wait for a period of time and use A&P spending as somewhat of an offset to it, we didn't increase prices since we got into this year.

Richard Skidmore - Goldman Sachs

And can you just provide any color around the level of magnitude of the price increase that you saw in March, anything?

Richard L. Wambold - Chairman and Chief Executive Officer

Sure, I'd be glad to. Overall, we think... as we look at the second quarter, we think our pricing in consumer, in general would be up around on an average for all products by about 4%. It's more in some products versus it is greater than that in wastebags and a little less in other products but it's going to be on average about 4%.

Richard Skidmore - Goldman Sachs

Thank you.

Richard L. Wambold - Chairman and Chief Executive Officer

Welcome.

Operator

Thank you. Our next question is coming from Alton Stump. Please state your company and then you may ask your question.

Alton Stump - Longbow Research

Sure, thank you Alton from Longbow Research. Not to beat a dead horse here. But I'm just a little bit confused on how your resin price outlook has changed versus the fourth quarter call and I was looking through the last conference here this morning from fourth quarter. And I think you mentioned at that point that you thought part or that you were at that time, factoring a part of the resin increase that we announced from the first quarter sticking. So, was it a matter of that the rate of actual increases of stock was higher than expected and that's why you are more cautious now for the outlook?

Richard L. Wambold - Chairman and Chief Executive Officer

Yes, exactly. When you look at this time we made the call, I can't remember how many increases were stacked up, I really don't recall anymore. And we haven't taken it all by the way. And when you look at the 10% roughly, I'm telling you that ultimately came through in the form of polystyrene. We thought maybe as much as 3% of that would stick to us. We didn't think the rest of it would, and in fact, it did come in. Ultimately, with the price include in the current rise therefore these, the rise in benzene, obviously that when there was strong cost pressure, the market went there. That was the thing that was not for seeing or frankly call at that point in time. That's the big difference.

Alton Stump - Longbow Research

Okay, and pound you were assuming the $0.01 to $0.02 was going to stay close than the $0.04, $0.05, is that on polystyrene?

Richard L. Wambold - Chairman and Chief Executive Officer

I understand. In the CMAI, which is what you're using right now there, doesn't accurately reflect everybody in the market place. It, by definition is a measure of, I am sure exactly where they get their data, I don't do the analysis but it is a measure, I think of what the higher into the marketplace phase, and therefore is a measure of how much movement you're seeing in the higher end of the marketplace. Doesn't necessarily reflect where we are and then the given point in time, where the absolute magnitude what we pay in this particular case, it is not accurate, in terms of the change in our pricing from January to the end of this quarter. Ours was good, somewhat greater than that.

Alton Stump - Longbow Research

Okay, thank you.

Operator

Thank you. Our next question is coming from Christopher Chun [Deutsche Bank]. Please state your company and then you may ask your question.

Christopher Chun - Deutsche Bank

Yes, thanks, I am with Deutsche Bank. I was just wondering in your free cash flows guidance, how much working capital builds you are baking in?

Richard L. Wambold - Chairman and Chief Executive Officer

It is the same as we said in January, which is $50 million to $70 million.

Christopher Chun - Deutsche Bank

Okay, and then can you talk a little bit about where most of that build is coming from and what you are expecting in '09 on that front?

Unidentified Company Representative

Well, about roughly half of that is due to filling the pipeline for Prairie products moving through the distribution centers of Pactiv, that rest is due to growth.

Richard L. Wambold - Chairman and Chief Executive Officer

And then obviously '09 is not an area we are going to comment on yet.

Christopher Chun - Deutsche Bank

Okay, but would you expect the working capital build to be less given --.

Richard L. Wambold - Chairman and Chief Executive Officer

Well, I think under normal circumstances, the answer is yes, the other reason you wouldn't is just in fact we have further expansion at the current levels but you are not going to sell the pipeline again and so therefore, by definition that piece would go away. So, in general, without committing my self to the numbers, yes I would expect it to be less.

Christopher Chun - Deutsche Bank

Okay, thanks.

Operator

Thank you. Our next question is coming from Ross Gilardi. Please state your company and then you may ask your question.

Ross Gilardi - Merrill Lynch

Good morning, Ross Gilardi from Merrill Lynch.

Richard L. Wambold - Chairman and Chief Executive Officer

Good morning, Ross.

Ross Gilardi - Merrill Lynch

Good morning Richard. I just had one quick question. Can you talk a little bit more about the seasonal pattern for your free cash flow for the balance of the year and just to elaborate on your debt pay down plans for 2008; its not that you bought back some stock, is that pay down still the biggest priority for your cash flow?

Richard L. Wambold - Chairman and Chief Executive Officer

Absolutely, we always buy... we don't always but we typically buy some shares back for dilution purposes. And we don't spend a lot of time talking about the fact that we tend to kind of maintain even accounted shares as we go through every year or so. Just, simply I moved it to continue to do that, we have always done that. The question is whether we buy over and above that level. Our focus is going to be on paying down debt, we are doing a good job. At this point in time, what we are about to begin dollars, our intent obviously is to finance that long term with the combination of getting equity and we think around 50-50 is the right kind of a number for that. So, consequently if the needs we need to pay down about $500 million of that debt to get where we want to go. We paid down $143 million so far. So, we made a really good start on it in our first few months of under ship of the business. At least there are some things in the neighborhood of $350 million or certain pay office we go forward. We'll pay some of that off this year obviously and we can use some of the cash for other things depending on where we think we're creating the most value for shareholders. So, I'm not going to make a commitment exactly, how much is going to go, to what application in which quarter at this point in time.

Ross Gilardi - Merrill Lynch

Where you have a much free cash flow generation in the second quarter, is most of your full year guidance...

Richard L. Wambold - Chairman and Chief Executive Officer

Typically, it's going to be second half for us. I mean we are still going to be building the pipeline. We are still putting in a lot of capital to fund the growth at Prairie in the second quarter. So, it's going to be a lower second quarter of free cash flow just because of those two things in normal. Keep in mind and what was our free cash in 400 or pretty close to that?

Unidentified Company Representative

Yes, in the second half we generate most of our cash.

Richard L. Wambold - Chairman and Chief Executive Officer

Typically, so it wouldn't be uncharacteristic of that for us at to generate that much cash in the second half

Ross Gilardi - Merrill Lynch

Okay. Thank you.

Operator

Thank you. Your next question is coming from Robert Trout. Please state your company and then you may ask your question.

Robert Trout - Goldman Sachs

Yes, thanks. Good morning. Bob Trout from Goldman Sachs.

Richard L. Wambold - Chairman and Chief Executive Officer

Hi Bob.

Robert Trout - Goldman Sachs

Hey It's kind of follow-up question to Rick, earlier on the consumer pricing. You said 4%. Now that's 4% versus, I guess the last time you set a price tag basically?

Richard L. Wambold - Chairman and Chief Executive Officer

It's 4% revenue increase from what we have shown in December, I guess.

Robert Trout - Goldman Sachs

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

Plus an increase in prices for this year, year-over-year and so, it would be an average at being year-over-year is the way to think of it but not since the last time we took price increase.

Robert Trout - Goldman Sachs

Okay. So, does that 4% cover whatever kind of the remaining lag was that you had to recover from the last 18 months of polyethylene increases. Or is there still more to go?

Richard L. Wambold - Chairman and Chief Executive Officer

Well, it depends on how you look at it. Life is like that, but the fact of the matter is remember, I told you, we took a price increase in early '06.

Robert Trout - Goldman Sachs

Right.

Richard L. Wambold - Chairman and Chief Executive Officer

And then resin was down. So, if you measured it from the very bottom and said now resin has going up from this point on, is this represent an increase equivalent to getting back to the top of where you... of recovering all that resin... but it would get us from, it would get us back to an even spread where from we had raised the price the last time. In fact, more or less even spread.

Robert Trout - Goldman Sachs

Okay. So you don't plan on taking anything else for the rest of the year to try to recover whatever is left from the bottom?

Richard L. Wambold - Chairman and Chief Executive Officer

Well I don't... what we'll do and so then, we'll be public about what we'll do in the remainder of the year. It would look like what goes on the resin market as we go forward and what goes on the energy market and then we're going to keep our business healthy as we go. We have to make decisions dynamically as opposed to take a decision in the late part of April of 2008. I think, we will wait and see how this year develops and make a decision later on

Robert Trout - Goldman Sachs

Okay. And just one last follow-up to that. When you push through the 4% increases did you see any... did you get a lot of push back from your... the customers or do you have any evidence of trading down to a price of label products at all?

Richard L. Wambold - Chairman and Chief Executive Officer

I would say the market is not resistant to the increase.

Robert Trout - Goldman Sachs

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

I think the whole market went up more or less, if this end up the same kind of percentages, just because it was completely justified and had to justify it for several months. And so, consequently there was an understanding... it was cost push. So, it went up pretty much with our competitors branded and private label.

Robert Trout - Goldman Sachs

Okay. All right. Thanks very much.

Operator

Thank you. Our next question is coming from Jason Kesselman [ph]. Please state your company and then you may ask your question

Unidentified Analyst

Hey guys. I think most of my questions have been answered, but just kind of talking your use of free cash flow, given the stock prices sort of was low, does that anyway change your view with regard to sort of purchasing more shares and spreading the cash flow, and continue to pay down debt and buyback, especially given that '09 looks pretty strong free cash flow year for you guys?

Richard L. Wambold - Chairman and Chief Executive Officer

Well, again as I said earlier. I wasn't really going to discuss how we split, how we deal with the use of the cash. I think in general, there is a clear recognition on the part of company that we to continue to pay down debt and that we are going to do and that number over the next few years is around $350 million. At some point would we consider some share repurchases? Of course, we would. Question is at what point and that's really not for discussion on the telephone today.

Unidentified Analyst

Okay.

Operator

Thank you. Our next question is coming from Mark Wilde. Please state your company and then you may ask your question.

Mark Wilde - Deutsche Bank

Yes. Good morning Richard. It's Mark Wilde from Deutsche. Just a couple of follow-ups on the margins. First of all, is there any risk on the cost side that you see more pressure from just things like that freight in terms of fuel charges and surcharges that can squeeze your margins further?

Richard L. Wambold - Chairman and Chief Executive Officer

I think we could argue that every company that makes the product, puts it on the truck and sends it somewhere in the United States. But, I guess, actually globally, is the exact same risk right now. Of course, I mean, to the extent that oil prices stay at $120 a barrel and go up from there. Diesel was at, I don't remember what the average was last week. But it was like 433 or something. Obviously that ends up in your P&L and at the end you got to find a way to pass it through sooner or later. I would say this much.

We are doing an amazing job in our company right now. I should give the team and Pactiv applaud but we're doing a terrific job of increasing our cube, meaning putting more product on a single truck, so that we get a chance to amortize the fuel charge against the larger load. We had a good job with improving it last year and we're doing a great job in improving it this year. We're finding our customers are working with us to help do that and so everybody on the supply chain side of things is working pretty hard to minimize the amount of cost of fuel. On the energy side, obviously all of our plans use a lot of it and therefore, to the extent that the electrical cost, in particular go up, that's going to be something that is something that we will have to monitor closely and whether or not, we have to include the price increases as we go forward.

Mark Wilde - Deutsche Bank

Okay and on the other side of it, is there is any press on that for moving your consumer products prices during the year rather than just a once a year initiative, if we had in on up cost pressure?

Richard L. Wambold - Chairman and Chief Executive Officer

We've done it more than one.

Mark Wilde - Deutsche Bank

Pardon?

Richard L. Wambold - Chairman and Chief Executive Officer

We have done that more than one time.

Mark Wilde - Deutsche Bank

Alright, thank you.

Operator

[Operator Instructions]. Our next question is from George Staphos. Please state your company and then you may ask your question.

George Staphos - Banc of America Securities

Thanks, BAS. Richard, I just wanted real evidence to revenue line and ask a few parts. One, could give us more formally what the acquisition effect were from Prairie in the first quarter, you gave us fair amount of color but if you had some numbers, that would be helpful. And then, secondly on the consumer price, realizing that everybody went up at the same time as adjusted, the price increase timing take little bit longer than you would have expected this September and you are looking at 2008, or do it go in typically, when you expected late in the first quarter of the upcoming year and if so why?

Richard L. Wambold - Chairman and Chief Executive Officer

Lets answer the second question first and then I will go back to Prairie. First, as we mentioned in January, our pricing assumption was that we will meet consumer prices as about the middle of March. That varies from year-to-year depending on what we are doing. I will... I think we said at the time that that's later than normal and it's typical for us to move in February, in early February. We did that rightly or wrongly but we did that on purpose and the reason we did that was not to delay our price increase. We did that because in order to range your prices you have to give enough notice and we were concerned at the end of last year that we will go out and net some price increases or go out and raise prices in inadequate level because we believe that resin prices were going to continue to go up and we were afraid that if we went in late December and said that this is where we're going. This is where the price increase is going to be. It's going to be effective on February 1 and in fact we undershoot the mark for the full year. That's just a conscious decision that we made. Some of the competition went out. They just fixed a price and in fact they kind of set a ceiling in the industry that we ultimately couldn't get above. I think at the end of it, we would probably from a strategy standpoint I think we had a good strategy to delay a month but from the standpoint of tactics behind that strategy, we didn't get as much as we wish we had. Now, we got enough to offset where we were in resin but if resin goes up anymore during the year we wouldn't have gotten an open net in that initial price increase to offset it all. That's pretty much the sum total of that issue.

George Staphos - Banc of America Securities

Correct.

Richard L. Wambold - Chairman and Chief Executive Officer

Wishwe'd gotten more. I think we should have. It wasn't because of the customers by the way. It wasn't really because customers. It was because a lot of people in the industry sort of set the ceiling late in the year.

George Staphos - Banc of America Securities

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

Okay. Second, we also have you that we are not able to break out Prairie in terms of its overall sales growth effect anymore. We gave you that piece of news in January but let me revisit why, so that you understand its not an arbitrary thing on our part. What happened with Prairie as we go forward is Prairie, of course, is continuing the ship its customers, I mean traditional customers but in fact we're starting to move in order to make room in some of its factories for expansion in the cup business. We moved product lines out in packet factories.

George Staphos - Banc of America Securities

Yes.

Richard L. Wambold - Chairman and Chief Executive Officer

So, whose are those. Have we compared numbers from one quarter to next quarter when you don't really... you really don't even know how much dollar sales it moves because that it results to attract customer. And second piece is when you are filing your own regional mixing center channel, direct ship out warehouses for packet. How you count those cup sales? Are those packet cup sales? Are those Prairie cup sales. So, the point is when you start to integrate the businesses sort of through the sales channel, you really start to loose a few as to what the real sales number is that belongs to that on a comparative basis. To this out of the way and you're adding some new, its hard to compare. So, clearly from a profitability standpoint, you make it even worse because reallocations that are required doing it. So, rather than give you numbers that aren't going to tie up well, its our to view that we are smarter not to do it. Now, with that said what information we have provided you is that the five months incremental ownership is worth about 6% of growth to us this year. We believe that about right. We think should hold and we are telling you that the business is doing well and that we are growing it throughout the entire company, but without being able to really break out, that's how it looks like.

George Staphos - Banc of America Securities

Okay, Richard. Thank.

Richard L. Wambold - Chairman and Chief Executive Officer

You're welcome.

Operator

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

Richard L. Wambold - Chairman and Chief Executive Officer

Thank you again. We really appreciate you being with us. Good questions help us. Thanks again for helping us clarify certain issues as we through it. We enjoy the Q&A part of this the most. I am looking forward to being back with you in a quarter to tell you about our progress.

Operator

This concludes today teleconference. You may disconnect your lines at this point. Thank you for your participation.

Copyright policy: All transcripts on this site are copyright 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.