Sonoco Products Co (SON) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sunoco third quarter earnings conference call. At this time, all participants are in a listen-only mode. My name is Alicia. If at any time during the call you require assistance, please press star zero and a coordinator will be happy to assist you. As a reminder, this conference call is being recorded. I would now like to turn the program over to your host for today's call, Mr. Allan Cecil, vice president of investor relations. Please proceed, sir.

Good afternoon and thank you for joining us for Sunoco's third quarter teleconference. With me are Harris Deloach, president and C.E.O., Charles Hupfer, vice president and chief financial officer, Barry Saunders, staff vice president and corporate controller, abandon and the staff vice president and corporate fresh treasurer. Let me state our disclaimer for purpose of safe harbor provided by section 21E. Such forward-looking statements are based on current expectations, estimates and projections about the company's industry man management's beliefs. Such information includes without limitations discussions as to estimates, expectations, beliefs, planning strategies, and objectives concerning the company's future financial and operating performance. For those of you who may not have seen our third quarter release this morning, our earnings per diluted share excluding one-time items were 34 cents compared with 43 for the same period in 2001, and in line with our revised earnings announcement of September 12 of 31 to 35 cents including one-time items, diluted EPS were 30 cents versus 45 cents. You may recall that also in our preannouncement, we estimated fourth quarter EPS at 35 to 39 cents excluding one-time items. During the quarter, we achieved year over year improvement in volumes, sales and productivity. Our cash gap continued to improve, and free cash flow remains strong. Price cost had the largest negative impact on the quarter led by higher cost per OCC and a longer than normal delay in recovering those costs. Our earnings results were also hurt by continued though improving new equipment start-up costs in our flexible and metal ends businesses, along with continued soft volume in wood reels, which is being hit by continued weakness in fiberoptics industry, and specialty paper board products such as glass covers and coasters impacted by a slowdown in the travel industry. However, we remain highly optimistic despite the weak economy. We expect full price recovery during the fourth quarter from OCC increases. The new equipment start-up issues are within our own making and within our control to fix, which we're doing. Indeed but for these issues, we probably would not have had to lower our estimates. Our dividend yield is around 4% versus a national average of about 2%. Our cash flows remain strong, and our balance sheet is leverageable so we're quite capable of making further complimentary acquisitions, and we are actively engaged in the hunt for such opportunities that fit our criteria. Meanwhile, we are continuing to increase expenditures for new product, market and technological development. In fact, we plan to update you on our results in this area at our December 6 December 6th annual breakfast meeting with the financial community in New York at the hotel intercontinental. Please mark your calendars and you'll soon be receiving an invitation. I'll now turn the discussion over to Charlie Hupfer.

Thank you, Allan. Let me begin by just walking you through a reconciliation of reported earnings per share to comparable earnings per share. Reported earnings per share for the third quarter were 30 cents. To that, we add back a restructuring of 4 cents a share to arrive at comparable EPS of 34 cents. The restructuring is actually a new plan that that was announced and put in place in the third quarter. It deals largely with some restructuring in the UK where we're closing a plant and downsizing another, plus some head count reductions in France and in Brussels along with some head count reductions in our flexible division here in North America. Comparing that to the 2001 third quarter, reported EPS was 45 cents. To that, we add back 2 cents related to Goodwill amortization in last year's number, not in this year's number. A 1 cent per share adjustment for company-owned life insurance. If you recall when I talked about the second quarter's results, our second quarter of 2001 had an 18-cent adjustment. This is just a fine-tuning of that in last year's numbers. And then from that, we subtract 5 cents a share dealing with a settlement, a legal settlement that we received in the third quarter of last year dealing with Sunoco's lawsuit over piracy of its technology and no-how. So if you add back to 45 cents two cents, 1 cent, you arrive at 40 3-cent, so our comparables are 43 cents this year compared with 43 last year. Which is in line with the guidance in our September 12th press release. Now to put some numbers to those EPS figures, in the year 2002, the third quarter, the restructuring charge is $6,446,000, and you'll find that in other expense . The tax impact of that is $2,322,000, which is obviously in taxes so the add-back is the $4,000,124, 4 cents a share. Ebit was on a gap basis $56,000,909, so if we add back the $6,000,446, we arrive at comparable Ebit at $63,000,355, so whenever I talk about percentages, for example, Ebit percentages, I'll be using this comparable Ebit number compared with sales. Looking at 2001, the goodwill adjustment was $2,000,976, and that's actually in the cost of sales section, and then the cole adjustment and the legal settlement and the small restructuring charge all total on a pretax basis income of $6,000,121. So the $6,000,121 plus the goodwill adjustment is a net subtraction from Ebit last year. So to arrive at comparable Ebit, we'll start with a gap number of $77,000,882, subtract 30 million -- $3,000,145 to arrive at a comparable Ebit of $74,000,737. And again, it's that comparable Ebit that will make all of our comparisons against. Using these comparable numbers, our gross profit margin in the quarter was 18.9%, and that compares with 21.3% last year, and as I go through the bridge, I think a couple themes will stand out. One of them is price cost, and in particular, OCC costs in the U.S. and in Europe. Another are some of the operational issues that we will discuss with two of our flexible plants, and a start-up situation that we have with one of our metal end plants, plus the general economic weakness that continues to affect our baker, reels and our molded plastic businesses. In terms of selling an administrative percent as a -- as a percentage of sales, the percentage is 9.8% in this year's quarter compared with 9.6% last year. The slight increase in the percentage would be due to the acquisitions that were made in the late third and early fourth quarter of last year. We continue to think that S and A spending is held well in check and we have good cost control over all discretionary spending. And our effective tax rate stands at 36%, the same as in previous quarters. Now let me go over the bridge that we typically discuss with you at each quarter, and what I'm going to do this time is take a little bit more time and evident to lay out the bridge for you so that then as a come back, I can talk about some specific numbers. But I'm looking at a chart, and if anybody is trying to keep up with me, I'm looking at a chart that has four columns on it. The first one is description, the second one is Sonoco total, the third column is industrial segment, and the fourth column is the consumer segment. So I'll lay out the numbers along that fashion. So the first line under description would be 2001, because this is a reconciliation from 2001's third quarter sales to 2002 3rd quarter sales, so on the 2001 line, Sonoco total was $649.3 million. In the next column under the industrial segment, that's $319.4 million. And in the consumer segment, 329.9. In the volume mix, the next line, the Sonoco total is $25.9 million. The industrial segment is $10.1 million. The consumer segment is $15.8 million. The next line is price. The Sonoco column, it is a negative $5 million. It is a positive 710,000 in the industrial segment, and a negative $5.6 million in the consumer segment. Acquisitions account for $43.4 million in the total segment, total Sonoco, broken down by 23.2 industrial, and 20.2 consumer. And then other, all other which includes exchange, is $3.8 million, industrial is 5.6, and consumer is a minus 1.8. And if I've done my math correctly, that shouuld add to totals for 2002 of $717.4 million for Sonoco, $359 million in industrial segment, and $358.4 million in the consumer segment. Now the foreign exchange impact, and that will be in that other column, is about $4.5 million positive, and that relates to the strengthening of the EURO as compared with last year. The acquisitions on the industrial side, it's haze, U.S. paper and Hutchinson in the industrial segment and Phoenix and a smaller portion of Hayes in the consumer segment. Now let me give you the E bit bridge and then I'll come back with a few more details. I've got the same four columns to describe Ebit, and the first line is again 2001 and then the Sonoco total is $75 million. In the industrial segment, it's 45, in the consumer segment, 31. Volume mix, Sonoco total is $4 million, industrial is six, and consumer is a minus $2 million. Price cost for Sonoco is a negative $18 million, industrial segment is a negative $11 million, and the consumer segment is a negative $7 million. Productivity is a positive $12 million for the Sonoco column, and on the industrial side, that's seven, and consumer is six. Obviously I got a little rounding to do there. Just to step back for a minute on productivity, that productivity of 12 compares with 12 in the second quarter and nine-and-a-half in the first quarter, so productivity remains a very important part of our profit picture, quarter over quarter. Finishing the Ebit bridge, after productivity, we have selling and administrative costs, and that's a negative $5 million in total with a negative $3 million on the industrial side, and a negative $2 million on the consumer side . Then other is a negative $5 million. That's for Sonoco. The industrial component is a negative $7 million, and the consumer is a positive 1. So the numbers for 2002 will be $63 million for Sonoco, broken down by $37 million on the industrial segment, and $27 million on the consumer segment . Now I'll make a couple comments about each of these bridges, and I'll start with the sales bridge and specifically volume in the industrial segment . As I said, volume was up $10.1 million. We generally had good volume throughout the industrial sector with the exception of our baker reel division and our cell and molded plastics division. Baker was down 18% compared with last year, volume was down 8% compared with last year. They continue to suffer from the weak economy especially in their reels group serving the wire and cable industries. And we've been talking about baker and crell inform some time. Not much different there. U.S. tube and core business, volume was up 4%. That's principally in paper mill cores, in film cores, and to a much lesser extent, in textile tubes. Volume was up 4%. Now that's actually -- that's comparing this year's third quarter to last year's third quarter. Volume in the industrial segment was actually down a little bit from the second quarter. In fact, it was down about 2% in the U.S. from the second quarter, but still well up over last year's third quarter. In Europe, our volume was up 2%, with the biggest increase coming from our Turkish operation which was up 10.5%, so that relatively new business for us is turning into one of our bigger plants in Europe. On the paper North America side, paper volume was up approximately 4%, and most of that is coming in Canada and most of that is from board sales out of our Trent valley machine. In terms of pricing, our year over year pricing in the tubes and core division was actually down around 2%, and that 2% is interesting because as you know, we implemented a 7.5% price increase that became effective in mid June and we implemented through the third quarter, so what we're actually seeing here is that from last year and the third quarter in October, all the way through May, we were seeing a fairly steady decline in the selling price of our tubes and cores in the U.S. operations. So by the time we announced a price increase in middle of June, we saw some of that in June and then again in July, August and September. So we are certainly up over the second quarter in terms of pricing, but if you go back and look at us compared with last year's third quarter, we are down in pricing somewhere around the 2% range. Now, in terms of Ebit, as you look at the Ebit bridge, the numbers that really stand out there are price cost. 18 in total, $11 million of that in the industrial segment. Far and away the biggest impact there is OCC costs, and we have in our press release how OCC cost ran up from $35 up to $130 and have dropped back down to into the $65 range right now. Our average cost during the quarter doubled from this year's third quarter compared with last year's third quarter . That's in the $50 a ton range is what that doubling effect would be, and the impact of that on our volume accounts for virtually all of the $11 million negative price cost difference that we have in the quarter. Unfortunately, we see some of the very same squeeze in our European operations . This isn't the usual -- and so obviously what's happened here is that that run-up in OCC cost from 65 to 130 and back down to 65 really resulted in excess costs in this year's third quarter that wasn't recovered and actually won't be recovered over the near term. That's certainly not the usual pattern for us in cost recovery, but then the run-up was more the result of unusual factors as opposed to a strong economy, and it came up and back so fast that we really weren't able to get pricing recovery for that portion of the OCC run-up in cost. Turning to the consumer side, and I'll just make a couple comments about principally off of the Ebit bridge, but the consumer you see, we had volume mix on the Ebit bridge that was down $2 million, but if you look at the sales bridge, you see that sales were actually up $16 million. So to explain that, in fact, the explanation is a little bit like the name explanation last year -- I'm sorry -- last quarter. Some portion of that deals with the change in mix, and our consumer products actually our composite can group saw volume down about 1.5%. Now that's a fairly high margin business for us, and so we've lost some business in our high margin area, and we made up for that in some lower margin businesses, and as a matter of fact, more than made up for it in lower margin, high density film products, packaging services, and flexibles business. But in the composite cannabis, as I said, volume was down about 1.5%. All of that really was in the snacks and juice concentrate area where we were down approximately 10%. We made up for that in nuts which were up about 8%, dough, coffee cartrages were up but the net of it all was about 1.5% decline. As I said, we replace that with volume in other places like high density packages service and flexibles. We also had some added costs in the composite can business at our Henderson, Kentucky plant where we make metal ends. We had some start-up cost in this year's third quarter related to ramping up new ultra seal metal end production. That machine is completely sold out so a lot of extra cost and time and effort went into the start-up of that machine, and that cost certainly affected us in this year's third quarter. When we look at the flexibles division, volume was up about 13%, and of course we've been talking about volume being up over a good many quarters now as they continue to implement that $60 million worth of new volume that they got last year. So volume was up 13%. The Ebit was actually down, and almost all of that is due to the problems related to the machine start-ups at two of our plants. We've talked about it before, our Winnipeg plant and one other, but they continued to have some start-up issues around new presses that were installed in those plants when we compare this year's quarter to last year's quarter. But much like the Henderson, Kentucky story, an awful lot of resource has gone into bringing those new presses up, and we are certainly seeing a turn around in that so that August was better than July and September better than August. And we expect to continue to see less scrap and improved results out of those two plants. When I look at the high density film, which is another consumer segment operation, our grocery volume there was up 5%, but the biggest single negative that we see on the price cost in the consumer side relates to high density film, and there, even though volume was up and pricing was down 11% year over year in the comparison. Now pricing was down 11%. Their primary raw material resin was also down but only down 5.5%. So we've gotten squeezed somewhat in the high density film business in this particular quarter. Some of the reason that costs are down -- I'm sorry -- pricing is down is that we have had to pass through some of that resin decrease to our customers, and we're seeing some heightened competition in that business right now. So that makes up the price cost squeeze in high density makes up far and away a majority of the $7 million negative price cost squeeze in the Actually when I was talking about composite cans, I also failed to mention some extra costs that we have in this year's second quarter related to research and development around the sonowrap product that we're in the process of making commercial -- becoming commercial around the first of next -- the first of this coming year. Those are the comments that I have on the income statement side. In terms of cash flow, our cash flow , as Allan said, is good. It's $71 million. We'll add back to that to compare to last year $41 million related to payments that we've made into our pension plan. So at $112 million of cash flow, that's comparable to last year's numbers and it's tracking well with what we think will be the $150 million cash flow that we expect for the whole year. Our working capital management has been good. Our cash to cash cycle which is days of receivables plus days of inventory minus days of payables continued to improve. We dropped to less than 48 days, and that's compared with 55 days at year-end and about 49 days at the end of the second quarter, so we're seeing good improvement there, networking capital was a positive $7 million during the quarter. Our balance sheet remains strong. Our debt was reduced by around $95 million from year end. Our debt to total capital is a little less than 45% compared with 49% at year-end. So the balance sheet remains strong, and with that, Allan, I'll turn it back over.

Okay. Thank you, Charlie, and I think we're ready to open it up for questions.

Ladies and gentlemen, if you have a question at this time, please press star 1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star 2. One moment for our first question. Our first question is from George Steffals. Your question, please?

Good afternoon. Hope you're well. Just wanted to go over a couple things. Can you comment on what the start-up costs were for the two or three areas that you highlighted? That's question one. Question two, can you give us a little bit more color in terms of the heightened competition in high density film, whether you expect this to continue and, you know, Harris, we've talked about this before, how do you feel about that business longer term? Thanks.

Charlie, you want to talk about the start-up first?

I'll give you some numbers. The two flexibles plants, the year over year difference was approximately $2 million. The additional research and development cost was approximately 1 million to two, 1,000,003.

The end was around $1 million.

Okay.

George, the second question was about --

High density film.

Competition in high density film.

Yep.

Unknown Speaker* We probably saw a little more competition in the last quarter than we have seen on pricing. One of the companies that -- one of the major player s has been in a bid process for their business. It's for sale, and I think there's been some movement on their part to try to sell down on a full basis. So it may be a little more competition. We probably have also seen in the last quarter or so more import bags coming in as a result of the differential between resin pricing in the far east as compared to North America. So I would say those two things have driven more competition there. We typically see that competition when there's a differential between resin pricing. The third, George, as you know, as I've said several times, we've looked at this business a couple years ago as to what we do with it, and we made the decision to keep it. It is returning, it continues to return over our cost to capital. This and, like all of our businesses, we continue to look at the portfolio and examine it from time to time to see what might be a fit, but at the present time, we're not prepared to do anything with it.

Okay. I'll turn it over to the other guys and I'll come back. Thanks.

Our next question is from owed Eddie Sea.

quick question. Charlie, I think you touched on the year over year increase in the tube and core pricing. I wonder if you could talk about the quarter over quarter or sequential increase in tube and core pricing, check to see on the extent of the company's pricing power in the quarter. I was also wondering if you would give us a little bit of color on the size of the bakers reels business so we can begin to factor in that business given our own opinions on the telecom towercom business.

I can comment a little on pricing. I don't have all those details, but in tubes and cores, we were seeing a steady decline, so in the second quarter, we would have seen a steady decline from April, May and June, and that was approximately about, you know, perhaps one to 2% on a year over year basis, so we were seeing that just as almost just a straight trend line, and that's what essentially we've flattened out and sort of started to reverse in the third quarter.

Great. And when you were talking about that decline as a steady trend up until this most recent quarter, what's the major driving force in that? Is that just increased competition, passing on a productivity gain, or what's driving that?

OCC had stayed very steady for a fairly long period of time, and I believe over a period of time with steady OCC, competition largely was the resulting factor for us to respond with prices.

It's obviously steady OCC, but you also saw over that period of time a fairly weakening economy. And the mills were not operating full and some of the competitors particularly in the lower end commodity grades of tubes, you see more pricing pressure there, and a weaker economy than you might ordinarily where people are trying to keep the mills full.

Great. Thanks. And then baker business?

Baker business is around $100 million business, $100 million plus a little.

Great. Thank you.

You're welcome.

Our next question is from Dan(incomprehensive). Please proceed, sir.

Dan(incomprehensive): Good afternoon, guys.

Hi, Dan. How are you?

Dan (incomprehensive): Good, thank you. Question. Charlie, I was looking at your table here and if I exclude, I think, acquisitions and price on the impact of revenue for the quarter versus a year ago, it looks like the combination of volume/mix was down about 12.5%. How much of that would be volume, how much of that would be mix ? I just simply took your revenue numbers and excluded acquisitions, and then I excluded price. What you're left with is about a 12 -- looks like about a $12 million, actually , decline.

Are you on the sales bridge?

Dan (incomprehensive): Yeah, I'm on the sales bridge.

Okay. Well, we show volume mix as a positive 20- five-point $9 million.

Dan (incomprehensive): I know that, but I excluded acquisition from that, Charlie.

Acquisitions were a separate -- acquisitions is a separate number.

Dan (incomprehensive): I know that, but in terms of the revenue bridge, and maybe I'm reading this wrong, I don't know, if I take out $43.4 million out of -- some of that volume and mix came from acquisitions, correct? Or is that --

No. The acquisition number that I gave of $43.4 million should be freezing acquisitions.

Dan (incomprehensive): Oh, okay. So what was volume then for the company in the quarter?

Well, you could actually -- well, have you to look at it segment by segment, but volumes were generally up, I believe, in the industrial segment, that works out to be about a 5% increase in most of our business.

Dan (incomprehensive): Okay. And that's excluding acquisitions?

That's right. U.S. tube and core volume was up 4%, Europe was up 2, paper volume was up 4. That's right. That excludes acquisitions. You should be able to add those numbers up and starting at 649, arrive at 717 by adding in the 25 million volume mix, and the 43 million acquisitions.

Dan (incomprehensive): I understand. I'm with you. Has this cycle of not being able to pass through the higher raw material costs -- I don't remember it being so pronounced in the past. I remember lags certainly over the years, but I don't remember not having the ability to get some of that pricing through or having this kind of lag. Is there something going on in the industry that is making it more difficult this time?

I don't think so. This is Harris. I don't think so, Dan, but you're correct, it is the first time in our history that we have not been able to do that, but I think what we've also seen this time is we saw OCC run up significantly for really reasons other than general underlying economic reasons. And then a very, very precipitous fall that obviously made the price increases, certainly the second price increase very, very difficult to recover, but generally, OCC is a hedge to us in slow economic times, and this is the one time that it spiked on us when the underlying economy didn't support it.

Dan (incomprehensive): Okay. And last question, kind after two-part question, have you given guidance for next year?

We have not, Dan. We will obviously do that in December.

Dan (incomprehensive): The reason I'm asking, correct me if I'm wrong, if you're successful, and I believe you will be, in passing through the full increase in OCC costs by the end of the fourth quarter, and also fixing some of the start-up issues related to the consumer business, it seems to me like you're deployed for a fairly significant 2003.

Dan, assuming your assumptions, we should have positive price costs rolling in to next year. And we will fix the operating problems.

Dan (incomprehensive): Okay, guys. Thanks.

Thank you.

Our next question is from Joel Tiffs. Please proceed.

Hi, guys. Actually we were just wondering, some time ago management laid out revenue objectives for some of the different businesses such as the flexible services and some of the other smaller businesses. We were just trying to see if you could give us an update as to what's going on there.

Joel, I'm afraid I couldn't hear you.

Hello?

Can you speak up a little bit?

Hello?

Joel?

Hello?

Can you hear us?

Hello?

Joel?

Bad connection.

Operator?

Mr. Tiffs' line is open.

Okay.

Michelle, I can't ask a question. Hello?

George, Dan, can you all hear us?

They don't hear me when I'm talking in the phone.

We'll take the next question from George Staffis.

George, can you hear us

I can hear you fine. But you do get that with conference calls from time to time.

Yeah.

Question on cash flow. You have brought down your target for this year, second time in a couple quarters, and obviously some of that is just the performance not being quite where you had expected it. In the past, you've held to an 8 to $900 million target over five years, and in your commentary in the press release, it's a little bit less specific. How would you help us think about your free cash flow prospects, Harris, over the next four years and how to follow on that topic?

George, I don't see a material difference in our cash flow going forward than what we've said in the past. Obviously you hit the nail on the head when you said that operations and certainly the earnings in this quarter and this year have suffered a little bit, but assuming the economy rebounds a little bit, I'm still comfortable with the guidance that we have given in the past.

Okay. Well, if I just take 800 and divide by 5, I realize that's very sim police simplistic, that would get me about $160 million of free cash flow. This year you're saying 140 to 150. Am I being too picky in terms of the differences and it's really the same place, just rounding between a 145, let's say, midpoint and 160 for next year?

George, I've never accused you of being picky

Others have. Don't worry about it.

I think you're rounding.

Okay.

As I look out, I don't see any fundamental change in the cash flow. Our cap X should remain in the same level going forward over the next four to five years . And I'm basically comfortable with what we've said. 160 doesn't bother me. 150, 160 doesn't bother me.

Okay. Now, when we look at your growth areas, do you expect -- and here I'm thinking about things like closures, like flexible packaging. Do you expect them to be as cash-general rahtive dollar for dollar, dollar of asset in the business, dollar coming out in free cash flow, as your other businesses? Taken another way, if these are going to be the growth businesses for you, perhaps 800 to $900 million is too lofty an objective for you.

I don't think so, George.

And I don't think so either. I think as we look out -- look into the future, we have actually forecasted our income streams, our company tall expenditure -- capital expenditures, and it all fits together so that your estimate of $160 million is --

Directionally correct.

Okay.

When we look at the cap X for these businesses to support the growth plans, the cap X total is still in the range that we've talked about.

That's right. It ramps up a little bit as the business grows, but not substantially different so that it all doesn't roll up to what we've been talking about.

Okay.

And we have plenty of capacity in the other businesses, so I don't see that kind of spending going on in the other businesses to pull it down.

Fair enough. Two last questions. When we look at composite cans, volumes are down, I think you said 1.5%, and that's , I believe, sequentially better than what you showed in the second quarter, which I think was down around 4 or 5, but it's still comparing against a minus 6 last year, and I seem to recall that you thought composites would be growing in the second half, and either/or, I guess the point is, when are composites going to start growing? You're up against really two years of negative performance. I would expect that that would have happened. Anything that's driving it above and beyond what you've talked about.

George, we've seen -- you're right, we've seen sequentially quarter over quarter improvement. We have seen year over year decline. I think clearly, between now and year-end, we will see a couple conversions that we can talk about which hopefully will bode well going into next year.

Okay. Last question on flexibles. Again, it's been an issue that we've all talked about. What type of target margin would you place on flexibles next year since at least in my assessment, it's probably not performed where you expected it would have been performing by this time, and, you know, what do you think Tom Cokeer brings to the segment that will help bring it to whatever your target market is?

Well, you're right, George, it has not been performing to our expectations, and when we dissect into where it is, it's the two areas that Charlie talked about. It's clearly at Missasa and in Winnipeg, and certainly Tom brings a lot to the business, but more importantly, the manufacturing assets that we have placed there under Tom, and we did this some three or four months ago and I think Charlie or Allan said we have seen month to month improvement. So as I roll into next year, I'm looking for a much be better performance in flexibles. I would be a little remiss talking about margins in these conference calls. I'm not going to do that.

Could you index the profitability? In other words, if you were at 100 now, are you at 110, 120, or is it infinite because it's such a low base this year?

We will see nice improvement next year, George, and hopefully we will give you some better guidance of that in December.

Okay. Thanks very much, guys.

Thank you.

Our next question is from Eddie Sea

You guys get some interesting volume data particularly on the industrial side, breaking it down tube and core business again both in the U.S. in Europe, some of the paper volumes, all of which seem very strong considering the state of the larger economy. I was wondering if you could perhaps give us some additional visibility into where those trends were during the quarter from the beginning to the end, given, I think, the market and certainly my concern here on where we stand today and where we stood in the month of September.

Okay. Well, let me try that. Actually on a quarter over quarter basis, we saw volumes come down in the tube and core business, so we have certainly seen -- while we were seeing an up particular in the April, May and June time frame, in July, August and September, we certainly saw a downturn by somewhere around 2% quarter over quarter number. We certainly have not seen any improvements to speak of in October, and I guess when you say we're down 2% quarter over quarter, normally this time of the year, the fourth quarter, we see a seasonal uptic in that business, so it's probably more than 2% when you factor that number into it. Hopefully that gives you some feel.

it does. Thank you very much.

You're very welcome.

Our next question is from Joel Tiff. Please proceed.

Hi, this is Mike Matice, one of his associates.

Hello, Mike. Do you have a better tone line?

Hopefully.

Good.

Some time ago, management had laid out revenue objectives for some smaller businesses such as the flexible services and some other ones, and I was wondering if you could give us an update as to what's going on with that.

Mike, I don't recall the revenue estimates that we gave, frankly, by --

I think about a year or so ago, you were talking about growing flexible s to like the 300 million-plus-type business.

Okay . Where we -- we passed the $300 million mark in flexibles, close to it, and our goal would be that that business should be a half a billion dollar business in the next three to four years.

Okay.

What other small business are we talking about?

How about the services as well?

Unknown Speaker*: The services business is up nicely year over year. Charlie, do you have that number in front of you?

I don't.

Sales of approximately $6 million . In fact, what services business did is they brought on since last year, we would have been bringing on the Chester, Virginia plant, and just having continued growth in --

The two existing plants.

This volume is going to be up 24, $25 million on an annual basis.

So we're talking close to $200 million now for services?

Yes.

And then I was just trying to get kind of an idea from the peak levels in '99 and 2000 where volumes stood now relative to back then. In terms of the magnitude of the drop to try to just gauge the amount of leverage you have on an up turn -- upturn.

Off the top of my head, and this is dangerous for me, somebody needs to help me, I would say that volumes are down probably 7% on the industrial side of the business.

Okay.

From '99-2000.

Our next question --

Mike, Just a second.

Sure.

We're seeing if we can find some data here. I can't pull it out, but we'll share that with you guys when we find it.

Good luck.

My gut said around 7%, but I'll be more definitive with you.

All right.

Our next question is from Jenny (incomprhensive).

Jenny (Incomprehensive): I had a question about OCC pricing. In your fourth quarter guidance, are you assuming that OCC stays at current levels, which I think you quoted at $65?

We are assuming no movement in OCC in our guidance.

Jenny (incomprehensive): Okay. Thank you.

You're welcome.

There's a follow-up question from George Staffis.

Last question, guys. Have you come up with an estimate for what you think your pension change will be from a P & L standpoint for 03 versus 02 in

George, we'll be prepared to talk about that in December as well. We're really looking into that, looking at all facets of it from the perspective of the investment return, from the perspective of the discount rate, and we're just not in a position to provide that kind of guidance right now.

George, I can give you more definitive numbers on those than Charlie if you'll tell me what the market is going to do between now and year-end.

And I appreciate that, Harris, but, you know, even if you assume flat level going forward till the end of the year.

I think it's going to depend on assumptions that we may, George, and that's all premature at this point.

Charlie, would it be safe to say it gets really down to return assets and assets and the amortization of losses? Would those be the biggest drivers?

The biggest driver in the calculation, service cost is always going to be sort of flat year over year, will be the return assumption, that's right. The return assumption and the asset base.

Okay. Thanks. Good luck in the quarter.

Thank you.

The next question is from David Lepold. Please proceed, sir.

Yes, good morning, or afternoon, actually. I don't know whether or not you covered it, and if so, I do apologize, I was distracted for a brief period. One, what percentage of your sales next year were will new products represent?

David, I don't know that because we haven't projected that far into next year, but as Allan talked about in the opening comments we spent a lot of money in the last few years on product development. Some of those are starting to come on stream, some will come on in the first quarter of next year and we will have a number for you in December that can more readily identify that.

Unfortunately I will not be at the December meeting but I will have somebody there to take copious notes.

I'll see that you personally get it.

Second question, you've indicated that you've spent a meaningful amount of dollars. Have you disclosed what that figure is?

No, we haven't.

Okay. Will the figure next year, 2003 calendar year, be higher or lower than what has been spent in the last I two years?

It will be higher.

Okay. And lastly, on the acquisition front, where you sounded rather confident something might find its way into your umbrella of companies. Could you give me some indication of the size of the acquisitions you are considering right now or feel a better than even chance of perhaps acquiring?

Unknown Speaker* that was Allan's optimistic tone he used, and obviously I can't talk about acquisitions. We've always got things going on that we're looking at, and frankly, we've got the flexibility to do most anything that we need to do within reason, so I wouldn't exclude something of a couple hundred million dollars. More than likely anything that we have on discussion now would be probably in the 75 to $100 million range.

And would they all be in areas the company currently participates in or would this be perhaps stepping out into additional pursuits?

They would be in the umbrellas that we're in today in the platforms, our growth platforms we have today.

Thank you very much.

Thank you, David.

Our next question is from Derek (incomprehensive). Please proceed, sir.

Derek (incomprehensive): Thank you. Good afternoon, everyone.

Good afternoon.

Derek (incomprehensive):: I have a question in regards to the goodwill of $353 million. I just want to know what the company was going to do or take any strategies into possibly taking that charge off?

We've looked at that from an impairment perspective, and have actually made those calculations, reviewed those calculations with our auditors, and we would -- do not expect, which means we will not have an impairment write-off of goodwill.

Derek (incomprehensive):: Okay. Second question. Is the company going to do anything in terms of the current long-term debt of $789 million?

Well, we paid down -- actually we paid down $95 million so far this year, but obviously we're not paying down the long-term debt portion. That comes out of commercial paper. Last year really around this time after we had made a number of acquisitions, we termed out $250 million of that debt. If I recall, 6.5% over 12 years. So our fixed rate debt position is pretty well firmed up right now, and I would expect it to stay as it is. I would expect that as we have cash flow, we would pay down our commercial paper, and as we have borrowing needs, it would be borrowed through our commercial paper on the floating rate side.

Derek (incomprehensive):: Great. And next question. I want to find out what's the current cash equivalent that you guys currently have right now, when are you guys going to purchase back your own stock?

Well, we have an authorization from our board to purchase up to 500 -- to 5 million shares of our stock. We have from time to time purchased stock and we just have to see. Our preference would be to use that cash for growth rather than purchasing stock, but I wouldn't preclude that.

Derek (incomprehensive):: Okay. And my last question. In relation to the consumer packaging sector, which company in the market would you say is your biggest competitor?

Well, that depends on which market you're talking about. If you're talk talking about composite cans, a German company by the name of eyedenmimeer. If you're talking about flexibles, it would be Beamus printpack, high density film would be the likes of vanguard and some other private companies.

Derek (incomprehensive):: Great. Thank you very much, guys.

You're very welcome.

We have no further questions at this time, Mr. See Cecil.

Thank you, and thank you for joining us. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Good day.