Sonoco Products Co (SON) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter financial results conference call.

My name is Andrea and I will be your coordinator for today.

At this time all participants are in a listen-only mode.

We will conduct a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to the host of today's call, Mr. Allan Cecil, Vice President of Investor Relations.

Please proceed, sir.

Good afternoon everybody, and thank you so much for joining us for our third-quarter teleconference.

With me today are Harris DeLoach, Chairman, President and Chief Executive Officer and Charlie Hupfer, Senior Vice President and Chief Financial Officer.

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 of any 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 third quarter of '05 were $0.46 versus $0.41 for '04.

However, excluding the effect of restructuring charges and onetime items base earnings per share, which is a non-GAAP financial measure, totaled $0.48 for this year's third-quarter compared with $0.47 for last year's.

Despite higher year-over-year raw material increases, these were more than offset by timely price increases resulting in a positive price/cost relationship for the third quarter and for the year-to-date.

The third quarter marks the sixth consecutive quarter of year-over-year increases in base earnings.

A reconciliation of base earnings per share to reported earnings is provided in our press release of today announcing third-quarter results.

The increase in year-over-year base earnings for the third quarter primarily reflects increased volumes in the consumer packaging and packaging services segments, plus productivity improvements across the Company.

Third-quarter earnings were negatively impacted by weaker demand in most geographies for engineered carriers.

Continued though certainly improving startup costs at our new rigid plastic container plant in Wisconsin.

Higher energy, freight and labor costs and continued difficult business conditions in Europe.

Companywide volumes for this year's third-quarter were up about 5% over the same quarter in '04, including those from the Sonoco-Alcore joint venture in Europe.

If you exclude the joint venture our companywide volumes increased about 2% year-over-year.

I should also mention that at the end of the third quarter we had achieved positive free cash flow, which we define as operating cash flow after dividends and CapEx, which was used to reduce debt.

Our debt to capital ratio at the end of the quarter was 39% versus 40.2 at the end of the second quarter.

Looking to the fourth quarter, let me first remind you that historically the fourth quarter is seasonally weaker in the consumer packaging and packaging services segments.

Excluding any restructuring charges and assuming no significant change in companywide volumes or raw material costs or pricing, we expect fourth quarter earnings to be in the range of $0.44 to $0.48 per diluted share.

With that I will now ask Charlie Hupfer to detail the quarter's results.

Thank you, Allan.

To reiterate, the third-quarter EPS was $0.46 per share on sales of 881 million compared with last year's $0.41 on sales of 811 million.

We did have restructuring in both years, and last year we also had a charge to replace the dollar (ph) insurance policies that were prohibited under Sarbanes-Oxley.

So I will identify those costs as they affect each of these years.

In the third quarter of this year restructuring, and it was principally the true up of some previously announced plans, totaled a cost of 4.3 million on a pretax basis or 2.5 million after tax.

So that is $0.02 a share.

So without the restructuring charge what we call base earnings, is basically just as reported earnings without the restructuring and in the case of last year these insurance policies, our base earnings were 78.1 million in terms of EBIT.

Net income was 48.4 million, and EPS again was $0.48 a share.

Last year's restructuring was 1.2 million pretax and 1.9 million after tax, which is $0.02 per share.

And then the executive life insurance adjustment that I mentioned a minute ago totaled 5.6 million pretax or 3.6 million after tax or $0.04 a share.

So last year without restructuring and without the executive life adjustment EBIT would be 74.1 million.

Net income would be 46.5 million, which is $0.47 a share.

So with those adjustments in mind, start again with the income statement, sales would be 881.1 million compared with 811.1.

Sales are up 8.6% year-over-year.

EBIT is 78.1 million versus 74.1 million.

So EBIT is up $4 million or 5.5%.

Net income is 48.4 million versus 46.5.

Net income is up 4%, and EPS as we said is $0.48 versus $0.47 last year.

And our estimate for the year for our guidance, rather, was $0.45 to $0.47 so we are on the high side of our guidance.

Let me comment now about the effective tax rate.

The effective tax rate in this year's quarter was 31.4%.

In last year's quarter it was 30%.

In both of these years we've had a true up of the accrual following the filing of our tax return, and this year we had some minor adjustments to deferred taxes and to state tax reserves following the ramp up of some state tax audits.

Last year we had similar kind of adjustments, last year's related more to a foreign sales credits and R&D credit.

So in both years we've had the effective tax rate pulled down from what would probably be considered a more normalized rate.

And in fact if asked, I would probably say our normal rate would be more like 35%, and so the difference between a normal 35 and say this quarter's 31.4 is about $2.4 million.

That is after-tax.

So taking that into consideration this past differential we probably would have been closer to our lower end of our guidance, say in the $0.45 to $0.46 range.

And to be quite honest about it, the month of September was a slower month for us, certainly slower than July and August on a four-week basis.

I don't know whether that is the impact of gas prices slowing down the economy.

I don't know if that is the impact of the hurricane working its way through the economy.

But it did certainly affect us in the month of September and pulled us more toward the middle to lower part of our range, absent the tax adjustment.

October does appear to be rebounding from the September slowdown, and so perhaps it was more of just a one-month kind of event.

Let me turn now to the segment reporting numbers.

These are in your press release.

And in the numbers in the press release related to last year, we have included the executive life insurance adjustment as an expense in last year.

So that pulls down last year's reported operating profit and would have increased the year-over-year improvement.

So if you consider that executive life cost to be a onetime event that comes out of base earnings, then you probably should adjust the segment reporting as well.

And so let me give you those numbers.

These would be the segments for 2004 operating profits, without the executive life adjustment.

On the consumer segment would show operating profit last year of 23.3 million.

That is versus 21 million that is reported.

The engineered carriers and paper segment absent the executive life adjustment would be 33.5 million.

The packaging services number would be $9 million as adjusted, and the all other 8.2 million.

So those would be the segment numbers without that executive life, and that would basically be what we call base earnings to base earnings comparison.

Now what that means is that the operating profits year-over-year would look a little bit different.

Consumer, for example, would show operating profit up 6.8% year-over-year.

Engineered carriers and paper down 4.5% year-over-year, packaging services would be up 31.9% year-over-year, and the all other category up 13.7% year-over-year.

So that's probably a fairer comparison on an apples-to-apples basis.

Now let me talk to the sales bridge.

And this is our variance analysis where we just provide the differences between last year sales of 811 million and this year sales of 881 million.

That is a $70 million year-over-year increase.

Volume makes up $17 million of that 70 million.

Increased pricing adds 14.4 million.

Acquisitions add 23.2 million, and then foreign exchange, other -- its all foreign exchange -- is 15.2 million.

So the 17, 14.4, 23.2 and 15.2 should add up to right at $70 million of year-over-year difference.

Now let me comment about the volume, the 17 million first.

We did see some negative volume in tubes and cores in the U.S.

In fact, volume was down 5% year-over-year.

We saw a decline in the textile segment that we serve down 14% year-over-year.

We had some positives.

We had positives in construction tubes, tape cores, household tubes, they were all up but not sufficiently to overcome the decline in textiles and paper mill for us.

So overall this U.S. and tubes and core group dropped 5% year-over-year.

We also saw linerboard volume coming out of the one mill in Canada that produces linerboard down significantly year-over-year.

On the other hand, third-party sales of paperboard and recovered paper were up, and so when you put it altogether the engineered carriers paper volume was overall down from last year, a little less than 3%.

So with that down, where's the volume coming from?

A lot of it is coming from the flexible division.

Their volume was up 9.5% year-over-year, and that is pretty much across the board.

It's existing customers.

It's new products like the snack and seal.

So they just had generally a strong year-over-year performance as they've had the past few quarters.

And then the other big driver is packaging services.

Their volume was up 18% with about two-thirds of that increase coming from the new CorrFlex business and the other one-third from our traditional pack center operations.

So volume in total was up 17 million.

Again, most of it was on the consumer side in the packaging services side.

In terms of price, pricing was up and contributed to sales $14.4 million.

Our tube and core pricing was up around 2%, and that is the net impact of our November 2004 and to some degree our July 2005 price initiatives.

The tube and core pricing was up some, but the biggest factor, and frankly most of the 14.4 million, is in the consumer packaging.

At the beginning of the year we were able to reset pricing based on formulas through the contracts that we have in this particular segment, and that is where the majority of our pricing initiative came from him.

In terms of acquisitions, 23.2 million, all of that is Sonoco-Alcore.

That is our joint venture in Europe, and then of course foreign exchange 15 million -- most of that was the Canadian dollar strengthening about 10%.

In total, the foreign exchange 15.2 million probably added about $900,000 of net income on the bottom line when you work your way through the translation from sales through cost of sales, S&A to the bottom line, about a $900,000 year-over-year impact.

Now to the EBIT bridge.

EBIT, as I said earlier, increased $4 million from 74 million last year to 78 million this year or about 5%.

The makeup of that $4 million is volume and mix was a negative $3.7 million.

Price/cost -- this is the year-over-year change in price versus the year-over-year change in material cost, was a positive $2.3 million.

And productivity added 13.2 million, and then in the other -- the catch all category, that was a -7.6 million.

And so those numbers should add to a $4 million year-over-year increase.

In terms of volume the -3.7, volume here is the profit impact of the volume increases that I talked about with the sales analysis.

So the volume shortfall in tubes and cores is -- and also some mix came about in some higher margin products like our paper mill cores -- affected this category.

So it is volume shortfall and to some degree it is mix.

But the big driver in this category was the intercompany paper volume, which was down year-over-year a little more than 9%.

And that is what is driving down the profits in our integrated paper operation.

So while tube volume was down, the related paper volume was down as well, and the integrated margin caused us to be negative year-over-year in volume mix.

In terms of price/cost, we have a favorable price/cost, and as I said in the sales analysis, selling prices were up 14.4 million.

Costs were up 12.1 million.

So we were still favorable in terms of price/cost.

We did not see a significant change in cost in our engineered carriers and paper segment year-over-year.

In fact, the average cost of our furnish -- which is our waste material which is largely OCC and news was pretty much flat this year's third quarter compared with last year's third quarter.

So most of the cost increases were in the consumer packaging side.

That is where those contracts reset at the beginning of the year, and those price increases were offset by the cost increases that we saw in things like steel and resin, which I will talk about a little bit later.

So the net effect of all of that is that we did have a favorable price/cost, and this is the third consecutive quarter this year where we have had favorable price/cost.

In terms of productivity, good productivity across the board in all of our operating segments and in all of our divisions; in the first quarter we had productivity of $10.3 million.

In the second quarter it dipped to 6.8 million.

So this year's $13 million or this quarter's $13 million is an improvement over each of the prior two quarters and is a significant driver in profitability in the third quarter.

So very good productivity.

That is a result of a lot of our programs like our Lean and our Six Sigma program.

I think it is being especially driven by scrap reduction programs where we are seeing good material usage and low scrap rates, especially across our industrial segment.

And then in the other category, other was -7.6 million; this is the catch-all that includes wages, fringes, energy and freight.

Of the 7.6 million, 5.1 million of it is higher energy and freight costs.

So that makes up most of that year-over-year differential.

Let me comment on cash flow, and Allan mentioned it briefly.

We had good cash flow in the third quarter.

Operating cash was $92.4 million.

Our capital spending was 32.8 million.

Dividends were 22.8 million.

So the net is a positive 36.8 million, most of which went to reduce debt during the quarter.

But the good thing about this third quarter cash flow is it keeps us on track to achieve 50 to $60 million in cash flow after capital spending and after dividends for the year.

So we feel good about what we saw with cash in the third quarter.

The reforecast, $0.44 to $0.48, given the seasonality I would expect us to be more at that midpoint that Allan was talking about.

And this compares with last year's $0.42 in the quarter.

One of the numbers I give you usually is new product sales in the third quarter; in our sales category new products accounted for $19 million.

That is the SonoPop, it is the valdent (ph) it's the retort pouch, it is snack and seal.

So I believe this was the highest quarter we've had in new sales and it totaled 19 million.

Now let me comment a little bit about price/cost, go back to that for just a second.

I said that we had a positive price/cost of 2.3 million, and that is the difference in year-over-year prices versus year-over-year material cost.

I know this is a hot topic because we have seen commodity pricing rise so much.

In the categories that we spend in film our quarterly spend that is in these numbers is about $25 million.

And that is a quarterly spend, and we saw film up 8.6% this quarter compared with last year's quarter.

Our steel spend is about $30 million, and it was up about 20% year-over-year.

And our resin spend in both the consumer side and in our molded plastics, which is sold into the other category, total spend is about 12.5 million.

And costs were sort of mixed there.

Some segments of that resin were up.

Some were down.

But since the hurricane all of those categories in the resin are up somewhere between 15 and 50%.

I will comment that we've seen some allocation but we don't expect any shortages to affect us in the fourth quarter or on into next year's fourth quarter.

So we do have -- I wanted to give you an idea of what our spend was -- because our spend if you added those up, the 25, the 30, the 12.5 -- our spend in these categories comes up to about 9% of cost of sales.

So while it's important spend for us it is not all that significant overall.

And while we did see some pretty significant increases like steel up 20%, we did cover all that with our pricing initiatives.

And we've had a lot of pricing initiatives through the year, which really I could identify if we need to get into that.

But we've raised prices in flexibles, in paper, in our industrial tubes and cores businesses.

So we've got all those identified.

And frankly, at this stage our pricing is more than sufficient to cover our costs.

And Allan, with that I am pretty much through with my comments.

Thank you, Charlie, and we are now ready to open it up for questions.

(OPERATOR INSTRUCTIONS) Edings Thibault from Morgan Stanley.

Thanks very much, and good afternoon, gentlemen.

A question for you on your pricing initiatives;

I was hoping you could sort of detail them.

It's certainly heartening to hear you think you can cover the cost increases going forward.

But I would want to perhaps question you on number one, your pricing and number two, why that guidance came down if you think you're going to be able to cover the costs.

Are you just concerned about volumes?

I would say as Charlie mentioned, if we had given this guidance in August we would have probably given you some different guidance.

But we saw a fairly significant turn down across all the business segments in terms of sales in September.

As Charlie said, whether it was Katrina or Rita or whatever it was, we saw that downturn and it lasted.

Now we have seen an uptick, a nice uptick in October, back more to seasonal, normal seasonal volumes.

We've got a pretty big storm sitting out in the Atlantic or the Gulf or wherever it is.

So call us cautious or whatever, but we are where we are.

And I can identify some of those pricing initiatives.

Effective November 1st our flexible division raised its prices 7 to 9%.

Effective September 19th, the paper division put in an energy surcharge of $10 a ton.

Effective October 12th the tubes and core division industrial products here in the U.S. put in an energy surcharge of 2.25%.

Effective June 27 our tubes and core division increased their pricing 5%.

Effective June 13th the paper division increased its pricing 30 to $40 a ton, and that was not related to OCC but to energy and other costs.

Effective going back to last year November, industrial products raised its prices 5%.

And back to September of last year the paper division raised its prices $30 a ton.

And then as I said at the beginning of the year, a lot of our consumer businesses in (indiscernible) area and Phoenix metal end in particular were able to raise their prices due to the contractual reset, and that is where the sale of our metal ends and our composite cans.

Those ranged anywhere from 6 to 12%.

So there have been a lot of pricing initiatives going back to basically September, November, January and then on through June, July and as late as November of this year.

It seems like the Fed is finally getting some of that message.

Can you just maybe spend a few more seconds on the surcharges?

These are fairly unusual if I am not mistaken.

And can you talk about the reception that the surcharges are getting and your optimism that you can achieve those surcharges?

We decided that we would put the surcharges in for two reasons.

One, we could move with them a lot more rapidly, and not knowing how long energy costs are going to stay up and how much of that is a result of Katrina, and how much is simply a long-term energy issue.

We made the decision to go with the surcharges.

At some point in time we may roll them into a price increase or whatever but for the time being we elected to go with the surcharges because we could move more rapidly with it.

I would say that most of the businesses feel they have been very successful with the surcharges.

The impression I get from talking to our customers and talking to our salespeople is their customers are seeing a lot of the same things from other people.

And so I don't want to give you a percentage but I would say it is a rather high percentage that we've been able to achieve.

Great.

And just without giving away too much how are those structured?

Is it just a strict $10 per ton or per pound, or are they somehow more directly linked to some of the energy costs?

They are more directly linked weekly to our energy costs.

Ghansham Panjabi, Wachovia Securities.

The sales in the packaging services business was up quite nicely year-over-year.

Can you give us some more color on what is driving the increase apart from just the CorrFlex acquisition please?

I would say the integration of that business into Sonoco and picking up the opportunities that our packaging businesses have provided, as well as just increased volume on the CorrFlex side has driven it.

It has grown quite nicely.

Okay.

And none of it is acquisition in the sense that they were in both last year's third quarter and this year's third quarter.

So unlike the joint venture on engineered carriers paper side, this is all what we would call organic growth.

You have obviously seen some real successes in the consumer packaging business, especially with the SonoWrap.

Are more niches within this category starting to open up given that your customers are also seeing good penetration?

I'm thinking products like Whims.

We are seeing more opportunities there.

And not only in SonoWrap, but we are also seeing, continuing to see opportunities on the composite side as a result of the run-up of steel prices last year and some conversions coming there as well.

So good opportunities in both.

It's fair to say the 19 million of new products in sales for the quarter should sort of be a reasonable benchmark going forward?

I think that is a fair statement.

Amanda Tepper, J.P. Morgan.

This is a bigger picture question.

I am thinking that as a paperboard packaging based packaging provider you might end up being in a very good position as other input costs for other types of packaging are skyrocketing and are not renewable, whereas paperboard is.

Are you having any of those kinds of details with your customers?

Do you expect that there might be any kind of tactic shift over time more towards some of your core products on the consumer packaging side?

Amanda, we have those conversations almost on a daily basis, not being facetious.

Are you starting them or are your customers starting them?

No, we have been initiating them for years.

Seriously I think you hit a very significant point.

And as we look at the cost of our paperboard packaging relative to other forms of packaging, particular plastic and others, we think the cost advantage is certainly continued to shift in our favor.

And there are those dialogs being initiated by our customers and obviously we have initiated some of our own.

So I think you're on target.

Okay, and then as you look out over the next three to six months, is energy really the biggest risk?

What do you think are the biggest hurdles facing your business over all?

I think energy is not that big of a risk to Sonoco Products Company.

I think energy is more of a risk to the country and to the consumer and what impact it will have on consumer spending, which could come back in fact to affect our products.

But as we've said publicly, we look at natural gas, and I think we are about 75% hedged through natural gas through the end of the year going through '06; it is about 50% hedged.

So we will see some exposure, obviously, to natural gas and oil costs.

But we feel like through our hedges and through our energy surcharge adjustments, the risk to the Company is rather small.

But I think the overall risk to our economy is one that everyone faces.

And so we will be in the same boat with everyone else as that rises the cost.

Can you give us any color on what kind of free cash flow you're expecting for the full year?

Probably in the 50 to $60 million range.

We are tracking ahead of last year and I believe last year was right at $50 million.

So our estimate, I said 50 to 60.

I would be looking for to be on the high side of that.

George Staphos, Banc of America Securities.

Congratulations on the quarter.

First question, with the pickup in normal seasonal volume for October, what did you see in engineered carriers?

What are you seeing in engineered carriers?

We actually saw a stronger September in engineered carriers than we had seen in the preceding months.

So we saw sort of a seasonal pickup in engineered carriers.

And that has continued into October?

Yes, I would say so, George.

The larger falloff in September, while we have seen some decline as we have been talking about the industrial side, the larger decline in September was on the consumer side of the business.

It was across the board -- it was metal ends, it was flexibles, it was whatever.

And that is where we've seen the nicest pickup in the last of couple weeks.

Harris, maybe I am reading too much into it, you didn't sort of pound your fist and say yes, we've seen a continuation in engineered carriers into October.

So has it weakened a bit or has it continued at a good rate, and what would those rates be?

Plus 3, plus 5, plus 1?

Charlie do you have that?

I don't have it.

No.

I don't have a month over month.

I don't have a month over month.

I don't know if we can look at it quite that closely.

Clearly I said our textile quarter to quarter, textile volume was down 14%; paper mill core volume was down 8.

But other categories were up.

And so that is a little bit of the trend that we've seen for some time.

Now whenever you look at it on a month-to-month basis I think you get a little bit of a different swing to it.

And maybe a proxy of that is our paper utilization and in the third quarter we were at 95%.

Right now we're probably almost full out.

So Octobers going to look better than September or July and August, I think.

Now how that carries on into the last two months of the year is still a question mark.

That is helpful.

Obviously your industrial business is a very good proxy for what is going on in the economy at large so that is the reason why I was asking you.

I want to come back to consumer.

You know we've talked about this in the past.

From your comments and the Q&A you're very pleased with your new product introductions.

It doesn't sound like cost is an issue for your being able to affect price increases.

Yet the margins in consumer remain well, well below where they had been historically.

And what else are we missing?

In terms of why you are not seeing the bigger pickup in margin?

Was it just that September falloff was so dramatic that it led to 100 basis points, 200 basis point drop off in margins?

I wouldn't say it led to that much, George.

It certainly led to some.

But we've seen nice improvements in that side of the business.

Especially that is right in the flexibles that sells into that consumer packaging has shown good year-over-year performance.

We have some startup type cost still related to our plastics operations, and we have a little bit of negative mix related to Europe that affected us in that category, as well.

And so those were two reasons why it would have pulled margins down a little bit.

Okay, but is this ever going to (indiscernible) back to 10% margins of a year or two ago you would have said so, Harris.

Is that still the case?

We're obviously not seeing it in the numbers right now.

George, yes, I said I think we can.

As Charlie said, the plastics, Warsaw and Corona until we closed it affected us fairly negatively this year.

But I think getting those behind us, yes, you can get back to the 10% margins in that business.

Last question and I will turn it over.

When we look at the productivity it was again impressive yet you did it on not particularly strong volume in your key businesses.

Can you help us understand how on not such great volume you were able to affect such good productivity in reducing scrap and materials on the floor or whatever the (indiscernible) was there?

Thanks.

George, I think it is the programs we can put in the last three or four years that last year I think generated some $80 million of productivity.

As Charlie said, it's Lean and Six Sigma.

And as Charlie alluded to about the paper mills being down I think 9% in the quarter while IPD was down about half of that amount is, frankly, the fact that our scrap reduction programs are in fact working.

And we are using less paper through those operations.

And we are just operating better as a result of the programs we put in.

Chris Manuel, KeyBanc Capital Markets.

If I could focus in on the consumer segment for a moment, do you have a sense -- can you tell us what volumes were for composite cans in the quarter?

Volume in composite cans was down slightly year-over-year.

Okay, and my understanding is in the last few quarters volumes in composite cans has been up pretty good.

Is anything changing there?

Is there any contracts, any contracts you are potentially losing or anything on the horizon that might see it pick up?

Can you give us a little bit more color?

No, there have been no contracts.

To the contrary there have been some conversions into composites.

I would venture that the down volume was directly attributable to September, and we had some major customers that had difficulty getting certain raw material products out that of the Port of New Orleans, mainly sugar they used in their process.

And some customers in the Texas area that were actually (technical difficulty) extended period of time as a result of the storm.

So no business lost.

It was September business conditions.

And have you begun to see that pick up at all?

We have seen the pick up.

I don't know that all those customers are back to where they normally would be.

But as I said earlier we have seen the pickup in October and October will be a much better month in that business.

Frank Dunau (ph), Adage Capital.

Could you just review -- I heard the seasonality -- Did you say the fourth-quarter is usually weaker than the third quarter?

It is.

We generally see a turndown first or second week in December.

And that generally drives the (indiscernible).

If I adjust for all the write off and the lower tax rate and stuff in your guidance -- you've sort of guided to a flat quarter sequentially it is seasonally weaker, so I am trying to figure out-- so what is getting better overall in the business.

And that is really part of the reason why I was saying that I was using the midpoint of that 44 to 48 range as the place to go.

And that would be -- I think that would be up about 9% compared with last year's fourth quarter.

And so it is pretty much in line with the growth that we've got year-over-year.

And it would reflect a little bit of the down side from the fourth quarter.

(OPERATOR INSTRUCTIONS) Edings Thibault, Morgan Stanley.

A question for you on debt.

Charlie, if I follow you, you are expecting an incremental 30 or so million of additional debt paydown this year.

Is that correct?

Or more, yes.

And how should we think about Sonoco's willingness and to do acquisitions?

You guys have been an active acquirer in the past.

I think you said a year ago following CorrFlex and the Alcor deal that you were going to move to the sidelines a little bit and pay down a little bit of debt.

Where do you stand, do you think, in terms of your debt paydown schedule and your willingness to perhaps entertain larger deals like the CorrFlex Alcore combination?

Well, we've obviously been on the sidelines for a year.

We haven't made any time type of large acquisition.

And we continue to look and in the meantime we will continue to pay down debt and look for other opportunities.

George Staphos, Banc of America Securities.

Last question, quickly, SG&A, you did a really good job holding that flat even with the revenues up high single digits.

What was behind that?

Cost control.

Okay.

Thanks very much.

Have a good quarter, guys.

Can you give us a little bit more color?

I don't know that there is any -- it is a number that we watch and we talk about on a monthly basis.

And every month I show selling and administrative costs against our own internal budgets, against last year.

It is something that we talk about regularly, and we make a real effort to not let selling administrative costs get ahead of volumes.

And so I don't think there is any real special trick to it.

Fair enough.

Should we expect that that stays flat for the next quarter or two?

You have that ability even with revenues growing?

Yes, we do.

Now I can say good luck on the quarter.

Thank you.

(OPERATOR INSTRUCTIONS) Mark Connelly, Credit Suisse First Boston.

I wonder if you could give us even a ballpark sense of how the FX flows across the various businesses.

The majority of it is going to be in the engineered carriers and paper segment.

That is where most of our outside the U.S. operations are.

No let me take that back.

There's really two things that drove it and I don't have the proportions, to be quite honest with you.

So I must take that back.

The Canadian dollar strengthened about 10%, and we would see that in our engineered carriers and paper segments, but we also see it in the consumer segment in flexibles.

And then the Brazilian reais strengthened 30%, and that is all going to be in the consumer packaging segment.

And so it is -- well actually, I've got a pretty close guess on that.

I would say about two-thirds of that sales increase is in the engineered carriers and paper, and the other one-third is in consumer.

That's actually very helpful.

I was going to guess it was almost all engineered.

I was too until I started to talk about it.

Just one last thing.

Are you seeing anything different from the usual, either seasonal or unseasonal in point of purchase display business right now?

Any more rumblings around the market around shifting strategies there?

Is there anything that you're seeing going on?

I think it was Ghansham asked about the increase in services side, and really it has had a good year -- the point of purchase has had a very good year, and as we talk to our customers they seem to be shifting marketing dollars out of different types of advertising into that in-store advertising.

So we are seeing that.

We have seen it.

This is generally the strongest side of the year for the point of purchase in the services side, September October November with back-to-school and the holiday season.

Being honest we did see a slowdown in September, as I talked about all the consumer businesses where some of the customers just didn't take the products they had ordered.

That is clearly picked back up for October.

So we continue to see an increase in that business, and I would expect the seasonality of that side of the business to be better.

So it's fair to say that the answer you gave Ghansham about packaging services generally applies to the point of purchase business?

It certainly does, Mark.

Perfect.

Thank you.

Ladies and gentlemen this does conclude your question-and-answer portion of today's call.

I would turn the presentation back to management for closing remarks.

No closing remarks other than to thank you very much.

Good day.

Ladies and gentlemen, thank you for your participation in today's call.

This does conclude your presentation.

You may now disconnect.

Good day.