Oct 27, 2010
Executives
William V. Hickey - President & Chief Executive Officer David H.
Kelsey - Senior Vice President & Chief Financial Officer Amanda Butler - Director of Investor Relations
Analysts
George Staphos - Bank of America Matt Wooten - Robert W. Baird Rosemarie Morbelli - Ingalls & Snyder Philip Ng -Jefferies Sara Magers - Wells Fargo Securities Rick Skidmore - Goldman Sachs Al Kabili - Macquarie Gil Alexander - Darfil Associates Peter Ruschmeier - Barclays Capital
Operator
Good morning everyone and welcome to the Sealed Air conference call discussing the company's third quarter 2010 results. This call is being recorded.
Leading the call today we have William V. Hickey, President and Chief Executive Officer; and David H.
Kelsey, Senior Vice President and Chief Financial Officer. After managements' prepared comments, they will be taking questions.
(Operator Instructions) And now at this time I'd like to turn the call over to Amanda Butler, Director of Investor Relations. Please go ahead Ms.
Butler.
Amanda Butler
Thank you and good morning everyone. Before we begin our call today, I'd like to remind you that statements made during this call stating management's outlook or predictions for the future are forward-looking statements.
These statements are made solely on information that is now available to us and our future performance may be different due to a number of factors. Many of these factors are listed in our most recent Annual Report on form 10-K, which you can find on our website at sealedair.com.
We also discuss financial measure that do not confirm to US GAAP. You may find important information on our use of these measures and their reconciliation to US GAAP in the financial tables that we have included in our earnings release.
And now I will turn the call over to Bill Hickey, our CEO. Bill.
William Hickey
Thank you Amanda and good morning everyone. During today's call I will be highlighting our business performance for the third quarter and Dave will discuss details of our financial results.
After Dave's remarks, we will take your questions both from the phone lines and from webcast participants using text-in questions. Earlier today we reported a 26% increase in our reported third quarter earnings per share of $0.43 and on an adjusted basis we achieved a 13% increase.
Our third quarter sales showed ongoing improvement in end market demand and new business gained with our solutions across various applications and regions. Our consolidated sales increased 5% to $1.1 billion, with 5% higher volumes and 1% higher price mix.
These gains were partially offset by 1% unfavorable foreign exchange. Volume performance improved in the quarter even as year-to-year comparisons were slightly more challenging.
Our Protective Packaging segment led the growth with a 9% or $28 million increase, which represented over half of our volume growth in the quarter. Another bright spot was in our food business, where volumes rose 3%, largely driven by 5% increase in our food packaging business in North America and a 7% increase in that segments Latin American region.
I should also note that equipment sales remained strong in all businesses, increasing 10% on a consolidated basis, but with a slightly note lower margin contribution. Total company price mix turned the corner and was positive in the quarter, as earlier pricing actions and favorable contract adjustments yielded $11 million of benefits in the third quarter.
Price mix was largely driven by a $14 million or a 3% increase in North America from our food businesses. These benefits were slightly muted by relatively flat price mix performance in the Protective packaging segment as that business has not yet received the favorable contribution from all of their pricing actions on a consolidated basis.
Developing regions sales remained strong with an 8% growth, which included 3% favorable foreign exchange. This growth reflected an 11% increase in sales and our food packaging business and an 18% increase in Protective packaging sales, each of which include 3% favorable foreign exchange.
Our reported developing region growth rate was muted by pre-buying that occurred in the first quarter as our medical customers in Asia built inventory ahead of our license renewal. Excluding our Asian medical sales to eliminate the pre-buying effect, our developing region sales would have increased 12%, which also includes a 3% favorable foreign exchange.
Developing regions represented 16% of our third quarter revenue and we expect continued growth in these markets going into next year. As for our medical business in Asia, I am please to report that we are granted a new license in mid September and our currently supplying exciting customers and our expanding our presences in that market today.
Input cost remains substantially high in the quarter and were remissest of 2008 levels, as our average resin price was only lower by 2% sequentially, compared to the prior year period we recorded $25 million of higher resin cost in the quarter. As price mix was positive in the quarter, we began the resin cost recovery in the third quarter and in combination with it, generated approximately $10 million of benefits from productivity improvements from our global manufacturing strategy and various cost savings and efficiency initiatives.
We came close to achieving cost price priority in the third quarter. So we are definitely moving in the right direction and except to continue to recover resin cost in the fourth quarter and next year.
Now I’d like to walk you through some of the key highlights by business area. Food packaging businesses constant dollar sales growth of 4% reflected the growth factors that we outlined last quarter.
North American beef production rose by approximately 3% in the quarter as compared to negative 2% production rates in the first half of the year. Additionally we benefited from increased demand for our equipment systems as customers continue to automate their operations; an on going success for piloting and commercializing the solutions in easy open and cook-in shrink bags globally.
For example in Brazil, we continue to expand our market presence through merchandising programs targeted at the local Brazilian consumers. Price mix performance was also a favorable in food packaging, reflecting the benefits of both prior price increases and contract adjustments.
Looking ahead to the fourth quarter, we are anticipating ongoing growth due to expectations for solid holiday meat demand and increase in customer production rates in several regions of the world and a steady growth in US beef export demand, which is actually up 22% for the third quarter. As resin cost recovery remains a priority, the business has also announced targeted price increases, that some of which we implemented in the third quarter and reminder of which will be implemented in the fourth quarter.
We also expect to continue to benefit from favorable contract price adjustments through year end. The food solutions business continued to experience improvement in the quarter with a 4% increase in price mix associated with benefits from prior price increases and contract adjustments.
Additionally, the business achieved a solid 3% volume increase. North America also achieved solid growth driven largely by case-ready and vertical pouch packaging and I am pleased to say that all regions achieved volume growth in the quarter, as our solutions showed strong penetration in developing regions, although of a small sales base.
Looking at our key product families, our case-ready business sales were relatively flat this quarter overall. However, we saw a solid growth in North America, where sales increased over 15% as we continue to expand our market presences with new customers and new applications.
For example, both our Mirabella lidstock and Tray Package and our Darfresh Vacuum Skin Package have been adopted by a number of retailers in the United States and Canada, and they’re helping to withstand our case-ready presence in the market and across a variety of meat types. In Europe case-ready sales remained below last years levels, but showed sequential improvement with strength in Freshpizza and whole poultry applications.
Additionally Mirabella sales are accelerating in the region as we have expanded our pilot test into large retailers and in growth application such as sea food. Our both liquid packaging sales led by our vertical pouch packaging portfolio increased 13% in the quarter, which included 70% favorable foreign exchange.
We achieved the largest growth in North America, where sales grew over 15% due to strong equipment demand and improving food service industry conditions. We also had good success in other regions.
In Europe we doubled our aseptic pouch sales in the quarter and are continuing to expand that products presence into Eastern Europe. I should also note that our ready meals portfolio, while smaller in comparison, continues to be rolled out at various retailers as food processors adopt our packaging solutions for their expanding ready-to-eat offerings.
So in sum, through the balance of the year we continue to expect similar favorable volume and price mix trends in food solutions, as additional targeted price announcements in the third quarter will start to benefit the business in the fourth quarter. As you saw in our financials, the Protective Packaging segment continued to be the standout segment as the business provided over half of our increased volume.
Its 9% volume growth was largely driven by 9% growth in North America and 8% growth in Europe, and I should also note that developing region volumes were up at the double-digit levels. Second quarter trends held through the third quarter, where demand increased across all industries in North America, driven from both real demand and some restocking.
The European market remained characterized by uneven recovery rates, while the Northern European countries represented the strongest rates of recovery and growth for us, with sales growing at double-digit rates to meet demand associated with higher industrial output and improved consumer confidence. As previously noted, price mix was relatively flat in this segment.
With resin prices remaining high, the business has already announced targeted price increases, some of which were implemented in the third quarter and balance implemented in the fourth quarter in an effort to continue to recover resin cost. Shifting to our EPS guidance, we have narrowed our range from 20% range to a $0.06 range, is now $1.54 to $1.60 on a reported basis or $1.56 to $1.62 on an adjusted basis.
This compares to our full year EPS guidance which was $1.48 to $1.60 on a reported basis. Additionally we raised our effective income tax rate guidance to 28% from 27% as our regional guidance anticipated an extension of the U.S.
R&D income tax credit that expired in 2009. If congress does pass and retroactively applied these tax credits, which are approximately $0.03 per share, then we expect to be in the upper end of our EPS range.
Before I pass the call to Dave, I would like to re-affirm that we continue to anticipate ongoing recovery in our end markets in 2011 and are staying focused on innovation and bringing differentiated solutions and technologies to the market. Our upcoming participations in the Pack Expo International Exhibit next week in Chicago will showcase several new products in our pipeline, including the launch of Cryovac 360, which is an innovative multi-layered shrink sleeve solution for primary or multi-packed labeling; for example, around beverage bottles.
We are excited about this solution as it allows us to expand into new markets with a higher performing and more sustainable solution than one that’s available on the market today. Additionally we will be launching our smart life initiative, which is an organization wide approach designed to raise awareness about the importance of sustainable packaging.
We will also be highlighting how we are advancing our sustainability mission to our business strategy across our solutions and we will be updating our five year sustainability goals. And now I am going to turn the call over to Dave Kelsey to review some additional details of our financial performance and our liquidity position.
Dave.
Dave Kelsey
Thank you, Bill. Bill has already commented on the components of our sales growth.
Given the year-over-year volatility of exchange rates, I would like to provide some further detail on foreign currency exchange. Compared to the third quarter of 2009, our sales were unfavorably impacted by $10 million from foreign currency translation as the Euro weakened against the U.S.
dollar by approximately 11%. Our Euro denominated sales were in the high teens as a percent of total company sales.
Year-over-year the unfavorable impact of the Euro was partly offset by the strengthening of our diversified basket of other currencies such as the Australian dollar and the Canadian dollar. Gross profit for the quarter increased 3% or $9 million to $321 million.
Excluding unfavorable foreign currency translation of $3 million, gross profit would have been $12 million or 4% higher than 2009. Gross profit growth was largely driven by volume growth in our industrial businesses.
Also contributing to our higher gross profit were $11 million in favorable product price mix from our previously announced pricing actions in contract pricing adjustments, benefits realized from our supply chain productivity improvements and benefits from producing products in our new low cost facilities in developing region. These benefits were partially offset by approximately $25 million of increased resin cost compared to last year.
Third quarter marketing administrative and development expenses decreased 4% or $7 million to $173 million. Excluding favorable foreign currency translation of $2 million, these expenses would have decreased $5 million.
This decrease was due to lower provisions for variable incentive compensation expenses, as our year-to-date results were not achieving our compensation program targets fully. We continue to invest in new product developments and these costs are higher year-over-year.
For the full year operating expenses are expected to be approximately 16% net sales at the lower end of our January guidance. Operating profit was $147 million or 13% of revenue on a reported and constant dollar basis.
There was no year-over-year impact from foreign currency translation. On a sequential basis from the second to third quarter of 2010, operating profit increased to 12%.
This growth was largely driven by 21% increase in operating profit in our food businesses due to the benefits mentioned earlier. You may have noticed in our financials that our tax provision increased to 28% from 24% last year.
As Bill indicated, this was mostly due to the benefit of the utilization of some U.S. income tax credits, namely the R&D tax credit in 2009, but which expired and have not yet been renewed for 2010.
I will conclude with some key cash flow and balance sheet items. Cash and cash equivalents increased $100 million in the third quarter to $762 million at September 30.
During the quarter, we paid cash dividends of $21 million and used $20 million for capital expenditures for maintenance, sales growth and productivity improvements. Our 12 year capital investment is still expected to be in the range of $80 million to $100 million.
This range includes our second quarter investment and an additional manufacturing facility in Brazil and is consistent with our annual capital spending before commencing our GMS projects in 2006. Our receivables increased $49 million from June 30, 2010 on a reported U.S.
dollar basis. Excluding foreign currency translation of $32 million which reflects a strengthening Euro in the quarter, our receivables increased $17 million, in line with our increased sales volumes.
Based on an analysis of day sales outstanding and past due aging balances, the quality of our receivables remains good. Inventory investment increased $27 million during the quarter, excluding foreign currency translation of $22 million, also mainly due to the strengthening Euro in the quarter.
Inventories increased $5 million, reflecting our seasonal trend in inventories, where we buildup inventory ahead of peak fourth quarter demand. Debt: Net of cash and cash equivalents at September 30 was $826 million down $96 million from June 30, 2010, mainly due to the accumulation of cash and cash equivalents in the quarter.
Also at September 30 we had no amounts outstanding under our global or European credit facilities or our accounts receivable securitization program. Our available committed borrowing capacity was over $750 million at September 30.
As shown in the supplementary information furnished with the financial statements, we generated $206 million of free cash flow in the first nine months of the year. This reflects an unfavorable impact of foreign currency translation on our working capital items of approximately $20 million.
Historically, our first and fourth quarters are the strongest quarters for generating free cash flow. We continue to expect free cash flow to exceed $300 million in 2010.
Now, I'll turn the call back to Bill and to your questions.
William Hickey
Thank you, Dave. Operator we now like to open up the call to any questions from the participants and we'll follow-up with any text questions from our webcast participants as well.
Operator
Thank you very much. (Operator Instructions) Your first question comes from the line of George Staphos of Bank of America.
Please proceed sir.
George Staphos – Bank of America
Thanks. Hi everyone, good morning.
William Hickey
Good morning George.
George Staphos – Bank of America
I guess my first question is around pricing. As I recall from earlier in the year and even last year, the company I think stated that it would be a bit more aggressive and timely in raising prices to offset inflation in input costs.
We talk about global manufacturing, we talk about new products, we talked about emerging markets, but at the end of the day it seems to me that getting resin pass-through still winds up being the biggest thing that we talk about or that you talk about in your press releases. So from here on now, why should we expect that you will be more aggressive in passing through resin when you have very little that we could see in protective packaging in the third quarter?
William Hickey
There are a couple of things in protective George just to point out. One is, the European price increase went into effect on September 1 and Europe actually had a resin increased earlier than kind of North America.
North America had their resin price increases and resin price increases actually didn’t occur until really the last month of the quarter. So we are out there within 30 to 45 days of the increase with all price increases, kind of the second and the numbers aren’t clear here, because we have this item called price mix.
And on the protective business, one of the largest single growth products was the inflatable product line, which grew about 16.9%, and that does have a lower margin than the rest of the protective business. So that is appearing in the price mix column.
It’s appearing as you are attributing it to price, but it’s actually a mixed component of it. If you take that out the number’s essentially flat.
So it does have an impact when you folks look at price mix. And I think the third item was there were some rebate adjustments in the quarter and that occurs when customers hit certain volumes, they hit certain rebate levels.
So you put all of those together, I think getting our price increases out quicker is something we have done. The price mix, the mix component of it, obviously we’ve got to find a better way to communicate that to you and kind of rebates just happens during the year.
So those were essentially the three components, and you will see with Europe, that Europe actually had only one month of price increase, the U.S. really didn’t have any months of it, but again the U.S.
price increase, cost increases were occurred at the very end of the quarter. So the answer is we are more aggressive.
I think 30 to 45 days is pretty reasonable, which is a lot faster than Sealed Air had historically done and it will always be a 30 to 45 day lag George.
George Staphos - Bank of America
Okay. Bill, I appreciate that.
I guess the follow-on I had, you had mentioned that you will effectively offset this, that’s my wording not yours, but I thought that’s what you were saying, by the fourth quarter, but you also said into 2011; so again around the same theme. Why would it take into 2011 to offset the input cost pressures you’ve seen?
Thank you.
William Hickey
I will just say, it’s about to be conservative there. I mean, the price increases kind of roll through, and I sure like to target it all through the end of this year, but we just gave ourselves a little way.
George Staphos - Bank of America
Okay, thank you.
Operator
Your next question comes from the line Ghansham Panjabi of Robert W. Baird.
Please proceed.
Matt Wooten – Robert W. Baird
Good morning. It’s actually Matt Wooten sitting in for Ghansham.
How would global beef price increases and changes in consumption effecting the volume distribution across your food business?
William Hickey
We haven’t seen that much of an effect. I mean interestingly enough, beef is actually up in the third quarter versus the first half, even though prices are up somewhat.
U.S. exports are up, primarily on actually the strength of the Australian dollar, which actually has opened up markets to U.S.
beef competitively that Australia had previously supplied and if you ask the questions about Australia, Australia beef exports are actually down. But as far as your question on beef consumption related to prices, we haven’t seen much of an impact in overall consumption.
We’ve seen it shift around the world. Brazil because of the strength of currency is actually consuming more beef at home than export, but that’s probably the best I can give you right now as flavor of things around the world.
Matt Wooten – Robert W. Baird
Okay, and then a follow-on if I could. There’s been quite a lot of M&A activity in the plastic packaging niche over the last 18 to 24 months.
Has there been any impact until there and do you guys expect to be more aggressive on M&A in 2011?
William Hickey
We’ve always been in net of acquiring in this industry and we continue to look for the right asset. So we’ll see what happens.
Matt Wooten
Thank you.
Operator
Your next question comes from the line of Rosemarie Morbelli of Ingalls & Snyder. Please proceed.
Rosemarie Morbelli – Ingalls & Snyder
Good morning all.
William Hickey
Good morning.
Rosemarie Morbelli – Ingalls & Snyder
Bill, the reason for your guidance, I understand you are narrowing the ranch, but what was in your assumptions that would have gotten you either to $1.70 and have changed, which will only get toward the high end, to $1.62?
William Hickey
Well, I think a lot of it was more stable resins. I mean, if you look earlier in the year, most projections were flat resin through the balance of 2010.
The increases that occurred at the end of the third quarter, the $25 million that Dave referred to in his comments was not there when we did the earlier guidance in the year, Rosemarie and we’ve been pretty good on the outlook for volume, but a higher volume would have given us at the upper end, but I’d say that the most significant piece has been the higher input cost that occurred that were not in the original outlook.
Rosemarie Morbelli – Ingalls & Snyder
Okay, that is helpful, and if I may, at 14.5% your food packaging margin is at its highest point. How high do you think it can grow as volume increases?
What is some kind of a long-term goal on…?
William Hickey
No, I think we’ve said on numerous occasions that our goal for the company, and it would include each of the businesses were to get back to a 15% operating margin. So, that’s our intermediate goal, that’s what we are working towards and that’s what we are aiming for.
Rosemarie Morbelli – Ingalls & Snyder
Okay, thanks.
Operator
Your next question comes from the line of Philip Ng of Jefferies. Please proceed.
Philip Ng -Jefferies
Good morning guys. Just a quick question on the protective packs and business volumes have been really strong, but comps start to get a little tougher now in Q4 and next year.
So I just wanted to get a feel for what kind of outlook you have in the volume from for Q4. I mean as we look at 2011 what’s the normalized run rate going forward?
William Hickey
Well, we are still looking for I’d say mid to high single digits as you look forward. That’s sort of where we see that business over kind of the intermediate term, and the economy’s been holding up.
I know there’s always been a concern about the possibility of a slowdown later in the year or double-dip, but right now the numbers we see don’t show a double-dip, and if there is a slowing down from the 9%, we are saying from the mid to high single digit.
Philip Ng -Jefferies
Okay. And I guess bigger picture just from.
When you look at your portfolio products longer term, are there any areas that you wanted to get bigger in or you think there is a Board from a technology standpoint or material from a geographic perspective?
William Hickey
I can get bigger everything. Yes, but I do think we will increase our presence in medical.
I do think, one of the things you’ve heard me say a number of times is more the business will continue to be outside the U.S. The Asian business if you look at the components, I mean, in protective business and China was up 23% and the food business in China was up 31%.
So those are the parts of the world that will get a bigger share of our attention and our sales growth.
Philip Ng -Jefferies
Okay. Alright, thanks guys.
Operator
Your next question comes from the line of Sara Magers of Wells Fargo Securities. Please proceed.
Sara Magers - Wells Fargo Securities
Good morning. I have a quick question regarding, actually just a piggyback off of George’s question on the protective packaging volumes in the quarter.
Was there any kind of pre buy, given that the price increase that happened in September? I mean how did the volumes trend throughout the quarter?
William Hickey
Yes, actually I think July was probably our slowest month of the quarter. July was actually probably our slowest month of the quarter.
August got a little bit better, September got a little bit better, but the price increase in September 1 wouldn’t have affected the quarter. So you have the back-to-school effect so to speak, but I wouldn’t see any pre-buying in Q3.
Sara Magers - Wells Fargo Securities
Okay, and then on the CapEx, I mean as you get closer to the end of the year, where do you expect to really come in regarding the CapEx range of $82 million, because if we keep on trend that you have been going on, through the balance, I mean through the beginning three quarters of the year, you’ll probably end around $80 million, which is the bottom end of the range. So, is there anything that you have done so far in Q4 or that you’re expecting to do in Q4 that would lead us to assume otherwise?
William Hickey
Dave?
David Kelsey
It is a little incomplete of the things that we would get $40 million out the door by December 31, but there are a number of growth projects that we will be evaluating through investment, but those dollars are more likely to actually get spend in 2011. So, from a guidance perspective, it is realistic to trend us to the lower half of the range.
Sara Magers – Wells Fargo Securities
Okay, great wonderful. Thank you very much.
Operator
Your next question comes from the line of Rick Skidmore of Goldman Sachs. Please proceed.
Rick Skidmore – Goldman Sachs
Good morning. Just like to ask a question about case-ready and specifically what you are seeing from a competitive standpoint in case-ready?
We are understanding that there is a competitor out there with a product that helps to maintain the color of the meat. So just wondering how you are seeing the competitive dynamic in that business?
William Hickey
We really haven’t seen anyone in the marketplace. We still think we have the leading role in case-ready, both the U.S., Europe, Latin America and Asia and we really haven’t seen any significant competitor in the marketplace.
Rick Skidmore – Goldman Sachs
Okay, and then just maybe shifting. Can you just give us a better sense of how your new product pipeline looks currently?
William Hickey
I think the new product pipeline looks pretty good. I know I mentioned during my prepared comments that we will be participating in the International Pack Expo Exhibition in Chicago next week; it’s Sunday, Monday, Tuesday and Wednesday, and we will be exhibiting at least five new products that have not been seen before, which would be pretty exciting.
So if anyone is in Chicago, you are welcome to contact Amanda and we will be happy to show you what we are showing to our customers.
Rick Skidmore – Goldman Sachs
Great, Thank you.
Operator
Your next question comes from the line of Al Kabili of Macquarie, please proceed.
Al Kabili – Macquarie
Hi. Thanks and good morning.
William Hickey
Good morning.
Al Kabili – Macquarie
Just a question if you could help us clarify on this price increases in the Euro protective packing. Just even if you can give us a flavor of the average overall magnitude of those price increases?
And then secondly, in terms of where you need to take pricing to recover the resin cost inflation, what percentage does that put you there in terms of what you’ve got in September that you mentioned? Thanks.
William Hickey
Yes, Europe price increases were September 1 and those were probably mid single digits and the North America is also mid single digits. And if you look at our top line numbers and your looking and saying we’re going to recover $25 million in resin, it doesn’t take too many percents of the $41.5 billion or $1 billion plus a quarter to kind of get you there.
Al Kabili -- Macquarie
Okay, fair enough, but the second question I suppose is on specialty resins. Could you comment on what you are seeing on the cost front on specialty resins, if you’ve seen up-tick recently there?
Thank you.
William Hickey
Yes, the specialties have ticked up a little bit, the specialties ticked up a little bit, obviously not as dramatically as the commodities which go up $0.05 and $0.06 at a time, but they have sort of tick-up, slightly over the last few months.
Al Kabili - Macquarie
Okay. Thank you very much.
Operator
Your next question comes from the line of Gil Alexander of Darfil Associates. Please proceed.
Gil Alexander - Darfil Associates
Good morning. As you look in to the future, would you have a rough idea what your capital expenditures could be in the 2011, 2013 period?
William Hickey
Gil, it’s great to hear from you, it’s been a while, but let me let Dave answer that question.
David Kelsey
I think there’s been a bit of a circular answer to that. It really depends on the growth rates we see in some of the new platforms.
The $80 to $100 million range that we have for our guidance this year is a good baseline for the business on a going forward basis. That covers both maintenance CapEx and sufficient incremental capacity to support mid single-digits growth rate in our core products, to the extend that we have higher growth in emerging markets or we started to get some real traction in some of our new growth platforms, then that amount would have to be ratcheted up.
So the next time to sort of check in on that would be at the end of January, when we give our guidance for next year. We’ll have a much better handle on the investment requirements for some of those growth platforms.
So you’ll see that both in our revenue projections and in the capital required to support those revenue projections.
William Hickey
Okay, operator.
Operator
Your next question comes from the line of Peter Ruschmeier of Barclays Capital. Please proceed.
Peter Ruschmeier - Barclays Capital
Thank you, good morning.
William Hickey
Good morning.
Peter Ruschmeier - Barclays Capital
I was trying to better understand the relationship between your organic sales and your margins. If I look on a year-over-year basis, your food solutions had the best year-over-year margin improvement and yet it had the slowest organic growth rate.
I guess I would have expected protective packaging with a much faster organic growth rate to have better margin up-tick from the contribution margins. Can you help me to understand those relationships?
William Hickey
Yes, I’ll try to do it is simple as I can, but basically mixes a big component of that. In food solutions, I’ll start with that one, is a lot of that business contains outsource trays.
I think you’ve heard us telling the story before, is that for our case-ready product we don’t manufacture the trays for most of the offering and we actually outsource the trays and those are made of a different material, those are styrene. As tray sales have gone down somewhat and film sales have gone up, they’ve really given a favorable mix component to the price mix on food solutions.
So they kind of benefited more from the mix than the price side and food solutions also had price increases in July, so they got the full benefit of that for the quarter. On protective, we got price increases going in September and afterward and those benefits will kind of follow.
So you’ve got a mix effect and a timing effect, but I understand where you are coming from, but they are two different businesses. On an apples-to-apples basis, organic growth and protective and compared to food solution at constant raw material cost, protective would be higher, yes.
Peter Ruschmeier - Barclays Capital
Okay yes. And just lastly if I could Bill, how significant is the pending Grace settlement as you think about your business.
Has this held you up from strategic steps or actions you might consider or once the settlement comes and goes is it really a businesses usual until there?
William Hickey
Well, it’s been somewhat of a weight on our shoulders sort to speak. It’s obviously, it’s a question investors ask.
I know we frequently get questions. Now obviously as the times gone on and the settlements come closer, in the view the number of questions have gone down, but in the early years of this nine year odyssey, there was always concern that Sealed Air would be dragged back in the court.
So I do think it’s been an overhang on the company. I think, it’s been somewhat of an overhang on our ability to raise capital at some point in time.
Again though that’s probably gone down as the settlement has gotten closer, and it’s got a negative effect on our earnings as we spent a good bit of our cash flow for the last several years investing in asset on the balance sheet called cash, so we make the payment and the negative arbitrage on that is about $0.12 to $0.14 a share. So yes, we feel very good when this is finally over, and as we said in our press release, it will result in a $0.12 to $0.14 per share pick up in earnings per share, just from eliminating the negative arbitrage on the balance sheet, as well as freeing up our future cash flow for investment in the business or paying down debt or returning cash to shareholders.
Peter Ruschmeier - Barclays Capital
We certainly look forward to the settlement. Thanks very much.
Operator
You have a follow-up question from the line of George Staphos of Bank of America. Please proceed.
George Staphos - Bank of America.
Thanks. I got to jump back on.
I wanted to the piggyback off Pete’s question there. Bill, is your read on the ramification and benefits to you still the same as was the case back really in the decade that went.
Great stuff come out of bankruptcy, if $0.001 forever resolves whatever issues you might have with great deployments?
William Hickey
Yes, I think the settlement that we mentioned years ago essentially give us the protection of 524G, which is a code provision that directs any claims related to a specialist, to the trust, and away from the company that has that protection. So yes, we still believe that is the case.
George Staphos - Bank of America.
Okay. Now the related question to that is, Bill again from my advantage point anyway, it doesn’t look like you need any more capital, but rather you probably got too much.
Now again that’s our view not necessarily your. Could we see something more structural more significant in return of capital back to you various constituencies once this occurs?
William Hickey
George, I really wouldn’t want to speculate as to what we might do right now.
George Staphos - Bank of America
Okay, but it is one of the options that you’d be considering presumably?
William Hickey
There are many, many options.
George Staphos - Bank of America.
Okay, I’ll leave that to the side. The last question and I’ll turn it over.
Within food, could you see, could we see an accelerated pick up and demand for your packaging relative to what ranchers and freelance operators are seeing right now in terms of feed cost and margins on cattle. I guess the point being margins go down, you see accelerated slaughter, at least a short-term pick up and demand for your product, but longer-term it stunts the cattle cycle again or do you think we should have a normal cycle from here on as going forward?
Thanks. Good luck on the quarter.
William Hickey
No, actually George that’s an excellent question. I just read yesterday afternoon, sort of an update on the cattle look, and actually the near term outlook is more cattle coming to market, probably at the expense of 2012 and some of 2011, mostly 2012.
So if feed costs remain high more cattle will come to market sooner and that will be sort of a little bit of a gradual dip through the 2012 period and will built back again in 2014. So now the differences are plus or minus a couple of points.
So they are not dramatic difference, but 1% increase in cattle coming to market, it means a lot to us.
George Staphos - Bank of America.
Especially when you look at the margins that you’re making your food packing business are raw, but I appreciate the color and good luck in the quarter again guys. Thank you.
William Hickey
Thank you.
Operator
Your next question comes from the line of Stewart Scharf of S&P Equity, please proceed.
Stewart Scharf – S&P Equity
William Hickey
I think it’s about 3%.Dave’s got some more updated numbers, but it’s about 3% of our business. Dave, do you want just to give…
David Kelsey
It’s probably in the ballpark $20 million to $25 million in annual revenue. Compared to the other company who was in the news earlier in the week it’s a much more modest percentage of our consolidated net earnings, less than 5% of our consolidated net earnings.
So, given the nature of our business where we import semi finished product into the country, and then finish it towards customer specifications , I don’t know that we would necessarily see a cutoff in our sale to Venezuela, may just be a case of selling more finished product into the country as opposed to semi finished product. So, we certainly been watching things closely there, not just in last three days, but the last several years given the volatility of exchange rates and the challenging economy.
But we do serve primarily the food industry; it’s been a business we’ve managed successfully over multiple decades and we continue to expect to have a profitable business in Venezuela.
Stewart Scharf – S&P Equity
Okay. Thank you very much.
William Hickey
Now, Catherine, we’ve got one more question here on the telephone, and then I will look at the webcast.
Operator
You have a follow-up question from the line of Sara Magers of Wells Fargo Securities. Please proceed.
Sara Magers - Wells Fargo Securities
Thank you for taking my follow-up. I just have one, and it’s regarding resin.
What are your assumptions for resin implied in your guidance, are you in order to get integrityin Q4, does resin prices have to say about where they were in September. I am just kind of looking for a range and what you’ve…?
William Hickey
I think our outlook right now is pretty flat for the rest of the year. So as in terms of where we are right now, the increases that have occurred should continue through the rest of the year.
Sara Magers - Wells Fargo Securities
Okay. So, flat and …?
William Hickey
Right, flat.
Sara Magers - Wells Fargo Securities
Wonderful. Great, thank you very much and good luck in the quarter.
William Hickey
Okay, thank you. I have a question from the webcast.
Question is, is the company committed to achieving full investment grade credit ratings and what is the S&P waiting for? Completion of the [Inaudible] litigation or something else..
I really don’t think I can comment on what any of the rating agencies, maybe waiting for, obviously that’s a question they are more prepared to answer than we are. But we anticipate that when the Grace settlement occurs to the extent that it has been a cloud over the business.
That the various rating agencies may take another look at Sealed Air and it’s very possible they could decide to raise our rating to investment grade. Obviously that’s the decisions that would have to made by the rating agencies and I guess any questions will have to go to them, but thank you for the question.
At this point, operator, I think that concludes the questions and I would just like to make a few closing comments before we wrap up the call. I would like to thank everyone for your time and participation.
Our business picked up momentum in the third quarter, which we feel will hold through the year end and into 2011. The ongoing economic recovery, strong growth in developing parts of the world, which is supported by extensive lead footprint, focus on recovering input cost and our continued commitment to innovation and investment in a differentiated pipeline of solutions, remains our focus.
We believe that strong execution and a balanced approach will continue to strive improved results and allow us to achieve our long-term goals and create value for all of our stake holders. I'll reaffirm again, that I am proud and happy to be a Sealed Air shareholder and thank you for taking the time to listen to us today.
David Kelsey
Thank you.
Operator
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