Sonoco Products Co (SON) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to Sonoco Products Company's second-quarter 2008 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, Vice President of Investor Relations. Thank you, Mr. Schrum. You may now begin.

Thank you, LaTonya. Good morning, everyone, and welcome to Sonoco's 2008 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 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.

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

Thank you, Roger. Today Sonoco reported second-quarter sales of $1,866,000,000, and net income of $58 million or $0.57 a share. Actual GAAP results include restructuring in both years, plus last year we took a $20 million environmental charge. I will reconcile GAAP to base earnings for both years.

Based earning were $62.6 million or $0.62 a share compared with base earnings last year of $0.56 a share, for an increase of 11.4%. The quarter played out pretty much as we expected. Year-over-year year volumes were weak in our Industrial Tube and Core and Paper businesses, especially in North America. The cost of materials, as well as both freight and energy, have risen significantly and gotten a little ahead of our pricing initiatives.

On the other hand, you will see that our consumer-related businesses were exceptionally strong in the second quarter, and our European Tube, Core and Paper businesses reported an all-time record in terms of quarterly profits, all of which speaks to the diversification we have in terms of products and geographies.

The quarter benefited from a lower-than-expected effective tax rate. If you recall our guidance of $0.58 to $0.61 assumed a 32% effective tax rate. In fact, our basic effective tax rate before giving effect to a tax law change in Italy came in a little bit higher, around 33%. After giving effect to the Italian change, the effective tax rate came in at 28%.

In Italy, we were able to take advantage of a law that allows us to write up our assets for tax purposes. In the second quarter, we made a tax election that will provide a $4 million tax savings over the next few years. The $4 million was recorded as a reduction in tax reserves and a corresponding reduction in tax expense.

Now let me reconcile actual to base earnings for the current quarter. During the quarter, we took a $10.8 million restructuring charge. About one third of that relates to salary continuation and loss on the sale of assets at our Shanghai paper mill; that is the paper mill that we closed last November. Roughly another one third relates to asset impairment at the recently announced closure of the our Montréal paper mill.

The tax benefit related to these restructuring charges was $4.4 million and the minority interest benefit was $1.8 million. So as a result, the bottom-line impact of restructuring was $4.6 million or $0.05 a share. So to arrive at that, we start with the $10.8 million less the tax benefit, $4.4 million, and the minority interest benefit of $1.8 million to arrive at the $4.6 million. And again, that is $0.05 a share. The net $0.05 a share restructuring charge added to our GAAP EPS of $0.57 gives us base EPS of $0.62 per share.

During the second quarter of last year, we had a restructuring charge of $3.3 million and an environmental charge related to the Fox River cleanup of $20 million. After-tax restructuring was $0.03 per share and environmental after tax was $0.12 per share. So if you start with a GAAP EPS last year second quarter of $0.41 and add back the $0.03 and add back the $0.12, you arrive at base EPS of $0.56 a share. So we think the correct comparison is $0.62 this quarter versus $0.56 per share in last year's second quarter.

Now with that as background, let me read out the full base income statement -- then again, this is on a base earnings basis. Starting with sales. Sales were $1,866,000,000; that is up 9.3% from last year's $994.4 million. EBIT -- earnings before interest and tax -- was $93.8 million, up 3.9% from last year's $90.3 million.

Interest was $12.1 million versus last year $12.8 million. And that decline is due both to lower commercial paper rates and reduced debt balances. Profit before tax then is $81.7 million; that is up 5.4% from last year's $77.5 million.

Taxes were $22.8 million versus $23.6 million last year, which as I said earlier is an effective tax rate of 28% in the quarter. And again, that is principally due to the Italian tax planning initiative that I talked about.

That leaves us with profit after tax of $58.9 million, up 9.3% from last year's $57 million. Then we have equity in affiliates, which is $3.7 million this year's quarter versus $3.1 million last year. And that gets us to the bottom line, the base net income of $62.6 million, which is up 9.8% from last year's $57 million. Base EPS at $0.62 per share is up 11.4% from last year's $0.56 per share.

Again, we were pleased with the quarter. Depending upon how you consider the Italian tax credit, we were either inside our guidance of $0.58 to $0.61 or we were nicely above it.

Now let me turn to the segment reporting. The Consumer Packaging segment reported sales up 14.2% and operating profit -- that is earnings before interest and tax -- up 44.3%. All of our divisions in this segment performed well. We had a significant turnaround in our flexibles business. If you recall, we ran into some operating problems in last year's second quarter. That is all behind us now. Volume was up year-over-year and productivity was good.

Our metal end business was strong. That was aided in part by the closure last year of our Brazilian metal ends plants. And our composite can volume was positive.

The Tube, Core and Paper segment reported sales up 6.1%, but profits dropped 6.8%. There was no surprise here. We had weak volume in North America and material costs were up. Also, energy and freight costs were up year-over-year. As mentioned earlier, we did have an all-time record in profitability in Europe in this particular segment.

Packaging Services segment showed sales up 13.6%, but profits were down 22.4%. We've talked before on these calls about the competitive bid with a major customer that negatively affected price and volume starting in the third quarter of last year.

And then the All Other category, sales were flat and profits were down 7.3%. Our reels and protective packaging businesses are in this category, and those businesses have been negatively affected by the housing market.

Let me turn now to -- having talked about the segments -- turn to the sales bridge. And what I'm doing here is reconciling the $92.2 million increase in sales year-over-year. The starting point is volume; volume was negative overall $4.2 million. Price -- these are price increases -- were positive $24.7 million. Acquisitions -- and this number is net of divestitures -- were positive $26.6 million. And then foreign exchange was positive $45.1 million. So again, volume - $4.2 million; price positive $24.7 million; acquisitions positive $26.6 million and foreign exchange $45.1 million. And that should yield the $92 million year-over-year increase.

Let me talk about each of those categories, starting with volume. The volume shortfall is primarily in our Tube, Core and Paper operations in North America and our Baker reels operation in the US. Tube and Core volume in the US and Canada was down about 5% year-over-year in almost all categories. Our tracking -- and we keep these statistics -- shows that we had a modest net share gain. So the negatives are our mill closures -- in fact, our paper mill core business volume was down 4% year-over-year -- so it's mill closures and just generally a slow economy.

In Europe, our Tube and Core volume was down 1.5% overall. We were down 3% in legacy Europe, and that is principally due to the closure of a plant in Spain. And then on the other hand, our frontier Europe businesses were up 9%. Russia, for example, was up 40%, and we're in the process of expanding that operation. Turkey was up 10%. But again, overall European volume, mostly because of the Spain closure, was down 1.5%.

Both the US and Europe paper mill volume was up around 3%. Our US operations reported machine utilization rate of around 98.8%, although frankly was some of that was some low-margin business.

Overall consumer volume was positive. Composite can volume was up around 2%, with all categories up except for caulk; caulk is sold into the housing industry. So we saw snacks up 6%, dough up 2%, powdered beverage up 4%, miscellaneous food up 8%. So very good volume in this quarter in our composite can businesses.

Flexible's volume was up around 3%. That was led by the re-closure package that we sell to Kraft. Packaging Services segment volume was positive, but a lot of that volume is a result of a pass-through sales at our pack centers, and that volume doesn't have a very big bottom-line impact. And then lastly in the Other category, our real volume out of our Baker business was down 15%, and that is due just simply to weakness in the construction industry.

Now price, as I said, added $24.7 million to sales. Tube and Core prices in the US were up and we're continuing to implement an 8% increase that we announced earlier in the year. Prices in Europe for Tube and Core and Paper were up around 4% to 5%, as we implemented an April increase there.

Pricing in the Consumer segment was positive as well, and that is due to earlier-in-the-year contractual resets and negotiated resets. Pricing increases in metal ends were put in place earlier in the year to cover steel and aluminum increases. In fact, pricing was positive in all of the segments that we report in except for Packaging Services, and that again is bid related.

The next category is acquisitions. Acquisitions added $26.6 million. That is principally the Matrix acquisition, where we had one month of sales last year versus three months of sales this year. And then foreign exchange. Foreign exchange added $45.1 million. That is a result of the weak dollar versus the euro and the Canadian dollar. Since this foreign exchange is all translation, it really doesn't affect the bottom line; it probably added somewhere between $0.01 to $0.02 per share in EPS.

Now let me turn to the EBIT bridge. And here I'm reconciling the $3.5 million year-over-year increase. Starting with volume, volume is -$4.8 million. Priced cost -- and this would be price increases less material costs -- and if you recall in the last quarter, we also added energy and freight into this category. So price cost is a -$8.7 million; productivity a positive $12.6 million; and the All Other category a positive $4.4 million.

Let me start with volume. As I said, volume is a -$4.8 million, and that represents the profit impact of the volume shortfalls that I talked about when I was talking about sales. All of the shortfall is in the Tube, Core and Paper segment and in the All Other segment. So you might wonder, why with a 4. -- we have a $4.8 million profit impact on a $4.2 million sales shortfall. And the answer is that mix played a role in that we kept our paper machines relatively full, but some of that was low-margin chip and tissue board. And also, a lot of the Packaging Services volume, as I mentioned, was just passed through material cost that really didn't carry with it much profitability. So, again, volumes was a -$4.8 million in terms of its impact on EBIT.

Price cost was a -$8.7 million. This number is the net of the $24.7 million of price increase that I just discussed less $33.4 million of cost increases. We did see our average wastepaper prices go up year over year, around 19%. Most of the other raw materials have seen significant increases as well. For example, resin, depending upon the type, is up anywhere from 12% to 25%.

Included in the -$8.7 million is our best guess of the year-over-year increase in energy and freight, which we think is about $6.1 million. So absent the $6.1 million representing energy and freight, we would have been slightly behind in terms of price compared with material costs.

Our US Tube and Core and Paper businesses have recently initiated a surcharge expressly to recover freight and energy. Those announcements came out on June 27 and June 30.

Now to productivity. Productivity added $12.6 million to profits. The only comment here is that this is much better than our first-quarter productivity, which was $8.7 million. Productivity was strong across all of our divisions in all of our segments.

And then lastly, the Other category added $4.4 million. This is a category that includes wages and fringe increases, but it's also net of fixed cost productivity and net of acquisition profits. I would like to say here that we've maintained very tight controls over S&A spending and that will fall mostly into this category. As we calculate it -- and that's selling and administrative spending -- is about 9% of sales. Just to give you a comparison, last year the same number was 9.7% of sales. So again, good control over discretionary spending.

Now to the cash flow statement. You will note that we put a cash flow statement in the press release for the first time. Operating cash flow was $79.8 million. This does include $10 million in cash that we received from insurance companies as we negotiate to settle the Fox River claim. So absent this insurance settlement, operating cash flow was about the same as it was last year.

There are three differences in terms of cash flow that are worth noting. One is that net income is up $15.6 million. The other is that net working capital consumes -- and this would be just receivables, inventory and payables -- that net working capital consumes an incremental $14.4 million. This year, working capital was -$22.2 million in the second quarter; last year it was -$7.9 million. So that is why I say it's an incremental $14.4 million.

But I want to assure you that our working capital program is very much on track. We calculate cash [gap] days every month, we report on them monthly. In fact, our three-month moving average of cash gap days was 42 days at the end of December; at the end of March it was 38.2, at the end of June it was 38.3. So obviously, no improvement from March to June, but no real slippage either.

The third point with regard to the cash flow statement is that capital spending was $28.8 million in the second quarter versus $49 million in last year's second quarter. Last year, we had some unusually high spending. This year's quarter doesn't include any big projects and is running at a more normalized run rate.

Now to the balance sheet. Really not much to comment here, other than we paid down $24 million worth of debt. As a result of that, our debt to total capital has been reduced to, the way we calculate it, 34.2%. That is down from 35.8% at year end and 35.2% at the end of the last quarter.

Now let me turn to the reforecast. Our reforecast for the third quarter is $0.63 to $0.65, not a real big range. We have elected to keep the forecast for the full year flat at $2.44 to $2.47, which means that given the $0.62 in the second quarter, we are reflecting a little bit of weakness from our earlier projection. Obviously, there are a lot of variables in a forecast like this. We are assuming that volumes stay relatively consistent with existing levels, and that volumes show the normal third-quarter and fourth-quarter patterns.

Besides volume, the big variables are a couple things. One is the implementation of the price increases in the market for Tube, Core and Paper that I said that we initiated toward the end of June. The second thing is the movement of material costs, especially OCC. We've assumed in our forecast that OCC will average $110 a ton -- that would be the Southeast yellow sheet price -- in the third quarter, and it would drop to $100 a ton in the fourth quarter. And we further assume that the effective tax rate for the second half would be around 31%.

Now, because we always report on it, let me mention new products. New products totaled $34.3 million in the second quarter. New products were up year over year by $13.2 million. That $13.2 million, we were actually up $12.7 million on the consumer side, and that is led by the reclose package we call SmartSeal, and also by new bottle sales at our Matrix operation. And they were up $500,000 on the industrial side.

For the full year, new products totaled $62.2 million. That is up $20.9 million -- almost $21 million over last year's $41 million.

Now let me make one other comment, and that deals with the Fox River. Just to make it clear what we did in this second quarter. The company's subsidiary, U.S. Paper Mills, recorded a $25.8 million income in the second quarter related to agreements we reached with several insurance carriers to settle claims related to the Fox River.

Now, consistent with our prior practice, the Board of U.S. Paper Mills then agreed to increase its reserve for a settlement by a like amount. So the income item and the expense item offset in the quarter. I will point out that all of our insurance claims have now been settled or agreed to, and that U.S. Paper Mills have or will receive a total of approximately $40 million in insurance.

So with those comments, I think we are prepared to turn it over for questions.

Thank you. (OPERATOR INSTRUCTIONS) Claudia Hueston from JPMorgan.

Thanks very much. Good morning. I was just hoping you could talk for a minute about the Tubes and Cores business and just the volume situation there. Have volume trends deteriorated at all since last quarter, are you seeing any difference in trends? It seems like the pricing is quite strong in Europe, but how are volumes looking? There's been some increased concern around the European economy recently.

Claudia, as I hear what you say, you really raise two questions. And we have not seen any deterioration in the Tube and Core volume over the last quarter in general. And then specifically North America.

The European economy, we probably have seen no deterioration there either. We have seen, as we said, in the second quarter some softening down around Italy and Spain, and that continues. But we haven't seen much change in volumes in the Tube and Core quarter over quarter.

Okay. Thanks. Then in terms of the pricing in that business -- or the margin improvement in that business, is it mostly pricing in Europe that is driving it higher or are there still cost reduction efforts that are going on?

I would say in Europe, it's primarily the pricing that has driven it higher. There are certain productivity gains that we're having in Europe as a result of the consolidation efforts that we made of couple years ago. The plants, the operations still continue to improve and I expect that to continue.

In North America -- and I'll go back to that for a second since you didn't answer it -- Charlie said we had pricing in the market that we continued to grow and to recover. The big issue in that North American integrated system in the quarter, if you really boil it down, it was the recovery of energy costs. And that was really the genesis of the announcement we made in late June to recover the energy surcharge that we put in place in that business.

Thanks very much. And then I guess on those energy surcharges, how has the reception been thus far? You guys have had mixed success, I guess, in the past. How is that going?

Well, it's still a little early to see, but I would say that we've gotten very good industry support. And most of our customers, frankly, understand the kind of energy costs that we are receiving, and for the most part it has been very -- it has been received as well as those announcements are ever received.

Okay. Thanks a lot.

Thank you.

Mark Wilde from Deutsche Bank.

Good morning. Any color in the point-of-purchase business? You know, there's always kind of a debate in that business about whether we see food and consumer goods companies actually use more point of purchase in a slowdown like this.

Mark, I don't know that I have any color at this point. When I talk to people that have been in the business for some time, the feedback I get is that in fact we do see more spending. I think we will have a lot more color on that in the next 30 to 60 days, because this is truly the time when they are ramping up for back to school and the holiday season. And I'm sure at the third quarter conference call I can give you a lot more color than we have today. But I haven't been associated with that business long enough, other than to give you what I have been told.

Okay. And just to come back to that question Claudia asked about the actual success on those energy surcharges.

Yes.

There's always a lots of debate in the trade about whether you can actually get customers to pay those. How long will it take, do you suppose, to be able to get a real read on whether you're able to make that stick, versus just having to put in a more general price increase to recoup these costs?

You know, Mark, our history has been we've gotten pretty rapid recovery of energy surcharges. And I go back, I guess most recently, to 2005 when we implemented such a surcharge right after Hurricane Katrina. And we had very good recovery. I don't know what percentage it was, but it was quite good. I would anticipate the same sort of thing. Now we actually rolled those surcharges into increases about six or eight months later. But I would expect good recovery of it.

Okay, all right, fair enough. The last question I had, you mentioned that pricing in Tube and Core had been better over in Europe. I know that there have been some kind of consolidation and rationalization moves in Europe. Has that been part of the equation, do you think?

Absolutely. With the acquisition that we made of the Ahlstrom business out of the joint venture and --. When we put the joint venture together with Ahlstrom in 2004 and the amount of capacity that was taken out by us and others, I think clearly changed the industry dynamics there and certainly gave us a much better system. And so the combination of those two, I think, has made pricing somewhat easier than it was, particularly in the 2000, 2001 timeframe when we were seeing more of a recessionary environment in Europe.

All right. And we really have seen a tremendous amount of news here in the North American business just in the last three or four weeks. So perhaps some hope there?

We have seen new capacity coming out in North --.

Yeah, yeah, yeah, yeah. See, we had a number of capacity closure announcements, at least by my tracking.

Yes, I would agree with that. And I would think that is very much a positive sign.

Okay. And finally, did you say how much your OCC was down right now versus your second-quarter efforts?

I don't think we said that.

Can we get some kind of a --? Because it seems to me it has been coming down for about three or four months here; I think more recently it looks like it has stabilized a bit.

Yes, it was out at $135 at the beginning of the year and down to $125 and it is $110 now.

And it averaged, I think, in the second quarter around $118, $120. So it would be down a little bit. But then that it's a blended number. But it would still be down some.

Okay, all right. I guess kind of hard for you or us to really call that market very far ahead.

I think that is right.

I think that was right from my side.

Well, then I will defer to you.

All right. Thanks very much, guys.

George Staphos from Banc of America Securities.

Hi, everyone. Good morning. I guess the first question is just for details, and I might have missed it. The way you are treating your operating numbers for the quarter, it was $0.62 in terms of base numbers. And in turn, that included $4 million of a tax benefit that you got from Italy. Is that the way to think about it?

That is correct.

Okay. Now second thing, in terms of the reforecast, you elected to keep the full year flat, even though you had some positive variance in the second quarter, and that was to reflect a little bit of weakness you said. However -- and I might have missed all this -- some of this -- you stated that you are expecting normal volume patterns, you have price increases being implemented, OCC looks like it is declining in your assumptions. So, I am just curious where is there slippage then, if I have enumerated everything correctly that you put out there, such that the reforecast is keeping some gunpowder, if you will, for the back half of the year for some weakness?

George, I think you obviously see exactly what we've said. I mean, we have not seen volume -- further volume slippage, and we've got price increases in the market place and we have been probably conservative about the recovery of those, the timing of those and the economy for the balance of the year. But erring on the side of conservatism, we have obviously said that we are holding the guidance where it is. And if OCC falls further, if we get to price increases more rapidly, if we see any volume movement, then obviously there is a positive effect to that.

What was the first quarter average for OCC? Wasn't it something around $125?

I don't have the average. Charlie may have it, George.

Okay.

We will come back to it in a second; he is looking it up.

Okay. Well, again, just looking at material cost for the quarter, as we recall -- and maybe we're missing something here -- you hedge a fair amount of your energy. So if that is true, that shouldn't have been that much of a source of negative variance for the quarter. OCC was coming down. You have some positives in terms of your overall consumer business relative to some of the other raw materials. I'm just curious where else you might have seen some negative variance on the material side that we are not thinking about.

I don't think, George, it was so much on the material side in the quarter. It was primarily, if you really drill down on it, we do hedge natural gas, we hedge to about 75% of it.

Right.

We've got 25% of it that is exposed. But it was the freight and electric side of it that this energy surcharge is driving to recover. That is basically where the negative was in the quarter.

Okay, fair enough. That is helpful.

It's the 25% on the natural gas plus the freight.

I understand, got it. And last question before I turn it over. Can you give us a sense at this juncture what the productivity funnel looks like for '09? I know you are only probably early stages right now in talking with the businesses; I know you will ultimately budget this later on in the year. But any color that you have for what -- you might be able to get at what might be a reasonable objective for 2009.

George, you really are testing my crystal ball, but I will try. As I look out at our productivity program, which has been very, very strong, we are tracking slightly below plan right now; I think about 93% of plan. But our overall total productivity, as I look at it, including supply management and other, was around $100 million for the year. I wouldn't anticipate that that would change very much at all in '09.

Okay, thanks, Harris. I will turn it over.

Thanks, George.

Chris Manuel with KeyBank Capital Markets.

Good afternoon, gentlemen -- or good morning, I guess. A couple questions for you. First, if we start with the -- you've talked about some of the surcharges you have going in. Would you assume then that if you get reasonable traction on those surcharges that price cost should at least balance out over the back half of the year?

Yes, I would certainly think so. I think we were positive about $2 million in the first quarter, but we were negative about $8 million in this one, which includes freight and other things. And I would anticipate if we get recovery of those and the other price increases -- there's a lot of inflation going on in raw materials as well. And we have a lot of price increases in the market in addition to the Tube and Core piece, in probably most all of the businesses. But I would anticipate that, as we have traditionally done, that we will have breakeven or positive price cost.

Okay. When we think about your positions in the market, you are in sort of a unique position that you make quite a few different products, see a broad cut of what is happening in the consumer market. At this juncture, with, for example, your composite cans or some of your paper-based products, OCC being relatively stable, while resins have shot up a lot, metals shot up a lot, have you begun to see any -- or can you talk a little bit about any conversion opportunities or changes in packaging preference that you are seeing?

Chris, with the announced anticipated steel increases, we are getting numerous opportunities and numerous telephone calls from around the globe from people of conversion from steel cans to composite cans. We have had, as we've talked, a good conversion over the last 12 to 18 months of powdered infant formula.

And there is still a fair amount out there in metal in Europe and Asia and North America. And we have more conversions to come in the second half of the year, and we are talking to folks about conversions into '09. We have some coffee conversions that we have recently made and I would -- we have some more to come. So I do anticipate this raw material run-up will be very helpful to us.

Okay. With respect to uses of your free cash over the balance of the year, how are you feeling today about the acquisition market -- balancing the acquisition market versus paying down debt versus share repurchase?

Well, our debt to total capital, as Charlie mentioned, is down in the 34% range, which is probably the lowest it has been in 15 years or so. And our preference would be to use -- I don't know that we're going to pay down a lot more debt if we have any other options.

But my bias would be to try to use it to take advantage of opportunities to grow the company. And absent that, in the third or fourth quarter, we would have to look at what other options we might have, debt or share repurchase.

Are there any big legs of the business or areas where you would like to add? If you look at product holes per se in the broad look at the one face, the customer look -- are there any big areas?

Chris, I wouldn't say there are big areas. I would say that there are opportunities to add on several places in different geographies. I look at the services business and there are certain pieces of that that we could use in Europe; there are certain opportunities on the West Coast of the United States.

I look at the Tube and Core business. The Tube and Core business, you didn't ask for that, consolidation opportunities could present themselves around the world, and we would expect to be a player in that. So, yes, there are things that we are looking at it in different spaces and in different geographies.

Okay. And the last question I have is in your pack services business, I realized the pricing environment had got materially more difficult in the third quarter. So the comps should begin to get a little easier the back half of the year. If you can confirm that or deny that, number one.

And then number two, I think as an offset to that, you talk about looking to win some more business, that it may free you up to go seek some other customers. And hard to -- at least by looking at some of the numbers, there doesn't appear to be a lot of flowthrough from anything along those lines yet. Can you comment as to the pipeline for new business in the pack service piece?

I can, Chris, thank you. You talked about the grandfathering, if you will, of the mega-bid pricing, which was last July, and that does occur in the third quarter of this year. I guess if you look at Charlie's bridge that he gave you year-over-year, from a high level, you look at the negative price cost and take freight out of it, most of that does come from the mega-bid, which was July of last year. So it does grandfather and comps get easier.

If you look at the sales in the Packaging Services -- and Charlie mentioned a good bit of that has come from pack centers, where it is somewhat pass-through pricing. But we've seen the CorrFlex volume actually nicely up year over year, so we have picked up some of that new business and we will continue to do so.

Okay, thank you.

Thank you, Chris.

Gene Pisasale from PNC Capital Advisors.

Thanks very much. Great quarter, guys. A couple of quick questions. On George's question about productivity improvements, I'm just wondering maybe you are playing your cards pretty close to the vest and maybe a holding back a little bit for what you might be accomplishing in the next year. Pretty nice new product sales in the first half.

I'm just wondering maybe from these new developments that you are talking about, that you are looking ahead at, maybe we could see some upside surprises there.

You really mentioned two things, Gen. You talked about the productivity that George mentioned. And what we traditionally do -- we have a history of the last four or five or six years of pretty strong productivity year over year, which is driven by Six Sigma and our lean efforts. And I would anticipate -- and we generally start putting that together about this time of the year -- our businesses start laying out their projects for the next year. And I would anticipate that number being the equivalent of what it has been for the last couple of years. And so I don't expect any downturn in productivity. Now volume affects that. But I would expect it to be close to the same.

I think our new product efforts are going quite well. I guess basically -- Charlie, you may help me here -- our first-quarter new product introductions is probably a record for the Company in terms of new product sales. We've got things going on as well, and I mentioned the conversions next year.

I lay over that, I must admit, some caution about this economy that we are sailing in -- that we are in. And there is some anticipation, at least on my part, that this is not going to improve in the short-term. So those are the mixes I look at, Gene, when I think about this year and next year.

Thanks very much.

Thank you.

Ghanshan Panjabi from Wachovia Securities.

Good morning. Harris, back to the Consumer Packaging business. The margin decline 2Q '08 versus the first quarter, which is very, very strong. I understand some of it might be cost related, but was there any sort of negative mix shift as well that affected that business? Because overall volume seemed fine -- very strong, actually.

If there's any -- I don't know of any issues, Ghanshan. We thought the performance was quite good both from a pricing standpoint as well as a volume standpoint. And it could have been a mix issue, but we have no issues going on there.

So looking at the back half of the year in terms of margins for that business, should we expect any sort of incremental improvement as you push through some pricing, assuming that volumes hold with 2Q levels -- is that fair?

I don't know that you are going to see an awful lot of pricing -- well, you will see some pricing in the second half of the year as we recover some out-of-contract pricing. I think you would see margins probably staying about like they have been for the six months, let me say.

But your visibility on volumes seems okay for that business?

Visibility seems pretty good. And as Charlie said, the only thing we obviously are seeing down year over year is the caulk side, which I suspect is going to continue, tied to housing.

Right.

There is nothing that raises a red flag to me on the consumer side over the balance of the year.

But on the flipside, do you see any benefit from the average consumer in the US staying at home? And we've read a lot about at-home consumption increasing as people are trying to save their incremental dollars. Do you still expect some sort of incremental benefit in that business from that phenomenon?

(multiple speakers) I do, is -- I think we said in the first quarter, we've seen dough basically flat. And normally, dough starts to tail off in the first quarter. We've seen frozen concentrate, which has been up, where in other years it has been down, the last 10 years it has been on a downward trend. Which is certainly an indication to us that the consumer is staying home, is eating at home and buying snacks and preparing more food at home, which is beneficial to our consumer businesses.

Okay, that is very helpful. Thanks so much.

George Staphos from Banc of America Securities.

Thanks, guys. Thanks operator. I just wanted to piggyback on Ghanshan's question. One of the things that I had as a follow-on is if consumers are eating more at home and, as you related, Harris, volumes ex the caulk business seem to be pretty good, why did we see a deceleration in 2Q relative to the first-quarter revenue trend? Is there anything that sticks out? I mean I've got to think that the caulk business was weak in the first quarter as well.

George, I don't know that anything was much weaker in the first quarter. Deceleration of --

I can't think of --

-- I can't think of anything, George, frankly.

Okay, okay.

We will look into it and we will discuss it, if it --.

And on the margin front, perhaps the fact that last year -- when did you start having difficulty with the flexible business?

In the second quarter.

And that is going to likely be a lower margin business, won't it be, relative to the --?

That is correct.

So, if it was running a greater amount of volume this quarter, maybe that was the reason why, on a percentage basis, margins were not as strong as first quarter.

That could be a good explanation, because clearly we've had sales increases in there. But we will check on that.

Okay, all right. Fair enough. Charlie, on working capital, I know you are pleased with the progress. But what else should we expect the rest of this year? And just thinking about it in dollar terms, maybe somewhat simplistically, what should we expect this year? Should it be a use of cash, a source of cash?

I would expect -- and I don't have a reforecast of cash for the whole year, but the ordinary pattern certainly is that we use cash in the first and second quarter and free it up in the third and then especially free it up in the fourth. So as it relates to working capital, specifically, I think I mentioned the 42 days at the beginning of the year. We would expect -- and our goal is to have that reduced -- these are internal calculations -- that reduced to an average of 39. So we expect some improvement in days. I would expect dollars would tend to be flattish just simply because of the exchange rates and growth.

Okay, so then --.

I certainly expect to see the shortfall in the first and second quarters turn around; I expect in overall operating cash and the working capital components to balance themselves out as well.

Okay. Given that you are, to your credit, reducing discretionary spending and we're seeing a (inaudible) on corporate and SG&A, if that is the mindset, how are you ratcheting up hurdle rates either on productivity projects or in general capital investments? Can you give us a sense? And could CapEx be -- I know it's early, but could CapEx be somewhat lower next year, given what you are seeing right now, or is it way too early to call that?

Well, we certainly don't have any initiative in place to try to significantly reduce capital spending. Again, two thirds of our spending is profit-generating, and so it wouldn't serve us to try to reduce that.

Our discretionary spending is more around things like travel and costs that perhaps are not directly related to customers or related to growth. So we are being pretty judicious in the overall spending program.

Okay. Last, and I will turn it over. As we think out to the end of the year, you said you are largely done buying or paying down debt as over time, the Company has availed itself of acquisitions. It's difficult to handicap, I know, but should we, come December, the analyst meeting, be expecting that we will be talking about perhaps some additional businesses that you've acquired, or do you think the odds are more likely, given what you are seeing right now, that you could be in a position to buy back more stock? Thanks, guys.

George, I would hope that when we get to the analyst meeting, we would talk about some businesses that we've acquired and the rationale for those and what they are going to add to 2009. If we don't do that, for whatever reason, I can't speculate about what the other announcements might be.

I understand. All right, guys, thanks very much. Good luck and good quarter.

Thank you, George.

Mark Wilde from Deutsche Bank.

Just a couple of follow-up issues. Harris, is it possible in any of your businesses to have an early read on how people are preparing for the holiday season? I know that this is kind of the time of year when a lot of producers start to ramp up for that holiday season.

Mark, I think it's probably a little bit early for that. We are generally an early indicator because we do see some of this. But what we are hearing from the customers is cautiously optimistic about the balance of the year. The proof of that is when they start placing the orders.

But it's a little too early. That was the reason for my response to you about the POP. That will start kicking in, in my mind, in the next 30 days. Now I would say the last month or so has been what we would have expected and some nice improvement. But it is still too early to tell.

Okay. Then the other question I had just on the acquisition side, I just wonder whether with perhaps some converters being squeezed by costs right now and then the fact that it's probably a more challenging market from a financing standpoint, whether this really, from a couple of different dimensions, puts you in a better position from an acquisition standpoint than you've been in over the last couple of years.

We keep our balance sheet strong so we can take advantage of those opportunities when they do present themselves, Mark. And my history says in times like these you normally do find opportunities that are -- opportunities are there because of the consistency of what you just said. But I would hesitate to speculate any more about any type of acquisition than I've already done.

That is fine. We will keep an eye on you.

Okay, thank you.

Thank you.

There are no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Thank you very much, 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 in the near future. 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.