Sonoco Products Co (SON) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Sonoco Products Company Second Quarter 2007 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Mr. Roger Schrum, VP Investor Relations for Sonoco Products Company. Thank you, Mr. Schrum, you have may now begin.

Thank you, Jackie. Good morning, everyone and welcome to Sonoco 2007 second quarter earnings investor call. Joining me today are Harris DeLoach, Chairman, President, and Chief Executive Officer and Charlie Hupfer, Senior Vice President and Chief Financial Officer. Our financial results for the second quarter of 2007, were released before the market opened today and are available via our website at Sonoco.com. Let me begin by stating that today's investor call may contain a number of forward-looking statements that are based on current expectations, estimates and projections. These statements are not guarantees of future performance, and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additional information about factors that could cause different results and about the use by the Company of non-GAAP financial measures is available on Forms 10-K, 10-Q, and 8-K filed with the SEC. I'll briefly review the highlights of our second quarters results and then Charlie will provide a more detailed analysis before we open the call for your questions. GAAP earnings for the second quarter of 2007 were $0.41 per diluted share versus $0.49 for the same period in 2006. Results for the second quarter of 2007 included an after-tax charge of $11.9 million, or $0.12 per diluted share, related to an increase in the environmental reserve as subsidiary paper operations in Wisconsin and after-tax restructuring charges of $ 2.8 million or $0.03 per diluted share related to previously announced cost reduction measures. Prior years results include $1.5 million or $0.02 per diluted share of after-tax restructuring charges. Excluding the impact of the environmental reserve adjustment and restructuring charges, Sonoco's base earnings per diluted share, which is a non-GAAP financial measure totaled $0.56, for the second quarter of 2007 compared with $0.51 for the same period in 2006. As mentioned, a more detailed reconciliation and explanation of based earnings is available on our news release.

Our second quarter base earnings per diluted share were within the range of guidance that we had provided. We announced in today's press release that we expect base earnings in the third quarter of 2007 to be in the range of 62 and $0.65 per diluted share. In addition, we announced that our expectation for full-year 2007 base earnings is unchanged at $2.36 to $2.40 per diluted share. With that introduction, I'll now turn it over to Charlie Hupfer.

Thank you, Roger. As you just heard, today we recorded second quarter sales of 994.4 million and EPS of $0.41 a share. These are GAAP earnings. They include restructuring expense and other unusual items. So this quarter we have two unusual items to pull out of GAAP earnings to arrive at base earnings. And again, base earnings is a non-GAAP measure, and there is a reconciliation in the press release.

As a reminder, we use base earnings to compare against our guidance and we think to give a better indication of profitability going forward. The first adjustment that we make is to restructuring. Restructuring charges totaled 3.3 million pre-tax or 2.8 million after-tax and that equates to $0.03 per share. The 3.3 million relates principally to outside the U.S. closures, Germany, in particular, and in Canada. The second adjustment, is a $20 million pre-tax charge, that's 11.8 million after- tax or $0.12 a share, and that charge is to set up a reserve for the cleanup of the lower portion of the Fox River near the location of our subsidiary, DePere, Wisconsin Paper Mill.

Let me take just a second and give you a brief history about the nature of this charge. We purchased U.S. Paper Mills Corp. in 2001. U.S. Paper is a wholly-owned subsidiary of Sonoco, they have two paper mill operations on the Fox River in Wisconsin. In mid-2005, we discovered an area of PCB contamination near the DePere Paper Mill site. At that time, we accrued $12.5 million as our share of the clean up for that specific site, which is referred to in our Ks and Qs as a hot spot. Unfortunately finding this hot spot opened U.S. Mills to potential liability downstream. We disclosed these events as they unfolded, but at the time we were unable to calculate or accrue a minimum liability due to any uncertainty over the total amount and also uncertainty over possible allocation. But based on recent information here in the second quarter, including the EPA agreeing to a method of clean up, we have accrued $20 million as a minimum liability in accordance with FAS-5. In addition to the $20 million at the outside, we have a maximum additional liability and that's capped at the equity value of U.S. Mills, which is approximately $80 million.

Last year we had a restructuring charge of 2.6 million, and that's 1.5 million after tax or $0.02 a share. So the income statement after restructuring in both years, and the current quarter's Fox River charge, in other words base earnings is as follows. So let me give you a couple of numbers. Sales, 994.4 million, that's up 8.4% over last year's 917 million. EBIT, 90.2 million is up 5.7% over last year's 85.4 million. Taxes are $23.6 million, compared with $25 million last year. And earnings are 57.0 million, which is up 12.1% over last year's 50.9 million. That leaves EPS at $0.56 a share, up 10% over last year's $0.51 a share. And our guidance as we stated earlier was 55 to $0.58 at the lower end of our guidance.

Let me comment on the effective tax rate. On a base earnings basis, the effective tax rate was 30.4% versus last year's 34.3%. That difference is made up of really two things, and it's about half and half. The first is of the lower effective tax rate reflects more low-tax foreign earnings this year versus last year, and we would expect that to continue on in to the second half. The other half is just the ordinary adjustments that we make to tax reserves, as a result of trueing up calculations, and we see those kind of true ups on a quarterly basis now. The lower effective tax rate did amount to about $0.03 per share in the quarter.

Now let me talk about the segments. The segments that I'm going to refer exclude the restructuring and they exclude the Fox River charge, so you can refer to one of the back pages on the press release to see the actual numbers. I'll start with the consumer segment. In consumer, if you recall is principally composite cans, flexibles and metal ends, Consumer sales were up 6.4% year-over-year, and EBIT or operating profits were down 14.5%. Frankly, our flexible division struggled during the second quarter because absent flexibles if we took flexibles out of these numbers, both sales and operating profits would be up more than 10% in the consumer segment. We did experience a lot of turmoil in flexibles. Some of that was caused by production that was shifting around to accommodate the launch of the new generation of snack 'n seal. And by moving that production around, we did have negative productivity, and that was largely in the form of high scrap. We also had high freight costs. We had high cylinder and plate costs, and in addition to that we had the start up of two new flex-o presses, plus one other press that was installed earlier in the year and wasn't up to speed. So those were all of the factors that influenced flexibles performance during the quarter.

The next segment is Tube, Core and Paper, Sales were up 11% year-over-year, EBIT was up 15.4% year-over-year. The increase in profits is generally lead by price costs, which was positive, and productivity, and we had a solid year-over-year improvement in Europe. Package Services, their sales were up 13.7% and EBIT was up 33.7%. We had a very good quarter in Packaging Services, volume was strong, we had favorable price cost and favorable productivity. And that was both at the pack centers and at the core collect operation. And then all other sales were down 0.006 of a percent. Profits EBIT was up 0.006 of a percent. We think that given the fact that the baker part of our business, the Reel's, as well as protective packaging sell into the housing industry, we were pretty well pleased with these results even though they were just flat year-over-year.

Now let me turn to the sales bridge. And the sales bridge is where we reconcile the 77.4 million difference between this year's sales and last year's sales. The four categories are volume, price, acquisitions, and foreign exchange. So in terms of volume, we saw negative volume at the sales line that amounted to $7.5 million. We saw prices increase sales by $24.3 million. Acquisitions increased sales by 38.5 million, and foreign exchange 22.1 million. So let me make some brief comments about each of those categories. In terms of volume again, volume was negative 7.5 million. We generally saw weak volume in the Tube and Core portion of our business in the U.S.. Volumes were down roughly 4% due to weak demand and frankly some modest share loss as we implemented our pricing strategy. We saw weak demand in the paper part of our business as well, which was -- some of that was just a pull through from the Tube and Core side of the business. On the other hand, volume in Europe was up. It was up about 3.5% over all with very good growth in what we call our Frontier businesses. They were up 16% over all. In fact, Turkey was up 22%, Russia 24, and Poland 12. And we did have positive volume in our legacy businesses which would be Germany, France, the UK, Spain. So all in all volume in Europe was substantially above last year. Volume in the consumer segment was negative year-over-year. We saw shortfalls in snacks, and powdered beverage on the composite can side, as well as shortfalls in flexibles. Volume on the other hand was strong in Packaging Services at both Pack Centers and at CorrFlex.

Now turning to price. Price was up $24.3 million, most of the pricing activity within our Tube, Core and Paper segment and the pricing was put in place to offset higher material costs. We implemented price increases in February in Europe, and in March, in the U.S., in both the Paper and Tube operations, and that really drove most of this year-over-year increase. In addition to the Tube and Core pricing, outside sales of wastepaper were up about 26% on average and that is due largely to higher year-over-year OCC costs. Acquisitions, as I said, accounted for $38.5 million, that's the impact of Demolli, in the Tube and Core and Paper segment and Clear Pack in the Consumer segment for three months, and Matrix for one month. And then foreign exchange, 22.1 million, that's the weak dollar, compared with all of the other currencies that we deal with. But I will point out as I always do that that has a negligible profit impact. In fact, profit impact would be less than $0.5 million or less than half of a penny a share.

Now turning to the EBIT bridge or operating profit bridge. Again, the categories would be volume/mix, price cost, productivity, and other. In volume/mix, we had a negative of $7.4 million. Price cost we had a positive of $7.4 million, so we were pleased with price cost in the quarter. Productivity was a positive 12.5, and then the all other category was a negative 7.6. So those four numbers, should add up to 4.9 million of year-over-year increase in EBIT. And again, that excludes restructuring in Fox River. Let me comment first about volume as I said it was negative 7.4 million, that is the profit impact of the volume shortfall that I talked about when I talked about sales, plus some negative mix. I'll give you some examples of that. In paper, Europe, we did see a mix shift towards lower-strength boards, which would be lower-margin boards. In composite cans, we had more lower margin powdered infant formula compared with higher margin powdered beverage and snack sales, and in Packaging Services, CorrFlex had some unfavorable mix as a result of more resale versus manufactured goods, that gives you some idea of some of the factors that impact the volume/mix as it effects profitability.

In terms of price cost, again, we were pleased with that, $7.4 million. That's the selling price increases offset by just material cost here. Obviously, the big driver of material cost is recovered paper, which is up about 36% year-over-year. In fact let me comment. OCC started the quarter at $145, it dropped $25 in April, dropped $15 in May, to end the quarter at $105. It has since gone up $20 a ton in July to $125.

Now to productivity, $12.5 million, productivity was good across all of our divisions. We saw especially good productivity as a result of our recent restructuring, particularly the closing of the Margett Mill. Our mill system in Europe is running pretty close to full. So in effect we're running the same tonnage that we did last year with one less mill. And then lastly, the overall -- other category, 7.6, this is a catchall, it includes wages, fringes, energy freight. Wages would account for about 6 million of the year-over-year difference. Energy and freight was negative about 3 million.

Now to cash flow. Cash flow for the second quarter was $69 million, versus 88 million last year. So that's a difference of $19.6 million, 12.4 of that is the year-over-year change in networking capital. I want to talk a little bit about that, because I wanted to stress the fact that even though networking capital is unfavorable $12 million year-over-year, that difference is really the result of so much improvement that we saw in 2006, and while we continue to see improvement in 2007, the rate of improvement isn't as great. So the year-over-year difference doesn't look at big. I think we feel very comfortable about our working capital program. It's still a success, so let me give you some numbers to point out what I just said. For example, in accounts receivable, our June accounts receivable days, were 42.5 days in 2006, and it dropped to 41.6 in 2007. So we saw continued improvement through the year and all the way through June of this quarter. In inventory days, inventory days were 30.6 last year, and they are down to 29.2 in 2007. So we continued to see further improvement in inventory. I guess the real point is we saw more improvement in last year's second quarter in inventory than we saw in this year's second quarter, and so that's why in large part you see the year-over-year difference in overall networking capital.

Accounts payable days last year were 25.8, this year they are 28.1. So again, I just used those numbers to reiterate the fact that the working capital program is in place and we seem to be working well toward our overall 2007 goal. Capital spending, 49 million versus 31 million last year. We do have higher spending in the quarter, some of that is our Columbus facility for plastic bottles, and two flex-o presses that I mentioned earlier. The balance sheet, balance sheet remains strong. Debt to total capital is 41.7%, that is up from the end of the year at 37.5%. Debt is up $213 million since year-end, but it's only up $46 million since last year's second quarter, and that's despite the purchase of Matrix for $210 million in the second quarter of this year, plus Demolli Clear Pack in the fourth quarter of last year and the share buyback earlier in the year.

Now let me comment on the forecast. Our third quarter forecast is for EPS to be in the range of 62 to $0.65. And we are holding the year steady at $2.36 to $2.40. I'll remind you that our forecast is a consolidation of our division forecast that were prepared, in this case, at the end of June. Our forecast takes into account, reduced pricing as a result of some recent bid activity in the Packaging Services segment. And it also takes in to account some of flexible second quarter problems rolling into the third and into the fourth quarter. On the other hand, we have some offsets that weren't included in our earlier re-forecast. Matrix is an offset, clearly, it wasn't in the April forecast. We are seeing stronger results in both Paper and the Tube and Core side in Europe, which is ahead of what we had previously forecast. And we are generally seeing a firming up of our industrial businesses relative to our earlier forecast. And now my last comment, because we always comment on new products. We did have new products that totaled 21.3 million in the second quarter of this year, versus 24.9 in the second quarter of last year. We had some products that dropped off the list. They were grandfathered off after two years, Ultra Seal Membrane Ends, and SON-a-POP, which is a point-of-purchase display. So we saw some grandfathering, and that explains the decline year-over-year.

But frankly I expect more activity in the second half, as we're going to continue to introduce the second generation of Snack 'n Seal technology, and we have a first of a kind restored Ultra Seal Membrane End that should be-- it is in production and will be commercialized and in our numbers in the third and fourth quarter. Those are my comments. Roger, I'll turn it back over for questions.

Jackie, we will take questions now.

Thank you. (OPERATOR INSTRUCTIONS) One moment please, while we poll for questions. Our first question is coming from Ghansham Panjabi of Wachovia.

Hey, guys, good morning.

Good morning.

In your press release you talked about some price reductions in certain flexible packaging and I'm not sure if you mentioned that on the call. But could you give us more color on that, please?

Ghansham, last year, I guess in probably the third or fourth quarter on a contract with one of our major customers there were price reductions given. They were baked into our guidance. They were baked into our plan, so while on a year-over-year basis -- obviously that was a difference there, but they had been baked into our guidance. Let me talk about flexibles for a second, because, Charlie mentioned we installed two new presses. We installed a third press at the end of the first quarter. And obviously, they too were baked in to our forecast, and were planned for. As Charlie says, we had an awful lot of disruption. We had an awful lot of efficiencies that caused us cost in moving around, and cut to the bottom line, frankly we didn't execute very well. And when you look at where we ended up the quarter, versus where you guys were on your consensus, the down side in flexibles more than offset that difference. More than offset that. And we made management change in that business in early June, and we have seen improvement, and I expect continued improvement as we go through the year in our flexibles operations.

Okay. Just as a follow-up, if I could.

Sure.

Were higher resin prices a big negative for the quarter relative to guidance?

No, they were not.

They were not. Okay. Great, thank you so much.

Thank you, Ghansham.

Our next question is coming from Edings Thibault, Morgan Stanley.

Thanks very much and good morning.

Good morning, Edings. How are you?

Great, thank you, Harris. I was hoping we could touch on some of the environmental issues at Fox River and just sort of talk about what your expectations are going forward in terms of how the situation may play out and what the timing may be of any in additional charges or what the sort of benchmark processes should be here?

I don't know what additional charges, if any, we may have relative to Fox River. As Charlie said, Fox River -- this sort of raised its head in June of '05, and we were put in a position, because there's some mediation going on at this point in time with EPA and a mandated mediator that under the accounting rules, we had to book what we thought was a reasonable minimum number, and we pulled that number -- I'm afraid I can't give you any more color than that, but what Charlie has done and what we said in the Q the exposure is capped, the net worth of that business, which is about 80 to $90 million, there is some insurance involved, and it's a pretty fluid situation right now. And I think probably -- although we have recruited -- the expenditures are likely to be spent in 2009, 10, and 11, as this cleanup goes on. I can't really give you a lot more color other than what is the max exposure and where we are today because it is pretty fluid, as I said.

And your total accrual to this point would include the $12 million from 2005 as well as this current 20? So you are standing at about $32 million; is that correct?

That's correct. And that's baked into that net worth equity in U.S. Paper.

Okay. And that was accounted for in SG&A, the 20 million charge?

That's right.

That's correct.

Okay. Then touching more on flexibles and just trying to get a sense of -- as you work through some of these operational issues should we expect a rebound and the margins back up to 8 fairly quickly, or with the pricing, et cetera, are we looking at more of a 2008 recovery there?

I would be disappointed if we didn't see continued improvement and better improvement in the third and fourth quarter, and back up to the levels of where we were prior to this what I'm going to call, upset , if we don't get back to that this year.

Okay. One final question and I know Charlie touched on it. I just wanted to make sure in terms of OCC and how they may or may not impacted the numbers, clearly we're seeing some incremental OCC increases today, but you didn't have any of the sort of hang-over effects? In other words if you were able to recover OCC margins in the first quarter, and there's no timing differences that might have put a hit to earnings in the second quarter; is that correct, Charlie?

We started the quarter $145 in inventory. So there was some roll over of inventory into the second quarter. Having said that, the pricing came in March and so we saw the pricing impact come in through the quarter as well. I think the best answer is we covered it all in the second quarter.

Great. In thanks very much good luck going forward.

Thank you.

Our next question is coming from George Staphos of Banc of America Securities.

Hi, guys good morning.

Hello, George how are you?

Doing well. I just want to dig back into flexible and consumer packing, Harris. Maybe I misunderstood the release or the Company's comments, even with flexible getting back to where you had been margin wise before the upset, as you termed it, you expect consumer profits to be down year-on-year in the second half? Or you are down for the full year because of the second quarter negative variance?

I think -- there maybe may be some conflict in what I said and what the press release said, George. In the press release we said the- we expect the operation issues to continue in to the third and fourth quarter, and that is baked in to our guidance. My response, I think, to -- was that -- personally we have seen improvement, and I personally expect that improvement to be more rapid than what we have baked in to our numbers, but we -- I get accused occasionally of being conservative, and maybe we have been conservative on these numbers, but that's where we are.

Fair enough. I guess stepping back, flexible has been -- and we talked about it a lot -- an on again off again business for you, probably more off than on over time. I realize it's a central part of the consumer packaging strategy, you certainly have gained market share. But is this nothing more than a high single-digit margin business going forward at best?

No. I think it is a low single-digit margin business for us --

Low single --

Excuse me. I'm sorry. Low double-digit --

I was wondering why you sounded enthusiastic.

Well, you always get me on this. I think it's a low single -- double-digit margin business.

When?

By the fourth quarter.

Okay. And what aside from management changes in the presses being in place needs to be done to get there, or do you feel you pretty much have it?

George, we saw, as you know nice improvements in our flexibles operations years ago. Basically the same people that made the improvements are there. And they know how to do it. And I think the changes that we have made will get us to where we need to be without further changes of significance.

Okay. Let me switch gears for a minute and then I'll turn it over. It appears that in Tubes and Cores and Paper you saw a bit of a slowdown in the second quarter versus the first quarter. I think in the first quarter your comment was if you adjusted for the extra shipping days, per workday you were about flat. I believe that was in North American comment -- I don't recall precisely --

I think that's correct.

This quarter you are down, I think you said earlier, 4%. Certainly there's been a lot of mixed head winds and tail winds in the market. It wouldn't be unsurprisingly (Inaudible). What did you see and what are the trends coming out in to the third quarter?

George, the trends we saw -- I guess first and second quarter, but it certainly continued -- increased in the second quarter. If you take the paper industry in particular, I think we have seen something like 17 or 18 mill closed -- 17 or 18 mill closures in Canada in the last 18 months. And that -- a lot of that's the Canadian dollar, it's consolidation and most of that is moving in to the U.S., and we'll pick it up. But that imbalance caused some shortfall in the Tube and Core. And I think just an overall slowing -- I think I saw a number the other day that the Tube and Can -- the Tube business was down industry-wide something like 3% in the first half of the year. We're down slightly less than that. I would also say that our aggressive stance that we have taken on pricing, some marginal business, we probably lost some of that. But we were aggressive on the pricing, and -- and it is what it is when that happens.

I understand. Has the third quarter continued at the second quarter trajectory? And will that prevent you from getting any pricing if you need to, because you mentioned OCC was up 20 or 25 in July, but we have heard it's up more like 10-plus in August.

I think we'll have to wait and see what August will bring. We have not seen any great improvement in Tube and Core volumes in North America? July over the second quarter. But if we see much more of an increase in OCC, I wouldn't be surprised to see us move on that George.

Okay. Thank. I'll turn it over.

Thank you.

Our next question is coming from Chris Manual of KeyBanc Capital Markets.

Good afternoon, whatever it is.

Hello, Chris. It's still morning.

Doesn't feel like it.

I understand.

(Inaudible) It sounds like some of the issues that are plaguing your right now in consumer packaging are just going to be temporary and your view by the end of the year you are right back on track. Is that a fair assessment?

I believe that to be the case, Chris, if not sooner.

Perfect. In one last question on the Fox River side do you have insurance in place that covers you there on the cash component of that?

There is insurance in place, Chris, and -- but the accrual that we made would be -- probably in addition to that insurance.

Okay.

The accrual doesn't specify the source, and the source can be anything, including insurance recovery.

Okay. I'm just -- I guess where I'm wondering if it becomes for some reason an $80 million hit, is that -- would most of that, if it were to be that sort of a number, would it be covered potentially by insurance or could there potentially be some cash flow leakage?

We haven't disclosed the amount of insurance but there's a substantial amount of insurance.

Okay. What I really want to ask you guys about is the Pack Services business. And now that we have got those other issues aside, and you talked a little bit in your press release that there were some -- some potentially some bidding issues that you may -- the business may get a little bit more challenging later in the year. Can you give us more color there, Harris?

I would be happy to, Chris. Let me start off, I think Charlie said this but our Pack Services business including CorrFlex and Packaging Services had an outstanding quarter, and I think the past four quarters are records for the business. So it is -- it is going well. What we were referring to in that was something you asked, I think, at the April call, either the February call about one large customer that was having a -- put a request for proposals out and we obviously participated in that. And while you hate to lose some business, and it looks like we will lose some business in it. Our job in reality is to create value for our customers, and obviously they thought our value proposition was not as good as somebody else's value proposition. And that's obviously a decision they have got to make. We are in the process of cutting some cost in that business, and by cutting cost, I'm talking about putting pressure on our suppliers and other things of that nature. Frankly, none of those improvements had been baked into the reforecast. And another piece of it is over the last 2.5 or 3 years, we have actually declined major pieces of business, and I mean major pieces of business in this service sector because of our relationship with this particular customer, and the way we use certain intellectual capital in that business with that customer. In we are now free to -- to take that. We have taken that to several customers, both of whom we had declined to do business with over the last 18 months. And I think we have an excellent chance of more than offsetting that position that -- that we may lose. But -- and none of those factors are baked into the numbers, that -- so, it is what it is.

Would it be your anticipation that whatever amount it is of business that you may have potentially lost, that it can be recovered by the end of the year, or should we anticipate that it may take a quarter or two for some of those offsets to kick in?

Well, some of this, Chris is pricing. So that will kick in pretty quickly, and depends upon how much we can offset that with reductions in suppliers and other things, and the increased business. The business that we lost will really move out between now and the end of the year or the first quarter of next year. And I would anticipate and hope that we would more than offset both of these factors -- it may take us a quarter or two or so to do that, but as I said earlier, this full loss is baked -- anticipated is baked in to our reforecast. The upside is not baked in to it. And Charles Sullivan and [Grand] Ross and those guys are working pretty hard to minimize the impact, if any, as quickly as we can.

Last question is for you Charlie. The tax rate that you implied for going forward. I think you were in 34 to 35 range. But you indicated earlier you thought it would be a little lower. Can you give us maybe some bookends for what you think it is for the rest of the year?

What we said and really sort of factored into that guidance is that it would be about the average and we used 32%.

Okay. Thank you very much, fellas.

Thank you, Chris.

Your next question is coming from Claudia Shank from JPMorgan.

Good morning.

Good morning, Claudia, how are you?

I'm fine, thank you. I was hoping you would comment on the other business in the consumer packing segment which sounded like some of them showed a little bit of strength and sort of what you were seeing there. And maybe just talk about the contribution from Matrix and sort of your preliminary assessment of that acquisition.

Okay. Well -- in the consumer we talked about flexibles, and I'll be happy to talk more about that, but I don't know that I can add a lot more color than what I already added. The others obviously, our Can business. And we have seen a little weakness in that business in the quarter. Charlie mentioned the lower margin powder infant formula business and all of that is up. In there is a milk shortage globally, which has impacted-- negatively impacted the packing of infant formula. So we have seen something there, although it is up. The other powdered beverage piece was down slightly as well, and our customers, fees and those type of beverage attribute that to a much cooler spring and a later summer. That will catch up as the summer goes on. We also saw -- have seen, as you might expect, Coke sales down year-over-year. Are as Charlie mentioned early, the record tied to the housing market, so we have seen the sealants cost down as well. We have seen three years of increases volume on composite cans. We were not up this quarter. I think it's a timing, a glitch issue and I expect it to be back in the third quarter and the fourth quarter. You asked me about Matrix I don't think we talked very much about margins in those businesses. Matrix exceeded our pro forma in the June time frame, and I think they are very well on track to deliver what we had anticipated and will do, frankly do better than that.

Okay. Thanks.

Thank you Claudia.

And then just on the cash flow. In CapEx was a little bit higher in the quarter and a little bit higher really through the first half of the year. Are you still looking for something in the 130 million range.

Go ahead.

The answer is yes. We have been generally saying 130 to $150 million. It's not going to get outside of that. I would expect it to be somewhere in the middle.

Okay. Thanks very much.

Thanks, Claudia.

Our next question is coming from David Leibowitz of Burnham.

Good morning.

Good morning, David, how are you?

All righty. I'm probably beating a dead issue, however, I'm trying to read from the overview and outlook section and you say that lower results impacting service relate to the outcome of recent bidding activity. In is that just one account you are talk about there?

That's just one account and I'm talking about, David it was the mention to -- (Inaudible)

Right.

-- question.

All right. Just wanted to make sure we are on the same page.

We are.

Next, what hasn't been discussed -- are you gaining or losing share of market by business segment right now?

I think if you look, we have gained market share in most all of those sectors. I don't know of any sector that we're losing market share in David.

Okay. And how much benefit are you getting right now from the weakening dollar?

I mentioned that -- on sales it was at $22 million increase. But on -- on -- all the way down to the bottom line, it's actually about $400,000 positive. So what happens is it is just translation, so you translate sales at -- and get a higher result, but also cost of sales, interest, taxes, and so on. So when you work all the way through translation, it has a minimal impact on bottom line profitability.

And lastly, what are the trends right now in year Core raw material?

Core raw material being OCC?

Right.

It's trending up. As Charlie said, it started the year at $60, first two or three months of the year it went up as high as 140, dropped down to 105, in May, and then June, and then July it was up to 125.

Is there anyway you can hedge your pricing on that?

There is a limited -- very, very limited hedge market that we have used in the past -- in the past six to nine months that's basically dried up. But the only kind of hedging we do of that is against a specific customer contract, where the customer will want guaranteed pricing, and we will enter in to that hedge with their consent to cover that.

Thank you very much.

Thank you, David.

Our next question is coming from George Staphos of Banc of America Securities.

Thanks, hey, Harris.

Hey, George.

The Packing Services, you mentioned earlier that the customer that you had lost your RP with, had been a partner in some intellectual property that will allow you more freedom to pick up new awards. If I heard you correctly, will that also allow that former customer to share the technology that you had had with some of your competitors so that might be able to use that in the market now too?

Absolutely not.

Okay. On productivity, can you tell me how the pipeline looks going in to next year? I know you are maybe now just at the beginning of the pipeline development and capital discussions but if you have any color on why or why not productivity will continue to grow at the rate you have been seeing a for the past two years. Thanks, guys.

(Inaudible) We're starting now rolling up the productivity projects for 2008 and capital. But our target remains in that 3.5 to 4% of cost, and that's what our people are accustomed to delivering, and I wouldn't expect that to be a reduction in our '08 numbers on productivity. We are tracking reasonably well this year against our goal that we've talked about and I would anticipate that to continue.

Are there any areas you would target particularly as you look at 2008, maybe internationally or within plastics -- understand you talked about already, and given us a lot of detail, but there have been some operational issues there.

Yes, and I guess Charlie may or may not have mentioned, we have gotten approval on the Abbott Bottle in to the Warsaw operation, and that is starting to run up in that business-- Warsaw, Wisconsin business, and that's going to have a nice impact positively on those operations. George, I think the biggest opportunity that we have -- always had in productivity and we have productivity efforts going on in every business in this Company and around the world, is leveraging what we're doing in one geography around the world. And so we'll be leveraging some of the stuff that we're doing in Europe across North America next year, we'll be leveraging some of the North American stuff in Asia South America, just to give you examples. So we have still got a pretty fertile ground out there to improve.

Hey, one last question, back to Package Services, I'm asking out of order. So then we should read your guidance as Pack Services EBIT is down the second half versus second half last year, but you hope that you do a bit better than that?

That's a fair assessment.

Okay. Thanks, guys, good luck in the quarter.

Thank you, George.

Our next question is coming from Chris Manuel of KeyBanc Capital Markets.

Hi, just two quick follow-ups, if I may. First, can you -- Harris do you have any new price increases out in the market today in any of your product areas particularly? Maybe on the paper side?

Chris, I don't think we have anything of a general announcement right now. We probably have some contracts that may be resetting in many of the businesses that would reflect adjustments in raw materials, but those are probably already baked in to whatever reforecast we would have given.

Okay. And then the second question I had was the acquisition pipeline. At this point, do you feel as though you've sort of got what you need? Or are you still actively looking for more targets out there in the market today?

Well, given our continued good cash flow, given our balance sheet, which is up a little bit from where it was at the beginning of the year, we continue to look at opportunities -- we always do, and we will continue to do that. So I wouldn't anticipate that there's any slowing there.

Okay. Perfect, and good luck the rest of the year. Thank you.

Thank you, Chris.

As a reminder, ladies and gentlemen, if you would like to ask a question, you may press star one on your telephone keypad at this time. Our next question is coming from Arun [Viswathren] of J. Goldman and Company.

Hi, guys. Thank for taking my question. Did you describe the competitive activity in flexibles? Was there any issues with pricing and so on?

The question was the competitive activity in flexibles?

Yes.

I'm not going to say there was none because there is always competitive activity in every business we have got. I would say to you that the shortfall they mentioned in flexibles was not market related. It was totally in our operations, almost entirely in our operations in -- we'll fix those.

So when you say it could impact a little bit going forward, when do you expect some of the execution issues to be resolved?

We can hardly hear you on your phone --

I'm sorry, can you hear me now?

Yes,I can hear you now.

I asked it is some of the execution issues, when do you expect those to be resolved.

I think my previous response we are already seeing some improvement in those issues in June and early July, and I expect them to continue to improve, and I hope by the fourth quarter, the end of the year, we're back to the levels of operating that we were before this upset.

Okay. And then the last thing was just on the other business. Can you talk about the display business a little bit and what you are seeing in that area?

We still can see nice demand for the services business, the displays. We're going in to the busy time of the year. In traditionally the third and fourth quarter are the strongest times of the year in that business because of the holiday season. We always have a pipeline of new projects that we're working on and the last time I heard, which admittedly was probably two or three weeks ago, that pipeline was at all-time high levels, so I would say it's going reasonably well.

Just to understand the second half of the year. So it seems like the -- the flexible execution could -- could, I guess trickle in to the third quarter, and that's why you are bringing your outlook down slightly for the third quarter, but keeping the year. Is that kind of how I should look at that or --

I think that's probably a fair way to look at it, and to the extent we improve that quicker, and may take some cost out of the services side, and purchasing and logistics area, that's upside to it.

Okay. Great. Thanks.

Thank you very much.

Thank you. Ladies and gentlemen, there are no further questions in queue. In I would like to hand the floor back over to management for any closing comments.

Thank you, again, Jackie. And let me again thank all of you for joining us today. We appreciate your interest in the Company and look forward to talking to you at our next conference call. Thank you again.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.