Sonoco Products Co (SON) 2003 Q2 法說會逐字稿

Good day, Ladies and Gentlemen. Thank you for joining Sonoco's Second Quarter Financial Results Conference. My name is Kaitlyn (ph). I'll be your coordinator today. You're all in listen-only mode. There will be a question and answer session following your presentation, and will you receive instructions on how to ask questions at that time. If at any time during the call you require assistance, please key star, zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

At this time, I would like to turn the program to your host, the vice president of investor relations, Mr. Allan Cecil. Please go ahead.

Good afternoon and thank you for joining us for Sonoco's second quarter teleconference. With me today are Harris DeLoach, President and CEO, and Charles Hupfer, Vice President and CFO. First permit me to remind you that today's conference contains forward-looking statements based on current expectations and are not guarantees of future performance. Additional information about factors that could cause different results and about the company's use of non-GAAP financial measures is available on forms 10-K, 10-Q and 8-K filed with the SEC. For those who may not have seen our first quarter release this morning, our reported earnings per diluted share were 24 cents versus 39 for the same period in 2002.

Reported earnings for the first quarter included restructuring charges of 8 cents per share in 2003 compared with 1 cent in 2002. These results are within our previously announced guidance for the quarter of 32 to 36 cents, which excluded restructuring charges. For the second quarter, we saw flat sales and a decrease in company-wide volume which reflected weaker demand in served markets of our industrial segment, while in the consumer segment, volumes declined in high-density film and flexible packaging.

Second quarter earnings were hurt by the lower volumes and a negative price cost relationship resulting primarily from higher resin costs. We also had higher energy costs and higher incremental pension and post retirement costs. Looking forward, we do not yet see indications of significant general economic improvement that would meaningfully enhance the near-term growth for our industrial segment. We've actually seen some further deterioration.

Therefore, we expect second and third quarter earnings per share to each be in the range of 31 to 35 cents not including the impact of restructuring charges. We also announced today that we will aggressively further reduce our cost structure. In addition to the $60 million or more in additional cost reduction since early 2001, which included the closing of 18 plants, we're developing plans to eliminate an additional $60 million or more in additional costs including closing a similar number of additional plants. Excluding the restructuring charges, these actions are expected to have a modest positive impact in the fourth quarter and then an accelerating impact into the first half of 2004.

Meanwhile, we expect several new consumer product introductions to come on stream during the last half of this year, including SonoWrap applications for the snack food, powdered beverage and pet food markets, a new retortable stand-up flexible package for pet food, and a high barrier aseptic plastic bottle for a soy-based nutraceutical drink. It should also be said that the company remains actively engaged in acquisition activities. The board of directors today at their regularly scheduled quarterly meeting elected James Micali, Chairman and President of Michelin North America, Inc. in Greenville, South Carolina to fill a board retirement effective immediately. Jim Micali will fill the board position of Allan Dixon, who recently retired from the board after reaching mandatory retirement age.

The board today also declared a regular dividend of 21 cents per share. This is the 313th consecutive quarterly dividend, and it will be payable September 10th, 2003 to shareholders of record as of August 15th, 2003. So with that, I'll now turn the discussion over to Charlie Hupfer, our CFO.

Thank you, Allan. As we've discussed, sales were $709.3 million, and that's .4% behind last year. EPS was 24 cents versus 39 cents last year. In both of these years, we have restructuring charges. In the second quarter of 2003, we have an eight cent re-structuring charge. That's $8 million both pre-tax and after tax, and it relates to the closing of a plant in France. The savings that we expect to get from that plant closing will be about $2.5 million on an annual basis. The restructuring charge last year relates to the closing of a flexible bag plant in California. If we add back restructuring, EPS becomes 32 cents for the quarter compared with 40 cents last year's quarter. And that also compares with our range of 32 to 36 cents.

Our expectations in the 32 to 36 did not include any consideration for restructuring charges. Admittedly, we're on the low end of our range. The big year over year differences in EPS are pension, which was 3 cents per share, energy cost is another 3 cents per share, and volume 7 cents per share. So those three items alone cost us 13 cents per share when compared with last year. In terms of pension, we've known that amount all year. That's a part of the 19-cent annual year over year pension difference that we've talked about. In terms of energy, we started to see energy rise again at the beginning of the year, so some of this increase was built into our expectations for the second quarter, but in terms of volume, the volume decline really started for us in May and worsened in June. In our domestic tube and core division, we have seen four consecutive months of year over year improvement, so May and June were really unwelcome surprise to us.

Now let's look at the P&L statement. The gross profit dollar amount is $129.2 million, and that's 11% worse than last year. The gross profit margin is 18.2%, and that compares with last year's 20.4%. All three of the factors that I just mentioned, pension, energy and volume, adversely affect the gross profit margin. Selling, general and administrative expenses actually $3.3 million less than last year, and SG&A runs at a rate of 10.1% of sales compared with 10.5% last year. What this represents is a continued focus by us on reducing discretionary spending, particularly in the selling and administrative category. The effective tax rate for the quarter, this is absent restructuring, was 34%, and for the year, it's 35.2%, so we brought the essential tax rate down just a little bit, and that primarily reflects a change in our foreign position.

Now let me turn and give you the bridges that we usually provide, and I'll start with the sales bridge. Before I do that, I need to make a comment, that these bridges are estimates, they're estimates based on a lot of accounting assumptions. We use them in our business to understand what's going on, but you have to acknowledge that they're not perfect numbers, but they're certainly they certainly give us a very good indication of what's happening with our business. So with that caveat, I'll give you the sales bridge. And the four columns that have are description, total, industrial segment, and consumer segment. And the first item in the description column is 2002 sales.

In the total column, we have last year's sales of $712.4 million. In the industrial column, 362.9, and in the consumer column, 349.6. The next item is volume and mix, and that's a negative $39.9 million in the total column, a negative 21.8 in industrial, and a negative 18.1 in consumer. price, which is the third item in the description column, price has a total of 15.18 or 15.8 million. Industrial column is 12.1, and consumer 3.6.

Next line item is acquisitions, and that's 4.5 in industrial it's 2.3, and in consumer, 2.2. Other/exchange is $16.5 million, industrial is 10.4, and consumer is 6.1. And the last column or the last item in this first column is 2003 sales, and it should be the sum of all the numbers I've provided, and that's $709.3 million. In the total column, 365.9 in the industrial column, and 343.4 in the consumer column. So clearly as you eyeball this, you can see that the issue for Sonoco in this particular quarter was volume, the drop-off in volume. And I'll make some comments there.

In our industrial segment, volume declined overall 6%, and generally we saw weakness across all of our industrial segment businesses. In our domestic tube and core business, we saw weakness really across all product lines in May and June except for certain sophisticated textile tubes and construction tubes. In our paper domestic business, that volume was off really for two reasons. One was when we acquired the Hutchinson Mill in 2001, we acquired a contract to sell liner board, and as that contract expired, those sales went away from this year's quarter. So that's an unfavorable year-over-year comparison. That accounts for about half of the paper division short fall. The other half is (inaudible). molded plastics business was down as well. Molded plastic sells into some of the same industry as baker does with their wire reels, and that business is off, and the textile market for molded plastics is off as well, selling into some of the same markets as our industrial products group.

Speaking of Baker Reels, their volume was down. Their volume was actually down 17%, and this is a story we've talked about before, but they sell into the cable TV and the fiberoptic industry, and there's no turnaround in those industries yet. In fact, in the industrial business, the one area where we did have improved volume was our recovered paper division, and they reported a 7% increase year-over-year. As we continue to further our position in this recycling business.

We don't believe in the industrial sector that we've lost any market share. In fact, we track pluses and minuses and feel like we're holding our own or actually gaining in market share, so we believe the decline in the industrial sector was all economy-related.

Now on the consumer side, the overall decrease was 5.2%, and again, we saw declines across the board. We saw declines in our rigid paper and plastics business, and in that particular business, part of their decline related to problems that both Sonoco and P&G had with the Jackson Tennessee plant and the Tornado. That affected our sales into - during the quarter. Our flexible division was down as well. Here we've probably lost some business in terms of price and some just to slack customer demand. Volume was also down in our high-density film business, and it was off modestly in our Phoenix Metal end business.

So when you put all this together, volume is the real story for this quarter. We certainly expected to come back when the economy improves, but frankly we don't see any signs of that improvement yet. Now moving down a line to the price in the industrial side, pricing is positive across all divisions. Industrial price increase amounts to 12.1%, as you have on the table that I just gave you what we did was we implemented price increases last June and July in our tube and core business, and again in April. Our tube and core pricing year-over-year is up about 1.5%, and we have further price increases that will be implemented effective July 1st, so we see that pricing improving even further as the year goes on.

We've had price increases that amount to on a net basis about 6% in our paper division, and in our consumer division, our high-density film products group had price increases that were around 8%, and those are increases that they put in place to cover some of the cost increases that they've had, particularly in resin. So we did have good success in passing price increases through to our customers during the second quarter.

In terms of acquisitions, acquisitions really had a negligible effect in the industrial sector. Last year we acquired two small reels companies, and that's what makes up the 2.3 million in industrial, and in the consumer sector, in the second quarter, we purchased an incremental interest in a subsidiary company or an affiliate company really, Keating Group, we took our interest from 30% to 80%, and you can see those sales coming through in the acquisition line in the consumer segment. And then exchange other, that's mostly exchange. It will be translation. A lot of it would simply the Euro strengthened by 25% year-over-year.

Now let me give you an EBIT bridge. I'll do the same thing as I did with sales. We've got four columns, description, total, industrial and consumer. And the first item in the description column is 2002 EBIT, and that number under total is $70.4 million. Under industrial, it's $41.8, and in consumer, it's $28.6. Volume, the next item, is a negative in the total column of $10.8 million. Industrial is a negative 4.2, and consumer is a negative 6.5. Price cost, next item, that is a negative $3.9 million in the total column, negative 0.9 in the industrial column, and a negative 3.0 in the consumer column. Productivity is a positive $7.4 million. In the total column, we had zero in the industrial column, and 7.4 in the consumer column. Inflation is a negative $8 million, total 6.1 industrial and 1.9 consumer, and then other is $2.6 million in the total column, 2.1 industrial, and 0.5 consumer. So in total, our 2003 EBIT is $57.7 million in total, $32.7 in the industrial sector, and $25.1 in the consumer sector.

Now I've already commented when I talked about sales about volume and the volume shortfalls, and what you see here in the $10.8 million is the profit impact of that volume decline. The next line item was price cost, and from the sales bridge, we saw that selling prices in total went up $15.8 million. When we add incremental pension -- or I'm sorry - raw material costs to this equation, that $15.8 goes to a negative $3.9 million. On the industrial side, the incremental cost is largely recovered paper, and there recovered paper costs to our paper division went up $11.50 in the second quarter over last year's second quarter.

Having said that, even though the industrial number is $900,000 negative in the U.S., or actually North America, price cost is actually positive, so what brought us from a positive in North America to a negative is outside the U.S. and particularly in Europe-Europe into a lesser degree in Asia. And frankly, we expect this price cost to improve on into the third quarter as some of the pricing that I mentioned becomes effective on July 1st, and we have seen OCC costs drop from $75 a ton, stated yellow sheet price, to $65 a ton. So we do expect further improvement in price cost as the year goes on.

On the consumer side, the cost increase is almost all in our high-density film operation, and resin cost there is up year-over-year 40%.

In terms of productivity, we had a total of $7.4 million, and that reflects positively on our Six Sigma and our lean programs. Industrial was at zero, and that is due entirely to the volume short fall that is we had in North America we just weren't running especially paper machines as much as we would have expected to, and that certainly affects productivity. Productivity on the consumer side was generally good across all of our consumer groups.

Inflation is a negative $8 million. Virtually all of that cost increase is made up of two things. One of them is wages and the other is energy. Wages last year increased about 2 to 3%, so we see the year-over-year impact of that in this inflation category, and energy is up and in our paper division, which is the big user of energy. Energy is up $4 million, so energy's up $4 million out of this $8 million number. So again, inflation, the two biggest items are wages and energy. Energy is up with natural gas prices being up roughly 50% year-over-year.

In the other category, and this is a positive $2.6 million, that largely represents the reductions in discretionary spending in the selling and administrative and in the plant fixed area. So in summary, this proves to be a pretty difficult quarter. Price cost wasn't as important a factor as it has been over the previous five quarters, but volume clearly weakened and pulled down productivity with it, and the higher energy costs were clearly a factor as well.

Now let me comment for a minute about our cash flow. Cash flow from operations, and these are year-to-date numbers and they're found in the press release. Cash flow from operations was $84.5 million compared with $115.3 million last year, so that's a shortfall from last year of $30.8 million. When we look to see where that difference is coming from, there are really three areas. One of them is net income is down, net income is down $19.4 million, and that's the starting point in the cash flow statement. And we've already talked about that. Networking Capital is negative year-over-year $55.2 million. And that's certainly one of the single biggest differences here. And then on the other hand, we have a positive pension payment of 29.3, last year we made pension payments of around $32 million, and this year pension payments, and this is largely in the U.K., are around $3 million, so that's a $29.3 million difference. Those are the single biggest items that account for the decline in our operating cash position.

Now, let me talk for just a minute about the net working capital, because we can see it when we talk about -- when we look through the balance sheet, we have had increases in net working capital. Inventories are up $39 million, and accounts receivables up $45 million. And this really represents a departure from the trend where we've had increasing and improving net working capital performance really for the last three years, so we're taking some pretty strong measures to turn this around. Accounts receivable appears to simply be slow pay and some extended terms along with some foreign exchange increase.

And so we'll be focusing on accounts receivable. Inventory, as I said, was up $39 million. Some of that is because we purposely built some inventory in our metal ends area as we start to move business into a new operation in Brazil. We also have some of the FX effect in inventory, and clearly higher resin costs affected our inventory, but I think the biggest single difference and the one that we can get our hands around the quickest is that we were somewhat slow to recognize the shortfall in sales in May and June and really didn't adjust our inventories as quickly as we could or should have.

In some instances, we waited until the July 4th shutdown, so as to not have to take two shutdowns and what that did was, that's fine, that helps us get our inventories in line, but it doesn't show at the end of this second quarter. So we believe that we can turn that net working capital difference of $55 million around and certainly expect to have that turned around by the end of the third quarter.

The balance sheet, part of your press release, remains strong. Debt to total capital as we calculated dropped from 44.5% to 43.2%, and debt to total capital drop is really entirely attributed to our increased equity sensed -- with the free cash flow position, we didn't pay down any debt. But as I said, really you can go back and sum up this quarter by just three items. Pension, which we've known about, energy, and then, of course, the big-ticket item was volume. So I'll turn it back to Allan for questions.

Thank you, Charlie. And operator, we're ready to open it up for questions.

Ladies and gentlemen, if you wish to ask a question at this time, you may do so by keying star 1 on your touchtone telephone. If your question has been answered or you wish to withdraw it, please key star 2. Questions will be taken in the order received. Please key star 1 to begin. Please hold as we pause for questions.

Your first question comes from Richard Hoolhan of Salomon Smith Barney.

Good afternoon.

Hey, Richard, how are you?

Good. Hi I had two questions. One had to do with pricing on the industrial side. I guess I was a little bit surprised to hear that pricing has moved up there given the weakness in volumes. Is that purely a function of OCC prices being up year to year over the course of the quarter? And if that's the case, then would that reverse if you see -- I guess it was we see year to year comparisons decline if those OCC prices stay where they are?

No, the price increase that was announced in April that we are increasingly implementing through the quarter and on into the third quarter really started with paper increases, and they weren't OCC-related. They were really related more to a general rise in overall cost, some of that being -- a lot of that being energy and some of the rest of it being things like insurance-type costs. And so that cost increase -- the cost increase and the related price increases were not OCC-related, so we wouldn't expect with OCC to drop for that to have an impact on the further implementation.

Gotcha! And one other quick question on energy. Could you remind us what the main types of energy you buy, whether it's natural gas or oil or what your exposures are there in

Natural gas would be the one that's increased the most. We do use some oil and some coal and electricity, but the natural gas is the one that's caused this roughly $4 million increase in our paper and flexible division.

Gotcha. Great. Thanks very much.

Your next question, sir, is from Edings Thibault of Morgan Stanley.

Good afternoon. Just wanted to follow up on that. Can you talk about sort of the percentage price increase that you have underway? You mentioned effective July 1, wanted to put that one on, and also a comment on the consumer business, the flexible packaging business that was lost, can you talk about what kind of the key drivers here and perhaps give us some more details on what type of business that was?

Edings, I'll be glad to. First of all, your question about the July 1st price increases, these are actually the price increases that we implemented or put in place in April of the year on the industrial products side of the business that had some delays till June 30 or July 1st due to escalators or contracts, and they will be rolling through, so it's not an additional price increase, it's the one that was actually put in place in April. With regard to the flexibles business, I think in total, we're talking probably 5 to 7, $8 million worth of business, if I recall correctly, and I would put those into two camps, and it was one piece of business that frankly we lost on price, and that was on 3 to $4 million worth of business. The balance of the business, as you recall, we had a lot of difficulties mid last year and late last year in two plants, Mississauga and Winnipeg. And as I said in two conference calls and publicly, I guess, those plants are performing quite well now. But the truth of the matter is, we lost some business and we weren't able to handle this, as those plants were not performing up to where they should have been, and we have not regained that business on a year-over-year basis.

Got it. And just a question, I don't want to beat this price increase, but I think the price increase that you announced in April was $40. Would you care to put a percentage on how much of that you accomplished during the course of the second quarter and then how much of that would have been left due to these escalators?

Well, let me take it separately. I would say that on the paper side, we probably got 50 to 70% of that increase going through the system, through the paper division into the converted side of it. Probably in the same range of price recovery of what we announced, maybe a little less than that, but that's a timing issue as well with the contracts in the July time frame.

Got it. Thanks.

Your next question, sir, from Tim Burns of Tranio Capital

Good afternoon, guys. Looking ahead, I mean, let's face it, the economy is still sputtering and, you know, latent energy, pension, everybody's got that problem so we can kind of see through it, but you're going to take some very aggressive action on costs. What's the time frame for achieving the $60 million? And then I have a follow-up.

Tim, this is Harris. How are you doing?

Good. Good.

Tim, this is not something that frankly we just pull the trigger on in reaction to something we've been looking at for some time. Obviously the continuing deterioration and the May and June probably speeded the process up a little bit. I think -- I don't think -- our time frame on this is that we will have a good portion of it completed in the third quarter, and certainly intend to have this all done by year-end.

Okay. And you're talking about the same number of facilities, roughly, and so just some more cost out of the system kind of squeezing your cost basis down to make sure that -- I mean, is the market still pretty ugly in terms of pricing or do you see any better tone there?

I would say that the market is a little better in terms of pricing. If you looked at quarter over quarter, we saw somewhat of an improvement in the second quarter. That doesn't mean there are no, not some isolated skirmishes all around the globe, but pricing is still, as Charlie Hupfer said, the issue of the quarter was volume. We were tracking along particularly in the industrial side, we saw month-over-month improvement January, February, March, April, nice improvement, and we thought we were getting an uptick and things were going along reasonably well, and then the apparently dramatic fall-off in May and June.

OK. And then it sounds like, you know, there's been a lot of time and effort spent on new products, and you talk about, I guess, the five or six of them here. Are these token or are these meaningful new growth opportunities? I mean, I was somewhat surprised by the new multi-layer high barrier aseptic plastic bottle. Is that a commercial business now for you guys?

Tim, as we've said in the past, well, let me say this, we think all of these are meaningful, not just token.

Sure. Sure.

So the SonoWrap is, I think, getting some track under its feet. We have four or five firm orders that will be on the shelf between now and the end, early next year. The vinyl is a nice niche with a nice current customer balance, so it's fairly proprietary Sonoco technology.

Gotcha. Well, I think it's exciting. And the retort pouch, the same story, right?

That's correct.

Well, I think all these things will eventually converge, the cost savings, the new products and a little better economy, and I think we'll move ahead, huh?

We expect all those little acorns to grow into oak trees.

Let's hope so. Thanks a lot, guys.

Your next question from George Staphos from Bank of America Securities.

Thanks, Operator. Hey, guys. How's it going? I wanted to ask you a question on volume. Last year in the quarter, you had a very strong quarter volume-wise, particularly as 2Q ended. Now, is the volume fall-off that you saw simply reflective of the fact that your comp was very difficult June versus June? Taken another way, how much was June down sequentially versus April/May in 2Q this year?

Charlie may have the numbers, but my gut reaction was that you saw a pretty significant fall-off in April to May and then in May to June, and as I looked at the charts from last year, it was a fairly significant fall-off from last year.

Harris, what are your customers telling you?

George, Charlie Hupfer may have a clarification of what I just said.

No, I don't. I agree entirely. I think George is right, we did have a nice Up-tick in the second quarter of last year, so the comparison would have been a tough comparison, but I think we were actually tracking that well, and so May and June really were a complete departure from that.

George, I don't mean to be flippant in my answer, but frankly, as I talk to my counterparts at many of my customers, they simply don't know. We have with most of our customers rolling three to four months forecast, and they have revised those forecasts downward the last couple months fairly significantly, and -

George Staphos Any areas more hurt than others?

I'm sorry?

George Staphos Any areas tougher from an end market standpoint than others?

On the industrial side of the business, I think Charlie Hupfer talked about there are only two segments that were up on tubes and cores, and that was some sophisticated film and some builder tubes. Across the board, everything else was down year-over-year and down quarter over quarter. Now, having said that, we may well have seen some buy-in, although as you know, George, most of our customers don't carry large inventories of our products, and we don't either. But we could have seen some pre-buy in the April time frame in anticipation of a price increase that could have exacerbated, if you will, the volume upside in April. But it couldn't have been a lot because, again, of the carrying of it. I think we're just seeing a weakening last two months, frankly.

OK. Just want to piggyback on Edings' question from before. You were speaking quickly when you were going through pricing and industrial, Charlie. Can you just repeat what you were saying in terms of tube and core pricing? I know industrial was up I think you said 6%, I think you said paper was up 6%, but if you had any of the other details, that would be helpful.

Actually what I said was tube and core pricing was up about 1.5%, and I did say that paper pricing -- and that's a net number, so it has mix in it -- was up 6% year-over-year. And then I believe the only other number I provided was high-density film was up around 8%.

Got that.

Charlie Hupfer That was passing on the resin increases. And so these are just sort of aggregated numbers looking at price and volume from one period to the next period.

Gotcha. When you look at the restructuring that you announced, you reflect back on the 2001 restructuring in a number of facilities and you're saying that this one coming up is going to be similar both in dollars of savings hopefully and facilities. When you look at the last couple of years, you haven't seen much, if any, benefit to the bottom line from the restructuring, yet you are saying here that you expect some pickup in the second half and then into 2003 from this restructuring, so the question, guys, is, what's different this time around with what you're restructuring and given all the acquisition activity, if you had to do it all over again, would you have done these acquisitions. given the amount of restructuring you've done?

George, you asked me about four questions all in one.

I've got to catch up, you know.

I know, you've been gone for a little while. Fair questions. Actually, we track the restructuring quite a bit, and do follow it, and we can put the restructuring savings from before pretty much to the bottom line, to the bottom line. Now, what it doesn't reflect is what was going on in other parts of the business that also were moving at the same time, so if we had not done the restructuring that we went through in 2001, it would have been a fairly ugly picture, frankly. What the driver of this is restructuring, frankly, is we will maintain our historic margins in this business, and we have targeted what I our historic margins are and what is our affordable fixed cost if we can have this business to maintain those affordable those margins going forward, and we have targeted the amount of costs that we need to get out, and I'm not going to sit here and give you a goal other than to say that it will be in excess of what we've taken out, that $60 million today, and there will be at least as many plants as we've taken out. That would be the floor on that. With regard to the acquisitions, yeah, we would have -- I would not second-guess the acquisitions that we made in 2001. Phoenix created a new platform for us that is going extremely well. It's growing nicely, and the expansion into Brazil will give us a nice opportunity to further grow that business. The acquisition of U.S. Piper put us into some board capabilities that we, in fact, needed to grow the business, but also to internalize some grades that we have. What I believe to -- buy at the bottom and see the paper business taking off, absolutely, but I don't second-guess that. And Hayes certainly gave us - business in the Midwest what we needed, so yes, I would do it again.

Thanks, guys.

Your next question from Dave Lebwits of Burnham.

Hello, Dave.

Briefly, Charlie, when you said we had 7 cents of the shortfall because of volume, did you indicate how much volume we're talking about to equal that 7 cents?

Actually I just took that number off of the bridges that we provided and tax-affected it. So that's how I arrived at that sort of the back of the envelope number.

Could you quantify for us then approximately how much volume would have been needed not to have had that 7-cent.

Sure. We actually just do it in reverse. Basically what we would do.

It's $40 million, David.

That's right . If we take $40 million equated to the $10 million of the EBIT effect, so it just sort of went back upstream from there.

OK. Also you mentioned the price increases. Could you give us some idea of unit shortfall year-over-year in industrial and consumer?

In aggregate, we did with a 5% and 6% numbers. And what I really didn't do was try to be too specific around each particular division, but I'd just comment where we had increases and decreases. And I gave, if I recall correctly, a 5% volume decline number on the industrial side, and then went on to say all those businesses were down with the exception of recovered paper. And I gave a volume decrease on the consumer side which I believe was 5.2%, and I said that was really across all of the businesses. So some were a little higher, some were a little lower, but that gives you a pretty good indication.

And lastly, I may have misheard you. You gave an indication of 31 to 35 cents a share for the second and fourth third quarter, or were those the third and fourth quarters?

Those were the third and fourth quarters, David.

Third and fourth quarter, thank you very much.

You're very welcome. Thank you.

Your next question, sir, from Dan Khoshaba of Deutsche Banc.

Good afternoon, guys.

Hi, Dan.

The volume decline in the consumer business, I guess the question is, how much of that in your mind roughly is really a result of the weak economy versus other trends because as I just kind of think about the consumer business, plastic bags, metal ends, composite cans, those kinds of products, they seem like they're somewhat defensive and more oriented to the consumer than programs the more cyclical economy.

I think that the volume in the consumer side, whenever we look at it, I believe with the exception of what Harris talked about in flexibles, we would attribute that to slack customer demand, the rest of it. So we would talk about that as just being the economy. I believe that in the metal ends business, that's largely just a reflection of the economy, and plastic bags, the bags we sell into the grocery store, that sort of -- that's a pretty competitive business, and what happens there is, if we compete for business, we get it or we don't and then it just sort of sits around from one manufacturer to the other, so we did lose some business there which we would expect to replace the next go-round.

So I don't know how to explain that any better than that. And then the composite can side of the business, I believe that that, with one exception, and we've talked about it before, and that's frozen juice concentrate, I believe --which is in a long-term decline, I believe everything else would be attributed just largely to the economy. There's certainly nothing specific out there. With the possible exception in this quarter about the volume that was lost out of Jackson, Tennessee with the tornado.

I mean, how about imports of plastic bags? I noticed that Sonoco was part of a group of plastic bag suppliers that had petitioned some governmental agency to slap tariffs or something along those lines on plastic bags being imported from various emerging markets. Is imports a problem? Has it become more of a problem, Charlie?

Dan, this is Harris. Clearly they've become more of a problem. There is a pretty significant differential between resin pricing today and in the U.S. versus Asia. Traditionally, you used to see anywhere from a 5 to 6 to 7% -- 7 cents a pound differential, and you're seeing at times now up as much as 14 cents, 13, 14 cents, and with natural gas becoming more expensive as a derivative in this country, it's going to become more of an issue.

So on the plastic bag side, imports are somewhat of an issue or an issue affecting volume. Last question, I don't want to belabor this one point, but Charlie, I think that you had mentioned you thought, you know, the metal end and the composite can segment had been affected by the economy, but again, I'm just kind of thinking, are people consuming less, I don't know, you know, powdered beverages or potato Chips or other types of products, or are there specific economically sensitive products that, you know, those containers hold?

Dan, I think they are segments that are economically sensitive. When people go into the grocery store in more difficult times, they tend to buy more meat and potatoes and other things than they do snack food and some things like that, but also the metal end business has been take one customer with a fairly significant impact is Slimfast. For whatever reason, we can all speculate whether it's the low carb diet or what, our sales of ends to Slimfast is down fairly significantly year-over-year, so whether that's your economy or trends or fads or whatever it is we didn't see that.

Thanks a lot, guys.

You're very welcome, Dan.

Your next question, sir, from Fred Spies of Spies Stores (ph) and Capital Group.

Can you tell us the price raw material gap from the OCC in the previous two or three quarters and this quarter? My impression is the price increases still haven't caught up to that.

Price increase has caught up in North America. In fact, we had a positive price cost in this second quarter. Fred, I don't have the first quarter numbers with me, with you we would have seen a negative price cost in first quarter, and then we would have actually had negative price cost in last year. In fact, what I do have is the slide that showed price cost clearly in this year's quarter, when you add everything up, it was a negative 3.9, and that was on my chart, but that is not North America tube core or paper. So it's other places. Some of it is the plastic bag division, some of it is Europe paper and tube business. But that's a negative $3.9 million. We had a negative 8.6 in the first quarter overall, and we had, it looks to me, like about the same number. I'm just looking at bars on a chart, so I don't exactly know, but it looks about the same number in the fourth quarter, and then, of course, in the third quarter of last year is when OCC ran up so much, and that was more than $20 million. So actually if we continue to have price improvement if OCC stays down, I expect there to be next to no price cost differential going forward. Having said that, you know, we have clearly over the last seven quarters had negative price cost.

OK. And so the OCC price raw material squeeze is better and the resin is now worse. Can you tell us sequentially the resin gap?

Actually resin has improved as well over the last certainly the last quarter. We've seen resin prices fall and we've seen price relief at least on the bag side of the business, so we've seen an improvement there. If you go back to our April tube and core price increase, we've realized about 3% or about 50% of that price increase.

So just so my math is right, you're saying 31, 35 for each of the next two quarters. Using that same math, what does that give you for the year in your guidance?

Well, I mean, we're at 63 cents, so you can add those numbers together --

So it's a base of 63. Ok. Good. Thank you.

Thank you.

Your next question, sir, comes from Dalia Cha of Credit Suisse First Boston.

Good afternoon. First I want to go back to flexibles a little bit. We had bee miss preannounce talking about the price competition there as well. Did that intensify through the quarter, or right now, I mean, versus when it started? If you could talk a little bit about the progression there? And then I have two smaller questions.

I don't think the price at least for us has intensified during the quarter. We talked earlier about some volume there, but so the answer to that is no.

OK. And then just on your CAPEX, is there any change in your guidance there or free cash flow? I know it's hard to capture what the restructuring charges will be, but I'm just trying to get a gauge of what you think your free cash flow will be this year.

There's no change in the CAPEX. I think we've said $100 to $110, $115 million, that range, and I would expect it to be in that range for the year. The free cash flow, I suspect, is going to be at the low end of what we have said. We've always said 125 to 150 or so when I think it's going to be at the low end of that range. And a lot of that is starting to depend on working capital. The easy pieces of working capital are the inventories. We will get after that. With the run-up that we had in June, we'll get out. Accounts receivable, we are seeing some of our larger customers frankly doing to us what we've been doing as well in trying to push things out. Overall, as Charlie was saying earlier.

I think, our receivables are in excellent shape. The aging of them. But we are seeing on the lower side larger customers push out, and most of them are contract customers and we'll have to put some stakes in the ground and get them back where they need to be, and we'll do that. The foreign exchange issue and the cost of resin will continue to be problems when you value the inventory. So -- but it's going to depend on working capital.

And the final question is just you mentioned earlier that you expected a bulk of the cost reduction program to be done by the end of the first third quarter. Does your 31 to 35-cent guidance for the fourth quarter, does that include the benefits of that?

It does not.

It does not? OK. Thank you.

You're welcome.

Your next question from Ghansham Panjabi of Lehman Brothers.

Given your current guidance for the second half of the year, what should we sort of assume for volumes across the board? I mean, it seems like last year, volumes were up 3 to 5%, and that might be some pretty tough comps heading into the second half. Can you just comment on that real quick?

When we looked at the numbers, we assumed our volumes being flat over the balance of the year with what we saw in the second quarter.

Volumes flat versus second quarter this year?

versus what we the quarter we just encountered, we're assuming flat volume over the balance of the year.

OK. Also Charlie maybe this is a question for you. There's been some talk in Congress about easing pension requirements and maybe increasing the discount rate for the next couple of years. Given your pension plan where there's really no rolling average, call it what you will, could that actually be a benefit next year?

It could be. I guess the issues for our pension plan really boil down to two things. One is just what the investment stands at December 31st.

OK.

And just to make a comment there, if the investments stayed where they are and interest rates, I guess, stay where they are right now, then we would probably have a pension expense that's flat with this year. And so the real big issues and real drivers are what happens to the investments through the second half of the year, because that would have a dramatic effect on the return portion of the FAS 87 calculation and also the amortization portion, and then, of course, what happens to discount rates. So it's pretty much an unknown. We've got a lot of variables that are moving in different direction or could potentially move in the same or different direction, but right now it seems like if I had to make my guess right now, we would probably have flat pension expense on through 2004 relative to 2003.

OK. And also finally, can you just comment on the current capacity utilization across maybe a couple of those businesses, across industrial and consumer?

You know, I don't know, Ghansham. We calculate our capacity, I generally like to calculate it on seven days a week, three shifts a day, and if we calculate it on that, we've got plenty of capacity, which is the good sign. Charlie, do you have anything more than that?

I had something that reflects the domestic paper division which would suggest that the machine utilization is down around 87%.

Great. Thank you very much. Good luck in the quarter.

Thank you.

And sir, did you have time for another question?

Yes.

OK. Your next question from Edings Thibault of Morgan Stanley.

Good afternoon. Just a quick follow-up. Harris or Charlie, do you have an idea of kind of the time frame for the company's announced restructuring program and the cost and how we should think about when those costs may be felt both in 2003 and 2004?

OK. Edings, I intend -- this is not something that we are just starting today. This is something that's been in the works for some time, and I our intent is to have the bulk of this in the third quarter. Some of it will carry over into the fourth quarter of next year, and I'd like to say it will all be done in the third and fourth quarter. That is probably an optimistic statement on our part recognizing that we will have some plans that we'll have to look at. But I would say to you that probably 80% of it ought to be done in the third and fourth quarter of this year. I would assume that the write-off would be about like we've had in the past, about a dollar for dollar of savings.

Got it. Great. Thank you very much.

You're very welcome.

Your final question, sir, is from George Staphos of Bank of America Securities.

Hey, guys. I'll make it quick as well. When you look at the consumer segment, we've talked about this in the past, the margins have declined steadily over the last several years, and again, you're around 7% or so. Aside from the restructuring, and maybe that's the key, what else will you do with the portfolio in the next several years to get back to what's been a normal margin for this business, Harris? Do you have to get out of some businesses, are you considering that? Help us fill in some of the blanks.

George, clearly the restructuring is targeted to improve margins on both the consumer and the industrial side. The operating improvements and the margin improvements that we're starting to see in flexibles will obviously help that as well because we've seen that business pull down the margins of the other consumer businesses over the last few year, and with regard to portfolio, we're always looking at that, and we do continue today to look at that portfolio of businesses on that side, George.

Any mileposts down the road in terms of

I'm sorry, I can't hear you.

Forgive me. Any points in time in the next six months, a year, where you will have more definitive view on what should be in the portfolio and what shouldn't be?

I would say, George, we will have a more definitive view of that by year-end.

OK, guys. Thanks. Good luck in the quarter.

Thank you.

And sir, there are no further questions.

Thank you very much.

Ladies and Gentlemen, this concludes your program for today. You may now disconnect.