Sonoco Products Co (SON) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Sonoco second quarter conference call. My name is Shawn and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session following the presentation. If at any time during the call, you require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Allan Cecil. Please go ahead, sir.

Good afternoon. And thank you very much for joining us for our second quarter teleconference. With me today are Harris DeLoach, our President and CEO, and Charlie Hupfer, our VP and CFO.

First, permit me to make the obligatory disclaimer that today's conference contains forward-looking statements based on current regulations and are not guarantees of future performance. Additional information about factors that could cause different results and about the use by the company if any 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 second quarter earnings release this morning, our reported earnings per diluted share from continuing operations were 35 cents versus 24 in 2003. Earnings for this year's second quarter included restructuring charges of 4 cents per share while last year's second quarter included per share restructuring charges of 8 cents. We saw increased volumes and prices in most of our businesses in this year's second quarter, which Charles Hupfer will discuss in more detail. On a year over year basis, however, we also saw a significant raw materials cost increases, including OCC and steel.

In the industrial segment, we are are seeing good recovery of OCC increases, due to previously announced converted price increases. While in the consumer segment-- while in the consumer segment, we have realized minimal recovery to date of significant steel increases. Recovery of steel increases will principally occur beginning in January of next year, under contractual pass-through provisions. The combination of steel costs and startup costs in our new Brazilian steel easy open closures business significantly impacted our consumer product segments results for the quarter. During the third quarter, we expect to continue to benefit on a year over year basis from previously implemented cost reductions, productivity improvement, previously implemented price increases, and volume improvement. Assuming no significant change in current volumes, or pricing, we expect third quarter earnings per diluted share in the range of 40 cents to 43 cents. Furthermore, we are increasing our guidance for the full year to $1.50 to $1.55. From the previous $1.40 to $1.45 per diluted share.

Also today, our board declared the 317th consecutive quarterly dividend of 22 cents per share. Our board also elected Dr. Pamela Louis, President of Queens University of Charlotte, as a member of the board. Dr. Louis has previously served as Dean of business schools at Queens, and Drexel Universities. Her area of specialization is strategic planning, with an emphasis on competitive and marketing strategy.

Looking forward, we have taken a number of actions to bolster our profitable top line growth capability. For example, the acquisition of the CorrFlex point of purchase business should significantly enhance our overall consumer segment strategy, being a full-service packaging provider. Our offerings under this strategy include developing packaging concepts, prototype production, and even billing for consumer market testing through our packaging development center, global graphics management to assure our customers a consistent, high quality graphics reproduction in any medium, ensuring customers of the highest quality of printing for their packaging, by providing laser engraved cylinders, managing through our packaging centers our customers supply chain requirements from customized packing to distribution, and now through Sonoco CorrFlex, we can help our customers put their products in front of consumers at the place and time the actual buying decisions are made. All these offerings are in addition to our broad base of consumer products, including rigid paper and plastic containers, flexible package, and easy open closures. Sonoco is the only packaging company in the world currently offering this full service capability.

We are also adding to our growth potential through increasing sales from new consumer products, long-term supply agreements, such as the recently signed 10 year agreement with BSH Home Appliances to be the strategic packaging supplier for their New Bern North Carolina complex that manufactures Bosch, Siemens brand, premium appliances for North America. Through ongoing geographical expansion such as the recent announcement to build an additional tube and core plant in Turkey. And through joint ventures such as the proposed combination of our European tube and core and paperboard operations with those of Ahlstrom with a put call provision that will give us the option to acquire all of the venture. And a similar put call agreement with Demolli of Italy with whom we already have a joint venture.

In short, we are seeing improving traction across most of the company in volume and pricing against the backdrop of previously implemented cost reduction, made challenging, however, by increasing raw material costs.

With that prelude I will now turn the discussion over to Charles Hupfer.

Thank you, Allen. I will start with a discussion of the statement of income and of course the one that we've put in the press release shows net sales of $763.9 million, that is an increase over last year of 11.6%. On the bottom line, EPS is 35 cents a share, compared with 24 cents a share last year. And that's a 50% year over year improvement. But as stated in the press release, and commented on by Allan minute ago, both of these years have restructuring costs in them, which make the years difficult to compare. So let me identify for you what the restructuring is in 2004, and in 2003, and how it affected these numbers. And then we can look at the results without the restructuring charges.

Restructuring in 2004 is a cost to us at the EBIT line of $5.8 million. Now, this is not a new restructuring plan and these costs are largely severance around previously announced plans. But the cost was $5.8 million. The tax benefit on that is $2 million. So the after-tax impact is $3.7 million, or 4 cents a share. The 4 cents, if added back to 35 cents, is reported, which show earning per share without restructuring of 39 cents.

If I do the same thing to the 2003 numbers, I see that the charge in that year is $7.8 million at the EBIT line and because this restructuring charge was largely international, there is no tax benefit, in fact there is a slight tax detriment, so we had an incremental tax of .1. So 7.8 at the EBIT line, .1 at the income tax line, means that income before affiliates-- actually net income was a drag last year, of $7.9 million. And the EPS effect of that is 8 cents. So using that 8 cents and adjusting the as reported number of 24 cents leaves us with 32 cents as earnings without restructuring. And I'll compare from now on the numbers that include 39 cents with 32 cents and feel like that is a good comparison of the year over year numbers.

So starting over with that base, I of course still have sales of 763.9 million, 11.7% ahead of last year. Earnings before interest and tax, and again, this is without restructuring, would be 66.2 million, in 2004 second quarter, compared with 55.5 million in last year's second quarter. That's a $10.7 million increase, or 19.3%. And I will provide bridges in a few minutes which reconciles the 55.5 to the 66.2.

Under EBIT, of course we have net interest, our net interest for the year, for the quarter, was 10.3 million. That's favorable to last year's second quarter by $3 million. And principally the reason it is favorable, we had some bonds, $100 million worth of bonds that came due in November that had a coupon of 5.875% so clearly we're paying 5.875% in last year's quarter, and those bonds have gone away in this year's second quarter. We also had good cash flow in the second half of the year. Plus the sale of high density film allowed us to reduce debt substantially so the reduction in debt and the payoff of those bonds largely accounts for the $3 million favorable difference.

That leaves us with income before tax of 55.9 million, which is 33% ahead of last year. We had certainly favorable affiliate income of around a million dollars. And of course in last year's number, we had income from discontinued operations. That's the sale of high density film, high density was in our performance in the second quarter of last year, we sold it in the fourth quarter, so it is clearly not in this year's second quarter. When we come down to the bottom line, we have of course net income of $38.7 million, compared with $30.7 million last year, that's a 26% year over year improvement. And of course, EPS, as I said, was 39 cents compared with 32 cents. So that is actually a little bit ahead of our guidance which was 33 to 37 cents for the quarter. So we're very pleased with the outcome in this particular quarter.

There is a segment analysis as part of your press release, and in the segment analysis, we have the industrial and consumer segments, and then we see restructuring charges after that. If we look at that, we see that the industrial sector sales were up 9.2%, and profitability was up 30.2%. On the consumer side, sales were up 14.6% over last year, and profitability or EBIT was up 3.8%. We were especially pleased with the performance in the industrial sector. We felt like that with the changes that have occurred over the last couple of years, in terms of cost reduction taking $115 million worth of costs out of our system, with the productivity that we put in place, that we would see much improved profit performance when we saw some volume, and clearly in this quarter and I will discuss it in a minute we did see some good volume increase.

On the consumer side, those earnings were held back by the points that Allen mentioned earlier, largely increased costs around steel, and some increased startup costs. Principally in Brazil.

Now, what I will do is discuss the sales bridge, and here, what I'm trying to do is reconcile 2003 sales to 2004 sales, and there's an increase of $79.3 million, and I will give you the bridge that I usually give you. I need to remind you, though, when I give you these bridges, we use these internally to help us understand our business, to break the business down, in terms of volume, price, and so on. We think they are very good indicators of what's going on with our businesses, but there is a lot of assumptions that go into these numbers, and so they shouldn't be taken as absolutes but they should -- can be looked at as good indicators of what is happening to our business. So with that as a caveat, to reconcile that 79.3 million, I'm looking at a chart that has effectively four columns, the first column is just the categories, the second column is Sonoco total, the third is industrial sector, and the fourth is consumer sector. And these are -- this is actually the same format that I've given to you in the past.

Starting with volume mix, we see that volume mix for the company as a whole was $32.2 million. So again, we had good volume increases. Of that 32.2, 10.7 million of it is in the industrial sector. 21.5 million in the consumer sector. We had price increases of 11.1 million in total. For Sonoco. 9.5 of that is in the industrial sector. 1.5 in the consumer sector. We had acquisitions that totaled 17.3 million. 3.7 in the industrial sector and 13.6 in the consumer sector. And we had exchange, the last item in my reconciliation, and that is a positive 18.9 million, broken down by 11.3 in industrial, and 7.5 in consumer. And that should provide you with a reconciliation of last year's sales of 684 million to this year's sales of 764 million.

Now, what I ought to do is comment on a couple of these categories, starting with volume. We clearly saw good volume increases in the industrial sector. $10.7 million. In our tube and core operation in the U.S. and Canada, we did see volume increases that were around 3% year over year. With some categories especially our performance films doing exceptionally well in the quarter. We saw in our Asian business volume increases of 12.5%, with exceptionally good increases in Malaysia, Indonesia, and China, we saw an increase of 31% year over year so we're very pleased with the improved performance of our Asian operations. Europe tubes and cores were relatively flat in terms of volume. Much like the story from previous quarters, we're seeing growth in places like Turkey, where we were up 16%, Poland, where we were up 40-plus percent, but we continue to see weakness on the continent.

And in molded plastics, a business that has struggled over the last several quarters, several years, really, all our segments performed well. The volume was up over 12% in virtually all of their product lines. Our North American paper business showed volume increases of 2.5% largely in Canada and most of that in liner board. So very good volume increases on the industrial side.

The same is true on the consumer side. Our rigid paper and plastics business, and that is largely composite can, was up substantially. They make up about 40% of this increase of $21.5 million. With certain categories like nuts, that was strong, year over year performance, cyber -- cold cartridges and plastic cold cartridges were up substantially as well. And we saw some new volume from the conversions of some self manufacture that we've talked about in the past. So solid volume increase in rigid paper and plastics. And good volume increases as well in our packaging services business. That's driven principally by Gillette at our Devon, Massachusetts, plant, Gillette had several product launches in this first half of the year. And we benefited substantially from that.

In terms of price, the 11.1 in total, 9.5 million of that is in the industrial sector. As you know, we announced a price increase of 6 to 8%, effective April 1, in our domestic tube and core operation. And we've been largely successful with our non-contract customers in implementing that through the course of the quarter. We did see some price declines in Europe, year over year. Those declines really started in the second half of last year, and have been relatively flat since then. But quarter over quarter, there were declines.

On the U.S. paper side of our business, first we announced a $50 a ton increase in March, to non-contract customers, that we were rolling in through the second quarter. While recovered paper business, they're selling prices were up around 12.6%. What that does is that just simply reflects the higher waste paper division. Of course we will see on the EBIT slide it is a negative in that it is also a cost to our producing paper division. Protective packaging, selling prices were up, as were baker prices, as they passed on material increases, largely by formula base. So again, good pricing initiatives on the industrial side. Very little pricing on the consumer side.

In terms of acquisitions, 17.3 million, 13.6 of that is in the consumer side. And much of that is CorrFlex which we brought in for one month in the quarter. Exchange is, as I said, 18.9 million. The Euro appreciated 9% year over year. The Canadian dollar appreciated over 6%. So that accounts for all of that, basically $19 million sales increase. Because I won't mention it later on, it gets absorbed in the numbers, these FX increases did add to our EBIT about a million dollars and did add to our net income by a little less than a million. Something like 900,000. So that was positive as well.

Now, let me turn to the EBIT bridge. And I will essentially go through the same sort of thing. What I'm trying to do here is account for an increase in EBIT, and this is EBIT without restructuring, of $10.7 million. And again, I've got the same four columns. So in the first column, volume mix, I have a total of $11.6 million, broken down by industrial, 6.2, and consumer, 5.4. I have a price cost column -- or not column, but a category, and that is a negative $8.2 million for the company as a whole. 3.2 million negative industrial, and 5 million negative consumer. So we did see some price cost squeeze. Productivity, for the company as a whole is a positive 15.2 million, industrial is 10.5, and consumer is 4.6. And then other is a negative 7.8 million, and the industrial category, it is about 3.6 million negative and in consumer, it's 4.2 million negative.

So just a couple of comments on this EBIT bridge, back to volume, and mix, this is the profit impact of the volume growth that we've had. We also had some good mix in this, especially on the industrial side, in our paper group as we're able to shift some -- as we're going to mill closer to capacity and we're able to shift from some lower strength boards to higher strength boards with higher margin, you can see that effect coming through in the EBIT line. In terms of price costs, 8.2 million in total. 3.2 million in the industrial side. Most of that is coming from our combined domestic tube core and paper operation. And of course, we saw a $20 a ton year over year increase in OCC. And that's the principal driver of that negative in the industrial column. And then the 5 million in the consumer, the principal driver of that is steel. We did see a steel increase at the beginning of the year. But since then, we've seen surcharges that got to $100 a ton in the second quarter, and we've been unable and in many instances to pass that steel surcharges on to our customer, and you can see the effect that it has here.

In terms of productivity, 15.2 million, productivity, very strong productivity in the industrial sector, 10.5 million, in fact, half of that is coming from the -- our paper operations in the U.S. and Canada, we're running at around 97% of capacity. In our Canadian paper mills, we're running liner board of the last year those mills took 33 down day, this year they had none. So you can see the impact of that in EBIT, especially through this productivity line. In consumer, we just generally had solid across the board productivity gains.

And then other, the other category, is largely wage increases, energy, general inflation, and you can see the negative effect there.

In terms of cash flow, we had a -- I guess a decent cash flow for the second quarter. The cash flow last year -- I'm sorry, cash flow this year from operations was 31.5 million. Compared with 43.8 million last year. So we were down about $12 million. When we go back and look at that 12 million, 7 million of that is in net working capital coming from accounts receivable and in fact our day was receivables are down year over year an our control over working capital, if anything, is improved year over year, so what that reflects is just the higher level of business activity. And then we did have another 5 million of extra funding this year in some of our benefit plan, versus last year. And that pretty much accounts for the year over year second quarter cash flow difference.

What we will undoubtedly do, we have made some further estimates of cash flow for the year, and we will be pulling our estimate down probably to $110 million range going forward. As we see business improve, I think we won't see as much cash flow coming from working capital as we've seen in the past.

Our balance sheet remains strong. Debt to total capital, by the way we calculate it went from 35.8% to 43.1%, but that reflects the impact of the CorrFlex acquisition, and you will note that our debt went up about $266 million.

Those are my comments about the performance. I will make a couple of observations about the forecast that Allan mentioned. We have revised our estimate to $1.50 to -- it to a range of $1.50 to $1.55. And we have taken the third quarter to a range of 40 to 43 cents and the fourth quarter, 38 to 40 cents. Our first and second quarters tracked well against our budget and expectations. And of course, that forms the basis for our forecast. So frankly, we've moved to the higher side of our previous forecast. Which now of course includes CorrFlex in these numbers. This forecast that we've given assumes that our price initiatives play out as expected. That volume remains pretty much at current levels and obviously that is very important for our industrial segment profitability. We've added some startup costs which we expect in the second half of the year around some new plastic bottle initiatives that we have under way. And of course, there are some big unknowns there. In the price, and in the availability of steel, as among the biggest unknowns that we have, and how that can effect our Phoenix metal ends business. And of course OCC is always an unknown. We are assuming that it stays flat at around $90 a ton.

Just a couple of other comments. Since I've got you on the phone. I will talk about our debt offering. On June 15, we did issue $150 million worth of 12-year notes. We were real pleased with that issuance. The coupon was $5.625%. The yield was 5.69. It was a very effective transaction for us. We priced it off of the 10-year treasury to the spread of 98. And we have certainly good receptivity to that offering. The proceeds along with $100 million worth of short term debt were used to finance the purchase of CorrFlex.

And then my last comment and it is also referenced in the press release, deals with segment reporting, and of course I've given you the segment, as we have traditionally done around consumer and industrial, but earlier this year we received a comment letter from the SEC, and it actually dealt with our 2002 10-K. And we responded to their points and we cleared all of their -- actually there were six points and we cleared all five of them with simple explanations. So it was just really in our opinion a matter of routine. But the one point that we haven't cleared yet is the makeup of our segment. The SEC doesn't disagree with our use of two segments. Industrial and consumer. But they want us to test the use of those two segments against a very rigorous application of FAS 131. And that's what we're in the process of doing. It is not out of the question that our segment reporting will change going forward. But at this particular time, I can't tell you if the segments will change, and if they do change, I can't tell you how they will change, and when they will change. I can tell you, though, that the change only affects segment disclosure. It does not affect net income. And so we will just have to keep waiting for this to resolve itself.

Allan, those are the extent of my comments.

Thank you, Charlie. And I think we are ready to open it up for questions.

Thank you, sir. Ladies and gentlemen, at this time, if you would like to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered and you wish to withdraw I would ask that you press star two. Again it is star one if you would like to ask a question. And your first question comes from the line of Edings Thibault from Morgan Stanley. Please proceed.

Thanks and good afternoon, gentlemen. Charlie, just to clarify for those of us not conversant with FAS standards, what is being tested in terms of the segment disclosure? Is it the makeup of those disclosures? Is it how you allocate costs within them?

No it is the makeup of them. It is what, you know, whether -- whether we can group, frankly whether we can group the tubes and cores business in North America with the paper business, with some of the other businesses. So it is the makeup. It is not -- it is not really the composition of the numbers in any way, shape or form. So we could very well have just a different makeup, but it doesn't deal with allocation.

Got it. I guess I will stay tuned. And just focusing on these steel costs, you know, is it just -- I guess others in the steel industry, particularly those in the fruit can industry, have been largely able to pass through surcharges in their contract provisions. Is it just that your individual contracts don't call for steel pass-throughs or what is it that is different about Sonoco's business? And I assume much of this is the ends business that you're involved with. And can you talk about whether or not that 3 million impact will -- how you would think about the extent of the impact for the balance of the year and then how you would expect to see it come back on as you cycle through and are able to raise prices again.

Edings, this is Harris, how are you?

Great, thank you, Harris.

Actually we do have pass-throughs -- first of all, let me say this is not the metal end business. As much as it is the composite can business. I think we've gotten virtually 100% pass-through on the metal end business, if not 100. It is a high number. But the impact is taking place, going forward, over the composite can side of the business, where we do have pass-throughs for steel in our contracts. Those dates of pass-throughs actually is, I think, Charlie, Allan said, play out through the balance of the year. I think there is one that is a September 1st date, but the majority of those are January 1st date, so it is more of a timing situation than it is -- it is clearly more of a timing issue than it is the ability to pass it through. This will -- if surcharges stay in that, the current level through the balance of the year, we are working with other suppliers and on the steel side, and we will mitigate some of that somewhat, but it will be an impact to us over the next two quarters which has in effect taken into consideration in our forecast. I think I'm safe in saying that by January of next year, we will have all of this pass-through, but I will not get pass-through until that time.

And the first surcharges disappear between now and then, and you have -- you know, more of a base cost that is higher, are you still able to pass them through in the form of higher pricing in 2005.

Yes, we are.

Okay. Okay. Great. And one other question, just a capital spending number in the quarter.

I think it was 52, $53 million. It is tracking our budget and the guidance that we've given. Charlie, do you have it in front of you?

I do have it. That is right on the money.

I don't have it in front of me but I remember 52, $53 million.

I suspect it is a number you keep an eye on.

53.5 and it is virtually right on line with last year's 52.8. It is a number we keep a really close eye on.

Got it. Thanks very much. I will get back in the queue.

Thank you.

And your next question comes from the line of [Mark Conley], Credit Suisse First Boston. Please proceed.

Thanks, just a couple of things. Your fourth quarter, your guidance for the year implies a flat to down fourth quarter. Curious if there is a change in seasonality or something else, because that isn't your typical trend, not that it always works the same way, so that is is question number one. Question number two, as you get involved in these more and more complex packaging relationships, how do issues like resin pass-throughs work? Are they negotiated as part of the overall product that is being delivered? Or are they broken out separately?

Well, resin is not that much of a factor to us anymore, Mark, but we will take steel resin, paper.

Yeah,.

Any of the pass-through, it is actually the amount of the increase that is announced that we pass through. And where you have a lag is what is happening on the steel side. It is the timing of the increases, and we employ hedges and other things against those to protect us. But it is a pass-through of the announced increase.

So even in the more complex, like the HP, Gillette type stuff, it is all just sort of baked in as a pass-through?

That's right. The HP and the Gillette is a little different, because in that case, they are providing a lot of their own products, so we actually are not billing them for that product. And all we're doing there is the packaging material and the raw materials that go into the packaging material that we do in fact provide to them.

Okay.

The first question, I'm sorry, --

Right, I'm looking at your guidance for the year, and for Q3, and that seems to imply a flat to down fourth quarter. Which you're more often up than down in that quarter. I'm wondering, is there a change in seasonality coming with the shift in the business mix? Or are we just seeing something different this year?

I don't think you're seeing anything different and we're he not implying a down fourth quarter at all. We think it will be -- the fourth quarter of last year was a very good quarter. And -- but I don't expect it to be down year over year.

Okay. And one last question. Are you seeing any substantive differences in the OCC supply channels that you're dealing with? Either in terms of sources or quality of supply?

No. As you know, we collect most all of our own, and sell a good bit. What we have seen in the last quarter, is a shrinking demand out of China. Which is a result of some restrictions that China has imposed on the importation of OCC, and so you haven't seen that demand there. But to offset that, you've seen high running rates on the liner board side, which is -- and you would say that the OCC side is pretty much in balance. But, you know, you continue to see a degradation of quality, the more you go to single stream collection, and so I think that is a trend in that direction. And it is more expensive and the quality is less.

Perfect. Thank you very much.

Thank you, Mark.

And your next question comes from the line of Ghansham Panjabi, Lehman Brothers. Please proceed.

Hi, guys. How are you doing.

Hi, how are you?

Harris, do you feel the previously announced price increases in industrials gets you caught up with the current raw material environment? Or do you feel there is more to be done there?

The current price increases in what --

In the industrials business.

Yes, we've had some positive price cuts there and so we're in good shape.

So you don't foresee any more price increases?

Well, I don't know that. If we see OCC move, well, certainly we will be aggressive with that. We are running at -- as Charlie said, the mill system, and the capacity utilization is pretty good. And so I wouldn't rule out some price increases.

Okay. Fair enough. And also just real quick trends in the flexible packaging business.

Year over year, flexible packaging sales and EBIT were about flat. We have seen nice improvement in the flexible business, and the first two quarters of the year as compared to the third and fourth quarters of last year. But compared to the first two quarters of last year, it is about flat. But we are expecting better performance, improving performance through the balance of the year.

Okay. Good. Good luck in the quarter. Thank you.

Thank you.

And your next question comes from the line of [Richard Holahan] with Smith Barney. Please go ahead.

Good afternoon.

Hello, Richard, how are you?

Good, how are you?

Fine, thank you.

I had a question, a follow-up on OCC prices. Given where I -- where the economy appears to be going and if I look at operating rates that the -- in the corrugated box industry in general, do you -- I would suspect that you start to see OCC prices move up before the end of the year. I guess my question to you is, do you -- how do you view that now? Are you trying to be more proactive? And get in front of those increases? And would you see yourselves perhaps pushing through price increases before OCC starts to move up? Or is it still sort of a catch-up game that you want to play?

Well, if you are playing simply price increases on OCC, you're generally almost always playing a catch-up game.

Uh-huh.

But I would not rule out, you know -- we've obviously had other cost, considerably other costs over the last several years, other than OCC. It is natural gas. It is healthcare costs. There are other costs. And those obviously have affected operating margins over the last few years. So I would not rule out an increase to just to improve those margins. Talk about OCC a minute, and you are right on target, given the economic improvements, that we've seen, the running rates on the liner board side, if China comes into the market, in a big way, are you likely to see up ward pressure on OCC between that and the balance of the year. The offset of that is are you going into the high generation part of the year, where you have back to school sales, have you the holiday season, and generally, this is the time of the year when OCC, particularly in the -- well, everywhere, is more plentiful. So you've got all of those things coming in. I would think if you don't see OCC price increases between now and the balance of the year, if the economy continues like it is, and China continues to pull at this level, or higher level, clearly if you don't see it in the third and fourth quarter you will see higher OCC prices in the thirt part of next year so I think it is just a matter of when, not if.

Gotcha. And all right, I had a second question. Just generally on CorrFlex, now you had a chance to be in there for a couple of months, do you have any impressions or is there anything else that you you've seen in there that either surprised you in either positively or negatively?

Well, we've had OCC -- I mean we've had CorrFlex for a little over a month, they've reported for a month. And as Charlie mentioned in his comments, they were accretive to us, as we thought they would be. They are tracking the pro forma. I would say the surprises that we've had have all been positive surprises. We did not bake a lot of any synergies into this acquisition. And by synergy, I mean opportunities within -- with customers within the Sonoco portfolio of businesses, and I have been very pleased, as we all have, have been very pleased with the opportunities that have presented themselves to us with our existing customer base, and carrying it from the other side, the opportunities that have presented to Sonoco operations from the CorrFlex customer base, so the surprises have all been positive.

Terrific. Great. Well thank you very much.

Thank you.

And your next question comes from [David Leibowitz] with Burnham. Please go ahead.

Good afternoon.

Hello, David, how are you?

Okay. A few brief questions. One, given the acquisitions that you have already made thus far in the last 12-18 months, what percent or better yet, what absolute dollars of sales and earnings will they be giving us in the second half?

Well, you take CorrFlex, and we said CorrFlex will have sales of around $200 million on an annual basis. That tends to be somewhat second half of the year loaded so we closed at the end of May, I would look for $100 million plus out of CorrFlex. The major acquisition that we've seen. The other that is standing out there is the Ahlstrom joint venture and we will pick up $100 million of annualized sales when we actually close that transaction and our best guesstimate at this point is that it will be in the late third quarter, early fourth quarter of the year, so I would say it is obviously negligible but it may be $25 or $30 million out of those two acquisitions, David.

And what about the bottom line? Will they both be --

They both will be accretive to us for the year. The further out in the year you get with the Ahlstrom joint venture, the lesser the impact on the bottom line, because there will be some consolidation costs that will go through -- will have to go through that, as we close down plant plants and that's going to be a timing issue. Both of them will be accretive to us.

That's because the joint -- because it is a joint venture, and we will -- we own of course 100% of our operations now, we will own 64.5% of the combined operation. They will be a minority interest. So while we expect it to be accretive, you ought to just think of that as flat. Or marginally up, but not -- not worth worrying about. CorrFlex on the other hand is accretive.

Okay. Second of all, you mentioned the debt that you put out there, the 10-year paper. Do you have any new targets or fixed targets you can give us for your debt to equity ratios going forward?

We like our debt to capital ratio being in the low 40% range. Or below. We would like to see it about 40%, David.

Okay. And thirdly, in terms of the cash on hand, and acquisition versus dividend, how do you stand on that right now? You gave the regular dividend today so obviously you have another 90 days but what are your thought processes in terms of acquisition versus using the cash in the form of dividend or other applications of cash paying down debt, you name it?

Well as Allan said I think it was our 300-and-something consecutive dividend and we have no plans whatsoever of changing our dividend policy. It has been that for 75 years and we've got a history of increasing that year over year. So that policy is not going to change. As I said at the last conference call, it is going to take us 12 months or so, I think 12-18 at that point in time, so I am going to say 12-15 at this point in time, to digest CorrFlex, and the Ahlstrom transaction. We've got a lot of work to do that. And optimize the earnings out of both of those. And during that time frame, we will pay down debt. And we -- it is not to rule out some small acquisitions during that period of time, but I wouldn't look for any major acquisitions during that period of time. And as we digest those and I think we will look for something that fit our criteria.

Thank you. And the last question, if I may, in looking backwards to past spurts of price increases from your suppliers, how far along in the cycle do you feel we are today vis-a-vis the historic record and if we were to extrapolate from the past, how many more price increases do you believe you are going to have so absorb and over what period of time?

Well, if you looked at Sonoco historically, over a business cycle, we have a positive price cost relationship, which means that we have -- traditionally had the ability to not absorb those kinds of -- those price increase, but to pass them through, through the system. I expect that to be the case in this business cycle. I think all business cycles are quite different. And the business cycle that we are seeing right now relative to steel is quite different than what we've seen in the past, simply because of the amount of capacity, particularly in North America in the steel industry, that is not here today that was here five years ago. But we are actually -- as I said earlier, using some other suppliers and actually importing some steel looking to import some steel into this country, so that is a hard question to answer.

Do you think the bulk of the price increases of raw materials are now behind us? Do you believe -- in absolute dollars, not percentages that we may see raw materials increases, increase again by a similar dollar amount or perhaps even a greater dollar amount?

I think are you going to see more pressure in the coming months as this economy -- it if this economy heats up, are you going to see more raw material pressure and that is obviously what we were talking about earlier, that I wouldn't rule out price increases across any of our businesses at this point in time, not only to pass through raw material prices but also to improve margins.

Thank you very much.

And the next question comes from the line of [Will Knackvisi] Heartland Funds. Please proceed.

Yes, good afternoon. Great quarter. Just had a quick question regarding -- I apologize you might have covered this earlier. I got on late. What you're seeing right now in July, in this third quarter, and maybe across geographic, you know, across your relative markets, I will take the answer off the line, thanks.

Okay. We are seeing the continued -- you know, in July, you normally see, in particularly on the industrial side of our business, a traditional July the 4th shut down. So I compare what July's -- for accounting purposes, is a five-week month, I generally always look at July as over a four-week month. And we saw a typical shut down in some of our businesses of our customers. But July has come back to the second quarter levels, and I have nothing at this point that would suggest that the third quarter levels of volume would be anything different than the second quarter levels. As you look around the world, Charlie mentioned South America, I don't remember the percentages, being up nicely year over year, Asia being up nicely, and North America, the industrial side was up, tube and core, up 3% as I recall. The main weakness in the Sonoco system today on the industrial side is in central Europe, an by central Europe, I mean France, Germany, and to a lesser degree the U.K. And those customers there are being negatively impacted by a strong Euro. It is being offset, however, by strong volumes out of Poland and our Turkey operations but I see nothing on the horizon at this point that concerns me about volumes in the third quarter and for that mater the fourth quarter.

Okay. Thank you very much.

Thank you.

And your next question comes from the line of Timothy Burns with Cranial Capital. Please proceed.

Good afternoon, gentlemen.

Hello, Tim, how are you?

Real good, thanks. It is almost as hot up here as it is down here. But maybe not.

We are in the mountains of Tennessee, so it's not bad. We had a board meeting in Knoxville visiting our flexibles plants and it is nice and cool out here.

Good for you. Good for you. The last couple of year, it is no secret, the composite can, you know, has taken some hits from alternative materials and I was just curious what your marketing people are telling you as far as, you know, the game playing out. I mean is there a recoup opportunity for the composite can after people have fooled around with plastic or new products in plastic, and then come back to, you know, core, no pun intended, products?

Tim, I don't now if it is knocking around after plastics or what it is but as Charlie said, we had the best quarter over quarter comparison increase in composite cans that we've had probably five or six years. And it is --

That's what I picked up on. I was curious.

And we've seen -- and it is no accident. It is -- we've put a lot of emphasis on that the last several years, in terms of new introductions, in terms of just new products, and it is starting to come about. So I'm -- I'm optimistic of the composite can. It is not going to an 8-10% product growth, product increase growth -- increased growth for us, but I think we can see 2-3% year over year.

Gotcha. And how about the money and time you've invested in your new plastics developments? Are they nearing some fruition? And I mean does this become a -- you know, a couple hundred million dollar product line or something like that over time?

Tim I think over time it does. We've invested the money. The Corona plant in California, on the bottles, is starting up, as we speak. Maybe last week. And it is running product. It will ramp up over the next couple of quarters. The squeeze tube is up and running. We have another couple of products that are up and running. So you will see over the next two quarters a good ramp-up of that and we have high hopes for it becoming a 100 to 100 million dollar business.

Gotcha. Okay. And in terms of, you know, I think you guys took some heat, and took it well, by the way, in terms of, you know, a lot of investment bankers coming down, and telling to you do this acquisition, or that acquisition. It seems like you know which ones you want to do. And they seem to like -- the ones that you've announced, whether the joint ventures or CorrFlex, or what have you, but they're just not, you know, ready to be harvested yet. So it sounds like you're more than willing to take a patient approach for the right deals, rather than just buying some. Is that fair?

Tim, I just ditto what you said.

Well, I mean -- well, are there some other interesting, you know, things to harvest in the near term, do you think?

Tim, you know, I think Allan laid out, you know, our consumer strategy very well. We want to be a solution provider to our customers. And the CorrFlex is an acquisition we've been looking for point of purchase acquisition for lat last two years or so, and we kicked some tires, if you will, and we were patient, and we got the one that we wanted. That will be some niche opportunities on that consumer side that we will continue to make. On the industrial side, there are consolidation opportunities in North America, as well as Europe. Obviously, we got the Ahlstrom thing ongoing. And you will see some investments startup investments in Asia and the eastern block countries so that is our strategy and we will be patient.

I mean last question, do you -- does CorrFlex, I mean I think it can, but then sometimes I'm not so sure but does CorrFlex help you sell flexible packaging? I know it helps sell, you know, packaging services.

It helps sell all of our packaging to our major customers. They are looking for someone to provide a solution from them -- to them, from -- in some cases, from managing the graphics, some cases obviously putting something in front of the consumer on the retail floor, so clearly, it does -- it pulls flexibles along with it.

So if they asked to you put something else in one of those display units that you're currently not making, you would do it?

Well, we will put most anything in it one way or the other. You make it and we will buy it from you.

Listen. Good quarter, guys. Keep it up. Stay cool.

Thank you, Tim.

And your next question, gentlemen, comes from the line of [Fred Steiff] from Steiff Stork Capital Group. Please proceed.

Yes, can you put a number on what the Brazilian startup costs were? And is that done? Are we going to see more of that in the second half?

Fred, it costs us about a million dollars in the quarter. And that business, that plant is up and running. One of the biggest issues that we faced on it, frankly, was a freight issue of getting -- we were making the product, and getting it shipped out, and that's because of the amount of export coming out of Brazil today and we think we have a handle on that and that is all -- we expect it to be profitable in the third quarter. And most of those startups are behind us.

Okay. And the flexible packaging, you've been talking about a lot of your productions now, effective, and your sales force has been selling, and there are some backlog of new products and new contracts that they've signed up. When will we start seeing that? It is hard to see it in this quarter.

It is hard to see it in this quarter. As I said, and maybe Charlie said, but I certainly said it, it was flat quarter over quarter. We expect you will see that in the third quarter. And we will be able to talk about it in the third quarter.

And is your unnamed big customer, are they starting to show traction?

Which --

In the consumer area. One of your packaging customers has been having difficulties.

Oh, yes, it is. It is starting to have traction.

Thank you.

And we will tell you who it is later.

Okay.

Thank you, Fred.

Uh-huh.

And as a final reminder ladies and gentlemen, it is star one for any questions. Star one. And gentlemen, I'm showing no further questions for you at this time.

Thank you very much. We appreciate it.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the presentation. You may now disconnect your lines. Have a great day.