Sonoco Products Co (SON) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Sonoco 2005 second quarter financial results conference call.

My name is John and I will be your coordinator for today. (Operator Instructions).

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

Please proceed, sir.

Thank you and good afternoon, everybody and thank you very much for joining us for our second quarter teleconference.

With me today are Harris DeLoach, our Chairman, President and CEO; and Charles Hupfer, Senior Vice President and CFO.

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.

Reported earnings per diluted share for the second quarter were $0.40 versus $0.37 for 2004.

However, excluding the effect of restructuring charges, base earnings per share – which is a non-GAAP financial measure -- totaled $0.45 for this year’s second quarter, compared with $0.41 for 2004, representing a 10% increase on a sales increase for the quarter of about 15%.

Charlie will walk you through details of the numbers in a moment, but first a quick overview.

The increase in year-over-year base earnings for the second quarter primarily reflects the CorrFlex acquisition, increased volumes in the consumer packaging segment, including a new monthly sales record for flexible packaging, productivity improvements and a lower effective tax rate.

Of note is the fact that the Company enjoyed a positive price cost relationship despite higher year-over-year material costs.

The second quarter earnings were negatively impacted by integration costs in Europe for the Sonoco and Ahlstrom operations; the national paper strike that occurred in Finland; continued weak general economic conditions in Europe; weaker demand for tubes, cores and paper in most geography; higher energy, freight and labor costs; and continued though improving start-up costs at our new plastic container plant in Wisconsin.

The majority of the Sonoco-Ahlstrom integration costs are now behind us and the Finnish paper strike is over, both of which should help improve European profits in the second half.

Company-wide volumes for the second quarter were up about 11% including Sonoco-Alcore; the JV with Ahlstrom, and Sonoco CorrFlex.

If you exclude these, volumes were up about 4%.

We expect to see continued improvement in our businesses serving consumer product companies drive by such new products as Pepperidge Farms Whims and Kraft’s newly introduced Snack and Seal opening and closing technology, jointly developed with Kraft and just being rolled out for their Nabisco Chips Ahoy cookies.

And, a new thermoform container for Hampton Farms Gourmet Peanuts has also just been introduced into the marketplace.

Assuming no significant change in company-wide volumes or in raw material prices, we expect third quarter earnings in the range of $0.45 to $0.47 per diluted share and full year earnings in the range of $1.77 to $1.81, again excluding any restructuring charges and assuming no significant changes in volume or pricing.

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

Thank you, Allan.

Let me begin with sales.

Sales were $878.2 million, that is 15% over last year’s $763.9 million and as Allan mentioned, EPS is $0.40 per share compared with $0.37 last year.

Those are our reported numbers in accordance with GAAP.

That includes restructuring of different amounts in both years.

So let me walk you through the restructuring charges and how they affected the earnings to arrive then at what we have been calling base earnings.

Restructuring in 2005 was a cost of $9.1 million pre-tax in this second quarter.

Most of that relates, $6 million of that in fact, relates to the closing of our Downingtown Paper Mill.

On an after-tax basis, the charge was $5.6 million, or $0.05 a share.

So without restructuring in the 2005 numbers, what we generally call base, EBIT would be $71.9 million and net income would be $45.8 million and EPS would be $0.45 a share.

Now looking at the 2005 restructuring, in that quarter we took a $5.8 million pre-tax charge against earnings.

After tax, a $3.7 million charge, so that is $0.04 per share EPS impact.

Without restructuring then, what we call base, EBIT would be $68.5 million, net income $40.4 million and EPS $0.41 per share.

So base earnings, which I am defining here essentially as earnings without restructuring, are $0.45 per share this year versus $0.41 last year, and that is around an 11% year-over-year increase.

Now the $0.45 was $0.02 higher than our guidance, our original guidance was $0.41-0.43.

Now let me focus a little bit on base earnings.

As I said, sales were $878.2 million;

EBIT is $71.9 million and that is up 5% over last year.

You can see the breakdown of that in the segment analysis that we have got in the press release.

Then we have interest of $10.8 million; we have taxes of $19.3 million; those of course are negatives, a subtraction, and then we have affiliate income which is a positive $4 million.

That arrives at net income at the $45.8 million which, as I said, is 11% higher than last year.

The increase in affiliate income of $4 million is an increase over last year.

A large part of that is minority interest, and minority interest comes through and we will talk later about some of the extra costs in Europe around the Finnish paper industry strike that Allan mentioned, as well as some of the extra costs in relocating the businesses as we closed down plants.

Those costs are shared by our partner and that sharing is what you find as a positive here in affiliate income.

So we take the charge up in EBIT and then the partner’s share comes out of the reduction in affiliate income and it looks like income on this line.

So that is what a good part of the difference between last year’s affiliate income and this year’s resides with, minority interest.

In terms of interest expense, it was up $0.5 million over last year, that is due principally to financing the expansions in Brazil and the growth in Europe.

The effective tax rate in this quarter is 31.6%.

Now that compares with 35% in last year’s second quarter.

During the quarter, we released $2 million in evaluation reserves in Mexico as a result of tax planning around a tax law change there.

Of course, that $2 million is after tax so that would equate to $0.02 per share.

That $0.02 per share, or $2 million will not be repeated in the third and fourth quarter and it was not factored into the guidance that we provided earlier.

A couple of other comments before I move on to the bridges, one of them is exchange in sales.

We had foreign exchange impact of $14 million at the sales line, but it had very little impact at the net income line, probably around $300,000.

So as we have talked about in the past, it affects our sales but it has a negligible impact on income.

The strike in Finland in the paper industry lasted for about a month-and-a-half from mid-May to the end of June and we estimate that it cost our company, our joint venture company, $1.8 million.

So after tax and after minority interest, that is about $1m or about $0.01 per share.

And then we also had some extra costs in Europe that I alluded to a minute ago, related to the closing of plant and the relocation of equipment and the relocation of production.

We feel that those inefficiencies crop up in all those moves, probably cost us around $2.5 million on a pre-tax basis, so again after tax and after minority interest, that is about $1m or about $0.01 a share.

All of those negatives are found in that Engineered Carrier and Paper segment.

Now let’s look at the sales bridge.

What I am doing here, as I have done in the past, is reconcile last year’s sales to this year’s sales.

Sales increased $114 million, $114.3 million.

The make-up of that increase is volume increase $29.5 million.

Price increases accounted for $14.9 million.

Acquisitions accounted for $56 million.

The foreign exchange that I mentioned a minute ago accounted for $13.9 million.

So those numbers should add up to $114.3 million and that represents the difference in sales year-over-year.

Let me make a couple of comments about each of those category.

One of them is, the starting point is volume.

As I said, volume was up $29.5 million.

Almost all of that was in the consumer segment.

In fact, when we look at the consumer segment we find that our flexible volume is up about 16.5% with good volume increases in the retort pouch that we have talked about in the past and we have commercialized over the last half year.

Special customer promotions, we had the new recloseable package, Snack and Seal, and so those all are reasons that account for about a 16.5% volume increase in flexibles.

In our rigid paper and plastics – and that is going to be largely the composite cans – we see volume up about 3% and that is across the board.

It includes things like snacks, [Call], [Dove].

It also includes increased sales with Sono-Wrap, Allan mentioned sales to – I think he mentioned sales to Pepperidge Farms and then the new self-heating canister.

So all of that amounted to about a 3% volume increase.

And then in the same category of consumer we have our Phoenix Metal End operation, and those sales were up about 11% with volume coming out of the new plant in Brazil.

So most of the volume increase is in the consumer segment.

In Engineered Carriers and Paper, volume actually showed a decline year-over-year.

We saw our cube quality in the U.S. decline approximately 5%, and that is largely as a result of textile volumes which was down around 14% and paper mill core volume down around 6%.

So in total, our US volume declined about 5%, most of that coming from textiles.

In Europe, we also saw a decline, in this case about 3%.

A lot of that was due to the paper industry strike plus just a sluggish economy that we have over there.

On the other hand, paper – our paper division, reported their trade volume increased about 7% as we look into and find new markets for our core board and packaging services volume was up as well.

So that gives you a flavor for the mix of our business as it related to volume.

As it relates to price, pricing is up $14.9 million, most of that price increase comes on the consumer spending side as well.

Composite cans in the US increased around 5% and at Phoenix Metal End prices increased around 10%.

These increases are a result of customer, or of contract resets that occurred early in the year and those resets give us the change to recover the higher cost like steel and aluminum costs, costs that we were not recovering in fourth quarter, we certainly recovered them with these price increases here in the first and second quarter.

We also saw good pricing movement in molded plastics that had increases that account for most of the rest of the volume that accounts for this $14.9m.

Molded plastics pricing was up about 7.5% and that is to cover the higher resin costs.

Tube and core prices were up in the US modestly, but they were down by a similar amount in Europe and recovered paper prices was down.

It was down roughly about $10 a ton.

We do, of course, purchase waste paper and sell some of it back into the market.

That waste paper was down about $10 a ton because of Southeast yellow sheet prices that declined roughly that amount.

That is a negative on the pricing line but obviously when we get to talk about EBIT it will be a positive there because it means lower furnished costs for our paper division.

The third component is acquisitions.

Acquisitions accounted for $56 million, $25 million of that in Europe and it relates to joint venture. $31 million of it relates to our purchase of CorrFlex at the end of May of last year.

As I said earlier, exchange is $13.9 million, that is simply the weak dollar versus the Euro and some other currencies.

Turning now to the EBIT bridge, what I am doing here is trying to account for an increase in EBIT of $3.5 million and the components are volume mix, and that is a negative $0.4 million.

The next component is price costs, and price cost is a positive $4.4 million.

Productivity, $6.7 million and then other is a negative $7.1 million.

So those numbers should add up, $0.4 million, $4.4 million, $6.7 million and a negative $7.1 million should add up to a year-over-year increase of $3.5 million.

Let me comment on volume.

This volume number represents the profit impact of the volume increases that I talked about when I reconciled sales.

So how can we have a volume in sales account for a $25 million increase on the top line and no profit to the EBIT line?

And the answer here is inter-company sales that are eliminated in consolidation but clearly affect profitability.

Our inter-company paper sales were behind last year roughly 7% and that had a negative effect on year-over-year profitability in our paper group.

And then we also frankly saw a little bit of negative mix because a part of the sales decline was in some of our higher margin products like textile tubes.

So volume and mix were down slightly, most of it is really attributed to shortfalls in our US tube and core group which then had a corresponding impact on our paper production.

In terms of price costs, price cost was up $4.4 million.

This is interesting in that our Engineered Carriers and Paper segment accounts for a little more than half of that increase.

So again, I was talking about prices down slightly on the sales side, but here we see that the furnished costs came down even more.

Our furnished cost returned us $4 less than last year.

So the price cost is a positive in Engineered Carriers Paper segment, it is not so much because price is up it is more because costs are down.

On the consumer side, pricing was largely offset by the higher costs.

So while we had very good price movement in consumer, what it did was offset these higher costs.

And year-over-year we had steel cost increases of around 22%.

We had aluminum increases of 14% and film increases of 16%.

So with those kind of cost increases, we were frankly pretty pleased that we were at breakeven in terms of price cost in the consumer segment, and that much improved over the third and fourth quarter of last year.

Productivity is up $6.7 million, that of course is the productivity that comes from our different programs like Six Sigma Lean, our scrap reduction program.

Productivity is in fact down from the first quarter’s $10 million number and most of that shortfall is attributed again to the US paper operation where that low volume resulted in something like 90 downtime days, and of course that triggered some excess repair costs, all of which negatively affected productivity.

But overall, productivity was a significant positive of $6.7 million.

And then in the other category, that is a catch-all category, it includes wages.

We had wage increases in June that would have accounted for about 2.5-3.5% year over year in wage increases.

Our energy costs were up, freight costs are up.

The two combined are probably about $3.5 million.

The Finnish paper industry strike, as I said, probably cost us about $1.8 million at the EBIT line, and then we had those extra costs of around $2.5 million.

So I think that gives you a good sense of what is in the other category and what is driving some of our numbers.

Let me move on to cash flow, make a couple of comments.

Our operating cash flow for the first half shows the $68.1 million that compares with last year’s $54.5 million.

Capital spending, $59.4 million compared with last year’s $53.5 million.

Our dividend was $44.5 million compared with $41.9 million last year.

Our balance sheet remains strong, we did see debt increase $24 million.

Debt to total capital, however, the way we calculate it stays roughly where it was at the end of December.

Our calculation shows it at $40.4 million.

Another point that I need to make is we have not made any decisions yet on dividend repatriation under the American Job Creation Act.

We are, at the present time, looking at a lot of different business and tax alternatives and we hope to be able to come to a decision some time over the next quarter.

Our guidance, as Allan said, was for the third quarter $0.45 to $0.47.

We certainly think that guidance is achievable, otherwise we would not have put it in the press release, but it does assume some things.

Frankly, it assumes that we will have better European profit.

Now that the strike is over, that is behind us, clearly, but we have to gain some of the efficiencies from closing those plants.

We need better productivity in our US paper operations in order to achieve these numbers, and we also need to see the usual seasonal uptick in our consumer and in our packaging services segment.

So we feel confident about this, the $0.45 to $0.47 but it does represent an increase in the run rate over the last quarter.

New product sales is a question that we always get asked.

New product sales accounted for $15 million in this quarter and that is $8 million that we had in the second quarter of last year, so that is an increase of about $7 million year over year in new product sales, up to $15 million.

That resealable flexible package, ultra-seal membrane, the retortable pouches, all fall into this category.

If you recall, we define new products as those that have commercialized in the last two years, so we have seen good success on the flexible side.

And probably that is the extent of my comments, Allan, I will turn it back to you.

Thanks, Charlie, and I believe that we are ready to open up for questions now.

(Operator instructions) Your first question will come from the line of Ghansham Panjabi - Lehman Brothers.

Please proceed.

Hi, how are you doing?

Fine, Ghansham.

Good.

Could you just sort of remind us as to how much in incremental synergies we should expect by 2006 as it relates to Ahlstrom?

And actually, how much have the integration costs been so far as well?

Much of the integration costs is behind us.

We closed six of seven plants and so a good bit of that is already behind us.

Integration is where the closing of those plants finds its way into restructuring, some of that was in that $9.1 million number; into goodwill because if it is an Ahlstrom plant that is where the accounting goes.

So what I was talking about mostly was just the cost of the dislocation around all of these moves and so that is all largely behind us.

We had, the original business plan really, if I recall correctly, talked about $10 million worth of synergies, so I would expect that we will start to see moving in that direction in the third and fourth quarter.

Okay.

Have you seen any sort of meaningful pickup in the Engineered Carriers business so far in 3Q?

Not especially.

Okay, great.

Thank you so much.

And your next question comes from the line of George Staphos of Bank of America.

Thanks, guys.

Hi, good afternoon.

Hi, George.

Hi, George.

Just some nitty gritty questions first and then other things.

First of all, Charlie, when I looked at the back trace and I adjust back for Mexico, the tax rate was actually a little bit higher than 35%, more like 36%.

So should we assume that rate into the rest of the year or is 35% 3Q and 4Q?

Yes, the tax rate, the way taxes are calculated now, there are so many more discrete items and it moves around a little bit.

I would assume that it – we basically thought it would be about 35.4% to 35.5%.

I think I had said I was [inaudible].

Okay, fine.

But you are right, it turns out to be a little bit higher, I think in the 36%.

I got that.

It took us a little while to figure that out too.

Now on the other costs, can you go back through energy, freight, Finland and [Federal]?

I had missed that, I apologize for asking you to go over ground you have already covered.

I can.

What I said was in our bridge, that is in that other category, negative $7.1 million which includes a lot of different things.

But what we did was – and this is not an exhaustive look –

I understand.

We went to the major divisions and looked at their excess costs and the excess energy costs was about $1.5 million.

Now it is not worse than that in part because we hedge about 77% of our energy needs and so that is a net number against some hedged gains that we had.

Freight was around, perhaps a little bit less than $2 million.

Got you.

And Finland was $1.8 million?

Finland, the paper industry strike we estimated at $1.8 million and the extra relocation costs we estimate – and that is what it is – about $2.5 million.

Got you, got you.

Now do any of the hedges come off such that that energy number may accelerate or at least increase at the same rate?

Not really.

We went over that, the hedged, with the audit committee yesterday, I am trying to remember.

We have a series of staged hedges, so in the fall we will put in another increment of hedges and so we are effectively hedged out.

Over the next six months we will always be hedged out around 75% and then it drops off after a period of three years.

So it is a smoothing technique.

I would not expect any near-term change.

So at any given time for the next three years you will be hedged out 75% of your next 12 months?

That is our strategy.

Okay, fair enough.

Now on free cash flow, very quickly it looks like you did a little bit better, obviously versus the first quarter, although there is seasonality there but also versus year on year.

In your mind, as to what some of the things there were that drove that?

CapEx is actually up versus a year ago.

Right, and we don’t use free cash flow anymore, [the assets we have] and define it –

But for rogue analysts…

That’s right, you have got the components there and there really was not too much difference in capital spending, it was just in line with what we had expected, 59.4 versus 53.5.

What was it at the working capital line?

Working capital, up in operating cash, operating cash I said was 68.2 compared with 54.5.

Operating cash is largely equal to what it was last year.

Net working capital change, $91.8 million and that would be the increase in working capital from December to the end of June.

We did not fund as much in terms of pension funding in the first – actually in the first half.

These are half numbers.

We did not fund as much in the first half this year as we did last, and that is really the principal driver in operating cash year over year.

Got you, got you.

Now on tube pricing, perhaps my memory is going and maybe you have now lapped what were prior price increases, but I would have expected a little bit more in Engineered Carriers.

Is it just that volumes are not necessarily as robust as you would like and therefore you are having a tough time on the pricing front, or is it just anniversarying?

Some of it is.

The price increase was in April of last year and I believe November, so we probably did grandfather some of that April increase.

But these are average prices and so that is a mix of contractual pricing, pricing on non-contract business and just what I gave you was the net number, what was a little over 2%.

Last one and I will turn it over.

When you talk about productivity being impacted by relatively weak internal sales of paper, what you are really saying is relatively weak Engineered Carrier sales.

That is not terribly remarkable, the last couple of quarters it has been a somewhat sluggish market, I guess it is increasing.

Harris, what do you think is going on out there?

You answered another question by saying things perhaps were – or Charlie you did – things have not really picked up all that much.

What do you think is happening?

George, I think as we look at it, [Ronnie Holly] showed a chart to our board today and you see tube volume in North America down but you see it down by a similar amount in Asia, South America, Australia and in Europe.

I think what you are seeing is a lot of over-capacity out there today and with oil at $55-60 plus a barrel, these folks in the man-made fiber side have some inventories and they are not running into inventories at those kind of petroleum levels.

So I think that has a lot to do with the slowdown we have seen, not only in North America but clearly on a global basis.

So Harris, what you are saying is there is a build-up of inventory of finished product that has turned right around on your carriers, and perhaps you are seeing some pick up or build-up of inventory in the carriers around the world.

At the consumer side, you are working that off right now?

I would say that, you know, there has been a build-up on our customer side.

It is probably not a great one but they are betting, rightly or wrongly, that they are going to see some relief on the petroleum side that will make it more attractive for them to run that inventory back up.

When do they think that will –

As we talk to customers, George, they say the balance of the year should be okay, so we are -- obviously, that is what we are counting on.

Okay, good luck guys.

Thank you.

And your next question comes from the line of Edings Thibault of Morgan Stanley.

Please proceed.

Thanks very much.

Harris, I wanted to follow up on that question, if you will, because I think one of the items you cited was lower textile volumes.

Would you include that in your discussion of manmade fibers?

You implied that there has been a textile inventory build as well.

Because I would worry about the differential between say the plastic side and the film side and some of these textile sides which may be more driven by China.

I think what I am talking is, I am talking about the manmade fiber side, primarily in the slowdown there.

I think that if you look at the different sub segments of the textile and the tube side, you see numbers that would range from being down 23-24% down to 2-3%.

So I think it is very segment driven, but it is consistent around the globe.

So if you were to look at your global Engineered Carriers business as a whole, considering there was also slowdown on the paper side, both because of the Finnish strike and because of industry conditions in North America, what kind of Engineered Carriers volume growth would you be anticipating in the third and fourth quarter on a year-over-year basis – rough numbers?

I would say we are looking at basically flat volume over the balance of the year in the numbers we have given, although as Charlie said, we saw Engineered Carrier volume down by 5%.

I think the number I saw, I don’t have it with me, North America or I guess globally we are down about 4.7%.

Most of that down year-over-year occurred actually in May and June of this year.

Okay, and some of that if I recall was due to just some very strong shipments in the prior period?

That is correct.

That is correct, but you point out quite appropriately, we have seen the same sort of slowdown – not to the same degree – but we have seen a slowdown on the North American paper side as well [inaudible], of course.

And film as well, for that matter.

Okay, got it.

And I am just wondering, as I look at these packaging services business, you guys have shown some very nice growth in that particular business.

Do you believe you can sustain that double-digit growth rate for the balance of the year or do you begin to lapse some new contracts that would slow that?

I think we can sustain that through the balance of the year.

I think one of the things that you need to look at as you look out, under our old reporting segment – I understand we report by four segments now – but we still look at the packaging service on the consumer side as a business, because it is all of our consumer strategy.

And as you recall, that has been part of our status strategy to growth that side of the business.

I think this quarter, if you look at the consumer side and the services side together, they outpace the industrial nicely and I think that is probably the first time in the Company’s history.

Which speaks to what we have been trying to do, and that is grow the earnings on that side.

We feel very good about it, we think it is sustainable.

Great.

And then one final nitpicking question.

Charlie, when you were talking about the impact of the dislocations in Finland, or the relocation in Europe, you said $2.5 million.

Would it be fair to say that that type of number should be netted out against the change in the minority interest, so in fact the net income impact is only about $0.5 million?

Well it is about –$2.5 million goes down to about $1 million because you have got the tax -- it would firstly make it an after-tax calculation and then we only own 64.5% of that cost.

So it would come down to just a little bit over $1m on the absolute bottom line.

Great, thanks very much and good luck with the quarter, gentlemen.

Thank you, Edings.

Thank you.

And your next question comes from the line of Mark Connelly of CSFB.

Please proceed.

Thank you.

Hi, everybody.

Hi, Mark.

Hi, Mark.

Just two things.

You talked about the volume pickup in flexibles.

I wonder, can you give us a sense of where that business is relative to your capacity or whether there is going to be a need to reinvest if it keeps going well?

Well Mark, I think it depends on Flexo versus Roto and in the Flexo we have good capacity, clearly in both to carry us out through to early ’06.

We will start bumping on the Roto side given our growth prospects, probably mid-year next year or so.

We will be looking at an investment of some sort in the Roto side.

And then just one more question, a broader question.

You talked about the new products that are going to market that are helping your volumes on the consumer side.

Are there new customer relationships involved there too, or is it primarily with existing customers?

It is actually both.

They are clearly in the Kraft, Charlie talked about the Snack and Seal product, Kraft is a major customer of ours.

You have got the Hampton Farms and some others, so it is a potpourri of both existing customers and new customers.

Okay, that is good news.

Thanks very much.

Thank you, Mark.

And your next question comes from the line of Chris Manuel;

KeyBanc Capital Markets.

Please proceed.

Good afternoon, gentlemen.

Hi, Chris.

A couple of questions for you.

If I understand this correctly, baked into your forecasts for the remainder of the year, both third quarter and balance of year are that Engineered Carriers volume would be flat.

Is that correct?

That is basically correct.

Okay.

And for the whole company, you are assuming volumes in line roughly at 4%, similar to what we have seen thus far in the year, is that fair?

Increases?

Repeat that please, Chris.

You have got a bad line for us.

You indicate with your guidance that volumes are roughly in line with where they have been thus far this year, so volume is up about 4% in aggregate for the Company, is that fair?

Assuming what is in your guidance?

Well that is right, except that we do clearly have a second half impact on the consumer side, composite cans, a lot of things like seasonal products.

The CorrFlex business also is predominantly in the second half.

One of the things I mentioned was we do have that built into this forecast and so we need to see the usual seasonal uptick that we usually have and expect to see.

Okay.

On the price side, do you feel – you guys have done a great job of offsetting higher raw material costs thus far, but do you feel that you have any more price left to obtain that would benefit you in the back half of the year?

Well we have for both the [inaudible] and the industrial – or tube and core price increase in the market in North America, and we feel like there is some small amount of gain that will be obtained from that.

Okay, and then two last quick questions for you.

One was you mentioned Wisconsin is hurting you a bit this quarter.

Is that behind you now?

Not entirely.

I think there actually were some engineering issues and we had to bring some new equipment in which the old equipment was not working as designed, and that new equipment was installed in July.

I think it is probably going to take a month to six weeks to get the bugs out of that.

So we certainly are expecting decreasing issues there, but I think it will be another three or four months before we get it exactly where we need it to be, Chris.

The last question I would ask you is, with regard to Gillette and Proctor and Gamble merger, you gave us an update last quarter.

Any new news there from the perspective of, can you pick up more volume or what you think might happen?

We do not have any more inside information than you have.

We are still quite bullish about the opportunities and we have had some discussions with both sides and we feel very good about the opportunity to grow the business.

Thank you very much, gentlemen.

Thank you, Chris.

And your next question comes from the line of John Mincey;

Global Assets Family Group.

Please proceed.

Thank you.

What are you most excited about from a growth prospect for your business?

What segment are you the most excited about?

You have talked a little bit about the film business, but I wonder if you could identify that for us.

I think, John, we are most excited about the consumer side of our business in total because that is what we have been trying to put together over the last few years with our solutions strategy, our solution approach to our customers.

That is resulting in not only higher sales but higher profits, and that is in flexibles, that is in composite cans, it is in closures and in the services business.

So it is going across all the ways of that stew.

We do expect that to continue.

Also I think clearly we are getting traction in our new product that all of you know that we have been funding for the last three or four years, and Charlie talked about some examples of those, the Snack and Seal, the Whims, and the Sono Wrap as well as the new Thermoform package with Hampton Farms.

So we are excited about that whole piece of the business.

That is what really gets me going.

Where did those ideas come from?

Basically talking to our customer base and trying to define their needs and bringing them back and developing opportunities for them.

Almost all of our ideas start with our customers.

We are not trying to create things to go out and sell, we are developing needs that they have and products and services to fill them.

That makes a lot of common sense.

Thank you very much.

Thank you very much.

And your next question comes from the line of David Frye of Stanfield.

Please proceed.

Thanks for taking my call.

I just wanted to clarify the questions on the Engineered Carriers segment, and I am talking about North America.

Volume was down about 5%.

Are you talking about tubes and cores or are you including the paper volume in that?

No, I was talking about tubes and cores in that, David.

And your paper volume I guess was flat, because the internal tons just sold externally?

No, the paper was actually down.

We are much more, we are internally focused on that paper.

We consume a lot more of it inside so it does impact our paper operations.

To a similar extent?

Actually it was to a little greater extent.

I think Charlie said 7% was the number.

Two reasons for that.

One, frankly is that our Engineered Carrier North America business is driving good productivity, good operations and as we do scrap quite significantly, so that has caused them to have less need for paper which is obviously positive to the industrial side and not so positive to the paper side – what I view as a positive.

The other is that the Engineered Carrier group reduced some inventory which was sold at a one-time event, but that really makes up the difference between the 5% and the 7%.

Do you think the external amount of paper you sell going forward will be kind of flat to down still, or do you think you will be selling more externally?

External was actually up.

External was up about –

Right, right, I am sorry.

Up about 6%, right.

We expect it to improve in the second half.

I am trying to figure out if there was some price increases, both on the paper and on tube and cores announced, but it sounds like the market is pretty weak and if you all are shipping extra paper into the market that does not bode well for the supply/demand, at least the way it feels.

Well, it is really different markets too though, David.

We are shipping most of our paper into a specialty segment that is not tube and core so it is not really comparing apples and apples.

Right, okay.

Great, thank you.

Thank you.

Your next question comes from the line of David Liebowitz of Burnham.

Please proceed.

Good afternoon.

Hi, David.

A few brief questions if I may.

What percentage of your sales so far this year are from new products that have been introduced in the last 12 or 18 months?

That number that I gave was $15 million, would be the total new products over the last two years.

Oh, okay.

So that would be the definition of it.

A new product for us over the last two years, and it was things like the retort pouch that we sell for pet food, and things like the Snack and Seal, the recloseable seal.

One of the things that did drop off was the valve end that we sell for the coffee canister, because that has been in the market for more than two years.

And what about the balance of this year and more importantly, next year?

Will there be a higher percentage or comparable percentage or lower percentage, as you view it?

We would certainly expect it to be a higher percentage, because frankly we have just started this Snack and Seal product and that has an awful lot of potential.

We are doing – we being Pepperidge Farms – seems to be doing well with their product, so again, some of the new introductions seem to be well-received in the marketplace, including the self-heating canister.

So yes, we would expect that number to grow then.

In terms of the self-heating canister for the moment, is there a chance that there will be a second product being offered in that canister before the end of this canister year?

David, I think there is a very high probability that will occur in probably September or October of the year.

Excellent.

And your dividend policy, which is marvelous in raising the dividend every year, are you a bit concerned that the dividend is now a too high a percentage of your net income?

No we are not.

Fine.

And lastly, you spoke about perhaps repatriating some cash from overseas.

How much cash do you have sitting over there and how much of a tax bite would it be to bring it back?

I cannot answer that.

I really just wanted to alert the international community that we, like all other companies, have to be looking at that number.

What we are in the process of – and the reason I cannot answer it is it is not entirely just cash that is excess.

We don’t have that much excess cash overseas, it also gets to questions like borrowing capacity and then borrowing capacity gets to questions like tax efficiency.

And there are issues around withholding taxes on distributions and so those are just all the variables that we are in the midst of looking at, so I wouldn’t even – I would hate to even venture a guess as to what that cost could be if we choose to do anything at all.

I did want to just sort of lay that out there as something that we and every other company that has foreign operations is looking at.

And one last question if I may.

Looking at the negative side of the equation about what could go wrong, outside of raw material costs and other costs of doing business – fuel, you name it – what are your biggest concerns?

You know, I think my biggest concern settles around the industrial side of the business and the decline in the tube and core volume around the world.

Beyond that, I think everything that we can control is in pretty good control, that is one that we have very little control over, so that would be my – that is what keeps me awake at three o’clock in the morning, David.

You should get a good night’s sleep and worry about it in the morning.

But thank you so much.

Thank you, David.

And your next question comes from the line of Allen Zwickler;

First Manhattan.

Please proceed.

Good day.

Hi, Allan.

Hi, Allan.

Could you just maybe, if we could in raw numbers, how much of your business in the US now is to the textile companies?

And what steps are you taking given that more than likely that business is not coming back?

Perhaps a follow-on question is, are you seeing some of those very same customers, are you getting business once they crossover to the other side of the world?

Allan, about 20% of our North American tube and core business is in textiles, and obviously I mean it was much larger than that and it is moving.

We think that in Mexico, in China, in Asian countries, we have a footprint that enables us to pick up a good bit of that business when it does move.

The same thing occurring in Europe when it moves into Turkey, it moves into the Eastern Block countries, we have a footprint there.

We are not picking up all of it that is leaving because our customers that are locating there are not carrying, are able to pick up all of it themselves.

But clearly our footprint in those areas enables us to grow the business and not lose all of it.

And you said 20%, that would be on just the tube and core side, so the Company as a whole, it is a number that would be less than 10%.

What is your tube and core volume, as you call it, in the US, roughly?

It is not exactly defined, but –

I understand that, that is why I am asking.

That segment that is defined as global Engineered Carriers and paper is largely tubes and cores plus some outside sales.

Okay, and so that business is, if one would isolate the textile business in the US, that certainly has been down year over year, and continues to be weak.

Is that what you were trying to tell us?

It was down, I think the textile piece of it was down by 14% if I recall correctly.

The tube and core piece itself was down, total tube and core was down about 5%, textiles were down 14%.

Okay, and on to brighter subjects.

In the consumer business, and again I am kind of new to this so maybe you could bear with me, if you are creating a package, as you call it a new product for a particular customer, is there any reason why you could not use similar, something similar, for one of their competitors?

Could you spend – and if we do not have time on this call, I understand it, but maybe you could just talk about… It sounds like you are aiming more toward new product growth which is a good thing, but I am just wondering how valuable that is, meaning if it is just one specific product or one specific customer, or can you use this technology again and again?

That is an excellent question, Allan, and our position is we are a packaging company and we are in the packaging business.

So if we develop technology we can take that technology to anyone that we like or want to.

There are products that we develop in conjunction with certain customers, such as Snack and Seal and so Kraft wanted some exclusivity on the confection, on the cookie side of that for an extended period of time.

We are free to take that technology into other products, to other customers.

Generally though, and I am speaking in generalities, when we develop a product with a customer what we are doing is giving them some lead time of exclusivity, be it six months or nine months or a year, and then we are free to take that to their competitors.

And if we were to look a year or two from now and we would have the same discussion about new products, saying it was seven last year and 15 this year, could you maybe quantify what would be a bogey for you guys?

Because certainly 15m is a nice jump, but in the context of your company it is not a big part.

So I am just trying to understand whether that 15 was replacing old – do you know what I am trying to say?

It is one thing that it is 15 but I do not know if that is new and it was replacing 15 of old.

Could you maybe try to explain that a little better, please?

That 15 was brand new and after two years the new product falls off.

What should it be?

We should be generating somewhere around $75-100 million of new sales each year, and that is the bogey we have, and then trying to drive to.

Thank you.

Thank you.

Your next question comes from the line of Fred Speiss of Speiss Thorton Capital Group.

Please proceed.

Yes, a couple of mundane questions.

What is your D&A and CapEx going to be for this year?

I think the budget, Fred, was like $126 million, if I recall correctly and I suspect it will come in something under that.

And the D&A?

Charlie, do you have that?

You know, I do not have – I almost have that.

At the half year mark it is $80 million and that is not – that is the total non-cash charge, but that would be largely depreciation and amortization.

And then you don’t smooth your pension costs, what do you expect your pension cost to be this year?

Or have you changed that accounting.

I don’t think you can change it once you make the option and we don’t smooth it, you are correct.

That is right and so that cost was set at the beginning of the year and it is largely level through all four quarters.

There will not be any change in the third and fourth quarter off those numbers.

Okay.

And as to the new business, you said $75-100 million.

Did you achieve that last year, and will you hit it this year?

Well I actually said new products, Fred.

Right, new products.

Did you get that last year and will you get it this year?

No, we probably got $50 million last year and we will probably get something north of that this year.

Okay, thank you.

Thank you.

Ladies and gentlemen, this concludes today’s question and answer session, I will now turn the call back over to management for closing remarks.

Thank you.

If this call has not been as clear as normal, I apologize.

We actually had our board meeting today up in our CorrFlex facilities and wanted to see that, I guess it was either Mark or Edings asked about CorrFlex.

It really has been a wonderful acquisition, it has fit into our portfolio of businesses well and we certainly do expect the continued growth of that services sector.

But I apologize if the line has not been as clear as normal, we are on a normal speakerphone.

Thank you all folks for joining with us today.

Ladies and gentlemen, we thank you for your participation in today’s conference.

This concludes the presentation and you may now disconnect.

Have a great day.