Pactiv Corp. Q2 2008 Earnings Call Transcript

Pactiv Corporation (PTV)

Q2 FY08 Earnings Call

July 23, 2008, 8:30 AM ET

Executives

Christine Hanneman - VP of IR

Richard L. Wambold - Chairman and CEO

Edward T. Walters - Sr. VP and CFO

Analysts

Tim Thein - Citigroup

Ghansham Panjabi - Wachovia Securities

George Staphos - Banc of America Securities

Chris Manuel - KeyBanc Capital Markets

Claudia Hueston - J.P. Morgan

Mark Wilde - Deutsche Bank

Ross Gilardi - Merrill Lynch

Richard Skidmore - Goldman Sachs

Presentation

Operator

Good morning, and welcome to Pactiv Second 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 begin.

Christine Hanneman - Vice President of Investor Relations

Good morning. I am Christine Hanneman. Joining me today are Richard Wambold, Chairman and CEO, and Ed Walters, our CFO. Welcome to our discussion of Pactiv's second quarter earnings.

In the quarter review our financial results, some of our comments today may include forward-looking statements. Please keep in mind that actual results could differ materially from those projected.

Also in our press release and this conference call, we will discuss our earnings results using some non-GAAP financial measures. Reconciliation of those non-GAAP numbers to GAAP numbers can be found on Pactiv's website at www.pactiv.com under the Investor Relations section under Financial Press Releases. Richard?

Richard L. Wambold - Chairman and Chief Executive Officer

Good morning everyone. In the second quarter, excluding restructuring charge, our earnings per share were $0.50. Looking at that, I really consider that to be pretty sharp showing considering the current economic environment and the rapid increases that we witnessed in energy and plastic resin costs.

Resin costs were quite a bit since the beginning of the year and as we will discuss in a minute, there are more increases announced for the third quarter implementation. To mitigate these costs, we raised the prices in our Foodservice segment for the second time this year in June and we have announced a third increase of 10% effective August 1. The August announced increase replaces our announced July 15th increase of 8%.

We also announced a second round of increases in our consumer business that will be effective in the third quarter and it will be between 7% and 13% depending on the product line. With the cost of resin continuing to rise, we expect that these pricing initiatives will be effective and they may be followed by others soon.

In the second quarter, much of our 11% volume increase was the result of last year's acquisition of Prairie Packaging. We continue to see excellent organic growth in our cups and cutlery product lines. Most of our new capacity is now on stream and we are running at high levels of utilization.

While the Foodservice industry is somewhat sluggish, our business has held up well. Because Prairie operations and sales have been integrated into Pactiv, it's difficult for us to completely pull up those numbers, but our best estimate is that our historical core product lines in Foodservice were down approximately 1%, maybe 2% in the quarter, in part because of the decline that we saw in our building product area. This is similar to what occurred in the first quarter. So it appears to be holding steady and is consistent with what we've seen in these kinds of economic situations in the past.

Our Hefty Consumer segment, our consumers have been adjusting to a weaker economy and the higher gasoline and higher food costs... prices. In general, most of the markets we participate in experienced slight volume declines. As you will expect, we have seen a decrease in purchases of higher count Hefty products offering and a slight uptick in private label sales.

Past experience in economic downturns has shown that many of these shifts rebound when the economy recovers. Our new cup business with Wal-Mart began shipping in June. We also gained new distribution for cups in the grocery channel. In addition, we are making very good headway in delivering cups though packaged regional mixing centers to our Foodservice customer base. We continue to focus on expanding our cups and cutlery offering to other retailers and other Foodservice accounts.

Overall, we have added or expect to add about $100 million to annualized business in cups and cutlery this year. Most of our efforts now are directed towards adding sales for 2009. We are well on our way to making last year's Prairie acquisition a strong contributor to Pactiv's future.

Ed will take you through all of the details of our second quarter performance in a few minutes, but now I would like to focus on what we seeing as we entered the third quarter in terms of the economy as well as the impact of higher oil prices on raw material, energy and logistics costs.

As we mentioned on our April call, we believe it is prudent to take a cautious position at this point with respect to the economy. While our businesses have performed quite well in this difficult environment, demand has been below the levels that we saw in 2007. We now expect improvement in demand in the second half in our numbers.

Likewise, high oil and natural gas prices are putting upward pressure on resin costs as well as on fuel and utility costs. Recently, resin suppliers have announced numerous new increases for all resin types. The most important resins for us are polystyrene and polyethylene. Since we last spoke in April, the announced increases for polystyrene totaled $0.17 to $0.18 per pound, while the announced increases for polyethylene now stand as $0.27 per pound.

As I mentioned earlier, we are raising prices again in both segments to offset these increases. But as normal for our industry, the higher pricing will lag the cost increases by around four months or so.

Should some or all of the cost increases go through, it will mean that our third quarter margins will be pressured significantly, as we will not fully catch-up with our pricing until the fourth quarter. We have a great deal of confidence that we will successfully recover these costs, but we cannot act quickly enough to neutralize our impact for third quarter.

90 days ago when we reported first quarter performance, most resin forecast showed reduction occurring in the second half. In fact, some still do. We tried to give you a middle of the road outlook while being careful to point out the potential risks and upsides. We were fairly accurate for the second quarter, but with the level of volatility in the energy markets, we could not foresee what was coming. We are again giving you a conservative lower-end estimate based on all the cost increases that have been announced at this time.

Our fourth quarter estimate is based on a continuation of these costs only offset by our pricing initiatives. Even with recent volatility on the downside for energy costs, we have not built in a case for declining raw material costs through the end of the year. Excluding restructuring, we are introducing a third quarter earnings per share outlook in the range of $0.32 to $0.40 per share. The full year earnings per share range has been reduced to $1.58 to $1.74 from what was $1.85 to $2.05. The low end of the range assumes all announced resin increases are implemented as scheduled by the resin suppliers. At the high end of the range, we have assumed that the resin producers will not be able to implement a portion of these announced increases.

We would like to give a tighter range than this, but frankly, as you know, with oil prices as volatile as they have been, it's very-very difficult to do and we I think prefer at this point to give you a conservative approach.

In summary, in either case, we expect to face soft demand conditions during the second half. While our third quarter pricing actions show strengthening margins or should show strengthening margins in the fourth quarter, we want to clearly communicate the likelihood a difficult third quarter. We remain confident that as in the past we will be successful in doing what it takes to improve this company's earnings capability over time.

Now, let me turn it over to Ed and then I will come back for questions.

Edward T. Walters - Senior Vice President and Chief Financial Officer

Thanks, Richard. Sales for the quarter were $951 million, up 15% from last year on the strength of 11% higher volume. The primary driver of volume growth was the inclusion of Prairie Packaging for a full quarter compared with three weeks last year.

As in the first quarter, we had strong organic growth in cups and cutlery. Higher pricing contributed 3%, reflecting the price increases we implemented in both foodservice and consumer in the first half. Favorable foreign exchange contributed about 1%.

Earnings per share from continuing ops were $0.49 compared with $0.52 in the second quarter of '07. Excluding a charge of a penny per share related to the restructuring program, second quarter earnings per share were $0.50. The year-over-year decline primarily reflected erosion in the spread between selling prices and raw material costs, higher utilities and transportation rates, and higher interest expense. These factors were offset partially by the benefit of higher volume and lower A&P.

Gross margin was 26%, down 300 basis points from last year. Operating margin, excluding the restructuring charge, was 13.8%, down 170 basis points.

Free cash flow in the quarter was a negative $8 million compared with positive $29 million in '07. The decrease was primarily due to the higher levels of inventory and receivables to support sales growth and higher CapEx to expand cup and cutlery capacity. CapEx of $39 million in the quarter was up $11 million from '07.

During the quarter, there were no share repurchases. The average number of diluted shares outstanding at the end of the quarter was 132 million, essentially unchanged from a year ago.

At the end of the quarter, gross debt totaled $1.6 billion, while our net debt was $1.5 billion. Since the acquisition of Prairie in June of '07, we have paid down borrowings of $145 million.

At June 30 '08, $100 million was drawn down under the company's accounts receivable securitization facility, which was $10 million more than at the end of the first quarter. Such draw-downs are excluded from the calculation of free cash flow.

Net debt to cap was 52.2%, 220 basis points lower than at the end of '07. For the quarter, leverage, which is debt to EBITDA, was 2.4 times. Interest coverage or EBITDA as a multiple of interest expense was 5.8 times. Depreciation and amortization was $46 million, up $7 million from the second quarter of '07, reflecting the acquisition of Prairie. EBITDA was $177 million or 18.6% of sales compared with $168 million or 20.3% of sales in the same quarter of '07.

SG&A expense was $70 million for the quarter, down $3 million from the second quarter of '07. In the quarter, we started to see the savings from our restructuring program. We also reduced advertising and promotional spending from year ago level. The effective tax rate was 37% in the quarter compared with 35.8% in the second quarter of '07.

Now I'll review the company's outlook for the third quarter and the full year. We expect to see sales growth in '08 full year in a range of 12% to 14%. This is an increase of 200 to 300 basis point from our prior guidance due to the additional price increases we have announced to offset higher raw material and energy costs.

For 2008, we anticipate SG&A expenses will be between $280 million and $290 million, pension incomes would be $49 million pre-tax or $0.23 per share, and the effective tax rates to be 36.5%. Free cash flow for 2008 is anticipated to be in a range of $140 million to $160 million., reflecting depreciation and the amortization of $185 million, capital expenditures of $160 million, and a cash tax rate of 25%.

Our previous cash flow estimate was a range of $180 million to $215 million. The lower free cash flow outlook for the year reflects the lower earnings projection, as well as an incremental investment in working capital associated with higher raw material prices.

Excluding the restructuring charge, we anticipate that earnings per share will be $0.32 to $0.40 for third quarter, and $1.58 to $1.74 for full year 2008. The full year estimate is down from the previous guidance range of $1.85 to $2.05 per share because of the impact of the increase in oil prices on raw material and other energy-related costs.

It's important to note that we utilize the LIFO method of inventory accounting for domestic inventory produced from polystyrene, polyethylene, polyester or paper. More than half of our inventories are accounted for on a LIFO base.

In a period of rapidly escalating or declining resin prices, the difference between reported EPS on a LIFO basis and EPS on a FIFO basis can be quite material. And it's important to understand, particularly since most of our competitors use FIFO and you may find comparing our results to theirs difficult. We are in such a period right now.

We estimate that EPS for the third quarter would be $0.10 to $0.12 higher if we are utilizing FIFO accounting for all inventory. For the full year, our EPS estimate range would be $0.17 to $0.19 higher on an all FIFO basis.

Richard, on that note, I'll turn it back to you.

Richard L. Wambold - Chairman and Chief Executive Officer

With that, we will be happy to take your questions.

Question And Answer

Operator

Thank you. We will now be conducting a question and answer session. [Operator Instructions]. Thank you. Our first question is coming from Timothy Thein of Citi.

Tim Thein - Citigroup

Hi, good morning.

Richard L. Wambold - Chairman and Chief Executive Officer

Good morning, Tim.

Tim Thein - Citigroup

Can you just share, Richard, if you said it I missed it, your... the breakdown in your full year or may be at least the back half of the year in terms of your new sales target, what the split is between price versus volume?

Richard L. Wambold - Chairman and Chief Executive Officer

I'll let Ed do that.

Edward T. Walters - Senior Vice President and Chief Financial Officer

Yes, Tim, for the full year, the full year effect of Prairie versus a partial year gives you about 6% on sales. The higher pricing for the full year gives you about 6%. And then on the low end, the organic volume growth is around flat. And on the high end, it will give you about plus 2%.

Tim Thein - Citigroup

Yes, thank you.

Richard L. Wambold - Chairman and Chief Executive Officer

Next question please?

Operator

Thank you. Our next question is coming from Ghansham Panjabi of Wachovia Securities.

Richard L. Wambold - Chairman and Chief Executive Officer

Good morning, Ghansham.

Ghansham Panjabi - Wachovia Securities

Assuming all of these published resin price increases go through and assuming that you get your pricing through as well, how many months in 2008 would you have been behind on the price cost curve? And, just as a related question, what do you think this published resin price increases sort of assumes in terms of what the price of oil implicitly would be? Thanks.

Richard L. Wambold - Chairman and Chief Executive Officer

I have no idea to question one. I mean, I don't look at it that way. Obviously to the extent that it takes us, say, 3 to 4 months to raise our prices and get them in place, maybe in some cases 4 to 5 months. The real driver of the answer to your question is what's happening with oil and resin, and unfortunately that's out of our control. So keeping score like that probably doesn't help us that much.

If you start to look at where oil prices are based on our forecast, that's probably in the range of where we were last week. We think that the... if you look at the nominations and we are largely talking about... we are taking the nominations on our low end of our guidance and saying they happen. And at the time when those nominations are going through, we were looking at oil that was probably between $135 and $140 a barrel. So, my guess is that the pricing... or costs that are coming at us are sort of predicated on the $135 to $140 level.

Keep in mind that, yes, there is optimism here that perhaps oil is falling back and so on so forth, and we is... may very well be at this point. Keep in mind that also some of the pricing activities that we put out there probably will not be completely successful either. And so, we will make the job easier, but it wouldn't in fact change necessarily the margins that much because this wouldn't recover in the fourth quarter what would expect to in total.

At this point I think the best view from our perspective is that it's going to be volatile, it's going to be up and down, and planning somewhat in that 130 and 140 bracket is probably not a bad thing for us to be doing.

Ghansham Panjabi - Wachovia Securities

But weren't you behind on the price cost curve in the first two quarters of the year or is that not accurate?

Richard L. Wambold - Chairman and Chief Executive Officer

Well, I think our margins in the first quarter were clearly below what we had in the year before. But that's to some degree because we were ahead of the price curve in the year before. But I would guess we were slightly behind, yes.

Ghansham Panjabi - Wachovia Securities

So, the first three quarters you expect to be behind then, right?

Richard L. Wambold - Chairman and Chief Executive Officer

Yes, that's relevant, I guess. It's probably ballpark correct

Ghansham Panjabi - Wachovia Securities

Okay. Thank you.

Operator

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

George Staphos - Banc of America Securities

Thanks. Hi, everyone, good morning. Banc of America Securities. Richard, I just... if you could comment on the volume, could you give us a sense for how volumes were trending at the end of the second quarter and into the early portion of third quarter across some of your key businesses? And kind of a related question and I will leave it there. You talked about where you had areas of strength aside from some of the building materials, where did you have some particular pockets of weakness? Thanks.

Richard L. Wambold - Chairman and Chief Executive Officer

Well, let's just start off with building materials. I mean, building materials for us means foam insulation boards. And the answer to that is everywhere. I mean, everywhere we make it it's down. So, it's just down with the building industry and that's just kind of the fact. The business is being managed fairly well from a profitability standpoint. So, we have done a lot of our SG&A reductions there and we continue to manage that business extremely well. But unfortunately, as we roll that business up, the volume does clearly affect us.

If you look at the overall trends in the business from a volume perspective, there are some things that were unique. First, I think the second quarter in general was pretty strong in foodservice, stronger than perhaps anyone expected it to be. Part of that was because we are seeing more of our processor type products being sold and they are offsetting some of the weakness that we see in take-out type containers.

George Staphos - Banc of America Securities

Got it.

Richard L. Wambold - Chairman and Chief Executive Officer

That's helping the cup businesses and cutlery business is obviously at real benefit. That business is growing well. It has higher growth rates in general plus we are getting market share there without question. So that's helping us out.

If you look at some of the things that may be in foodservice that weren't as strong, the weather in the second quarter was not particularly cooperative for agricultural businesses. And in fact it's picking up now. And as we look into July, overall our foodservice business has pretty darn strong from a volume prospective, which is good news for us. And part of that is again processor, part of this is the agricultural business, and we are not seeing quite the same level of weakness in some of the foodservice products. But whether that's volume-related or other things is pretty difficult for us to tell until we get later in the quarter.

Consumer, again, as you look at consumer, cups and cutlery business was strong. We had some conquest sales there, some new business coming on. If you look at waste bags as a product, waste bags for the industry, for all players in the industry, was not stellar. It was all down a bit. There was a slight amount of movement for branded to private label across the board, but not particularly any movement between branded players in that segment. So it does what you would expect it to do, it's slowing down a little bit. But again, we didn't see anything that would cause us to be concerned that it's falling rapidly or changing its course very much. Again, in July, the business is pretty darn strong.

And so, perhaps that's an element for the remainder of the quarter or perhaps that's just the first few weeks of July restocking from what was not a real strong second quarter. I hope that color gives you some help.

Operator

Thank you. Our next question is coming from Chris Manuel. Please state your company name and then proceed with your question.

Chris Manuel - KeyBanc Capital Markets

KeyBanc Capital Markets. Good morning, gentlemen.

Richard L. Wambold - Chairman and Chief Executive Officer

Good morning.

Chris Manuel - KeyBanc Capital Markets

A couple of questions for. When you think about... well, first, just more of a housekeeping question. Do you know what specifically the Prairie revenues were in the second quarter last year that we were included?

Edward T. Walters - Senior Vice President and Chief Financial Officer

Well, it's about three weeks worth of business. I don't have that number at this... at my fingertips.

Richard L. Wambold - Chairman and Chief Executive Officer

We can call that out probably on the call, we will give it back to you. We won't charge you a question for it right now.

Edward T. Walters - Senior Vice President and Chief Financial Officer

I have to take to even give that number if we can find it because we don't track sales by week, Chris. And it's not... anything I can give you just would be a proration of the month.

Chris Manuel - KeyBanc Capital Markets

Okay, all right, that's fair enough. I guess where I am going is it sounds like the momentum this year in the Prairie for your win [ph] and you talked about $100 million of business, [indiscernible] full year '08 or that's what you are anticipating?

Richard L. Wambold - Chairman and Chief Executive Officer

That's annualized growth. Remember we are putting in machinery for the first really, well, pretty consistently through the first half of this year so that we can gain the business. Also remember that Prairie is very seasonal. So it tends to pickup in early... late spring, early summer months and it's just pretty much of a summer, early fall business. So the reality is that we didn't have the equipment in place to take on large new pieces of business to pre-build the inventory for it, and to be able to give customers a great deal of comfort that we will be there for them in the summer, this past year. You really have to have that in order to serve a customer appropriately, especially a large customer, you usually building inventory in January, February and March so that you can meet their peak demand in June, July and August. We did not have the luxury of doing that this year. So, all in all, considering the fact that we think we will add on an annualized basis $100 million in sales, we are right along our sales target.

Chris Manuel - KeyBanc Capital Markets

Right. And then where I was going to go... that's helpful. So that's fine on an annualized basis. Where I was going to go was that as you look at 2009, you are in the peak season right now that the selling product for '09. Do you have any sense as to how that sell-through goes looking into... I know it's early to look at '09, but how you think that business might perform in '09, do you think that there are incremental wins to be had?

Richard L. Wambold - Chairman and Chief Executive Officer

Yes, I definitely do. We are in a peak season for a '08, I think is what you meant to say, for shipping. And we are also at that stage of the game where you begin the process of really trying to bring on your '09 new conquest business. Is there additional business? I believe there is a substantial additional business for us to be able to get. And we are having what I would consider to be very fruitful conversations with a number of large customers in regards to that, and hopefully we will have that. To some degree the investments we have already made will help us pre-build for that. And for some degree we are going to have to add some additional capacity, we will get it, but not on the scale of what we get to add in.... in late '07 and '08. So our capital will not be as intense, but hopefully the sales will be.

Chris Manuel - KeyBanc Capital Markets

That's helpful. I'll jump in back in the you. Thank you.

Operator

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

Claudia Hueston - J.P. Morgan

It's J.P. Morgan. Thanks very much. Good morning. I was hoping you could just comment on the progress thus far of your restructuring program, where are you on that and are you still comfortable with $0.05 of benefits in 2008 and [indiscernible] basis? Thanks.

Richard L. Wambold - Chairman and Chief Executive Officer

Yes, we are pretty far along on it actually. And one of the reasons our SG&A is perhaps a little lower than what we anticipated is we're really kind of ahead of it. So we are comfortable with both the cost that we projected for and comfortable with getting it all. And if anything we may get lucky shift a little tiny amount of that incremental nickel into 2008, get it done a little earlier, and we're certainly trying to do that. It is going fine.

Claudia Hueston - J.P. Morgan

Okay, thank you.

Operator

Thank you. Our next question is coming from Mark Wilde. Please state your company and then proceed with the question.

Mark Wilde - Deutsche Bank

Hi, Deutsche Bank. Good morning, Richard.

Richard L. Wambold - Chairman and Chief Executive Officer

Good morning, Mark.

Mark Wilde - Deutsche Bank

Richard, is there anything else in that $20 million reduction in SG&A you're pulling back on advertising or promotion?

Richard L. Wambold - Chairman and Chief Executive Officer

There is a little bit, but that's a very slight amount of it. The principal issue, there is something else in it, which I guess the shareholders will be interested in. But part of it is pulling forward the restructuring a little bit, part of it is being very focused on control and making sure that we don't spend money that we don't need to spend. In an environment like this whether it's spending your capital, you are trying to focus on making sure the you spend what's going to be fruitful in the near term. The third element is... it should be obvious, and that is guess what, we are not going to make the goals and objectives that we set out at beginning of the year. So the chances are that we are not going to pay the incentive compensation that we had hoped we would pay at the beginning of the year.

So, by definition, as we get further into year, that becomes clear to us, is that... it would obviously be, if we take our numbers down, then we begin the process of adjusting those numbers as well. So that also is an influence on SG&A.

Mark Wilde - Deutsche Bank

Okay. And just as a follow on, Richard, can you talk about anything kind of incrementally that you are looking at over the last three months to deal with a combination of a slow economy and this big run up in raw materials?

Richard L. Wambold - Chairman and Chief Executive Officer

Well, this is not new ground for us. Unfortunately... I wish it were, I wish this is a brand new thing we have never seen before. But in fact, this is something we have seen more than one time in the last five or six years. And, Mark, the key this, we are... we are watching every penny we have to. We are watching what we do in terms of the capital, we are focusing on the project and the sales opportunities that we have that are going to bring the biggest bank for the buck. So we are doing all the things that you do to control the expense side of the P&L. We are doing all the things that you do to make sure that you are maximizing the revenue side of P&L. But the number one thing you can do outside of negotiating with suppliers, the number one thing you can do is to make sure that you are adjusting your business in real time, as close to real-time as you can get to the realities of the resin market. If resin is going up by a dime, then the fact of the matter is when you look at the profitability of the packaging business and you say how good is this business going to be if it makes a dime less a pound [ph], it's not going to be very good.

Consequently, knowing that and there being doing the things that one must do to make sure that you pass through those costs are essential to the long-term health of our industry and is essential to, frankly, to the health of our customers. They want healthy suppliers. So making those things happen and making them happen in a realistic timeframe, I think, is goal number one. I think when you listen to the number of pricing actions that we had out, the success that we have been having with those pricing actions as the year has progressed, it may be true that we are somewhat behind and that we have been behind, but we have been transitioning.

It's not like our row materials are getting more expensive, it's we are transitioning a business from $80 a barrel oil to $140 a barrel oil. We're transitioning the business... where raw materials represent 60% to 65% of cost of goods sold, we are transitioning the business to something that has 20% to 30% increase in raw materials during this period of time. And so obviously, focusing on getting your revenues adjusted appropriately is a job number one and I think we are right on top of that.

Operator

Thank you. Our next question is coming from Ross Gilardi. Please state your company and then proceed with 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 wanted to get a comment on just the level of comparative support you are seeing for your pricing initiatives and is there anything that lead into... I think you mentioned that your second foodservice price increase was moved from July 15th to August 1st?

Richard L. Wambold - Chairman and Chief Executive Officer

Yes, there is something to be said for that. We took it up and when we changed the amount from 8 to 10, we needed to move the date. That's just sort of the way things work. And so the reality is we felt that it needed to be higher. I will tell you if this is... again, the situation I described just now about job number one and about... this is not a profitable industry if you don't get your resin pass through and so on, it's a fact. It' an industry-wide fact, not a Pactiv fact. The result of that is that this industry has to adapt or not be a profitable business going forward. And as a result of that, we've seen so far the whole industry move. Every single key player that we track has pricing out in the market place more or less in total adding to what we have. And we would anticipate, which, by the way, is nothing more than really recovering costs. This isn't adding to profitability, it's just getting back to the historical levels of profitability.

So, I would anticipate that so far it's happened that way and I would anticipate that depending on how resin goes forward that it will continue to go that way. So, I would say that both on the foodservice and I think on the consumer side as well that that's what will occur over the next several months.

Ross Gilardi - Merrill Lynch

Okay, thank you.

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 ask your question.

Richard Skidmore - Goldman Sachs

Good morning. Thank you, from Goldman Sachs. Richard, just wanted to discuss may be following up on Mark Wilde's question about the top line, is there anything that you can do from the standpoint of passing through the price increases faster than what's you are currently talking about the four to five months given the unprecedented volatility in energy and resin, and what might actually continue going forward? Can you shorten that lag time at all with your customers?

Richard L. Wambold - Chairman and Chief Executive Officer

I think right now that the reality is that the way we try to make it move quickly is by getting the price increases announced early, as opposed to saying that you are going to collapse the time. The industry has a fairly consistent way of working and the competitors that sell in this industry work in that way. Chances are if we try to break that in a significant way, i.e., we are going up tomorrow in a kind of force majeure methodology. My guess is we would pay for it with volume that is at about its current [ph] cost inventory. Keep in mind that they are on FIFO and we are on LIFO. So the reality is... my guess is most competitors will continue to sell at the old price for a continued period of time. So I don't think we would gain much for it.

Richard Skidmore - Goldman Sachs

Okay. And then just maybe the follow-on to that is there ability to... instead of just offsetting cost actually work to try to get more margin or is it just that the competitors have moved up to just get cost?

Richard L. Wambold - Chairman and Chief Executive Officer

Well, I think they are trying to get cost. The question is what cost. The cost involved in this is more than resin. It's diesel fuel, it's other costs as well. And clearly, as we go out, we think it's reasonable in kind of a... these are all energy-related kinds of costs. So when we go out we are really thinking about recovering our energy costs in a broad spectrum as opposed to just the resin costs. And I think that's what I see. When I analyze what's going on in the marketplace, I think that is what I see fairly broad based. I don't think we can get up... I don't believe we'll make a profit margin on it, but even so our profit margins are pretty good. So to the extent that we can recover the cost, I feel very satisfied with that.

Operator

Thank you. Our next question is coming from Abard Anian [ph]. Please state your company and proceed with your question.

Unidentified Analyst

Yes, just a question on your... on the Hefty Package segment. I am just curious you said you had some organic sales growth. Was any of that, you think, attributed to people buying ahead of the price increases that you announced in consumer?

Richard L. Wambold - Chairman and Chief Executive Officer

I got there to be honest with you. That would not be a typical response. I mean, you could see a little of that, but the truth is the customer, meaning the retailer, the tendency for them is to absolutely minimize inventory in their systems. And in doing that, I mean, they really don't have the wherewithal to stock a lot of incremental inventory. So, you may find consumers, meaning the ultimate customer for the product, buying larger boxes of product, which means they are looking at... if I buy a larger box with more trash bags with Hefty bags in it, they might be buying a larger format box with more bags in it because the price for bag is slightly less. So that would tend to favor the revenue side, and you can think of that as a small pre-buy. But it wouldn't again be a major one.

Operator

Thank you. Our next question is coming from Sam Osceola [ph]. Please state your company and then ask your question.

Unidentified Analyst

Hey, Guggenheim Partners. Good morning guys.

Richard L. Wambold - Chairman and Chief Executive Officer

Good morning

Unidentified Analyst

A couple of quick questions for you. Regarding the high end of guidance for 2008, you have mentioned that that was a portion of the resin... announced resin price increases --

Richard L. Wambold - Chairman and Chief Executive Officer

Right.

Unidentified Analyst

Would not go through. Can you quantify what that portion is?

Richard L. Wambold - Chairman and Chief Executive Officer

I am sorry, I can't.

Unidentified Analyst

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

I do know it, but I can't do that. The last thing I want to do is to tell everybody in the world what my resin negotiation strategy is, and consequently I'll take a pass on that.

Unidentified Analyst

Okay. And does that assume you had mentioned that if you are able to get some concessions on the resin that you are buying with, you may have to give those concessions to your customers and kind of back-off from some of your price increases. Does that reflect the same as well you are getting concessions --?

Richard L. Wambold - Chairman and Chief Executive Officer

I think there's a little bit of a difference here. I think the reality is where is the market going on resin. I was offering that up with regards to a question that was, I thought was kind of pointing at... oil today is whatever oil is, $124 or whatever we are today, it was 135 last week and a 145 the week before that. It follows like that, is that margin now going to go into your pocket. And the answer is some of it will, but clearly if resin falls along with oil, and that's what happens, some of that will find its way back into the marketplace.

The best way for me to give you an answer is that think about our history in this regard. Because of the way our pricing does adjust, we typically do expand our margins during the fall on... falling resin price environment. Last time we went through it, it expanded by as much as, say, 300 basis points. It could do that again and you keep that as long as resin prices are falling.

So, it's possible that we would see some expansion. Then again it's just as equally possible in my mind that oil goes back to 145 right now. So, we are not betting on oil dropping in our forecast going forward.

Operator

Thank you. Our next question is coming from Matthew Cowel [ph]. Please state your company and then ask your question.

Unidentified Analyst

Hi, [indiscernible], good morning. I had a question on the pension income. How much of the pension income did you book in the first half of the year?

Richard L. Wambold - Chairman and Chief Executive Officer

Half of the full year amount, it's $20 million $25 million for the first half.

Unidentified Analyst

Okay. And what do you intend to do for the other $25 million, is it split evenly between Q3 and Q4?

Richard L. Wambold - Chairman and Chief Executive Officer

Yes, it's absolutely flat across the year.

Unidentified Analyst

Okay. Thank you very much.

Operator

Thank you. We have a follow-up question coming from Timothy Thein. Please state your company and then proceed with your question.

Tim Thein - Citigroup

Yes, sorry. Richard, if you look at your main product lines within consumer, can you comment if you look... if you assume the recent... your recent price increase initiatives, what the spread is relative to private label, just if you would speak generically to it, and maybe how that compares to historical averages?

Richard L. Wambold - Chairman and Chief Executive Officer

Well, I mean, our spreads right now are may be slightly ahead of private labels, slightly ahead of historical averages and private labels, before the price increase. But private label probably needs a price increase more than we do. And so my guess is that private label will be taking their prices up as well. Obviously, that in a higher resin environment, you are a private label producer and you have relatively low margins, your need to recover higher costs are pretty strong. So, my guess is that overall not much is going to change there.

Tim Thein - Citigroup

Okay. And just quickly, Richard, can you share how much of just round numbers of your polystyrene buy, how much of it is a high impact?

Richard L. Wambold - Chairman and Chief Executive Officer

May be 25% in total, including... that's basically in the cup side.

Tim Thein - Citigroup

Okay, thank you.

Operator

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

George Staphos - Banc of America Securities

Thanks, Banc of America. Hi, Richard. You gave us the cumulative amount of resin price announcements that we've seen since, I think, it was April or January?

Richard L. Wambold - Chairman and Chief Executive Officer

It was April.

George Staphos - Banc of America Securities

Okay, thank you. When we look at the guidance for the third quarter and just look at the low end here, how much cumulatively has been nominated and which is built into your guidance, could you parse that for us?

Richard L. Wambold - Chairman and Chief Executive Officer

So, what you are really asking means is from April to... of the money... of the dollars or pennies I gave you, I want to make sure I get the question right. Are you still on, George?

George Staphos - Banc of America Securities

I am still here.

Richard L. Wambold - Chairman and Chief Executive Officer

Okay. So what you are asking is to take the April numbers that I gave you and split it between how much has gone in and how much is still on table?

George Staphos - Banc of America Securities

Yes, correct. And particularly for the third quarter?

Richard L. Wambold - Chairman and Chief Executive Officer

I have to be rough about that.

George Staphos - Banc of America Securities

I understand.

Richard L. Wambold - Chairman and Chief Executive Officer

Because that's kind of a competitive thing.

George Staphos - Banc of America Securities

If you want to talk about it offline, that's fine too.

Richard L. Wambold - Chairman and Chief Executive Officer

Yes. My guess is that at this point in time if you look at it, it's bad as much on the table as... on average... on average on all the resin grades we have, about as much on the table as has gone through. So it's in the neighborhood of 50:50, may be 40:60 in some cases.

George Staphos - Banc of America Securities

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

It's may be a little less that's gone through than there is on the table. There's probably a little more on the table.

George Staphos - Banc of America Securities

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

Does that help?

George Staphos - Banc of America Securities

Yes, it does.

Richard L. Wambold - Chairman and Chief Executive Officer

I can build the model on that, but you get a sense of it. There is more in front of us than is behind us, but there is a lot behind us.

George Staphos - Banc of America Securities

Okay, thank you.

Operator

Thank you. Our next question is coming from Chris Manuel. Please state your company and proceed with your question. If you're on the speaker phone, please pick up your handset. We are unable to hear you into the teleconference.

Chris Manuel - KeyBanc Capital Markets

A quick question regarding, you talked about freight and some other pieces you're passing through. When I thought about your distribution network, you have a pretty nice competitive advantage that you built there with your mixing centers such that as your competitors are passing along their freight costs, I would think you will be able to have an advantage. And is that an advantage you think that you can capture and essentially get a little more pricing maybe than what you just need to recover your freight that keeps you competitive with your... the other folks that you are competing against? Does that make sense?

Richard L. Wambold - Chairman and Chief Executive Officer

Yes, it does, although perhaps just a little further clarifying. We... to a very real degree, we get paid for our distribution capabilities already. If those distribution capabilities don't come for free, they require fixed assets, they require people, they require equipment. And so therefore they cost us money to be able to deliver that way. And customers that see the value in that typically pay a bit of a premium for it. And perhaps they pay that premium by virtue of a slightly higher price. Oftentimes they pay their premium by virtue of giving us more volume or by working with us to give us volume in a way that helps us manage our combined costs better.

So, we think... as we have analyzed that over the years, we think we are compensating for that capability in the base of the business that we have today, as opposed to trying to recover the second time. So, in our particular case, I think that again the goal is for us to recover the added cost associated with shipping product, not double recovering.

Chris Manuel - KeyBanc Capital Markets

But if I had a premium, if you just maintain the same premium that would implicitly end up giving you an extra cushion, it's kind of where I'm going.

Richard L. Wambold - Chairman and Chief Executive Officer

Well, if you did it as a percent calculation, it would. If you look at dollar margins, of course, it wouldn't.

Chris Manuel - KeyBanc Capital Markets

That's fair. The last question I had was with... on the resin side. It's looking like... and maybe this kind of helps tie up the question George had as well. There is some sizeable nominations on my calculations, that's just $0.15 on the table on polyethylene, another three to four in styrene, but it's looking like in the last week or so we began to see that break and some of those even come back a bit. Can you comment on... I know you are on a contract basis and much so on a spot, but can you comment on what you are actually seeing in the markets right now that whether all of that... what's nominated just for this month appears to be going through or if in fact the things have done little bit of break due to oil and gas falling off?

Richard L. Wambold - Chairman and Chief Executive Officer

The difference between, I guess, my perspective and yours is that every month we go through the same thing. This month doesn't look any different to me. Every month we negotiate as to how much of the nominations we take or don't take. And in the next month sometimes we have to make some up, sometimes it comes back. If we overpay it, it comes back; if we underpay it, it goes up. And so looking at it for one month and trying to say that's a trend line to me is... in my 14 years of being here, this is a... it's a zero some gain.

What we try to look at instead is how do you get whatever advantage we can get over whatever period of time we can get. And we try to look at based on what the input costs are, what is... we have formulas for every single resin type that we think are fairly representative of true cost, and we try to recognize where people are trying to go based on where current input costs are, what do they have to have in order to have a fair margin over a period of time.

I think as we've built this forecast, I think... to start with, I think if you look at in today's light, with $120 something a barrel of oil, I think you can criticize us for being a little conservative. Next week, if oil is $125 a barrel, you look at us and say you are about right on. We try to build a middle of the road forecast, which says it was going to be in the 130s and that's what this forecast is sort of predicated on, as I answered the question earlier.

So, you are never going to be exactly right. But our feeling is, we put in the nominations on the low end, we put in pricing to offset that, we put in the lag associated with that pricing, and we are trying to give you a realistic understanding based on having all the numbers in front of us as to what the likely earnings impact is. About the only thing I can tell you to be really truthful is that we will be wrong when get to the end of the quarter. I just don't know how much and in which way.

Operator

Thank you. [Operator Instructions]. Our next question is coming from Eric Gordon. Please state your company and proceed with your question.

Unidentified Analyst

[Indiscernible] Investment Management. I have a two-part question related to the same overall topic. Richard, with chemical industry forecast just calling for a considerable global capacity additions for polyethylene and polypropylene by later this year, even if oil prices were to remain in the sort of $135 range, as you've suggested they could, would you anticipate resin costs to come down in to early next year driven by those capacity addition?

And sort of as a follow-on to that, answering one of the prior questions, you mentioned that when resin prices do come down, typically margins will increase and I am assuming that that's gross margin. But more pertinent I think to Pactiv is what happens to absolute gross profit in that situation? Thank you.

Richard L. Wambold - Chairman and Chief Executive Officer

Okay. I'll limit my point of view to the first part of that by saying that if significant amounts of capacity of resin that we buy come on to the global markets, will it have an influence on pricing? Yes. When and if second part is last time we went through this our dollars margins went up. Next question?

Operator

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

George Staphos - Banc of America Securities

Thanks. Richard, I know that focusing on return on capital is important within Pactiv and always has been. You have a very good record in improving returns over the years. We know also from what you've said qualitatively you are focusing on every penny and likely... the likelihood is that CapEx next year won't be as high as this year. I know it's early, but can you give us a sense how we might see some of that discretionary spending come down or the level to which maybe is what I'm really getting at because it pulls back, and how far could you pull it back without impairing what appear to be some share gain that you have going on in your business and obviously with Prairie? Thanks.

Richard L. Wambold - Chairman and Chief Executive Officer

Okay. George, the first thing is this year's 150, and last year's 150. This year's 150 is kind of a... it's not a perfect number. I mean, it may turn out to be slightly below that to be truthful with you. But it could turn out to be the whole [ph] 150.

George Staphos - Banc of America Securities

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

And the reason is obviously we review every single project as they come through for their ability to have an impact or their absolute need. I mean, sometimes it's a maintenance project and you just have to do it. So in rough terms, as we look at our list, it's easy for us to see 155 between now and the end of the year based on what we actually serviced and could be somewhat less than that.

This year and last year with the acquisition of Prairie, we had to build a base of cups and cutlery capability that would be able to service the market for this summer as much as we thought we might be able to bring in. In doing so, and if you look at the annualized capacity of that, that annualized capacity is well greater than the peak capacity that we expected to get to. So, to the extent now that we pre-build inventories which is a much better deal for us to do, frankly, that for us to buy enough capital equipment to hit surged peak the capacity, we are already in place to take on additional business for 2009.

So, the question now is what this peak 2009 look like. And if you were to roll back all of the capital dollars this year and say where, how much was the incremental capital, I mean, it wouldn't surprise me last year and this year... well, let's just use this year, what surprised me this year is the incremental capital dollars worth $30 million, maybe even as much as $40 million.

George Staphos - Banc of America Securities

Right.

Richard L. Wambold - Chairman and Chief Executive Officer

Okay? So, that puts you to base that's not so dissimilar from the base that we used to run that, a little bit more but not much. We have given you a kind of a number that we talk for next year, which kind of a good, long-term image of where the number ought to be, we said 190 [ph]. That incorporates money for expansion to maintain good EBITDA growth as we go. The only caveat that I have given to that is to the extent that we are given the opportunity by customers to add additional business, but it requires us to put in capital to get it in a short-term business. That means if it comes on next year, we'll be foolish not to spend the money to do so. So, the only reason that number is going to grow appreciably over that is because somebody has come to us and said we give you this much more business, but we need to have this capital to get it.

George Staphos - Banc of America Securities

Richard, I know it's hard to parse it, but this incremental business hypothetically if you were to get it, if you were to go for it and put capital behind it, would the average margin or cash accretion from that business in per unit, I don't know how do you measure unit per se, would it be higher than your average?

Richard L. Wambold - Chairman and Chief Executive Officer

Typically we look at things in internal rates of return obviously. I don't really... we don't really look at it as dollar margin, but it would... typically for us to want to spend expansion capital money on things, we are looking at... we ought to be looking at 18 to 20 plus percent EBITDA margins. That kind of relates to the return on capitals that we are looking for. So that would therefore return into middle teens operating margins.

George Staphos - Banc of America Securities

Alright.

Richard L. Wambold - Chairman and Chief Executive Officer

So I guess it would be slightly above where we are today, but since I haven't really worked the numbers with new resin prices through, by the time the dollar margins are going to be right, the percents may be slightly off on.

George Staphos - Banc of America Securities

Okay.

Richard L. Wambold - Chairman and Chief Executive Officer

You know what I am talking about past and pricing again.

George Staphos - Banc of America Securities

I understand.

Richard L. Wambold - Chairman and Chief Executive Officer

The old 15 is now 13.

George Staphos - Banc of America Securities

Thank you.

Richard L. Wambold - Chairman and Chief Executive Officer

Next question.

Operator

Thank you. Our next question is coming from Sam Osceola [ph]. Please state your company and then ask your question.

Unidentified Analyst

Guggenheim. Just a quick follow-up. With regards to capital structure win, I just wanted to get your thoughts on any consideration of a dividend in the future and stock repurchases?

Richard L. Wambold - Chairman and Chief Executive Officer

We have historically favored stock repurchases over dividends. I think there is probably a point, I have been asked this question many times in the past that there's probably a point when our debt reduction in the not too distant future gives us the option of perhaps doing even both. We are not opposed to dividends per se. I'm not sure what the new administration is going to do from a tax standpoint on dividends, but in general, the way we have given money back to shareholders in the past is through share repurchase, which we favor quite a bit. But I don't think... I certainly am not... I don't believe our Board is dead set against a dividend, it's a possibility.

Unidentified Analyst

Alright, thanks.

Operator

Thank you. There are no further questions. I would like to hand the floor back over to management for any closing comments.

Richard L. Wambold - Chairman and Chief Executive Officer

Thank you very much. Again, we really thank you for participating in the call. We had quite a broad audience today, and we appreciate you staying with us for almost an hour. We look forward to reporting back to you at the end of this quarter and hopefully some of the optimism I hear will come to bear in the quarter. I think we have been conservative, but on the other hand I think we are trying to be very realistic with our shareholders about what the prospects are in the third quarter. I think we've focused on the things that are important here. We are getting good growth, we are focusing on... clearly on the higher growth, higher margin aspect of our business. That's what our capital is doing, that's where we are trying to grow it right now. I am very proud of the team and the effort is going on there, and we are making some great headway.

And finally, again, one of the keys to maintaining accreting value in our business is to maintain our margins and maintain at least our dollar margins, and that's going to mean a focus on costs. It's not something that our people like to do... pricing rather, it's not something that our people like to do, nor do our customers like it. But unfortunately it is the reality in the marketplace today. So, I appreciate all of the people working with us as we go through and try to adjust the business to that near reality. Thank you very much.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. 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.