Sonoco Products Co (SON) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Sonoco third quarter earnings conference call. My name is Carlo and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating a question-and-answer session toward the end of this presentation. [Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Mr. Allan Cecil. Please proceed, sir.

Good afternoon and thank you very much for joining us today. With me are Harris DeLoach, President and CEO and Charlie Hupfer, Vice President and CFO.

First permit me to make the obligatory disclaimer if you will that today's conference contains forward looking statements which are 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 which are filed with the SEC.

Earnings for the third quarter of '04 released this morning were 41 cents per diluted share, compared with 14 cents for the same period last year.

Third quarter 2004 results included the negative impact of a penny per diluted share due to previously announced restructuring and a onetime cost of 4 cents per share related to executive life insurance.

On the plus side third quarter earnings include 2 cents per diluted share from reduced expenses related to the new Medicare prescription drug program.

Third quarter earnings were negatively impacted by increased steel prices for which primary recovery is expected to begin in January.

Average OCC prices were also up vs. last year's third quarter, but this impact was virtually offset by selling price increases.

Earnings for the third quarter were also adversely impacted by startup costs, related to a new plastic container plant in California, which is now running full. The new easy opening closure operation in Brazil which is ramping up toward four lines, and cost of moving production between several plants during the quarter.

Last year's third quarter included 16 cents per diluted share related to restructures. Charlie will discuss the EPS bridge in much greater detail in just a moment.

Net sales in the third quarter were up about 18 percent over last year's third quarter, reflecting higher average prices and increased volume in virtually all of our businesses. Including composite cans which saw its third consecutive quarter of year over year volume increases as well as flexible tax, both of which also sought year over year margin improvement.

Company-wide volumes were up 15 percent compared with the third quarter last year or up 8 percent if you exclude the CorrFlex acquisition.

On October 6th, the European commission announced its approval, subject to certain conditions, of our proposed joint venture with Ahlstrom, which will combine the two companies' European based tube and core and coreboard operations. This transaction is expected to be completed shortly.

Finally, the Company expects fourth quarter earnings in the range of 40 to 43 cents per diluted share. This guidance excludes any restructuring charges which we can't (ph) estimate at this time and includes a favorable impact of 2 cents per diluted share which is related to the 2003 Medicare prescription drug legislation, which was not included in our previous guidance but which we will now routinely recognize.

With that prelude, I will turn the meeting over to Charlie Hupfer.

Thank you, Allan. Let me begin at sales. 811,117,000, we're up 18 percent over last year; and earnings per share of 41 cents per share versus 14 cents last year.

Now let's look at the components of the EPS in both years.

We really have four separate components. We had a restructuring -- and this is third quarter 2004 -- we had a restructuring charge of 1 cent per share so that's the -1 cent embedded in the quarter. We had prescription drug FAS 106 adjustment. That's a positive 2 cents. We had an adjustment for executive life insurance -4 cents per share; and then we had base or operating earnings of 44 cents a share.

Those would be the four components; and if we add those four components together we arrive at 41 cents a share as reported number.

Looking at 2003 third quarter, really only two components here. One is restructuring, where we had a -16 cents per share and then the base business which was a +30 cents per share.

So adding those two numbers together we arrived at 14 cents, which is as reported earnings per share.

I will talk about each of these components to a degree but most of my focus on the analysis will be on what I'm calling the base component which is 44 cents a share this quarter, compared with 30 cents last quarter.

But before I get to that, I will comment on each of the other three items. The one is restructuring. And the restructuring is a charge against earnings against EBIT of $1.2 million. That had a tax benefit attached to it of .2 -- $200,000 so the after-tax impact was .9. $900,000. And that's the -1 cent per share.

That relates to ordinary expenses, really, just a carryover expense related to our prior restructuring programs. A lot of that was outside the U.S. in this particular quarter.

The next item is Medicare relief for the prescription drug adjustment. The FAS 106 adjustment. The law that was passed last year provides for a 28 percent subsidy for companies that offer prescription drug benefits to their employees and Sonoco is one of those companies that offers that benefit.

So in the third -- we had to account for in the third quarter of this year and we made calculations. The impact of that 28 percent subsidy is to reduce our projected liability by about 1/4. And it is that our projected liability that results in a lower annual cost to the Company. That lower annual cost is $7 million per year after tax; and that will get spread evenly through each of the quarters.

So in this particular quarter, we picked up 1.7 million of income that we otherwise would not have had. That's of course 2 cents a share.

In the fourth quarter we'll pick up another 1.75 million and then of course we had the catchup for the first two quarters which would be 3.5 million or 2 cents a share in each of the first and second quarters. So that is an adjustment that we have that goes back into the first half of the year, affects the third quarter, will affect the fourth quarter and then on into next year.

In dollar terms, the EBIT effect of that was a positive impact to EBITDA of $2.3 million, and then we had a tax effect of .5 or $500,000, so the after-tax positive is 1.8. -- as I said, 1,750,000 to be exact, and that's the earnings per share of 2 cents.

And then the third adjustment is the executive life insurance adjustment that we took. And what this is is that the cost of replacing the current insurance program that we have, that we had to change because it is prohibited by the Sarbanes-Oxley rules. The impact of that on EBIT is a negative $5.6 million. The tax benefit attached to that 5.6 million is 2.0, and so therefore the after-tax effect is a negative 3.6 million or 4 cents a share.

Now what that EBIT impact of 5.6 is, it is really the present value of the policy cost going forward in time. So we had to calculate the present value and record that as expense in this third quarter. It is an accounting charge. It is really not a cash charge because cash would be paid out over the period of time as much as 20 years as premium payments are made on those policies.

So what we did was we substituted one kind of policy for another, but it had the impact on the accounting in this particular quarter.

Now let me turn to the base earnings component. I'll make a couple of comments before I get to the bridges. In terms of base earnings, as I said earlier, sales were up 811.1 million. That's 18 percent over last year. Without CorrFlex, sales would have been up 11.3 percent year over year. So we had a solid performance with and without CorrFlex.

As you go down the income statement, you will see that interest was favorable to last year by about $800,000. Some of that is because we paid off $100 million worth of bonds that came due in November of last year that had a high coupon rate. Well, the coupon was 5.875. And we replaced -- and when we acquired CorrFlex, we did place some bonds in June of this year of 150 million at a rate of 5.625. We have swapped some of that into current or floating rate debt so as to have a 50/50 fixed floating objective which is where we're at now. So while we have about the same level of debt, the interest rates would have been different with more floating rate debt.

And then the last point that I will make is the effective tax rate. When you look through the clutter of what I have just described, it is actually a rate of 32 percent -- 32.3 percent. We did take some adjustments in the quarter. We revised upward our estimate of R&D credits and foreign sales corporation credits in this quarter after having filed the tax returns for last year. So we have a 32 percent effective tax rate in the quarter. We would expect that to move back to 35 in the fourth quarter, which is probably more indicative of where it would ordinarily be.

Now let me comment on the segments for just a minute. As I make reference to the segments, I'm going to be talking about the new segments that we agreed to with the SEC in this last quarter, and many of you probably know we filed an 8-K last week so as to bring everybody current on what those new segments would look like and what the impact of the changed segments was on our prior quarters and prior years.

So the segments that we will be talking to are the consumer packaged segment, and that's largely our composite can business, our plastic model business, our metal ins and our flexible business.

Another segment is the engineered carrier and paper segment, and that is all entirely our tube, core and paper operations worldwide.

The third segment that we have is packaging services, and that's our existing packaging services business, plus now, of course, the CorrFlex operation. And then other, which really isn't a segment, includes some of our miscellaneous businesses. We have molded plastic, our baker reels and our protective packaging division inside the other segments.

At one point, we did revise these segments. That information is out there in the form of that S-K. The segment revisions did not affect earnings at all, just the presentation.

Now let me give you the sales bridge, and what I'm doing is reconciling last year's sales of 687.3 million to this year's sales of 811.1 million. And the four components are first volume and mix where we had a volume increase that amounted to $53 million in terms of the sales increase.

The next component is price, and price accounted for 11.7 million of the year-over-year increase. The next component is acquisitions, and acquisitions accounted for 48.3 million. And then the last one is exchange, and exchange accounted for 10.8 million of the increase. So those four elements -- 53, 11.7, 48.3 and 10.8 -- should bridge from last year's sales to this year's sales.

I'll make a couple of comments about each of those categories. In terms of volume, the 53 million, 13.5 million of that is in the segment we call global engineer carriers and paper. And looking behind that, I look at tubes and cores in the U.S. and Canada, and we see that volume there was 2.5 percent year over year. Volume was up nicely in high-performance film cores and paper mill cores and in tape cores an overall 2.5 percent increase.

On the paper side of our business inside that same segment, paper U.S., we solve trade sales up 1.5 percent. Interdivisional sales were up consistent with the increases that we saw on our tube and core division in the 2.5 to 3 percent range. So good volume increases in that particular segment.

Also in the volume of about 53 million, we had in our consumers segment an increase of almost $30 million, and that was good volume increases across the board. We had volume increases in our rigid paper and plastic business that Allan alluded to earlier. That was actually up in unit terms 6 percent year over year. Flexible packaging volume was up a little bit less than 2 percent, and our Phoenix metal ins business was up 18 percent in terms of volume with good volume coming out of their new Brazilian operation, which is up and running now and it is actually more than that. It is also good solid volume out of the domestic operations. That volume was up there 18 percent. And then in some of our other category, our protective packaging volume was up around 4. Molded plastics volume was up in the 20 percent range. So volume increases really across the board in all of our businesses.

In terms of price, the amount that affected price as I said was 11.7 million. The majority of that -- far and away the majority of that is in our global engineered carriers and paper business. If you recall in April, we announced a $50 a ton paper increase, and then we followed that with an 8 percent increase in tubes and cores. Those are domestic increases. So through the second quarter, we were implementing those price increases, and you see the impact of that in this year's third quarter.

While I'm talking prices, I'll note also that we have announced price increases in the $30 to $40 a ton range for our domestic paper businesses effective the 1st of October, and our tube and core businesses we have announced price increases at a minimum of 5 percent effective in November. So we should be seeing the further price improvement, probably not much to affect the fourth-quarter numbers, but it will roll on into 2005.

Add acquisitions 48.3 million of increased sales, as you can well imagine, that is virtually all the CorrFlex acquisition, and then of course, other 10.8. That's exchange. The Euro was stronger to the dollar on average by 7 percent, and that's largely what accounts for the majority of that 10.8 increase.

Now turning to the earnings before interest and tax, EBIT, I've got a bridge in front of me, and what I'm reconciling is a total increase of $19.7 million year over year. Last year EBIT was 48.8 million, and this year's, if you add up all the segments and come to a subtotal, you will arrive at 68.5 million. So the components of EBIT are volume and volume was up $11.9 million.

Price cost was a negative $2.7 million for the quarter. Productivity was $16.2 million, and then other was a negative 2.4 million. And then the last category would be the combination of the prescription drug adjustment and the executive life and that is a negative 3.3 million. So with those five items, we should arrive at 19.7 million, and that bridges us between last year's EBIT and this year's EBIT.

Just looking a little bit behind some of those numbers in terms of volume mix, the 11.9 million, that is really just the EBIT impact of the 53 million sales increase that I talked about earlier.

In terms of price cost, the 2.7 million, approximately half of that is coming from our global engineered carriers and paper business. Really most of that is coming in Europe where we did see average prices declined in both the tube and core side and in the paper side of the business. So while we had seen good price stability in Europe for the previous three-quarters, the fourth quarter of last year and first and second quarter of this year, we did see some deterioration in our pricing in the third quarter.

The other half is really coming from rigid paper and plastics, and here what we had is we increased pricing earlier in the year on contract and some of our non contract business, I should say, and some of our contract business. And when we put all that contract and non contract pricing increase together, we did see an increase year-over-year in terms of pricing, but that was more than eaten up by the steel increase year over year where we saw an increase at the beginning of the year and, then pretty rapidly after that, steel surcharges that are up $70 a ton.

In this particular division, we have been really unable to pass the steel surcharge on to our contract customers, and we will have to, for the most part, wait until these contracts reset in January, and then we will be able to pass that on. So that clearly that accounted for a good part of the negative price cost that we saw in this year's third quarter.

In terms of productivity, productivity as I said was up 16.2 million. Productivity was generally good across the board, and as you well know, their company was focused for a good long time on its productivity programs. It's linked to Six Sigma program and most especially on our scrap reduction programs. So we did see good productivity across the board. The majority -- a good part of the increase almost $10 million of the 16 million came from our engineer carriers and paper business and a lot of that is coming out of our paper operations. This year we -- our machine utilization was around 97 percent in this year's third quarter, compared to 90 percent last year.

So the machines were running slow; and productivity was very solid in that position and you can certainly sit in these numbers.

And then, lastly, other is a -2.4 million, that is, energy costs are up. So some of that, again, is in our paper division; and then we also had startup cost.

We talked about the startup costs in our Brazilian metal in plants. We also had started cost in our Corona California plastic bottle plant and we moved five production lines in consumer segment during this quarter and certainly saw some cost there. At least there were some significant benefits coming from those relocations but we don't see it here in the third quarter. It will roll into the fourth and next year.

So that is sort of in a nutshell some of the more important events that affected our earnings. Let me talk for just a minute about the cash flow.

Our cash flow, operating cash was 135.7 million. That compares to 205.6 million last year. So we are actually short right at $70 million compared with last year. We had in terms of cash flow we had capital spending of 86.3 million this year, compared with 81.6 last year. Our dividend to date is 63.4 million compared to 50.8 million. But there is a shortfall of about $70 million in operating cash and it's not hard to see where that is.

It's in networking capital, and our networking capital is used cash to the tune of $104 million in 2004 compared to $29 million in 2005. So that's a $75 million year over year difference in working capital this year vs. last.

We think, obviously, we look very hard at this. We have very good control over working capital and have managed working capital effectively for a lot of years now; and we think that, as we look at today's calculation that we've run, days of receivable, days of inventory dates and payables, we are continuing to see year-over-year improvement and we have some improvement over last year's third quarter.

So it's not really in the management of working capital. It has more to do with the level of activity. Accounts receivable was actually up about $97 million year over year. And when I look behind that we can see just comparing back to December, our sales per day are up 18 percent and that largely accounts for why our receivable balances are up.

In days terms, days of receivables are virtually flat with last year. They're 43.8 days this year compared to 43.4 last year. So we are managing about the same as we were last year, but the level of activity is just that much higher.

Inventory was up about $36 million and accounts payable was up which is favorable $37 million. It really relates more to the level of activity that we've had.

As we look to the fourth quarter and then, of course, for the whole year we would be -- we will have to reflect this third quarter or were first three-quarters performance in our estimates and we would more likely expect cash flow in 2004 to probably be in around $65 million range. What we see each year and will clearly see it this year is some improvement, substantial improvement in the fourth quarter, especially in December but we will certainly still have year-over-year increases in our networking capital.

So we will bring our projection down from -- $100 million range to about $65 million range.

And then my last comment before I turn it over for questioning deals with our projection for the rest of the year. We said our fourth quarter range will be in the 40 to 43 cents area. That includes 2 cents for prescription drugs. I don't really want to talk down the fourth quarter because I think we will continue to expect to see the momentum that we've had in the first, second, third carry on into the fourth. But we generally have a slowdown in the fourth quarter especially in some of our consumer-related businesses. So we take that into consideration when we make our forecast.

Frankly we will have some startup cost. We had some in the third quarter around one plastic bottle plant that we started up in California and we expect to have another one we will be starting in the fourth quarter or certainly current startup costs. And then of course the tax ratio should go back more to the 35 percent range. But we would think that fourth quarter range should be in the 40 to 43, which includes the 2 cents.

So -- and of course without the 2 cents, that range would be 38 to 41. So as I look at the base earnings and I believe the base earnings is largely what the financial communities used and is published in the first call estimate. The first quarter was 33 cents, the second quarter was 39 cents.

On that basis, the third quarter would be 44 and our estimates for the fourth quarter would be 38 to 41.

That's, I think, the way that will probably be looked that. It could be looked at that that 2 cents needs to be added to each of those numbers and I think it is important that there be consistency the base plus 2 cents would be 35 in the first quarter, 41 in the second, 46 in the third and a range of 40 to 43.

But I think the base says it relates to the way the numbers have been used in analyst expectations would be more around the 38 to 41 number.

Those are my comments and, Allan, I will pass it back to you for questions.

All right. We are ready to open for questions.

(OPERATOR INSTRUCTIONS)

George Staphos, Banc of America.

As we look out to the fourth quarter understanding that you do see seasonal dropoff in the momentum within the consumer business it does look like comparisons are also getting tougher. As I look at the second and third quarter you are well ahead of last year's result. Are there any other factors we should consider in terms of why the fourth quarter versus the fourth quarter increase won't be quite as large?

George I don't think so. I think Charlie covered that. The consumer seasonality but, frankly, as I look back over the last four Decembers, the last really strong December we had was '99. And since that time, frankly, both of our businesses, industrial and consumer, has been weak as customers have taken downtime. So I think we've built that kind of conservativism into the numbers.

So that that would argue perhaps that you should see a stronger level of performance in the fourth quarter than you're currently guiding to? If last year wasn't a potentially tough comp.

I wouldn't say that. I think the foundation we don't know at this point other than what we can see.

I appreciate the position you are in. And you're not seeing any reduction momentum in industrial. How would you -- in your early fourth quarter trends, would you say that industrial is doing better than third quarter about on par or maybe some (MULTIPLE SPEAKERS)

George, with the exception of Europe, perhaps, particularly Western Europe which is still weak the rest of the industrial businesses are on par, I would say with what the third quarter performance was like.

Last questions. And then I'll turn it over to the other guys. On the new basis, I have not looked back historically, I do remember the old old format for consumer. You still were doing -- you were still performing at a much higher level of profitability than the results you are currently putting up.

Is there any significant initiative that can get the consumer segment out from out of the 7, 8 percent range that used to be at 10 percent or better margin business?

Well, clearly we saw and then Charlie talked to it year over year performance improvement in flexibles. So as that business continues to improve we'd expect to see margins in the consumer side improve. As Charlie also talked about, we had been impacted by the steel price run-up surcharges, which we have not completely gotten through and I suspect that you would see -- I don't know 1/2 a percentage point improvement as we pass through those steel surcharges which we would expect to have enough first -- January of next year.

So, yes, I think there's momentum to get back up to those levels, George.

Harris, 1 last one. I apologize. We've been waiting for flexible to come around for a while. Is there any greater level of urgency within flexible these days? Maybe without necessarily relaying to us what the goals are? Is there a -- we got an increase of margins there about 5 percent by a certain point in time? Or something to that effect type of goal in the business?

George I don't think I could frankly heighten the awareness (MULTIPLE SPEAKERS) flexibles anymore than is are ready there. But as I mentioned, we have seen year over year improvement both in sales and profitability in that business. And I expect it to continue on that upward trend.

Tim Burns with Cranial Capital.

I missed one point, which was the growth rate of composite cash. I know somebody said something. I just didn't hear it.

I said 6 percent. What I didn't say was some segments were pretty strong. (indiscernible) were up in the 20 percent category. 20 percent range but overall 6 percent year-over-year improvement, Tim.

Good -- that's what I was hoping to fill in. And the plastic bottle plant. Is that kind of a clone of what you're doing out in California just in a different geographic location?

Yes. But it will have some different products in it Tim. It is in the East Coast.

So it's an East Coast location. Eastcoasters usually don't drink those fancy nutraceuticals. They drink that sugary Snapple. But let's hope.

Okay so -- and when does that plant come up and run?

The first quarter of next year. We actually have an additional machine going into the West Coast plant as we speak. It will be debugged in November, December, and up and running. And then the new plant will come up in the first quarter.

How are -- how will the joint venture with Ahlstrom affect 2005? I mean, it's a superb strategic move, it's something you guys have been dreaming about I think since Tommy Cox was around back 20 years ago.

That was the crust of the earth, wasn't it?

It really was. But Tommy always told me -- he said he used to date these owners, basically, it was like courting them and eventually he pulled them in. But how is that going to impact your overall structure in Europe as you see it, Harris?

What's the question? Is it the earnings level or is it the structure of that?

Well I guess it's a joint venture, number one -- right?

Correct.

And I was just curious as to when you put these two businesses together I mean is it 1 plus 1 equals 2 3, 5, I mean is it going to dramatically improve your earnings and your position in what's historically been a very strong business in North America but one that's been under construction in Europe?

Fair question. I think, in 2005, 1 plus 1 equals 2. Because we're not going to see much improvement in '05 primarily because we are going to have a lot of moving pieces with closing down a number of plants which I really don't want to get into until after the announcement of the action to closure. Those moving pieces will be expensive in '05. And so I don't see an improvement there. In '06, I would like to think that 1 plus 1 probably equals 3 and then it will stay there. It won't improve but it will stay there until we buy Ahlstrom out under the terms of the agreement.

And will this bigger integration -- integrated converting network enable you to do anything upstream on the paper side that could be interesting? Or maybe you already are, and I missed it.

Well I think what this footprint will do is we will hopefully put Europe in a -- a paper business (indiscernible) business in a buy position where we will again internalized all the volume running the mill school and we will be buying board on the outside which is the -- we think will be an advantage in Europe.

So that's where you want to be?

Exactly.

Edings Thibault. Morgan Stanley.

Charlie, I was wondering if you could quantify some of the startup costs. You mentioned them for the easy open businesses, both in North America and Brazil. I was wondering if you could put a number on the kind of earnings drag you think that's providing?

I can make a stab at that. I think in Brazil operations that's probably about $2 million year-over-year. And then whenever we look at the start-up in the rigid paper and plastics business, and all of these are in that consumer segment. That's about 1.9 say $2 million year over year as well.

So we will probably have close to $4 million of just start-up types of costs in the fourth quarter. I'm sorry -- third quarter.

And when -- what's kind of the timing for you to break even on those costs as you bring those machines and plants up?

Brazilian operation is -- all four of those machines are in production and running. So we should see that startup cost significantly diminish. And as it relates to some of the other cost, we had the Corona, California plant is up and running with one line Harris mentioned that there will be another line installed there so we will clearly see some startup cost at that plant.

But then we also I mentioned I think moved five production lines. Those five production lines -- that is largely behind us now. So I think the answer to your question is that a lot of what we saw in that number at least half or more of what we saw in that number, should go away. And I would expect a lot of that in the fourth quarter.

And as you look at that as that ends business when you are putting in those new facilities, what customers are you serving? Are you serving existing customers with an upgrade easy open or how are you justifying the cost, I guess?

We are serving some existing customers in North America. Some new customers in Brazil and some new customers in Mexico.

All out of -- no I guess the presenting customers are being served out of Brazil. That would make sense.

We are serving some North American customers out of Brazil.

Just wondering if you could prioritize your cash flow needs as you are or cash flow priorities in terms of where you put cash over the next couple of quarters, Harris?

I would say as we consume cash, it would be paying down some debt and reinvesting in the business. We expect next year our CapEx to be in the -- we haven't rolled it up yet -- 115, 120 range, something like that. But it will be pulling our debt down and reloading the guns.

Cap spending for the rest of this year as we are at 86 million we'd expect that to be about 115, 116 by year end and probably not changeable a lot going in 2005.

So even on the -- you mention reinvesting the business even on the larger asset-base. Does the cap -- (indiscernible) does that capital plan, Harris, that you are referring to, include the new assets in Europe?

No. Actually the assets in Europe that will be a joint venture so what we do is we basically just take the Ahlstrom business and combine it with the Sonoco business. And so there won't be any investment at all that will represent an outflow of funds.

Okay and so that -- as that business invests, you'll be using internally generated?

We will be (MULTIPLE SPEAKERS). That's correct.

But you will be accounting for any capital spending in that business on a consolidated basis?

That's correct. Everything will be consolidated. And as long as Ahlstrom owns 35.5 percent of Sonoco Outpour then there will be a minority interest charge. So that it will have -- the proportions are probable -- were designed actually to be in line with that 64 1/2, 35 1/2 and so minority interest will account for their share of it. So there probably won't be much of an impact on earnings as a result of just merging two businesses together. The impact will come as Harris is saying down the road whenever we get some of the synergies from consolidating the back office. Back offices in our two businesses and then also closing some plants.

But -- and I apologize. Just to be clear that 115 to 120 doesn't capsulate the consolidated European business?

It does. Yes.

Finally, any thoughts on perhaps repatriating earnings from these overseas businesses? Are there significantly cash holdings overseas that you guys will be looking to bring home, given the recent changes in the tax law?

There's not a substantial amount that we clearly do have some cash that's built-up outside the U.S. and the way we are actually structured, most of our outside the U.S. operations are known by a Luxembourg company. So the cash builds up outside the U.S. and we will look at that law and make some decisions.

Part of the thought process would be to take advantage of the law and I think it's 5 1/4 percent; on the other hand we will have some investments to make in Euros over the next period of time, which is a little bit undefined. But certainly as it relates to our acquisition of the remaining 75 percent of the (indiscernible) that will be a Euro based acquisition and then also the potential further down the road -- acquisition of Ahlstrom shares -- should that occur would be Euro based. We'll have to sort of decide what makes sense. To repatriate money and send it back or sit on it.

Is there any sense of -- can you give us a sense of order of magnitude on that in terms of the amount of money that is sitting in Luxembourg that you are going to have to decide what to do with?

No, there really isn't probably will be able to repatriate $10, $15 $20 million if we pushed it. And I'm not too sure we are inclined to do that. So I don't think that -- at this stage in the game what we know about the law it will just be rank speculation what we will do.

We have started the process of analyzing.

Richard Hallahan, Smith Barney.

I had two quick questions. One was with regard to OCC and you passing those costs through in pricing. I think you mentioned earlier that you've essentially passed most if not all of your higher costs you've seen year-to-year from the third quarter through and higher prices where you stand now. Is that accurate?

That's correct.

With the price increases with OCC having come back over the last couple of months and not much -- 10 percent or so but since the late spring early summer, are you seeing some resistance on the latest round of increases or price increases? Or are customers understanding in the sense that they expect I don't think there is many people don't expect to see prices and pulp prices to be higher next year. And that you're getting in front of that a little bit.

Richard -- it's been a long time since I've called on any customers that are very understanding of price increases. But having said that, I think OCC has pulled back $5 in the last few months; and at this point in time, certainly on the paper side of the business we are pushing through the price increases and while there's some resistance I think most people understand that basic raw materials and imaging cost have gone up fairly well and significantly and we certainly are seeing the display in the industry at this point to push these through, anticipating that there may likely be more price increases in SEC in the first-half. So my answer is we are seeing nice support for those increases.

Ghamsham Panjabi, Lehman Brothers.

Harris, can you help us understand how you view Sonoco's position in the rigid packaging market longer-term? It seems like a pretty competitive business and I wanted to hear your thoughts on that.

The rigid plastics? Is that what you asked?

Yes exactly.

We see Sonoco serving very niche markets in that business, Ghamsham, and that's obviously what the Corona, California plant is designed to do. We don't want to be in commodity grades; and we have customers who have come to us, want us to design a certain type of niche products foam which we will do and that's we will do with it.

And how much should we expect those to affect CapEx going forward?

We invested $20 million in Corona and this year I'd expect over the planning horizon of the next to three years probably a like amount of that.

Mark Connelly, Credit Suisse.

Just a couple of quick --

Mark, we can hardly hear you.

Just a couple of quick questions. First on the packaging services side of the business. Obviously the results there are looking pretty good but can you give us a sense of the kind of growth we should be expecting and where it's going to come from? You picked up Bosch. How will that layer in? Do you target growth rates there or do you target new customer -- new customers coming into the chain?

Mark now the Bosch and the protective packaging is not in the packaging services.

Right I understand, I am just sort of lumping it altogether.

Okay.

Because it seems to me that those are the two parts of the business where you have some somewhat different growth trajectory. And can you give us a sense of how you target growth in those two businesses?

In the protective packaging we're obviously trying to growth the post business with not only the appliance customers around the world but also anyone that needs stacking strength. That could be cabinets, that could be air conditioners or whatever. What we're seeing in the appliance industry today and that's obviously what Bosch is are these folks are wanting tier 1 suppliers. And they want someone to come in to handle more than just their packaging, more than just the post business with the protective packaging. We have, as I think you know, designers in that do nothing but design packaging for these appliance customers.

And so, we are providing services and products for them over and above the components that we are in fact providing for them from a packaging standpoint. We think that the growth of this business or that section of the business will be nice growth over the coming years.

On -- what I'm really referring to as packaging services side which is the Devins, the Gillette, the Hewlett-Packard and the CorrFlex side, frankly, we have a number of opportunities there, particularly where we are leveraging with existing Sonoco customers that did not currently do business or did not do business with CorrFlex. So I think even there we have even greater opportunities to grow the top line.

Again pulling them both together it sounds to me like the focus and the growth is intended to come more from an existing customer base than it is from expanding the customer base. Is that right?

Clearly, we have fertile ground with existing customers. But we in the past quarter we had several new customers that we didn't serve on either side of the business that are intrigued very interested in our solutions platform so we created the solutions platform to go out to get new business and as I think I told the management team a couple of days ago we build this and we can't expect people to come. We got to go sell it and we are selling it and I think you'll see good growth from it.

From both of those areas?

Yes.

And just a point of clarification on the steel costs that you've not been able to pass through. Do have an expectation of when you'd have that in?

We do. Most all of those -- all of that business is under contract and probably 80 percent of that business is under contract for passthrough on the first of January. And I think there is one other account that's some time later in the first or early second quarter.

Mike Meek with Atlantic Investment.

Just to circle back on the steel costs. I think in your Q2 release you said steel had hurt you by 3 million in Q2. And I was wondering what the impact was this quarter?

I don't have that handy, Charlie, do you? I would suspect it would have been a similar number.

I think it is and the reason it didn't show as profound on that price cost is because we also had some material substitutions. Steel number would be in that same 3 million range and then the substitution that we had like waiting in steel would have negated some of the impact as it comes through our numbers and price costs. Mike, I think that's still probably a good -- pretty good estimate.

And I think you should expect the same thing in the fourth quarter.

Then just also to circle back on the startup costs. The Brazil plant cost you about 2 million this quarter. I think you said on the last call, it would cost you about 1 million and 2Q and there was a reference in the 8-K to Brazilian startup costs. I was wondering if we were to look through the first three quarters of the year, what does that Brazil startup cost you?

I don't know I guess that number might -- I would have thought maybe as much as $6 or $7 million.

Okay. All right.

If you put it altogether. Now some of the startup that we saw was because we actually got a little bit of a slow startup because we were somewhat slow in moving equipment out of the units because our business has domestically picked up. So when you just look at the Phoenix business itself it is up well over last year and that's because the domestic side has done well. Brazilian side is coming along despite the fact that we had the startup costs. All in all, it's a good performing division for us and it's probably not quite right to just focus on startup period.

But Brazil has hurt you by 6 - 7 million through the year and I think I may have gotten this wrong -- I may not be reading my notes right but I think you said that in fourth quarter you may have just a little bit of a drag from Brazil and that sort of goes to at least breakeven. In the following quarters.

That's fair, Mike.

And if I were to look at the California plant, that cost about 1 to 2 million in the quarter. In that figure, is that including the moving around of production between factories or is that another separate number that we should layer into that?

What I said, too, I was putting it altogether. Let me come back and change (indiscernible) I've been looking through some of my numbers. It's about 4 million year-to-date on the Brazil startup.

Brazil, thank you. Terrific. And then the California plant that's -- do you -- I guess it's going to look to sort of a similar startup cost over time as to what you've seen in Brazil?

No.

Less expensive?

Brazil is four lines that have been coming up since last year and this is the one off one line and now a second one.

George Staphos.

Harris, (technical difficulty).

George I can't hear you.

In terms of Mideast Asia what is your net paper position? Do you have enough available supply as you expand your converting operations there or do you have enough ability to trade between Europe and those regions?

Yes, we do.

How much -- how many years' worth of growth do you think you have or how much tonnage do you think you have available to grow into?

George, actually, given (indiscernible) capacity situation in Europe we would probably source that from the outside. In Asia, the same thing. There's so much capacity sitting there today, I doubt we would make an investment in another mill.

This is probably something you can't answer directly; but what type of growth rate should we expect for those regions where you in terms of your more traditional converting operations? Could it be a 5 percent type of growth rate, 10 percent here I'm talking about --

I think it's probably the latter number, 10 percent for our growth rate.

Now CorrFlex, doing some rough math. Margins there were probably in the low teens. And your still early days in terms of integrating that. A, would you agree with that number and B, where are you thinking you can get that to over the next one to two years?

Well, we are early in the integration standpoint from an integration standpoint, George. I would say that it is tracking along with the pro forma that we had and you're direction correct in your margin assumptions.

The last question I had, within the all other Sonoco segments now which is a hodgepodge of a lot of your older businesses. Are there any strategic connection between those businesses, some of these more important segments. In other words could you somewhere down the road stand to part with Baker Real (ph) even though it is a quasi engineer air carrier business. Because, ultimately, your most important segments are engineered carriers and consumer and as those grow, so goes probably the health of the Company? Or would you disagree with that statement?

Well I would agree with you that in the other sector there are obviously some businesses that didn't fit very nicely in the other sector. The (indiscernible) would've been in there. Protective packaging is very much a keeper. It's a consumer of paper and it fits very very nicely and is I think -- Mark Connelly was asking the question about the services; and the design ability; and how that fits with taxing services so while that is over there, it's a lot of the same things.

Also in that sector we have some of our internal operations such as our adhesive operations that supply material into our converting operations. We have Crohen (ph) that is the molded plastics that sells in the industrial side and the consumer side. You mentioned the outlier and that's Baker and Baker's been in our portfolio for a long period of time. And it's an excellent contributor. But having said that I think as you know we look at the portfolio from time to time and if things are not strategic to us, we are not adverse to capitalizing on it.

Edings Thibault.

Just wondering if you could comment a little bit more on the price increases, Harris, in terms of how should we think about your average price on the engineered carriers in terms of the 8 percent price increase. The first 2 percent price increase. Is that fully in in the quarter?

That is no. Not fully in in the quarter but I would say that by the end of the quarter we recovered probably what we're going to recover under that. And so what you see for the first increase is what you're going to see. It's in the early stages, the second increase, which I think the effective day of that is the 1st of, November, and so that -- my experience has been three weeks before the increase they always look good. We'll have to see.

Could you give a little maybe a little bit more clarity in terms of an average price or an average realization on this price increase vs. where you see it at the end of the quarter.

I can't do that.

But there's still more pricing we should look for incrementally a couple more million from the first price increase?

It would be very marginal.

Tim Burns with Cranial Capital.

I know there's an answer for this but as I looked at packaging services, there's been dramatic growth. I assume that's related to the CorrFlex acquisition?

That's right.

Is that right?

Yes.

So the growth in both sales on an absolute basis and then margins have literally doubled so if it's really there (indiscernible) low teens business that has been integrated with yours, that's causing that affect?

That's correct. That's right, Tim.

Because I was just curious. Everybody talks about there's some kind of Holy Grail threshold point in this packaging services area, where if you get there, you start to make money and it wasn't CorrFlex I wanted to know what it was. Because it would be very very important. The other question I had was in terms of the protectives business can you give us a ballpark figure on just how big it is today and where it's going?

That business today is $75 million range and we would expect above average growth from that business, Tim.

And, ideally, you're basically -- some of your products, edge cards and post and things of that nature are kind of designed at your place and using your paper. Are there more of those to come? Or do you need to put something else alongside it to get more attention? Or do you want more attention?

Well I think that we have the soda pop that we have talked about which is a consumer piece of utilizing that post on the consumer side which is a perfect fit, frankly, with CorrFlex and we already had some success with CorrFlex out, introducing that product into customers frankly that neither one of us had beforehand. So we -- that's a patented Sonoco product that adds stacking strength to a number of applications. So yes we think it's got a lot of applications beyond just the box (ph) business, Tim.

You call it SonoPop.

Yes.

Sir, we have no further questions at this time.

Thank you very much. We appreciate your participation.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.