Sonoco Products Company
Q2 2011 Earnings Call Transcript

Published: 21 Jul 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Sonoco Products Company Earnings Call. My name is Modesta and I'll be your coordinator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) as a reminder this conference is being recorded for replay purposes. I'd now like to turn the call over to you host for today Mr. Roger Schrum, Vice President of Investor Relations. Please proceed sir.

[Roger Schrum:]

Thank you, Modesta. Good morning everyone and welcome to Sonoco's second quarter 2011 investor call. This call is being conducted on July 21, 2011. Joining me today are Harris DeLoach, Chairman and Chief Executive Officer, and Barry Saunders, Vice President and Chief Financial Officer. Our financial results for the first quarter were released before the market opened today and are available via our website at sonoco.com. Let me begin by stating that today's investor call may contain a number of forward-looking statements that are based on current expectations, estimates, and projections. These estimates are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additional information about factors that could cause different results and information about the use by the Company of non-GAAP financial measures is available in our Annual Report and on the Company's website. With that introduction, I'll now turn it over to, Barry Saunders.

[Barry L. Saunders:]

Thank you Roger. This morning Sonoco reported that second quarter sales were $1.128 billion, up $117 million or 11.7% over last years first quarter. We reported GAAP earnings up share of $0.52 per diluted share and base EPS of $0.60 per share. The base EPS of $0.60 is $0.01 better than last years base EPS of $0.59. We were just below the low end of our guidance of $0.61 to $0.65. This short fall than what we expected when our guidance was given was driven by soft patch that we experienced in May in some of our consumer business and due to productivity being larger than what we expected in a few businesses as well. We did see improvement in our consumer businesses in June and we ended the quarter with stronger productivity. Let me first describe the $0.08 difference between GAAP and base EPS. $0.04 is associated with the unwinding of the Sonoco For-Plas joint venture we had in Brazil where we own 51% of the business that produce Composite Can, metal ends, and injection-molded plastics products. We bought out the former partner’s share of the venture but then sold injection-modeled plastics assets to him and recorded a loss on the sale. Also included in base EPS was $0.03 per share related to restructuring charges for the quarter, most of which was associated with the announced closure of a Flexibles packaging plant in Winnipeg, Canada. And fees associated with acquisitions divestures cost us $0.01 in the quarter. We acquired a small Tubes and Cores operation in New Zealand and a Composite Can business in the UK. Last year, we only had $0.01 of restructuring expense as an adjustment to arrive the base earnings for the quarter. All of my comments will be directed towards our base income statement, which excludes the previously mentioned adjustments. You can find the reconciliation of GAAP to base numbers in our press release and on our website. As I mentioned sales of $1.128 billion are up right at 12% year-over-year. Base income before interest and income taxes or EBIT was $92.8 million essentially unchanged from last year’s second quarter of $92.9 million. I will provide our normal bridge of the drivers of the change in sales and the factors that created flat EBIT in just a moment, but first let me roundup the income statement. Interest was down slightly to $8.2 million versus $8.6 million last year. Thus base income before income taxes was $84.6 million compared with $84.3 million last year. Base income tax expense was $27 million versus $26.8 million last year as the effective tax rate on base earnings was 31.9% up a tenth of a percent from last year’s 31.8%. Equity in affiliates net of minority interest was essentially unchanged year-over-year. Thus net income attributable to Sonoco was $60.8 million, very slightly improved over last year’s $60.6 million. However, with fewer average diluted shares outstanding, base EPS was $0.01 higher. I’ll first walk through the sales and EBIT bridge then discuss the results by segment. As previously mentioned sales increased by $117 million, which can be explained by four drivers. Volume and mix accounted for $21 million of the increase. Price accounted for $33 million of the increase. Acquisitions, net of dispositions drove $34 million of the change. And exchange and other accounted for $29 million of the increase. Beginning first with volume, the $21 million increase represented roughly a 2% increase in volume for the company as a whole. In the consumer segment, we saw nice improvement in Flexibles which is up about 8% year-over-year, low molded plastics was up in unit terms 12% and unit volume was up 1% in Composite Cans in North America, but other rigid plastics volume was down about 5%. Volume was essentially flat in the Tubes and Cores paper segment, literally unchanged in North America and Europe. It was up about 5% in South America and 2% in Asia. And as you would expect paper volume in North America was essentially flattish as well. Packaging Services volume was strong in Poland and we had increased activity in the U.S. some of which was related to a contract manufacturing facility where we previously announced that those activities were been transferred to another service provider beginning July 1. The volume has also improved in fulfillment operations in the U.S. and in Poland and Mexico. Business is all other Sonoco had overall higher volume, which was up 11% in, molded plastics with significant increases in almost of the markets they serve. Our Reels operation was up 11% driven by higher demand for steel reels for utility industry. But these improvements were partially offset by an 8% decline in Protective Packaging due to lower sales to the appliance market. Now moving down to price, price accounted for $33 million of the increase in sales associated with higher input cost, which I’ll discuss in just a moment. We saw increases in essentially all businesses, but mostly certainly in the Tubes, Cores, Paper segment. The increase in Tubes, Cores and Paper was driven primarily by increases in Europe where prices were up 8% for Tubes and Cores, and then Recycling in North America where OCC prices based on the south-east jealousy averaged $143 per ton in the second quarter of this year which was $10 higher than the average price of $133 last year. Overall trade prices in North American Tubes and Cores were essentially flat as increases on noncontract accounts in North America and freight surcharges were essentially offset by the impact of contracts resetting at lower rates year-over-year. Now, although I just mentioned that the average prices for the quarter for OCC were $10 higher year-over-year, many contracts have reset that are based on the last month of the preceding quarter. So the typical contract last year had reset for the second quarter based on the March 2010 price of $175 per ton versus $140 per ton in March of this year. Price were also up in all other Sonoco just to the higher prices in molded plastics to cover revenue increases up in Reels for higher lumber steel and transportation costs and up slightly in Protective Packaging. Associated Packaging Technology or APT accounted for most all of the increase from acquisitions along with a small acquisition in Tubes and Cores and one in Reels. And finally, foreign translation and other sales differences had a favorable impact of right at $29 million and this was driven by foreign exchange rate as the dollar weakened against most major currencies. As usual when you get all the way to net income, translation really had little impact on the year over results probably adding only approximately $0.01 to the bottom line. So now moving onto the EBIT bridge, I’ll quantify the drivers and then discuss each of them. Volume and mix combined added $1.1 million to EBIT, price increases net of material inflation, energy and freight cost was negative year-over-year by $7.5 million. Productivity was positive adding $5.4 million, other, which is our tax out category was negative $3.7 million, and lastly, pension expense was lower and therefore added $4.65 million to EBIT. The above variances net to a year-over-year decline in EBIT of approximately $100,000. Starting with volume, you see that’s roughly 2% volume increase for the company as a whole that we saw in the Sales Bridge translated to only about $1 million impact on earnings when you otherwise expected to see something more like a $5 million increase. And the difference is due to the mix of business. In the consumer segment, we saw some unfavorable mix primarily in Composite Cans that negatively impacted results. The flat volume in Tubes, Cores and Paper was exacerbated by the impact of the mix spread across almost all operations, but most notably driven by Tubes and Cores North America due to a shift to a higher proportion of film core sales from paper mill cores and due to lower paper mill plug sales, which also have a solid contribution. Mix was also negative again this quarter in Core sales where we continue to see a higher proportion of export business with lower pricing. The higher activity in Packaging Service did add notably to EBIT as you’ll see in the segment analysis. Moving on to price/cost. The benefit of the higher prices you saw on the sales bridge was more than offset by raw material energy and freight inflation, which again was unfavorable by $7.5 million for the company quarter-over-quarter. Freight and energy cost alone were roughly up $7 million for the company due to rate changes. For example, fuel surcharge were up from $0.31 per mile last year to $0.47, a 51% increase. Many businesses have implemented surcharges to recover much of the increase in freight. We did have a price/cost shortfall in the consumer segment as steel costs were up just under 10%, aluminum roughly 24%, coatings and outside process costs were also up. In Flexibles, soft film prices were up anywhere from 5% to 20% depending on the type of film. And for our plastics businesses most resins were up 15% to 20%, ABS was up 25%, but C-type resins and other additives and modifiers were up 25% to 30% year-over-year. Although you did see price increases in all of our consumer businesses related to those higher input costs, as you would expect, in a rising products environment contractually fit have not yet kept with cost increases, but we’ll do so as prices moderate, which we expect in the third quarter and then even move slightly positive in the fourth quarter in plastics particularly if resin cost decline as expected. A significant part of the product cost short fall was in the Tubes, Cores and Paper segment and most all of this can be explained by the impacts of the contractual resets based on OCC prices in the proceeding months of the quarter versus the average price paid for recover paper during the quarter. As previously mentioned in the pricing discussion in 2010, prices reset at 175, then Southeast yellow sheet averaged 133 for the quarter while they reset at $140 this year then moved to 143 on average. In addition but to a lesser extent we continue to be impacted by the regional OCC pricing differences where the spread between the Southeast price and other regions was more negative than we historically seen. But that gap now has essentially been closed particularly with the increase to $170 per ton for OCC prices in the Southeast, which was the pricing in July. Productivity was weaker than expected with the shortfall really driven primarily by two businesses. We had some production issues in our Metal Ends business that resulted in some excess cost and machine downtime. Productivity was also below expectations in our Paper operations, but the shortfall was isolated to our Hartsville complex. In addition, we did have costs associated with the start up of a new paper mill core plant in Germany, a fire at our German paper mill, and continued excess cost associated with the ramp up of new product launches at blow molded plastics products. These factors partially offset the benefit of productivity projects, which came through as expected in many business units. The other is the catch off category and was negative about 3.8 million which is driven by wage and other inflation that was partially offset by cost reduction and lower pension expense. And since speaking specifically of pension which is actually broken out on a separate line, pension expense is lower year-over-year by $4.6 million. Now, when you look at our results in terms of segments which you can find on page seven in our press release, you see consumer sales were up $58.3 million driven by the APT acquisition and higher sales in Flexibles and blow molded plastics, and the impact of translation. But earnings were down $7.1 million where the benefit of the higher volume was offset by negative mix, the impacts of the production issues mentioned in Metal Ends, continued cost associated with the ramp up in blow molded plastics activities and price cost which had a notable impact particularly on our Plastics operations due to higher resin and other costs. The EBIT percent of sales dropped 7.8% but it is expected to improve in the second half as material cost stabilizes and price through contractual resets improves and productivity gets back to more historical levels. In the Tubes, Cores and Paper segment, sales were up $40.2 million due primarily to the higher selling prices and translation but earnings were flat due to the negative year-over-year comparison in price cost when we had a favorable spread last year and a relatively flat spread this year. The mix was negative and productivity was larger than expected in Paper as I mentioned and we certainly believe it should improve in the next quarter. Packaging Services sales were up $10 million and EBIT up $4.6 million due to the strong activity in contract packaging. Some of the benefit came from activities associated with the customer who has not transferred those activities to another service provider. So earnings in this segment can’t be expected to be lower in the next few quarters as this business has transitioned out. Sales for all other businesses were up $9.2 million while earnings were up by $2.1 million. Now, turning to cash flow. We had cash from operations of $46 million, which compares to $42 million last year. Our latest forecast indicates that we expect to generate approximately $270 million cash from operations for this year as a whole but that includes, total global pension contribution of $130 million or roughly $400 million in cash from operations if you exclude those pension contributions. Most of the pension contribution relate to the $85 million made to our domestic plan earlier this year. This is somewhat lower from an earlier forecast due to the lower projected earning as well as an increase in working capital associated with the inflation that we’ve seen. Capital spending was $42 million for the quarter, which was up $11 million from last year’s $31 million. Approximately half of the incremental $11 million in spending is associated with higher IT spending where we are in the middle of implementing a new ERP system for our industrial converting business in North America. The development is going extremely well and roll out is expected to begin later this year and continue pretty much to next year. We do expect capital spending to be approximately $150 million for the full year. We did have as previously mentioned two very small acquisitions during the quarter, a Composite Can manufacture in the UK and a Tube and Core business in New Zealand, which cost us about $10 million for the quarter and will add sales of approximately $15 million annually. And as you know, we pay dividends of $0.29 per share or $29 million in total during the quarter. Our balance sheet remained strong with debt-to-total capital of 31.5% at the end of the quarter and well positioned to support our growth initiatives. Turning to the guidance for the balance of the year; we project that base earnings for the third quarter will be in the range of $0.64 to $0.68 per diluted share. As normal this is based on a roll up of our division’s individual forecast. This guidance is based on a steady economy that does include the usual seasonality that we’d expect to see. This takes into consideration the headwind we are seeing from OCC prices where we have used the current southeast sheet price of $170 per ton as the general range for the third quarter again after many contracts reset at the June price of 150. But we have assumed that OCC prices will fall off somewhat in the fourth quarter. It also reflects the normal seasonal improvement in our Consumer business that also reflects the impact of losing the one contract-packaging customer and it reflects productivity improving from the second quarter. This guidance assumes an effective tax rate of 30.6% in the third quarter, 32.6% in the fourth, so it averages to about 31.6% for the second half. We changed our full-year guidance to $2.46 to $2.50 from a range of $2.46 to $2.54 per share which is down from $2.52 to $2.60 based on the second quarter results, some product cost headwind moving into the third quarter and steady rather than slightly improving overall economic activity. That concludes my overview of the quarter and I’ll now turn it over to Harris.

[Harris E. DeLoach:]

Great, thank you very much. We’re clearly disappointed that we didn't have the earnings than we expected in the second quarter. As we mentioned our Industrial and Consumer businesses really showed mixed results with some businesses performing very well and others facing some difficulty frankly versus our expectations. For example on the Consumer side of our business, our Flexibles business and Packaging Services performed very, very well. But our Composite Can and Closures business faced market related and operating productivity issues that clearly impacted their results. And as Barry mentioned even the markets we served were somewhat mixed during the quarter. But we saw a continuous strong growth in Composite Can with coffee up 56% year-over-year and snacks up 28% year-over-year. But nuts were down about 18%, powdered infant formula down 7%, fiber cartridges down 13%, juice concentrate down 12%, which offset those positive gains on coffee and snacks. Overall the unit volume in Composites were up about 1%. As most of you know, we have strong market positions in all of these segments that we’re down and we believe that this is a clear reflection of the lower consumer demand. In our Industrial businesses, the Tubes and Cores and Paper segment was essentially flat. But again certain geographies and certain markets were up nicely while others faced difficulty. For instance North American Tubes and Cores were essentially flat as was Western Europe. Eastern Europe was up 8%, South America up 5% and Asia up 2%. But even in these markets they were up by showing some weakening demand over the last few months. If you look at our served industrial markets, film cores were up nicely during the quarter, but textiles, which had done well over the past several quarters was down as well as paper mill cores. And as Barry mentioned, Protective Packaging which sells into the appliance industry was down about 8% year-over-year. During the second quarter, clearly we experienced a soft patch in volume in May some growth – second half of May mostly. I think this may have been reflected weakness, continued weakness in consumer spending that we’ve been somewhat in the first half of the year. However, I will say that volume returned in June and as we head into July volume in both Consumer, Packaging, and Tubes and Cores are holding up pretty well and we expect them to follow-up a normal seasonal pattern through the quarter. Overall, I do believe that the third quarter in the second half will be improved. We had strong productivity in the month of June after faltering somewhat in May and not having a stronger first half as I would have expected. I do believe that in the second half we will be near our historical productivity run rate. However, as Barry mentioned, we have built into our guidance expected headwinds from OCC pricing. And we entered the quarter with Southeast Yellow Sheet pricing at $150 per ton and prices have increased $170 a ton. Some of our people say there is a chance that prices could increase again in August, but we still do believe that prices should retreat in the fourth quarter. The regional difference in OCC pricing, which we faced in the first half of the year, is much less prevalent in July and we continue to work with our customers to make certain that this regional differences do not continue to impact us. I must admit I’m still a bit uncertain about the overall economy and consumer spending going into the second half, but frankly I don’t see a lot in the economy and the economy is going to change in the very near term. But I will say as of right now, our customers are telling us that they see some improvement, which is reflected in early orders that we’re experiencing. And as Barry said the normal seasonality is baked into our expectations for the balance of the year and our expectations do start with our customer demand and we will look from that. In addition, we have a very robust new product level, new product sales in the first half of the year, topped $177 million on track with our expectations. And we have a number of new products heading to sales in the second half and particularly in the rigid container areas. And in Flexibles and Composite Cans particular with profit conversions, excuse me to take place. With that maybe close up and with Barry and I will be happy to take any of your questions.

[Operator:]

(Operator Instructions) Your first question today comes from the line of George Staphos with Bank of America. Please proceed sir.

[George Staphos:]

Thanks, hi guys, good morning.

[Harris E. DeLoach:]

Good morning, George.

[George Staphos:]

I guess the first question I had, from your discussions with customers, do you get the sense that they are ordering a much shorter smaller quantities, may bring lead times and even more given their uncertainty. So we’re maybe going to see this pattern really persist over the course of the year. You see tell up in orders at the end of the quarter into rebound as the new quarter begins. What's your sense having talked to them?

[Harris E. DeLoach:]

George, I don't know these order patterns have short of that order quantities have shortened. As you know, basically we look at anywhere from a three to four week lead-time. But clearly, when I was back at the first quarter of the year, January was a relatively strong month for us, February was somewhat weaker, March was a relatively strong month, we saw in April, the strongest month that we've seen in the year, then May, the second half of May demand fell off fairly significantly came back in June and now we’re seeing price demand strengthening these demand in July. So clearly our customers while we’re talking to them about demands and they are more conscious perhaps than normal, what they’re actually doing I think is watching the inventory and watching that consumer demand more closely so that they don't build inventories, which is obviously having a effect on us and in terms of our overall demand. So clearly we’re seeing something there, George.

[George Staphos:]

Harris, considering that how do you then have comfort in your productivity goals over the rest of the year because obviously productivity is going to be driven (inaudible) the type of volume and sustainability you have of your orders, ending your production run. So obviously, there are no guarantees on anything, but how do you feel comfortable with that productivity in the back half of the year?

[Harris E. DeLoach:]

George, clearly I’d be less than honest if I said to you that volume did effect productivity because we all know that in some of the volumes shortfall we have seen particularly in our Plastics business where we have a lot of new products coming in that we’ve talked about as well, that $75 million in new products and we have the equipment and staff ready to run we have the engineers in place. And this is new products that are coming in with existing brands in a new package and so it’s not depended on the success of a new product and we know what the traditional volume levels have been in those products for years. But nonetheless, the volume is not yet flowed into that plan and clearly that’s created some negative productivity there. I will say as I said before, most of our productivity is we know well in advance they are projects that are signed, capital is going to sign, people is going to sign to him, so we know what they are. Some of the productivity shortfall well, clearly volume is a factor. Well, some of the productivity shortfall we’ve seen in the first quarter, now the first half of the year is basically we made some organizational structural changes over the last number of months to enhance to make certain that our productivity efforts longer term or just as robust as they’ve been for the last 10 or 12 years and then focus on longer term continuing our productivity. Perhaps we’ve taken that a little bit off for the short-term productivity as we’ve done that, we jig that if you will and then make certain that the focus is equally on the short-term as well as the long term. So a combination of that plus just productivity projects we have, cost related and otherwise (inaudible) comfortable that we will deliver the productivity over the balance for the year.

[George Staphos:]

Okay. Last question I have and I’ll turn it over. I had expected to see a bit better price/cost performance in consumer based on your dialog in the first quarter there were some timing effects related to contracts, did price/cost and consumer wind up below your expectations and were there any – assuming if that’s the case, were there any particular businesses where it was more difficult than you would have expected and what’s the resolution other than time if you will to heal that, thanks.

[Harris E. DeLoach:]

Well, I need to rather than painting with a broad brush, I probably need to talk about perhaps the individual businesses because in Composite Cans we are above the way we were expected to be on the price/cost side. We had some resets that took place in June and July, if I’m not mistaken on contracts. So we basically anticipated that is and then I was expecting improvement on that in the second half of the year. We chased resin, I mean we have, but as you well know certainly we have about 80% of that business and then most all of the Plastics business own contracts. In an inflationary environment where we’re chasing resin or inflationary raw material, we generally do lag and we will obviously get it and as it starts to moderate, we will gain on it. So we were perhaps a little short of where I expected Joe, but as I look at the numbers and look at what’s going on, its about where we expected on the upsides side on both the consumer and the industrial side, the real shortfall is in our contract customers – outside non-contract customers probably I would say we have a positive price cost year-over-year. It’s in the contracts where we are lagging that we normally do in an inflationary environment.

[George Staphos:]

Okay, interesting. I will turn it over. Thanks, Harris.

[Harris E. DeLoach:]

Thank you, George.

[Operator:]

Your next question today comes from the line of Ghansham Panjabi with Robert W. Baird. Please proceed.

[Ghansham Panjabi:]

Hey, guys, good morning.

[Harris E. DeLoach:]

Good morning, Ghans.

[Barry L. Saunders:]

Good morning.

[Ghansham Panjabi:]

Harris you know the month-to-month trajectory was certainly helpful. If you were just to sort of look back 1Q versus 2Q, 1Q I think in aggregate volumes were up mid-to-high single digits across your businesses. 2Q was up about 2% based on what you said, commodity costs at the end of the first quarter started moving up quite a bit. Do you think there was any sort of pull forward in demand just based on commodity cost going up?

[Harris E. DeLoach:]

You know, it may have been some Ghansham, but I’d say it was negligible. There could have been some on the paper side; we may see some rebound in outside sales paper. But on balance, I don’t think it will even catch up in the rounding to be perfectly honest.

[Ghansham Panjabi:]

Okay. And then a lot of your consumer customers are positioning for price increases for the back half of the year across-the-board whether its food, beverage or consumer products. And they are sort of tentative in terms of what the consumer will do just based on way consumer spending overall. They are also exploring new packaging formats to kid of keep the price points constant and perhaps a smaller package or different package, are you seeing anything along those lines in terms of project activity?

[Harris E. DeLoach:]

Actually we are, well, I think I’ve mentioned previously that we have I think about 30 projects in the funnel, rolling about $90 million of new projects that we are working on with a number of our consumer customers. And these all are not going to hit in the second half of this year, it will be – some will be in the first half of next year and into next year, but we still see a lot of activity on new product formats.

[Ghansham Panjabi:]

Okay. And just finally just a clarification, I’m sorry if I missed this, but what did you say textile cores did during the quarter, year-over-year?

[Barry L. Saunders:]

They were down 6%.

[Ghansham Panjabi:]

Okay. Great. Thanks so much.

[Operator:]

Your next question comes from the line of Philip Ng with Jefferies & Company. Please proceed.

[Philip Ng:]

Good morning, guys. I just have a quick question on the consumer margin, it obviously got squeezed with the template prices resetting in the back half of this year, how much of improvements should we expect?

[Harris E. DeLoach:]

As it relates to the consumer margins, we would expect that they will improve notably as we move through the balance of the year largely because of recovery of most of the material increases that we’re seeing. So certainly, not full recovery in the third, but by the time we get to the fourth most of the contracts we’ll have reset and we would expect margins to be directionally moving backup in the 9% to 10% range for the consumer business.

[Philip Ng:]

And then can you help, help me, give me a little more color on the consumer business, it seems like there is a bifurcation in demand byproducts, Flex was quite strong than Composite Cans does that weaker with down tracking that dynamics?

[Harris E. DeLoach:]

Phil, can you repeat that, I am sorry I couldn’t hear you?

[Philip Ng:]

Yeah, sure, in your consumer packaging business, volumes were quite strong and Flexible is somewhat weak in Composite Cans, what’s driving that bifurcation in demand?

[Harris E. DeLoach:]

Well, I have an opinion, I think it’s primarily weak consumer demand, but I do think that they have some consolidation in the Flexible business and I think we have been the beneficiary of some of that as some people have merged, also I think that new product development that we’ve seen in our Flexible Packaging driven on the back of technology that we developed, it helped that business to grow. So overall, I think consumer demand is down, but I think, we’ve benefited from those two topics on the Flexible side of the business.

[Philip Ng:]

Okay. Thanks, guys.

[Harris E. DeLoach:]

Yeah.

[Operator:]

Your next question comes from the line of Chip Dillon with Vertical Research Partners. Please proceed.

[Chip Dillon:]

Yes, good morning. First question is on the, you mentioned that your assumption that OCC would come down toward this end of the year, I’d guess that what mean that, there would be a benefit that might go away a little bit in the first quarter, unless, it continues to drop in the first quarter because of your contraction, is that a fair sort of guess directionally, I mean, you would hope to have offsets? And secondly, is that reflected sort of in the way your tax rate goes up in the fourth quarter because I’d presume that means you make more in the U.S. in the fourth relative to the third?

[Barry L. Saunders:]

Chip, I’m going to first, I’m referring across the table about the tax rate, but I would say that’s probably a pretty good educated guess on OCC and what it does.

[Harris E. DeLoach:]

And the tax rate is based just on our expectations of the mix of business in the third versus the fourth quarter and just the normal activity that occurs in the third quarter. I don’t think much all of it is affected by the change in OCC pricing assumptions in the fourth quarter.

[Chip Dillon:]

Okay. And then when you look at the new product development pipeline and can just your discussions with your customers, especially, the largest one’s you’ve partnered with more closely, are you finding that more of the development is tied to either cost reduction or is it tied more toward more, I think, I’d say higher-end purposes whether it’s better graphics or ease of dispensing in the case of some of the products that you sell into?

[Harris E. DeLoach:]

Chip, I think, it’s in several buckets, I mean, obviously cost is always a factor and if they can lower the cost, like there’s something interesting, but most of these consumer products companies will allow this as, they are interested in market share gains for themselves, and they’re looking for better graphics, better ease of opening and all of the things, which you mentioned. So I think it’s technology tends to drive most of it, whether it’s new product or whether it’s opening and closing phases, whether it’s a depends on the sale of what it might, any of those things.

[Chip Dillon:]

And then lastly, Harris, I think over the last couple of years as you witnessed your own balance sheet get quite strong, you wanted I think to possibly increase the acquisition pace. And we haven’t apart from the deal last year, in the middle of the year, has it been that robust and I was wondering do you think it’s more a function of good properties not being available or is it a matter that they are there, but the price just isn’t right?

[Harris E. DeLoach:]

Yeah, I think it’s – Chip you need to think about what we probably have said is that by the year 2014, we – our goal is to be a $6 billion company embedded in that is $1 billion worth of acquisitions. And that make sure that says we will make about $20 million of acquisitions each year. And so we were looking at it in the given time, we’re looking today at things, we’re in discussions at any given time and the things need to meet our criteria and when we find them and reach them we will pull the trigger and when we don’t, we won’t. I’d say, it’s not something that keeps me wake at night.

[Chip Dillon:]

Got you. Okay, thank you.

[Harris E. DeLoach:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Alex Ovshey with Goldman Sachs. Please proceed.

[Alex Ovshey:]

Good morning.

[Harris E. DeLoach:]

Good morning, Alex. How are you?

[Alex Ovshey:]

I’m doing well, Harris. Thanks. Harris, can you share with us what’s your longer-term outlook is for OCC, are you concerned that with all the recycle capacity coming on line in China and sluggish generation at U.S. that are over the next couple of year, the world may find itself short OCC?

[Harris E. DeLoach:]

Well, I think clearly, I am not sure, my crystal ball of OCC in the future is any better than anybody else’s, but as we look at OCC clearly over the last five or 10 years there had been fundamental changes in the demand, supply demand balance of OCC, with China and India and all the places adding all this new capacity. And clearly, in that timeframe we’ve seen OCC prices generally trend up and where a good bps. So, I think when I look at from our perspective is and clearly today and I think the future demand may have pace it times supply. What I worry more about is this company’s ability to pass through price increases to more than cover the raw material costs and I think the business model that we have established with the high percentage on the contract, the pass throughs and our market position around the world allows us to pass through and have positive price cost. So with that, I don’t really worry that much in the long-term about the price of OCC whether it’s $90 a ton, or whether it’s a $175 a ton. What I worry about is the fundamental cost position of the products that we make out of the Paper, the converted products. And when I look at those versus alternative substrates, Paper is significantly cost advantage. So as long as we mange and have in place mechanisms in our business model that will allow us to recover it. It’s obviously something that we worry and it does keep me awake more – (inaudible) talk in the morning then the next acquisition does. But it’s something we manage and we traditionally manage it well and I expect this to manage it well.

[Alex Ovshey:]

That’s helpful. And to the extent that a deal doesn’t come along by year-end. Can you just talk about, what your appetite is toward share buyback versus maybe a special dividend versus debt pay down?

[Harris E. DeLoach:]

Well, there is not a lot of debt, we can in fact pay down, need to pay down. I think our debt-to-capital at end of the quarter was in the 31% range plus or minus three basis points.

[Alex Ovshey:]

Right.

[Harris E. DeLoach:]

So traditionally my expectation is frankly the end of the year, we would have made some acquisitions that will make the consideration and discussion that we’re talking about a viable alternative, but in the advance that it is a viable alternative, we do have a history of buying back stock and we go back some years, we do have a history of paying special dividends. But I think that’s probably a quarter or at least a way before we get into that consideration Alex, to be perfectly honest.

[Alex Ovshey:]

Got it. Maybe one last question for Barry. What will be the benefit to earnings in 2012 from the $130 million pension contribution in 2011? How should we think about that?

[Barry L. Saunders:]

Well, certainly a big part of that was already factored in. This year's pension expense since we knew that we were making the $85 million contribution probably in the year. So we think fully considered in this year and have no additional benefit next year. The other contribution certainly we’ll have some impact that again, largely considered in what the expense would have otherwise been, so not a lot of year-over-year improvement because most of those are related to the other global plans.

[Alex Ovshey:]

All right. Thank you.

[Barry L. Saunders:]

Thank you, Alex.

[Operator:]

Your next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed.

[Ian Zaffino:]

Hi, thank you. Just a couple of questions. As far as some of the business of that you had lost what was the motivation, because you were higher on the cost curve, you just didn’t want and how do you think about this going forward?

[Barry L. Saunders:]

Actually the service business that we lost, we talked about for sometime, the consumer Composite, the company decided that they would use a switch contract manufacturer’s or use a contract manufacturer to manage the product and that contract manufacturer wanted to do their own packaging. And so they moved both packaging and product manufacturing to one person. And so that was the basis of it.

[Ian Zaffino:]

Okay. All right, thank you very much.

[Barry L. Saunders:]

You’re welcome.

[Operator:]

Your next question comes from the line of Mark Wilde with Deutsche Bank. Please proceed.

[Mark Wilde:]

Good morning, Harris. Good morning, Barry.

[Barry L. Saunders:]

Good morning Mark. How are you?

[Mark Wilde:]

Excellent. Harris in your commentary, you mentioned that you are seeing some slowing in some of the emerging markets, I wondered if you could just amplify on that a little bit?

[Harris E. DeLoach:]

I think clearly, I was in a meeting on Monday with our folks from Asia and they were talking about basically what was happening in Singapore. Singapore would have basically negative GDP in the second quarter. And Singapore obviously exports a lot of electronics and we put film for plasma televisions and other plasma type film on our Tubes and Cores. Clearly, as that demand is falling in Europe and in the U.S., but televisions and other things that certainly has a full back effect on us.

[Barry L. Saunders:]

Well, I think the same thing is occurring Mark in textile demand, which is obviously down from China and other places. We’re seeing in South America, for instance, we’re seeing a lot of imported textiles coming in and out of China into Brazil, which is affecting their markets. So I think it’s we live in a global county, which you very well know. And so slowing consumer demand in Europe or here has a play back in some of these other emerging markets, which I think we’re clearly seeing.

[Mark Wilde:]

Okay. Just kind of related to that, since you mentioned Brazil and we know that the strength of the currency is drawing more imports in there. I think making exports a little more difficult. Are there other places kind of a cross shift business where you’re seeing some fallout from FX right now?

[Harris E. DeLoach:]

I would say, what you described in Brazil is exactly what we’re seeing and I would say that’s probably the biggest geography or the biggest country we’re seeing that effect in.

[Mark Wilde:]

Okay. And then finally just on input costs. I think you mentioned that your third quarter assumption is for the current Yellow Sheet price, so if prices were to move up in August and then sit there at that level in September, would that mean you’d have a higher cost there than you are currently baking in?

[Harris E. DeLoach:]

There is no question, it would be higher cost, and it will be a higher cost, no question about that.

[Mark Wilde:]

Can you just remind us like how much the sort of monthly OCC purchase runs kind of across Sonoco?

[Barry L. Saunders:]

Well, just to put it in perspective of each $10 change when you look across our integrated business including the benefit we would get in recycling from the higher selling prices. This cost is roughly $750,000, a monthly $10 change.

[Mark Wilde:]

Okay. Fine, that’s good that sounds great. And what are you guys assuming on in terms of resin behavior here in the third quarter and how does that kind of fit into your guidance numbers?

[Harris E. DeLoach:]

We look at resin is solving peaked and it will start trending down, I don’t know specifically marked beyond is to what kind of trends because we use so many different resins.

[Mark Wilde:]

Yeah.

[Harris E. DeLoach:]

And gone up so much to give you an answer to that would be probably inaccurate and I don’t know anything like that.

[Mark Wilde:]

Okay. All right, that’s fair enough. Thanks Harris and good luck in the third quarter.

[Harris E. DeLoach:]

Mark, thank you very much.

[Operator:]

Your next question comes from the line of Chris Manuel with Keybanc Capital Markets. Please proceed.

[Christopher Manuel:]

Good morning, gentlemen.

[Harris E. DeLoach:]

Good morning.

[Barry L. Saunders:]

Good morning, Chris, how are you.

[Christopher Manuel:]

I'm all right, thank you. I wanted to – most of my questions have been asked and answered. I wanted to kind of focus in on one area and that was as you are thinking about the back half of year, new expectations kind of versus old and it sounds like Harris, you talked about very good color with the month-to-month trajectory and it has a whole, it sounds like the back half of the year slowing in little bit and what I wanted to get my arms around is, if I look at the downward revision much maintaining guidance it’s about $0.06 or so at the mid point, and its more than what your short fall was here in 2Q. So I’m trying to understand what the difference is, if its mostly volume related, is there also some lingering productivity impact that you are running through there or is that, I would think that some of the raw materials are better than you would have anticipated earlier in a year, just trying to understand what’s driving the balance of your variance?

[Harris E. DeLoach:]

The variance is primarily volume. And we started the year with our original guidance, I think planning volume increase 3%, 3.5% range, if I’m not mistaken. What we are seeing, we thought we will see slightly continuing volume, what we saw was basically flat volumes, in some case, negative volumes and what we are projecting for the balance of the year, I think, we’ve said is basically volumes continuing like the one in second quarter, and isn’t that fair Barry?

[Barry L. Saunders:]

And so something in that two-ish percent as a whole company, but okay.

[Harris E. DeLoach:]

At that end we were expecting the seasonality that we normally would expect in the third and fourth quarter. So I would say puts and takes, but the biggest issue is the volume expectations

[Christopher Manuel:]

Okay.

[Barry L. Saunders:]

It’s clear that price and cost is also a bit more negative than in the third quarter and particularly than we expected before because of the headwind we where seeing with OCC and the fact that all of the resin price increases we’re seeing as well.

[Christopher Manuel:]

Okay. And then when we think about mix that was another item that had human factor issues certain components in Composite Cans that obviously given a fully integrated for your high margin business, has that trajectory of that as we work our way through July improved you just look at it as a temporary thing you absorbed or how do you think about mix as well through back half of the year?

[Harris E. DeLoach:]

You know, Chris, I don’t how to answer that, other than to say, in that mix that I mentioned in my comments earlier on you got certain sectors just by their nature or higher and I will take one being fiber cartridges and it was up last year and housing starts are up, but it’s obviously down to the extent that it improves and obviously we will get some higher margin mix into the business. Those are complicated Tubes to make and they carry higher margins. But it’s a guesstimate on my part, just to say what that mix is going to look like.

[Christopher Manuel:]

Okay. That’s helpful. These are all my questions. Thank you. Good luck.

[Harris E. DeLoach:]

Thank you, Chris.

[Operator:]

Your next question comes from the line of Bill Selesky with Argus Research. Please proceed.

[William V. Selesky:]

Hi, guys. Good morning.

[Barry L. Saunders:]

Good morning, Bill.

[Harris E. DeLoach:]

Hi, Bill. How are you?

[William V. Selesky:]

I am fine thanks. I just want to ask a question regarding contactual resets. I think you mentioned that some of your contractual resets will hit Q3. I am wondering if these resets will allow you to at least catch up to where you want to be with respect to raw material and input costs or will the catch up really hit more coming in the fourth quarter?

[Harris E. DeLoach:]

Certainly a good bit of it will be caught up in the third quarter, but we would continue to see some benefit in the fourth quarter as well particularly in the Consumer businesses and with the Industrial businesses as well based on the assumptions we’ve made for OCC prices.

[William V. Selesky:]

Okay, great. And the only other question I had with regarding productivity, some of the negative productivity issues that happened here in the second quarter, could you discuss kind of what you think will happen in Q3 with respect to some of those other than volume I am thinking will most of these tend to kind of play itself out and you should be in better shape heading into Q3 and Q4?

[Harris E. DeLoach:]

Bill, I would certainly hope that those things have already played themselves out. I think either mentioned or Barry mentioned in our comments that June was a strongest productivity that we have seen year to-date. It was over our budget and over our planned number for productivity. And in fact we recall our productivity in June representing about a third of the productivity we’ve seen in the first half of the year. So my expectation is clearly that we are back on track with our productivity and we’ll see a significant improvement in second half of the year.

[William V. Selesky:]

Okay. That’s great. I appreciate that. Thanks a lot guys.

[Harris E. DeLoach:]

Thank you, Bill.

[Operator:]

Your next question comes from the line of David Leibowitz with Horizon. Please proceed.

[David Leibowitz:]

Good morning.

[Harris E. DeLoach:]

Good morning, David. How are you?

[David Leibowitz:]

All right. Very briefly – two questions; one, your operating capacity what percentage were you operating at by major business line?

[Harris E. DeLoach:]

David, I don't know that. We generally look at the mill system, the mill system was operating in the 97%, 98% operating rate. Most of all the converting businesses generally operate on one or two shifts on a five day shift, so it would be very easy to add additional shift, to add additional people to give capacity, capacity is not an issue for Sonoco.

[David Leibowitz:]

The second question, the inventories on the balance sheet were up and I was wondering how much of that is price and how much of that is actual merchandise?

[Harris E. DeLoach:]

I would say to you that our working capital program that Barry had mentioned is up, working capital in terms of days, where we track it are well within plan, or at plan or within plan. The dollars are up primarily because of raw material cost, input cost and then both, there are unfinished goods, the (inaudible) process and the finished goods, and I would say I don't know the exact answer, but I would say that I would have sort of guess it is 90% to 95% of their price and not additional inventories.

[David Leibowitz:]

And you may have mentioned several times about new product introductions in the second half especially in the fourth quarter, as things stand today do you expect to see more new product sales, in this year second half than you had last year.

[Harris E. DeLoach:]

I don't know about compared to last year because I don’t look at it like that. What I think we said was that we would have $150 million to $175 million of new product sales for the year through the first six months it was at 77, so last year feel good about that goal of $150 million to $175 million, we will have some product introductions in the second half which will add to that number.

[David Leibowitz:]

And the last question if I may in terms of share of market and looking at your major categories, do you believe you gained or lost share of market by category.

[Harris E. DeLoach:]

I don't think there has been much change at all in the Core either way David, we haven’t lost any market share and I don't know of any significant pickups that we’ve had other than the new products, which obviously weren’t cannibalizing other things that we aimed.

[David Leibowitz:]

And I apologize for one final one because I have neglected it when I went through my listing. Your target for 2014 in terms of share of market, with share of company being retail or consumer oriented versus industrial, have you had any changes in your thoughts on that score?

[Harris E. DeLoach:]

We have not and I still think it will be about 60% or so consumer and the balance industrial.

[David Leibowitz:]

Thank you very much.

[Harris E. DeLoach:]

You are very welcome, David.

[Operator:]

Your next question comes from the line of Tom Mullarkey with Morningstar. Please proceed.

[Thomas Mullarkey:]

Hi, Harris.

[Harris E. DeLoach:]

Hi, Tom, how are you?

[Thomas Mullarkey:]

Doing good, thanks. My question is about the consumer segment. You talked about kind of a mix shift where the Composite Cans for nuts, infant formula and juice where the demand for those products were actually lower in this quarter. Do you see that bouncing back soon or some of your customer’s actually maybe switching Packaging material for those products?

[Harris E. DeLoach:]

I think it’s, I always hate to say it’s a 100% something, but I would say its 95% consumer demand for those products. We always see some shifting going back and forth in some Packaging, but predominant shortfall here is consumer demand.

[Thomas Mullarkey:]

Okay. Thanks Harris.

[Harris E. DeLoach:]

You’re welcome.

[Operator:]

(Operator Instructions) Your next question is a follow-up from the line of George Staphos with Bank of America. Please proceed.

[George Staphos:]

Thanks, hi, guys. Couple of follow-ups here. I want to go back again to the first quarter Harris and the consumer segment. If I remember correctly the figure is either a $3 million or $6 million, there was a timing effect if you will that was negative in terms of how you did price cost in consumer that should have improved and reversed itself for the second quarter. And if I look at last year’s second quarter, you did about $42 million and even in consumer of this year’s second quarter you closed something around 35. So, if I'm correct with that additional benefit you should have gotten this year, don’t make the delta something on the order of $10 million or more, if I'm missing something in terms of that bridge analysis, please fill them in. And then in turn, if you could help to finish in how much of that variance was mix and how much of it was just purely cost resin and film raised ahead of where your thoughts that would be for the quarter?

[Harris E. DeLoach:]

Sorry, I don’t know the answer to that. Let us take a look in, we’ll get to you on that, frankly, I can’t figure out, how the inflation firmly have figured in.

[George Staphos:]

Okay. But there is no price competition above and beyond kind of the normal vagaries in the market this quarter, this past, correct?

[Harris E. DeLoach:]

No, not at all.

[George Staphos:]

Okay.

[Harris E. DeLoach:]

What I am not really referencing is last year, I don’t have that in my mind and being compared to the first quarter, what we said we would see was it, we had surprised resets that where we ate the cost in the first quarter that they wouldn’t reset until the second quarter.

[George Staphos:]

Right.

[Harris E. DeLoach:]

But we still had that in April and May, one reset in June and one didn’t reset until July. So we actually still had that negative effect rolling to most of the second quarter, there was one in April, but we still had that negative effect, now that will reverse itself in the second half of the year in the Composite Can side, but let me get back to you on...

[George Staphos:]

Okay.

[Harris E. DeLoach:]

With that information.

[George Staphos:]

Because some of that effect reversed itself last year in the second quarter, so it should have helped your comparison on that side anyway?

[Harris E. DeLoach:]

It did; however, we had some different dynamics going on in the first quarter of last year and in the second quarter where we had – from the year before we had some positive in last year’s first quarter that we did not have in this first quarter of this year, but let us solve that and get back to you.

[George Staphos:]

Fair enough. Barry, as we think about the shipping days in the fourth quarter that move to the first quarter of this year, what will that cost do you think from an EPS standpoint that’s $0.02 or $0.03 that we should just have in the back (inaudible) a headwind for 4Q?

[Barry L. Saunders:]

It’s certainly in the guidance as we anticipated the shorter year-over-year quarter. In the first quarter, we said it was roughly 6% extra days, we will get similar amount in the fourth quarter I believe this year.

[George Staphos:]

Okay. Two last ones on international. Harris, did you say you had a mill fire in Germany, did I hear that correctly, if not where was it? And then longer-term, how do you accelerate the growth in industrial where you have such great margins and returns, above and beyond what you’ve already done? Thanks, guys and good luck in the quarter.

[Harris E. DeLoach:]

George, give me the second question again.

[George Staphos:]

Yes, in Tube and Core business, it has such great returns overtime for any number of reasons. How do you accelerate the growth of that business outside of the U.S. above and beyond what you’ve already done, what are the opportunities, what are the hurdles to being able to do that?

[Harris E. DeLoach:]

The fire in Germany was in one of our smaller mills, I think, it’s in Nordhorn mill and it was very moderate. It was – it did create some down time for a day or so or a couple of days, two weeks.

[George Staphos:]

Okay.

[Harris E. DeLoach:]

But it wasn’t anything of substantial damage. I think the acceleration; there will be some further consolidation of this market probably in Europe and in South America and clearly in Asia over time, which will accelerate the growth of it. And then I think you do it with particularly in Asia, with a lot of the technology that we have in other places around the world, as that market emerges. But that will come in time.

[George Staphos:]

Okay, thanks very much guys.

[Operator:]

Your next question is another follow-up from the line of Chip Dillon with Vertical Research Partners. Please proceed.

[Chip Dillon:]

Thank you. It seems like in the last call that we were all very surprised and very happy with how well the Services segment was doing. And my impression was it probably wouldn’t continue sort of at this very strong pace and yeah in the second quarter, it was another up sequential result which is terrific. Should we be thinking better about that business and maybe or do you feel better about that business than did say three months ago?

[Harris E. DeLoach:]

I feel a lot about that business, I mean three months ago, six months ago and nine months ago, I think they’re making good partnership. But I think clearly what we said is the business that we lost we knew was going away and you should not take the earnings this quarter and extrapolate it over the next couple of quarters. But I do feel much better today since we are picking up business and I feel quite good about that actually.

[Chip Dillon:]

Do you feel like by next year it’s reasonable that maybe the earnings rate we saw in the first half of ’11 could be obtained or is that probably a little aggressive at this point?

[Harris E. DeLoach:]

It is probably a little aggressive at this point.

[Chip Dillon:]

Okay, got you. Thank you.

[Harris E. DeLoach:]

Thank you, Chip.

[Operator:]

Your final question is a follow-up from the line of Mark Wilde with Deutsche Bank. Please proceed.

[Mark Wilde:]

Just to the extent we kind of continue in this, overall growth mode and we’re continuing to face some constructural issues in some of your markets for Tubes and Cores like the Paper business. Have you restructured that business as much as you need to or is there potentially you need to downsize capacity further?

[Harris E. DeLoach:]

I don’t know that we need to downsize capacity Mark. We were running at pretty good rates and that we have downsized the plant foot print in the Tubes and Core business in North America. But the problem is these are smaller plants and dedicated to customers and so you probably don’t downsize them a lot more. We’ve obviously restructured the retail industrial business from a number of business segments into several business sectors. So I’m not going to say that there is never anyway to restructure it but we’ve done a pretty good job I believe over the last number of years adjusting that business to demand and we look at that frankly on a pretty consistent basis and when we need a process to do it, we do it.

[Mark Wilde:]

Okay. And on the other side of that, as we see some of these businesses growing so rapidly in places like China, if you’ve been able to put the same kind of business model in place in China that you’ve had herein in some other parts of the world where you got a small kind of essentially captive Tube and Core plant feeding that particular customer?

[Harris E. DeLoach:]

Right, we may have a smaller Tube and Core plant because this had dedicated to a customer, our multiple customers, but clearly what we found in every geography it’s a little bit of a different business model such as in Europe, we’re net buy abroad, here we’re net sell abroad. In Asia we’ve got all of our board, in South America, it’s a different business model. So at least a fifth of geography, but the small plants close to the customer because of transportation cost (inaudible).

[Mark Wilde:]

Okay. And then finally, have you picked up any share domestically in the business because you’ve had two big competitors that have gone through restructuring over the last two are three years?

[Harris E. DeLoach:]

I responded to someone earlier. I don’t think we’ve seen much market share or gain or loss in clearly this quarter, we picked up some business in over the past several years, but we’ve also lost the business.

[Mark Wilde:]

Okay. Fair enough, but again, good luck in the third quarter.

[Harris E. DeLoach:]

Thank you, Mark.

[Operator:]

Ladies and gentlemen, that does conclude our Q&A portion of the call. I would now like to turn it back over to Mr. Roger Schrum for closing remarks.

[Roger Schrum:]

Thank you, again, Modesta. As a reminder, Sonoco’s management team will be making several investor conference appearances in the month of August and September. For more information on these upcoming events simply go to sonoco.com and click on our Investor Relations site and look under the events calendar. In addition, we do expect to release third quarter financial results on October 20th, so please look forward for our announcement before that time. Let me again thank everyone for participating in today’s call. We do appreciate your interest in the company and as always, if you have any further questions please don’t hesitate to contact us. Thank you, again.

[Operator:]

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.