Sonoco Products Co (SON) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sonoco 2006 second quarter financial results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Allan Cecil, please proceed, sir.

Good afternoon and thank you very much for joining us for Sonoco's second quarter teleconference.

We're visiting with you today from Sonoco's new Innovation Center in Cincinnati, which serves Proctor and Gamble and where we held our regular quarterly board of directors meeting today. With me are Harris DeLoach, Chairman, President, and Chief Executive Officer, and Charles Hupfer, SVP and Chief Financial Officer.

Today's conference contains forward-looking statements based on current regulations that 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 as filed with the SEC.

As released this morning, reported earnings per diluted share for the second quarter of 2006 were $0.49 versus $0.40 for 2005, a 22.5% increase. Base earnings per diluted share, which is a non-GAAP financial measure that excludes certain items, were $0.51 for this year's second quarter compared with $0.45 for 2005, a 13% increase. First Call's consensus estimate was $0.47.

Base earnings for the second quarter excluded after tax restructuring charges of $0.02 and $0.05 per diluted share respectively for 2006 and 2005. Despite higher raw material costs, with the exception of OCC, and rising energy, freight, and labor costs, Sonoco again achieved a positive price/cost relationship led by additional tube, core and paperboard price increases and continued productivity improvement.

The second quarter marks the ninth consecutive quarter of year-over-year increases and base earnings for Sonoco. Charlie will discuss in a moment the positives and negatives impacting this quarter's earnings. This was also the ninth consecutive quarter of year-over-year increases in earnings and EBIT margins for our Consumer Segment.

I should also note that our businesses serving the consumer markets achieved new product sales, which we define as sales of up to two years after commercialization, of 20.9 million in the second quarter and that compares with 16.8 million in last year's second quarter.

The Company also continued to enjoy year-over-year increases in cash flow from operations during the second quarter, driven by our ongoing emphasis on working capital and from improved earnings.

With better than expected results from the first half of 2006 and improving results and or prospects across our business segments, we expect third quarter earnings in the range of $0.54 to $0.57 per diluted share and full year results in the upper range of $2.07 to $2.10, including approximately $0.03 per diluted share that relate to expensing of stock options and excluding any restructuring charges and additions to the environmental reserves and assuming no significant reduction in pricing due to general economic changes.

As you recall, we previously increased our full year guidance to the upward end of the $1.96 to $1.99 range from the original range of $1.90 to $1.94. Also today our board declared our regular quarterly dividend of $0.24 per share. This is the 325th consecutive quarterly dividend declared by Sonoco and will be payable September the 8th to shareholders of record as of August the 18th. I'll now turn the conference over to Charlie Hupfer, our CFO.

Thank you Allan. As you heard sales were 917 million, EPS was $0.49 a share, up from $0.40 last year. Both the second quarter of 2006 and 2005 include restructuring charges. The restructuring charge in the second quarter of this year was $2.6 million pretax, after tax that's 1.5 million or $0.02 a share. And what that represents is just the residual from some previous actions, because we certainly have had no new program in this quarter.

So eliminating the restructuring charges from last year and this year, we arrive at base earnings, last year's restructuring was $0.06 a share. So base earnings, that is without restructuring, is sales of 917 million, up 4.4% from last year's 878 million. EBIT 85.4 million up 18.8% from last year's 71.9. And net income 50.9 million up 11.3% from last year's 45.8. And again, EPS was $0.51 versus $0.45 last year.

Included in the income statement, you'll see interest expense, which was $1.7 million higher than last year. That's essentially due to a 200 basis point, or almost 200 basis point increase in our commercial paper rates year-over-year, plus some higher borrowings at higher interest rates in Brazil. You'll also see that in terms of taxes, the effective tax rate for the quarter was 34.3% versus the effective tax rate last year of 31.6.

If you recall, last year we adjusted tax reserves in Mexico and we released $2 million to earnings. This year we had no similar adjustments so that obviously then the effective tax rate is higher. Putting it all together, the gross profit margin increased from last year's 18.3% to this year's 19%.

So this is an increase of 70 basis points year-over-year. And accordingly, EBIT as a percent of sales increased from 8.2 to 9.3. So generally just a very good overall solid performance in the second quarter, one that we're very well pleased with.

In the press release, we provided segment information, so let me comment on that for a minute. Certainly in the Consumer segment you see the increase in sales year-over-year as well as profits. In fact, sales were up 4.9% and profits, or earnings before interest and tax EBIT, was up 7.3%.

Looking at sales just briefly, then I'll get into this in a little more detail with the bridges. Sticking with the segment reporting for right now, starting with sales. Volume was up slightly in this Consumer segment.

We had good increases in volume in our rigid paper and plastics business, which is largely composite cans. And those increases were coming from conversions in powdered infant formula, plus just improved sales in powdered beverages and in caulk cartridges. That increase was offset in large part by volume shortfalls in flexibles, which I'll talk about a little later.

As with previous quarters, our pricing was up and a lot of that was due to the contractual passthroughs in our composite can businesses.

And then in this particular segment, EBIT was improved largely because of a positive price cost differential as well as increased in productivity. The next segment, Tubes, Cores and Paper, sales were up 5.1% and EBIT was up 40.4%. Starting with sales, most of the sales increase was volume related and much of that was trade sales out of our paperboard group.

In fact, in the U.S., our trade sales in paper were up 24%, in Canada they were up 27%, with about half of that going into the liner board market, which is particularly strong right now. And then up in Europe 37% and some of that's just a year-over-year comparison because you might remember that last year in the second quarter the paper mills in Finland were down due to strikes. But at any rate, overall 37% increase and generally solid increases in outside sales of paper board through the whole quarter.

EBIT was increased largely due to a positive price cost, also due to productivity. And then also then the third point would be a pretty significant year-over-year change in Europe from losses last year in 2005 and profits this year.

And again, if you remember last year, we were integrating the Ahlstrom businesses, so we saw a good level of improved profitability in France, Spain, and Germany, year-over-year.

The next segment is packaging services. Here sales were down 4.2% and EBIT's down 20.2%. The sales shortfall, and we talked about it in the first quarter, is largely due to a very difficult comparison versus 2005.

In the second quarter of 2005, CorrFlex had three launches and one rework project they rolled from the first quarter 2005 into the second quarter of 2005. We had no special launches or rework project in the second quarter of 2006. And that's the principal difference in both sales and EBIT.

One of the things that we do is we look and track design projects, thinking that design projects are a pretty good proxy for business activity. And we see that design project year-over-year are up 18%. So that suggests to us that the basic business is strong, the basic business is improving, but we clearly have a year-over-year difficult comparison and that's what you see in these numbers.

And then lastly, the Other category sales are up 11.2%, EBIT's up 31.3%, the majority of this sales increase is protected packaging. And the majority of the EBIT increase is price cost plus productivity. Let me turn now to the sales bridge. And this is where we reconcile last year's sales to this year's sales.

Sales increased $38.8 million and the makeup of that 38.8 is: volume accounted for 15.5; price increases accounted for 13.2; divestitures, or the net acquisitions in divestitures, was a negative 1.3 million; and foreign exchange was a positive 11.5.

So those four numbers, 15.5, 13.2, a negative 1.3, and 11.5, should add up to the 38.8 year-over-year difference. So I'll comment on each of these categories briefly. As I said volume was up $15.5 million.

Tube and core volume in the U.S. and Canada was essentially flat, it was up a little bit year-over-year, in fact some of the categories that we sell into like textile tubes, paper mill cores, we're up around 1%, packaging film was up about 6%. But overall the business was just up about somewhere between 0.5% and 1% in terms of volume year-over-year. But I would remind you that in the first quarter volume was down 5% year-over-year, and so we actually see this as pretty strong volume in our tube and core group in the U.S. and Canada.

Tube volume in Europe was down 2%,and that's principally in Germany and in France. But as I said earlier, paper board volume was up significantly in the U.S., Canada, and in Europe. And I gave you some of those statistics a little while ago. Rigid paper and plastics, again that's largely composite cans, that business was up in volume terms 3%. Again, that's mostly powdered infant formula, powdered beverages and caulk sales.

And then rigid paper and plastics, again composites cans, in Europe was up 15%. They'd been up for a good many quarters now just on the basis of some new customers, new business they brought in. And then lastly, our flexibles volume. I mentioned earlier that that was down.

It was down around 7% year-over-year. And it's principally because one of our major confectionary customers seems to be falling behind its competition. And that's reduced their sales and their sales have reduced our sales. In terms of price, price increase was $13.2 million. This is the net effect of the February price increase that we announced in the U.S. and a March increase that we announced in Europe.

In this quarter, it's a relatively modest 1 to 2% because the implementation was just building through the quarter and we expected it to continue to build on into the third and fourth quarters. We also experienced price increases in the 3 to 6% range in our flexibles business and in our baker [reals] business.

And I've already talked about contractual increases in rigid paper and plastics, which is largely a pass-through of raw materials. All in all, that accounts for roughly 13.2 million of the price increase. Acquisitions a negative $1.3 million.

This is the net of our June purchase of Marks & Rosenthal, which is a point of purchase business, and last year's sale of our Charlotte folding carton plant. And then lastly, foreign exchange, it's effectively the weak dollar versus the Canadian dollar and the Brazilian real. And so while we see, in sticking with foreign exchange for a minute, an increase in sales of 11.5 million, we've calculated because this is only translation, that the effect on the bottom-line was about $600,000 after tax or about $0.005 a share.

Now let me go to the EBIT bridge. And here what I'm doing is reconciling last year's EBIT to this year's EBIT and it's an increase of 13.5 million. Volume/mix is a negative $6.3 million. Price cost is a positive 13.3, productivity is a positive 13.5, and other is a negative 7.1. And those four numbers should add up to the $13.5 million year-over-year increase.

In terms of volume, I talked about positive volume in sales and now I'm saying that we have a negative profit impact on that volume. And the reason, essentially, is mix, and I'll give you two examples. One of them is our paper division volume that I talked about.

It's frankly lower margin edge board volume and single ply paper versus high-strength tube board and higher margin specialty grades. So we see a negative mix when we trade off some of that high margin business for lower margin business. But I would like to point out that we get a lot of efficiencies from running at capacity and you find those efficiencies in the productivity numbers that I'll talk about in a minute.

So that's one part of the reason why we have a negative mix here. And another is the unfavorable mix that we find in our flexibles business.

As I said earlier, their volume was down, but probably just as importantly, the change in mix is we've lost some high-margin confectionary business and made up some of that with lower margin shrink wrap business.

And so those would be two principal reasons why there is a negative mix in this category. In terms of price cost, price cost is a positive 13.3 million. In our Tube, Core and Paper businesses we did experience price increases. I commented on that earlier. And that's combined with an 8% reduction in this quarter year-over-year in our total furnish cost. So OCC and in fact total furnish is down from last year's second quarter. The total is about 8 %. So a positive price cost in Tube, Core and Paper is coming from the fact that we have positive prices and we have a positive cost impact.

A little bit of a different story in consumer packaging here where we have positive prices. Again, a lot of that is in the compositive can business and it's contractual reset. But there they had to absorb resin increases of about 19%, aluminum increases of 25%, film increases of roughly in the same 19% range.

And so we see a little bit less price cost, although it is positive in the Consumer Packaging segment because of absorbing some of those increases.

Productivity 13.5 million. Generally productivity is positive across all of our divisions, it's a function of our lean program, Six Sigma program, scrap reduction program. Frankly, it doesn't hurt that our paper mills ran at full capacity and so we saw good productivity coming from our paper operations in this quarter.

We also, and I talked about it earlier, had solid year-over-year efficiencies in France, Spain, and Germany, as we've worked through the integration there. And our flexible business showed good productivity as well, they took 100 basis points out of their scrap year-over-year as a part of their scrap reduction program.

So those are some of the reasons why productivity, along with just general focus throughout all of our divisions, is up 13.5 million. And then Other, that is energy, wages, freight, this is our catch all category. It's a negative 7.1 million, but energy itself is 4 million of that 7 million year-over-year. There's a lot of that in the U.S. and in the UK.

Now let me switch gears and just comment briefly about our cash flow for the first half. In the first half, first and second quarter, our operating cash totalled 161 million. That's compared with 68.2 million last year, so that's an improvement year-over-year of $92.6 million.

It's not hard to find where that improvement's coming from, our net income is up. In fact, it's up 17 million. But the big difference is year-over-year change in working capital of $63.5 million.

What we're seeing now is that our working capital program, that we talked about at the end of last year and we saw some improvement in the first quarter, is really starting to take hold. In fact, the principal driver right now is inventory reduction.

And again, these are first half numbers, but last year our inventory from December to June increased by $31 million. This year our inventory from December to June actually decreased by $17 million. So you can see that inventory is the big driver of our working capital performance.

In the second quarter alone, now speaking just the second quarter, our operating cash was $89 million versus 46 million last year. Our capital spending, 59.1 was right in line with last year's 59.4, and dividends at 46.9 are in line with last year's 44.5.

Our balance sheet remains strong. During the quarter we paid down debt by $37 million. Our debt to total capital, as a result of that, was reduced from the beginning of the year at 38.2% to now 37.8, by our calculations.

I think Allan's already commented on the new products, most of that's coming out of the -- it's $20.9 million and most of that's coming out of the consumer side of our business. It's flexibles with things like Mack & Feel and thick pack, rigid paper and plastics, squeeze tubes and powdered infant formula, but an uptick compared to last year's 16.8 million.

Now to our forecast, our reforecast. As was mentioned for the third quarter, we're forecasting $0.54 to $0.57 and for the year $2.07 to $2.10. Our current forecast basically calls for business conditions to remain as they are, which are generally pretty good. We've assumed OCC in this forecast at $95 in July and August and then we have it dropping in September.

So that represents a little bit of a risk because OCC right now is at $100, but forecast was put together before that came in and we haven't changed it. Effective tax rate is expected to be about the same in the second half as it was in the first half. And Harris, I believe that's the extent of my comments. We should turn it over for questions.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Mark Connelly with Credit Suisse. Please proceed.

Thank you. Just a couple of quick things. Can you talk about the experience in the construction tube market right now and what, from your perspective, it looks like in the next quarter or so? And I was also wondering if you could just give us a sense of how much container board actually contributed to the improvement in tube and core results whether it was a meaningful part or not?

Mark, how are you? This is Harris. We are seeing nice year-over-year improvements in the construction tube market. And we expect that to continue and it's primarily driven off the new product that we have, RainGuard. And it's been positive. I don't know what the comparison is year-over-year, but I know it's positive and we expect that to continue.

I would have to say that the container board is not meaningful in the results. It fills in [Trend] Valley when we need to run something else, but not meaningful.

Okay.

I concur, I think that it affects productivity probably more than it did.

Right, that's what I was figuring. So with the new RainGuard tube, would you say that you're picking up share? I'm just trying to get a sense of how much that market is actually growing right now.

Right now we are picking up share, Mark. And so it's hard for me to say how much the market itself is growing, it's growing some, but we're gaining share right now.

Okay, okay, that's all I had, thank you.

Thank you, Mark.

Your next question comes from the line of Chris Manuel with Key Banc Capital Markets.

Hello?

Sir, your line is open, please proceed with your question. Your next question comes from the line of Ghansham Panjabi with Wachovia Securities, please proceed.

Guys, how are you? Congrats on the quarter.

Hi, Ghansham, how are you.

Harris, usually we give you a hard time about being conservative on guidance. But this time I want to do the opposite. You earned $0.96 during the first half of the year and if you look at your guidance you're expecting to do $1.12 to $1.14 in the back half. You also have tough comparisons, especially in the fourth quarter. And I was just curious as to where do you expect to see the most upside relative to your forecast going into the year?

Ghansham, thank you. I did read your prerelease this morning. I think you accused me of being conservative still in that one, though. Thank you. Ghansham, as Charlie said, we see pretty strong business conditions across all the businesses and across all the geographies. So as we look out the business is reforecast, we see a good second half of the year. So I can't say it's coming one place or the other.

But is it being skewed by pricing, you think?

No because we're seeing raw materials. And as Charlie said we've got OCC that's now at $100 a ton. But we feel like the price that we have in the marketplace today covers us and if OCC traditional, it does what it traditionally does, is tails down, we'll be fine. If it stays up, or goes up even further, I think clearly we're going to contemplate another price increase.

Okay. All right. And just one final question on the flexible patching business. A lot of the food companies are rolling out products, such as the 100 calorie packs for specific confectionary type products or cookies, is your flexible packaging business part of that too?

We probably have as much going on in flexible packing business today in terms of new opportunities, including what you're speaking of, Ghansham, as we have at any time. Charlie made a comment about flexible lost business, and actually I would say that was flexible substituted business because we haven't lost the business. We have a customer that is simply down in their volumes right now.

Okay, great, thank you. Good luck in the quarter.

Thank you, Ghansham.

Your next question comes from the line of Edings Thibault with Morgan Stanley.

Thanks very much, and good morning.

Good morning.

Good afternoon, excuse me. I just wanted to chat with you, Harris, as well, about what you're seeing in the businesses here. And particularly on the OCC side. I know we're at $100, can you talk about why you are anticipating that pricing will subside in September? Is that a seasonal decline? Do you have a view on Chinese inventories that you want to share? What's kind of the thought process on that cost element?

Thanks, I'm not sure my crystal ball is any clearer than anyone else's. Exports to China have been up year-over-year, as they have been for the last three or four years, and we expect that trend to continue. In our own mill in China, we do have some inventories on hand. But I don't think that's going to have a lot to do with whether prices stay up or go down.

My comments are based solely on the fact that traditionally starting in the August time frame you see increased supply [generation] in this country with the back to school programs and the holiday programs. And if you chart prices of supply, always September through the end of the year is the most plentiful time of the year.

I think inventory levels in China are probably such that they will be buying during that time, but I think we'll see a tail off. If we don't, as I said earlier, we're prepared to move with pricing. We'll do either one.

Great. And just to follow-up on, I think, Charlie's comment on tubes and core volumes. You said, and I know you were talking about U.S., Canada, and then Europe, but it sounded as if total tube and core volumes were up about 0.5 to 1%. And that was a sharp turnaround from the negative 5% in the first quarter.

It was a sharp turn around and we have seen a nice turn around and frankly that continues, that upward trend continues as we sit here today. A lot of it is in North America and Canada and the U.S. and Mexico.

Okay. Any particular segment that's driving that turn around or is it more broad based?

Well, no, but I mentioned that some segments that had such [shung] year-over-year shortfalls like paper mill, cores and textiles were positive. I suspect that if we focused on those turnarounds they'd look pretty good. Film core has been strong.

Film market is strong.

Okay. And so that's one of the things that's driving some of your optimism on the second half. And then just on your guidance a little bit. I don't want to put words in your mouth, but is there any reason why your business has sifted that you wouldn't be expecting sort of the seasonal lift in the fourth quarter that you normally get? I think it's generally about $0.04 to $0.08 sequentially.

No, I think that's right, Edings. And what we -- Ghansham's question about the optimism from the second quarter, it is that seasonality that we expect to see, particular on the consumer side. We see tubes and cores improving monthly. And obviously the mill systems running full. And we're seeing improvement in Europe. So we're reasonably bullish, as bullish as we can generally be.

Well, let's not get giddy. And just one final question, I apologize. In that Tubes and Core segment, if you could just perhaps review the pricing announcements that you have currently in the marketplace, what's been implemented, what's currently being implemented.

I know Charlie actually has that

I've got some of that information. I think it's up to date. Look back, going back to the quarter on May 24th in Europe, we announced a 30 euro a ton increase. On February 3rd, in Tubes and Cores in Europe, we announced 12 to 16% increase in some areas and 8% in the Nordic countries.

And June 6th we announced a Paper North America 40 to $50 a ton increase. And then on June 29th, we announced the 6% tube increase in U.S. and in Canada. And I believe we've announced another tube increase in Europe.

Okay. And the status of the paper -- I assume it's too early on the tube increase for June 29th, June 6th increase.

Very little impact these increases have in the second quarter's results. So I think we'll see that roll into the third quarter.

But you're confident that -- where do you stand on the June 6th? Is that -- ?

We're seeing good support in the market place for those increases.

And that, obviously, then positions you well for the tube and core entry.

Absolutely.

Great.. Thanks very much. Good luck in the quarter.

Your next question comes from the line of Chris Manuel with KeyBanc Capital Markets. Please proceed.

Good afternoon, gentlemen. Can you hear me now?

We can hear you, Chris.

Much better. I wanted to ask you a couple of questions. First of all in your packaging services piece. You mentioned there were some reorders or some repacks in the first couple of quarters that you didn't have this year versus last year. As I look at your pack services business and what you did in the third and fourth quarter last year, there were some substantial pickups in the back half of the year.

Would there be any reason to believe that -- well, let me ask it this way, are the difficult comparisons done? Or do you think that you can improve year-over-year as you go through the third and the fourth quarter?

Chris, I think the difficult comparisons are done. They are really -- this is a business that is third and fourth quarter loaded. We knew that the first quarter. And particularly in the second quarter last year, as we've said, were unusually strong. And so I think the difficult comparisons are over.

Okay. That's a positive thing. Can you give us an update on where you are with P&G with respect to looking at some of their distribution centers and pack centers?

It's ongoing, and they are in the process of assessing opportunities and that's probably all I should say at this point in time, Chris.

Okay. And then the last question I wanted to ask you was, as far as the price/cost relationship goes across the business, as you sit today, do you feel that you're fully caught up or do you think that some of these price increases that you've announced will help you actually expand margins or how would you look at that?

Oh, I think we are certainly caught up. Charlie mentioned that OCC reforecasted a guidance was based off of $95, $100, I don't think that's going to make a big difference one way or the other, frankly. But I think we're positioned well to continue to expand margins.

Okay, thank you very much, gentlemen.

Thank you, Chris.

Your next question comes from the line of David Leibowitz with Sonoco, please proceed.

Good afternoon.

Hi, David, how are you?

All righty. A few questions if I might, totally unrelated. First, how much did currency and the joint ventures contribute to the first half results?

I'll let Charlie answer the currency piece.

The currency piece, and that's -- I was referring to the translation impact, the 11.5 million in sales had about a $0.005, $600,000 $0.005 impact on our overall profitability. That's the translation piece. We'll have some transaction gains and losses that are just a normal part of our business.

Okay. And the joint venture piece?

The joint ventures, David, we had a number of joint ventures that range from the partitions business with Rockton, to the cone business with Conitex, to the Ahlstrom. They contributed about $3 million in the quarter.

Okay. Next question. Are there any further targets on the balance sheet, vis a vie reducing debt or increasing the equity side of the ledger?

We've often set our targets that will stay in the low 40% range debt to capital. I think Charlie's number showed we're about 37% right now, so we are below what our targets would be. But we will continue to pay down debt until we find another use of the capital.

Okay. That leads into the next question. How close are you, without identifying, making further acquisitions this year?

You know, I can't comment on that at this point. We obviously, at any given time we have some discussions going on and that's certainly true today and it will be true tomorrow. And it would probably be inappropriate for me to comment on that, David.

Even in terms of just optimistic that you might have another one or two to consummate this year?

My optimism level is high.

Okay, that's a good answer right there. And the last question, if I may. In terms of the new products coming out in the second half, is there any reason to believe any of them might be particularly more successful than the new products introduced last year in the second half?

I think we will continue to see a carryover effect the first quarter, particularly stack and seal, the cookie container. And there are a couple of other projects that I also can't talk about because the companies will not allow me at this point, that I think will be introduced in the second half.

I expect the trends that we have seen for the first half to duplicate or actually be higher in the second half. And I would expect year-over-year that new product sales will be nicely ahead of last year.

Okay and finally, and I do promise this is the last question. There was an item in either Forbes or Fortune magazine a couple of issues back, about a company that deals in product innovations on a consultancy. And it appears they shipped out your self-heating can. And in the article it pointed out that there have been complaints about the cans overheating. Is there anything you can enlighten us with in terms of progress with the self-heating container?

The self-heating container, one of the issues is, depending upon the ambient temperature around the can, it can either make it warmer or make it cooler. But the sales of the self-heating can have not been a lot of sales in the first half of the year.

We've started back shipping, it's my understanding that there is a dispute between our customer and Wolfgang Puck and they are not producing the Wolfgang Puck product at this point in time. There are producing some Hills Brother's coffee for Sam's and Wal-Mart. Beyond that I can't give a lot more color to it, David.

And what about the [Via] hot chocolate?

It is still in the hot chocolate.

Thank you so much.

Yes, sir.

Your next question comes from the line of Tyler Lankton with JP Morgan.

Good afternoon. In terms of just cash flow, I know the working capital and it shows you paid off year-to-date quite well. Sort of for the full year '06, are you still looking for the same improvement you were in the past or do you think it's going to be a little stronger?

It's going to be stronger. We've been saying that operating cash is going to be in the 300 million range. And, frankly, with the way working capital is coming in, it's going to be substantially stronger than that. I think you can take the reforecast and the improvement that we've seen this year and it would suggest a solid second half and a real good cash flow result for the whole year.

Okay, and then in terms of the Consumer Packaging segment. I know margins were up in Q2 year-over-year, but not as much as in Q1 and down a little bit sequentially. What are you looking for for the rest of the year in terms of your margins in that segment?

I don't have that number right off the top of my head. There won't be any significant change in margins. We certainly put our forecast together with business largely the way it is. As I've said earlier, a strong business projected through the third and fourth quarter. I can't tell you exactly what a price or the margin change is.

Okay, great. Thanks a lot.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of George Staphos, Banc of America Securities . Please proceed.

Hi, guys, good afternoon.

Hi, George.

How are you? We'll start with packaging services and flexibles. I remember from the first quarter, these were businesses that didn't perform up to your expectation. There were obviously pack services had comparative issues, you had talked about that.

My take from last quarter though is you had expected a little bit more pickup in the second quarter than perhaps we've seen, maybe that's a correct assessment, maybe that's not. Were there any areas or any businesses or any customers that didn't lift like you thought they would in the second quarter?

I even remember from the first quarter the discussion around your confectionary customer was one of you had thought your customer had gotten their mix right and they were back in the market and aggressive, more aggressive.

We're talking about flexibles now.

Well, I rolled those two together because they seem to be a little bit off the mark this quarter, same as first quarter. Last quarter you had assumed that they would be, at least our take, accelerating. I just want to see if that was a correct assessment. Where was the variance?

That was a correct assessment, George. I don't want to lump them together because they are very separate. And I think the flexibles one it was a customer, a major customer of ours that raised some prices at year-end and had some issues with Wal-Mart as a result of that. And two of our other customers that we don't have as big a position with, we've seen increases.

Right.

But this one customer, they are starting to get traction back. And we've met with them and they feel rather comfortable that the balance of the year will be back to the levels. So we haven't seen exactly the pickup in the second quarter from this customer that I would have anticipated.

Okay.

But I do anticipate it in Q3 and 4. The pack services we talked about a difficult quarter over quarter. I would say that CorrFlex is tracking our internal budget about where we expected them to be. And as to Charlie's point earlier, we track product development projects or [INAUDIBLE] projects and they're up about 18%, over 18% year-over-year.

We've also seen a major customer of ours in that arena whose fiscal year ended the end of June and has been very involved in the integration of a major business, a rate business into their business. And that integration, I think, is their weak link and they say has taken probably away from some of the product launches.

They have significant product launches, significant is my word, in the last half of the year. So I'm optimistic that, I think it was Chris Manuel that asked me about the second and the third and fourth quarter of packaging services. So that's one of the reasons I'm reasonably bullish about the third and fourth quarter there.

Got you. On snack and seal. Maybe you can't answer this question, my sense is perhaps. One of your customers perhaps had use that as a lever for pricing and it didn't exactly end up being a lever it was expected to be, would that be a fair assessment?

No, that's not fair at all. They're getting the growth out of that that they anticipated. And the conversion is in fact ahead of schedule to other brands within their portfolio.

Okay. But in terms of their sell through in the market, they feel they're getting a leverage off of it?

Yes, I think they are.

Okay. Okay. And it will get even better presumably as the big retailer takes back. Tube and core. Last year in the quarter I think you were down 4 or 5%. And so, I guess the question is has business changed such, or the end markets changed such, Harris, that a good quarter in tube and core will be a plus one or plus two?

You know with textiles having moved off et cetera. Or do you think the old days where you could get to a peak volume say of 4 or 5% is actually still achievable?

I don't think that 4 or 5% is achievable, George. Globally we're going to see a lot higher rates in China and all of Asia and perhaps in Turkey and Eastern Bloc countries. But I think 2, 2.5, 3% is going to be considered a good quarter there.

Okay. Are you seeing much of your customers shipping into Canada these days given the differential in foreign exchange? And do you think that's adding at all to the growth you'd otherwise be enjoying?

No, we don't see that at all, George.

Okay. Last question and I will turn it over. Price costs you've done a terrific job there. You are all to be congratulated on that, I would think. You feel confident, it would appear, that if OCC goes up again, you'll be able to go out into the market and raise both board and converted product pricing.

Are you beginning to get any kind of pushback, though, from your customers who see you raising prices while, up until recently, OCC has been declining such that maybe the next few price increases will be a little bit more difficult to achieve? Thanks, guys.

George, I think after a couple of years of what -- our customers were accustomed to deflation, they've seen four increases in the last 18 months to 2 years. So obviously there is some resistance. But they also have seen increases in energy costs and moving prices, as well.

I think any time you add two or three or four on top of each other it gets more difficult, but we'll do what we have to do. Let me comment one thing, one thing that you were talking about about the snack and seal and the customer on the flexible side that I was referring to. They are not one in the same. They are two separate ones.

Okay.

So I just want to clarify in your mind.

Thank you. All right guys. Congratulations on the first half, good luck the rest of the year.

Thanks.

There are no further questions in the queue.

Again, thank you so much for joining us and have a good rest of the week.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect, have a wonderful day.