Pactiv (PTV)

Q2 2010 Earnings Call

July 30, 2010 8:30 am ET


Richard Wambold - Chairman, Chief Executive Officer and President

Christine Hanneman - VP, IR

Edward Walters - Chief Financial Officer and Senior Vice President


Claudia Hueston - JP Morgan Chase & Co

Ghansham Panjabi - Robert W. Baird & Co. Incorporated

Albert Kabili - Macquarie Research

Alton Stump - Longbow Research LLC

Jason Brown - Keybanc Capital Markets

Richard Skidmore - Goldman Sachs Group Inc.

George Staphos

Chip Dillon - Crédit Suisse AG

Timothy Thein - Citigroup Inc



Good morning, and welcome to Pactiv's Second Quarter 2010 Earnings Release Call. [Operator Instructions] Beginning this morning's call is Ms. Christine Hanneman, Vice President, Investor Relations for Pactiv Corporation. Ma'am, you may begin.

Christine Hanneman

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

In the course of reviewing our financial results, some of our comments today may include forward-looking statements. Please keep in mind that actual results could differ materially from those projected. In our press release and this conference call, we discuss our earnings results using some non-GAAP financial measures. Reconciliation of those non-GAAP numbers to GAAP numbers can be found on Pactiv's website at under the Investor Relations section under Financial Press Releases. Richard?

Richard Wambold

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

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

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

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

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

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

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

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

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

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