Sonoco Products Co (SON) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2010 Sonoco's conference call.

My name is Crystal and I will be your operator for today.

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

Later we'll conduct a question and answer session.

(Operator Instructions).

As a reminder today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Roger Schrum, Vice President, Investor Relations.

Please proceed.

Thank you, Crystal.

Good morning everyone and welcome to Sonoco's 2010 second quarter earnings investor call.

This call is being conducted on July 22, 2010.

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 on our web site at www.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 guaranteed for 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 information about the use by the Company of non-GAAP financial measures is available in our annual report and on the Company's web site.

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

Thank you, Roger.

Today Sonoco reported second quarter sales of $1.0101 billion, and we reported EPS of $0.58 a share.

And EPS $0.58 a share is in conformity with US GAAP, and that means it includes restructuring expense.

Base EPS was $0.59 a share, and base EPS excludes restructuring, and it also excludes any unusual one-time gains and losses.

Base EPS of $0.59 compares with the second quarter of last year's $0.41 per share.

So that's a 46% year-over-year increase in EPS.

Our guidance for the quarter was $0.52 to $0.56 so we came in $0.03 a share over the high side of our guidance.

The only reconciling item this quarter between GAAP and net income and base net income is restructuring.

The restructuring in the quarter was $2.5 million pre-tax, $1.6 million after tax or around $0.01 of share.

Restructuring relates to some division-specific reductions that we took for reductions in force, plus some of the miscellaneous rollover costs of some of our previous restructuring actions.

In 2010 we had restructuring totaling $0.08 per share.

Last year's restructuring included several plant closings, also severance for reduction in force.

So taking restructuring into account, that means we've got an income statement for you for both the second quarter of 2010 and the second quarter of 2009 on a base earnings basis.

Starting at the top of the income statement, sales in the second quarter of 2010 were, as I said earlier, $1.0101 billion.

That's up 16.9% from last year's $864.2 million.

Cost of goods sold is $817.6 million, that compares with last year's $705.9 million.

And then selling and administrative expense which includes other is $99.6 million this quarter compared with $90.6 million last year.

So a subtotal would be earnings before interest and tax, or EBIT, of $92.9 million, that's up 37.2% from last year's $67.7 million.

Net interest expense is $8.6 million.

That compares with last year's $10.1 million.

Taxes are $26.7 million compared to last year's $17.7 million.

And equity and earnings affiliates -- and I'm including in here minority interest as well -- is $3 million this year compared with $1 million last year.

So the bottom line is net income of $60.6 million and that's up 48.1% from last year's $40.9 million.

Gross profit margin was 19.1% that's well above last year's 18.3%, but it is a little bit behind the fourth quarter's 19.3%.

Otherwise, the gross profit margin in this particular quarter is at the highest level since the first quarter of 2007.

Likewise, the EBIT margin at 9.2% is at the highest level since the first quarter of 2007.

Let me comment on interest expense.

Interest expense was $1.5 million favorable.

That's due to and interest rate swap that was put in place last year and it's also due to somewhat lower year-over-year debt levels.

The effective tax rate was 31.8%.

That's slightly higher than last year's 30.9%.

One of the big differences in the effective tax rate is mix.

And by mix I mean it's -- this year we had a higher proportion of higher taxed US income than we had in last year's net income statement.

Now to the segment.

Segment reporting is found on page 7 of the press release.

I will start with consumer.

Consumer segment sales were $392.5 million and that's up 4.3% year-over-year.

And profits were $42.1 million, that's up 7.6% year-over-year.

This was, I think as in the press release, this was our tenth consecutive quarter of year-over-year improvement.

We continue to see good and improving profitability in our composite cans and in our metal end business.

Our matrix plastic bottle business saw strong volume in this quarter.

I'll comment on that when I get to the sales bridge, but profits were squeezed by a higher year-over-year resin cost.

And then likewise our flexibles business experienced higher year-over-year film costs.

Next segment tubes and core/paper -- that segment shows sales of $415.6 million, up 28.5% year-over-year.

Profits were $36.9 million, up 82%, 82.4% in fact, year-over-year.

And these strong results were driven by two things -- volume and productivity.

Packaging services segment sales were $113.8 million, that's up 19.6%.

And profits were $3.6 million, which is four times last year's levels.

Volume drove a significant year-over-year profit improvement at both tax centers and in our core operations.

And then in the all other category, those segment sales were $88.2 million and they were up year-over-year by 26.9%.

Profits of $10.3 million were up year-over-year by 38.5%.

Here we saw solid volume in our injection-molded plastics business and that accounted for most of the profit improvement.

Now let me go to sales bridge.

This is where we reconcile last year sales of $864.2 million with this year's sale of $1.0101 billion.

That's an increase that we'll reconcile to of $145.9 million.

And the make up of that 145.9 is volume, which accounted for $76.2 million, price that accounts for $42.8 million and then the -- sort of the foreign exchange all other category $26.9 million.

So volumes $76.2 million, price $42.8 million, and FX/other $26.9 million.

We did see exceptionally good volume in the tube and core/paper.

In aggregate, that segment volume was up 11% year-over-year.

Our tube and core volume in the US and Canada was up in tonnage terms 11.5%.

We saw exceptionally strong volume in textiles.

Our textile volume was up 39%.

That does include some market share gain.

We also saw good volume in our paper mill core business.

That volume was up 11%.

Likewise, our tube and core volume in Europe was up around 15% year-over-year.

And legacy Europe, which is principally Western Europe, was up 13.6%.

And what we call frontier Europe, which is largely eastern Europe, was up 19.5%, with Turkey up 26%, Poland up 10% and Russia I believe was up around 8%.

Tube and core volume in Asia was up around 18%, year-over-year, volume in our US and Canadian paper mills was up 9.6%.

And our paper mill volume in Europe was up by a similar amount as well.

So extremely good volume in the tube and core/paper segment.

Now our overall volume in the consumer segment was up a more modest 2%.

The matrix plastic bottle volume was up 16.5% year-over-year so very strong year-over-year growth there.

Our metal end volume was up around 4%, but our composite can business in the US was slightly negative year-over-year.

It was negative around 1%.

And here we see sort of a mix of businesses.

Our coffee and powdered infant formula business, and those are both recent conversions, were fairly strong.

They were up in the 3% to 6% range.

Snack volume was especially strong.

That's after a weak second quarter of last year.

Our fiber caulk sales, selling into the housing and the housing repair market, remained strong.

Where we saw the weakness was in a couple categories.

Dough was weak year-over-year, as was juice concentrate and the nut category.

Now, shifting to the packaging services, there we saw volumes up 21%.

Our package center volume was up due to Gillette's launch of ProGlide in the quarter plus volume created by their transition out of their Massachusetts plants.

And we also saw general fulfillment volume up year-over-year in our core plugs business.

Much of that is with ain Poland.

Now in the all other category, overall volume was up 19.3%.

I think I mentioned earlier that we saw a lot of improvement in our injection-molded plastic volume.

It was actually up 32% with very good volume increases in the film and textile market, which sort of mirror the paper sides of our tube and core business.

Protective packaging volume was up around 20%, and our Baker Reels volume was up 12%, with most of that improvement coming in the cable TV and in the energy category.

You remember Baker Reels is one of the business is that really hasn't participated much in the recovery so I think that 12% is a very good sign.

So all in all volume in the second quarter was strong.

So when we get to the EBIT bridge we'll see that volume and productivity were really the keys to driving the profitability in the quarter.

Now let me move to price because price accounted for $42.8 million of the overall $145.9 million of the sales increase.

Virtually all of the increase was either OCC or OCC-related.

The average pricing at our Sonoco recycling operation was up $83 a ton.

Just in looking back to what the yellow sheet was last year versus this year -- the yellow sheet was in April, May and June was $45, $45 and $60 a ton.

This year it's a $145 in April, is $130 in May and $125 in June.

So that's really what this overall $83 a ton increase.

Then there is a carry on effect.

Our tube and core pricing in the US and Canada was up around 8%.

And what that reflects is contract pricing resets that were actually based on March's $175 a ton OCC price plus the implementation of a price increase that we announced in February as well as another increase that we announced in April.

And we saw prices in the US in our paper business up approximately $60 a ton for core board.

The last elements of the sales bridge is exchange/other, and that's a positive of $26.9 million.

Sales of our corrugated medium are up $17 million.

I think they comprise $17 million of that $26 million total.

If you remember this is the first year where we're selling medium on the open market.

Previously we sold it under a contract manufacturing arrangement.

And then the rest of that principally would be foreign exchange, that the dollar did strengthen against the Euro year-over-year but then it weakened against most of the other currencies that we do business in.

Now let me turn to the EBIT bridge.

This is where we're reconciling this last year's EBIT of $67.7 million to this year's $92.9 million.

And that's a difference of $25.2 million.

Now the make up of that $25.2 million is first of all volume mix.

That's a positive $22.1 million.

Price cost -- and in that we include energy and freight in the price cost dynamic -- price cost is a negative $8.9 million.

Productivity is a positive $19.4 million.

The all other category is a negative $14.5 million and then the year-over-year change in pension is a positive $7.1 million.

So, again, $22.1 million of volume, price cost negative $8.9 million, productivity $19.4 million, all other a negative $14.5 million and pension $7.1 million.

And that should account for the $25.2 million.

Starting with volume -- as I said volume is $22.1 million.

That is the profit impact on the $76.2 million that I talked about on the sales bridge.

And that would calculate out to and average contribution margin of 29%.

Now to price cost.

Price cost in the tube and core/paper segment is essentially flat.

Although we had around $42 million of price increases in the segment, again that's back to OCC and OCC-related increases, our costs and this is largely waste paper, largely OCC, were up in total by roughly the same amount.

We did see a little bit of a mix issue in the sense that price cost was negative around $5 million in Europe where they're now just getting price increases implemented.

The Europe negative price cost was largely offset by a positive price cost in our own US recycling operations.

So a total price cost in that segment was pretty much neutral.

Productivity was a solid $19.4 million.

Productivity was good in all segments, all divisions, and this is the third best productivity on record.

And then all other is a negative $14.5 million.

This is our catch-all category.

Year-over-year wages and incentive accounts for most of the increase.

And pension is a positive year over year $7.1 million.

And then like last year the 2010 calculation was -- or like last quarter I guess I should say the 2010 calculation was positively influenced by last year's 22% investment performance and also the discretionary $100 million payment that we made.

So we saw a year-over-year improvement in the first quarter and the second quarter and we will see some of that again in the third quarter.

So that really talks through the EBIT bridge.

Let me move on quickly to cash flow.

Operating cash flow was $41.6 million this quarter versus $106.4 million year second quarter and that's a difference of $64.8 million.

That differences made up of three elements.

The first element is a positive.

Net income was higher by $26 million.

So that's the force of cash.

Now, the second element is net working capital.

Net working capital was negative year-over-year by $44.7 million.

Inventory is $36.8 million of that negative $44.7 million.

Let me explain.

Last year we saw reductions in inventory and those reductions are a source of cash that amounted to $25.9 million, and that was largely just and inventory being reduced given what was going on in the economy.

This year due to the higher level of business activity, inventory is up and so there's a use of cash of $10.9 million and so the difference between the source of $25.9 million and the use of $10.9 million accounts for that $36.8 million difference.

We also saw some of the same in accounts receivable net of accounts payable.

That added another $7.9 million.

And then the third element that I talked through is a tax payment.

The tax payment for $46 million greater than last year.

Before I get to that third element let me come back and just comment a little bit more on working capital.

Working capital remains on the under very good control despite the dollar increase I just talked about.

We treat working capital here as a process just like we do productivity, and safety, and new product development.

And by that I mean we have division goals, we report on them each month.

And the primary measure that we report on is cash GAAP days and by that I mean days that receivables plus days of inventory minus days of payables.

So our cash GAAP days at the ends of the quarter were 39.75.

Those cash GAAP days compare with 39.3 in December.

and 42.6 in last year's June.

So we certainly haven't lost grounds in terms of managing working capital despite the fact that the dollars are up.

The inventory part of that -- inventory was 30 -- 30.01 to be exact days in June and that compares with 30.2 days in December and 32.2 last June.

So in days terms inventory is actually improved but, again, overall dollars is up substantially.

And then global accounts receivable compliance, and by that I mean the percentage of accounts receivable that are inside of their term, is over 90 percent.

So my point is that working capital remains under very good control and the negatives here has to do with higher input costs and really for the most part just a higher level of business activity.

Now let me go back again to the cash flow.

I was reconciling that $64.8 million.

I said that net income was $26 million higher.

Net working capital was a negative $44.7 million, and taxes were a negative $46 million.

What our tax number is is really up due to three different things and I will go into that.

The first is that last year we assumed that the pension contribution would be made in 2010, and that pension contribution would be a deduction in our 2009 tax return.

Of course that would reduce 2009's estimated tax payment.

We made no such assumptions for 2010.

We're not assuming that will be a pension deduction built into this year's estimated tax payment.

And so that's one of the drivers of the higher estimated tax this year versus last.

The second principal reason is that we simply have higher annualized income.

Last year we didn't have the stronger third and fourth quarter built into our earlier estimated tax payment.

So we have a significant difference in just the amount of estimated pre-tax income or taxable income this year versus last.

And then I think the third element is the turn around of some deferred taxes that are brought about by bonus depreciation that we've taken over the last two years.

Under the program that was in place, we can take accelerated or bonus depreciation calculated it at a rate of 50% appreciable assets.

So that turns on us pretty quickly and we are assuming that there is no legislation to extends on this depreciation into 2010.

So those are the three principal reasons why our estimated tax payments in the seconds quarter were up $46 million more this year than last year.

Our capital spending for the quarter was $30.5 million versus $22.7 million last year.

In our earnings release we gave guidance for operating cash flow and for capital spending for the full year of 2010.

We said that operating cash flow would be around $375 million.

There's no question that's clearly down from the $410 million to $420 million that I was talking about on the last conference call.

$30 million of that shortfall relates to these extra taxes that I was just talking about that hit us in the second quarter and that's principally the turn around of those deferred credits answer.

And then there's also some modest working capital increase for the increased level of business for the third and fourth quarters.

Our press release also said that capital spending now estimated to be around $160 million.

Much of that increased related to plastic bottle projects that we have approved over the last quarter with very good overall returns.

And now to our balance sheet.

Our balance sheet is strong.

Total debt is flat with last year.

Again, we had no commercial paper outstanding in quarter end.

Our debt to total capital stands at 29.1%.

That's down from December's 29.6% it's down modestly from 29.2% in the first quarter.

I will point out that the APT acquisition occurred after quarter end so it's not accounted for in this balance sheet.

But if we did take the $120 million purchase price and just add it to debt, that would raise the debt to total capital to around 33%.

So it's still a very modest number.

Now I want to comment on the forecast.

Our forecast for the third quarter is $0.62 to $0.65.

So for the fuel year it's $2.27 to $2.34.

This compares with our full year guidance that we gave in the last conference call of $2.15 to $2.25.

This forecast like we always do was built up as a roll up of our individual division forecast.

And last though divisional forecasts assume that the recovery will hold, it assumes that volume will remain principally at current levels and then adjust that for seasonality.

It further assumes that price cost is relatively flat.

So let me expands on that for just a minute.

In our second quarter domestic tube and core business and paper business, pricing was set on the March southeast yellow sheet of $175 a ton.

So the April, May and June pricing was set on that March $175 a ton.

OCC as mentioned earlier dropped to $125 in June and that created about a $10 million favorable price cost when we look at the second quarter compared with the first quarter.

We're assuming in this forecast that third quarter pricing will be based on -- and it is, that's a given -- based on June's $125 a ton and that cost will stay flat with July's $120 a ton.

So there's not as much price cost -- price cost is relatively neutral in the tube and core segment in the third quarter.

In the consumer segment we're also looking for a relatively neutral price cost.

We have some composite can contracts with delayed resets and I have talked about that before but I will give you and example.

In some cases -- in all cases we have full recovery of that early 2009 steel increase but because of delay that was spread over the last half of 2009 and the first half of 2010.

That means that some of that contract pricing will decline in the third and fourth quarters.

On the other hand, we do expect some resin decline in our plastic and our film business that should create and offset.

And so put all together, we expect price cost on the consumer side to be neutral in the seconds half of the year.

We have included in this guidance some incremental earnings for the APT acquisition and the effective tax rate that we've projected is at 28% for the third quarter and 30.5% for the fourth quarter.

And with that that's -- that's the extent of my comments so I'll turn it over for questions.

(Operator Instructions).

Your first question comes from the line of George Staphos with Bank of America Merrill Lynch.

Please proceed.

Thanks.

Hi guys, good morning.

Hi George.

How are you?

I guess I wanted to dig a little bit more into the inventory question.

I know you said that working capital and inventory were up and that was largely driven by increased business activity.

Nonetheless, was working capital inventory more than you had planned for and, if so, what caused at that variance?

Then I had a couple of follow-ons.

I don't know that it was any more than we had planned on.

I think the price in the inventory probably was I factor that is -- we had some difficulty adjusting as we saw OCC pricing up, and the runoff of that higher OCC at $175 running off and also the higher resin carried over into of course raw material inventories as well as finished goods inventories.

I would say that the valuation was the biggest issue.

Okay.

To the extent that you have visibility was there more finished goods inventory or was this more raw materials, a work in process?

George, I think it's probably more raw materials in OCC and otherwise.

The days calculation, if it stays the same, we're actually improved.

The days will have built into it because that's based on cost of sales.

It'll washout that -- those higher prices but the dollar is down.

Okay.

Then the other question I had was just on -- on price costs.

I guess I would have assumed because of OCC's decline in 2 Q relative to the pricing that I guess that you had sets at the beginning of the quarter paced on where OCC was, that you would have had overall positive price cost in total.

Seems like you had that within tubes and cores and papers so I am assuming that, maybe you mentioned this, that the offset was largely in resin.

Would that be fair in terms of why it was a neutral.

I think that's fair.

There's also still some negative price costs, if I recall, in Europe, where the prices where we were still implementing price increases in Europe, George.

Okay.

And then you're absolutely right.

It sort of spread in the consumer segment and in the packaging services segment.

And what it is is in flexibles as well as matrix they did see some resin increases and/or film increase year-over-year.

And that's largely the driver, as well as in the bridge and paper, private can sides of our business.

The paper component was increased and that was a bit of a negative that we hadn't had in these numbers.

With the exception of that paper component, this is largely resin related.

Okay.

Last question and I'll turn it over.

You are implying in your guidance that if trends continue to pace as strong in the seconds quarter that you had, that trends have continued that way into the third quarter.

Could you give us any kind of commentary about the that you're seeing across your business this early in Q3?

Thanks.

George, I would say that we have seen very little, if any, change in the trends as far as July as compared to the second quarter other than normal seasonality.

All right.

Thank you, guys.

You're welcome.

Thank you.

Your next question comes from the line of Ghansham Panjabi with Baird.

Please proceed.

Hi guys.

Good morning, Ghansham.

Charlie, on the consumer business can you quantify the impact of resin specific to that segment for your patience follow up to George's question?

And also can you help us understand why dough sales were down?

Was this some sort of issue at the customer level?

While Charlie's looking for the answer to your question, I'll try to deal with the dough.

If you go back a couple years ago -- dough is really a seasonal item and generally we start seeing a tail off in dough as warmer weather comes into play in the second quarter and it kicks back in the late third quarter.

The last two years I think primarily because of consumers were staying at home and consuming more at home dough sales stayed relatively flat.

And I think we're getting back more to a normal seasonality on dough.

Okay.

And Harris, I'm sorry -- could you give us some more color on the rationale behind the APT acquisition?

I think you made some smaller acquisition in the rigid food service base before, including Clear Pack, I think it was in 2006.

Is there a niche where you see an opportunity to sort of roll up a still-fragmented space?

Or is APT just sort of a one-off for you?

No, it's not a one-off, Ghansham.

Thank you for asking the question.

At the time we bought APT, we said that part of our rigid plastics strategy was to grow in firmer foaming, but more in the food area, more in the multilayer barrier.

And Clear Pack was our first step in that direction.

We had developed come technology of our own.

APT fits into that very nicely.

It brought us some additional technology but also a good footprint in which to take our technology into their plants.

Also they had a good bit of open capacity -- I think it's about $35 million, $40 million of open capacity as we had calculated.

They had good technology and good equipment, as I had mentioned, but also it was food related.

It interfaced with a number of our customers, our corporate customers.

and the fit was very nice.

I will say that integration is going extremely well.

It's obviously early in the process but the reception we've gotten from their customers and our customers has been positive as well as from our new Sonoco associates at APT.

Okay.

Thanks.

Thank you very much.

Yes.

I could make a goods stab at that.

Our overall resin, and this would be up in the consumer segment, largely is -- and also there is a piece, then, in the all other category -- would add up to about $2 million.

And then the fill part, which is -- which would all be in the consumer segment, is roughly another $2 million and then one thing I did not mention was in that all other category we also had year-over-year increase in lumber that amounted to $2.4 million.

So It's really sort of -- none of them are real big numbers and they're scattered around different divisions.

Okay.

Thanks.

Your next question comes lot line of Claudia Hueston with JPMorgan.

Please proceed.

Hi.

Thanks very much.

Good morning.

Good morning, Claudia

I was just wondering if you're seeing much of a difference in trends in your European consumer business versus your European industrial packaging business.

We're not, Claudia.

Our European consumer business is more seasonal business and it's more gravies and things of that nature that tend to flow into the seconds half of the year.

So I think what we saw in the first half was about what we expected.

We would expect that ramp up coming in the third quarter in the consumer business, the industrial business we've seen volumes holding steady as Charlie mentioned about Western Europe and Eastern Europe.

They held nicely and as of Monday of this week they are still holding up nicely.

Good.

So no real signs of slowing in either business?

Not -- not in any of the markets that we're serving, Claudia.

Okay.

That's actually helpful.

And then I was hoping that you could elaborate a little bit on the increased capital spending and some of the plastic bottle investments that you are making.

And then just as we look to 2011, is there more opportunity for you to continue to take advantage of some growth opportunities?

Frankly, I'm exited about the organic opportunity.

I'm always glad to spend capital dollars on organic opportunities, as long as they have got the appropriate returns.

And most all of that spending, that increased pending is basically, as Charlie said, in our plastics alluded to -- they're tied to about $70 million to $80 million of new plastic sales contracts with existing customers and food related.

These projects some of them will be in the third, fourth quarter of this year most of them will be out over the next eight to four months and all generating returns so we are really excited about the opportunity to spend this additional capital, our money.

Okay.

That's great.

Thank you very much.

Thank you very much.

Your next question comes from the line of Sara Magers with Wells Fargo Securities.

Please proceed.

Good morning, gentlemen, and congratulations on the quarter.

Thank you very much, Sara.

Just a follow up on Claudia's question on the capex increase.

Is it more capacity -- is it additional greenfield capacity or, you know, where is it going to be globally?

Can you give us more color on that?

I would be glad to.

It is additional capacity.

And when you talk about greenfield -- I think you're talking about new plants.

Yes.

There won't be existing new plants in this capital although there is a startup of a formal plants, some former Sonoco plants where we're putting equipment in a former existing Sonoco plants, but it is all basically new equipment to support this business.

Okay.

And then just on.

And it's in the US.

Okay in the US.

Thank you.

And just on that, could you repeat, then, the depreciation guidance for the year.

I assume that it would change.

Charlie, if we -- my guess is it's not going to vary much from the $165 million, $170 million in depreciation.

I wouldn't think so.

We've been not spending at those levels so it was coming down so it would probably hold steady, would be my take on it.

I would agree with that.

Okay.

And then on the resin question just having a hard time, I guess understanding, you know, the -- I guess the differences in the quarter because I would have expected it to be neutral.

Because you had said on the Q1 call that you saw neutral or positive in Q2 and neutral for the year.

Was there something that changed in the quarter from the end of April?

Was there a lag effect, was there some kind of rational competitive pricing in the market?

No.

It wasn't a rational because most of this is tied to contract and it was probably more of a timing issue, Sara.

And I don't have the transcript in front of me, but I -- I think what we said is we felt the second quarter would be probably modestly negative well and would pick up the balance of the year.

Charlie, do you have that?

I've got something like I can speak to because when I talk, I talk about year-over-year comparisons.

And that does create some confusion.

For example, let me see if I can find the -- the price cost.

We saw -- we saw film in the low 20% range year-over-year.

And we saw resin up much higher than that on the matrix side of the business.

So when I go back and just look at resin and I look at it compared to the second quarter compared to the first quarter, it looks like a negligible difference.

So when we look at the -- so when I'm talking about I was talking about the year-over-year comparison and it's not so much that resin changed from second quarter.

when it compared with -- I'm sorry the first quarter when it compared with last year's second quarter, and we do expect some modest decline in resin as well as in film in the third quarter.

And then again, when I look at the film prices, I see the very same thing.

I'm not going to give numbers here, but the PE, the polypropylene film in the second quarter is up substantially from last year's second quarter.

So there's been some stability of late, but the comparison is what they're talking about.

Okay, great.

Thank you very much.

You're welcome.

Your next question comes from the line of Chip Dillon with Credit Suisse.

Please proceed.

Good morning.

Good morning.

First question is when you look at the tubes and core business which of course had a phenomenal recovery from last year, you know, it's still back to only about where it was in 2006 at least just looking at the second quarter.

And as you look out, do you think you have a shot at getting back to the old levels of business or so much of it in a general sense, or maybe talk about particulars, go away permanently?

Well, Chip, I think -- you can't paint this with a broad brush.

You have got to talk about this on a global basis or specific geographies.

I think in North America you probably don't get back to where previous levels because of any changes that have taken place in some of the markets that we serve and I think newsprint is a primary example of that.

But I think as you look around on a global basis and you look in Asia, you look in eastern Europe, you look in western Europe and South America you probably get back to close those numbers.

Got you.

And then quickly, Charlie, you mentioned that at the very ends of your comment -- I just missed it -- that something would be 28% in the third and 30.35% in the fourth.

Is that the tax rate?

That's the tax rate.

Okay.

And then I noticed not that you need it but you know the -- I guess the back stock to the commercial paper program ends in about ten months.

Is that something you intend to extends for a rainy day or for whatever reason?

We do, indeed, and we will do that as either the tail end of the third quarter or early fourth quarter.

It's a $500 million program it's fully back stocked.

We are looking whether we want to bring it down some because we don't need that much capacity.

But nevertheless we will have that in place either as I said late third, early fourth before the end of the year.

And we have, going all the way back into 1980s, we have traditionally use the commercial paper as a core part of our financing.

We get a good rate, good dealers and we would expect to continue to use that going forward.

Got you.

And then finally I know that you mentioned, Harris, the organic opportunities and obviously that's in the CapEx increase especially for example plastic bottles -- given that you have and early read on what 2011 CapEx would be at this point?

Chip, we don't.

We really don't start going into this process, but I would expect that we would probably hold CapEx to the $140 million to $150 million range next year depending on business activity.

It might be the outside of it.

Okay.

That's helpful.

Thank you.

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

Please proceed.

Good afternoon, gentlemen.

Congratulations on a good quarter.

Thank you, Chris.

A couple questions for you.

First, I jumped on a call a few minutes late.

I didn't hear you talk about the new products.

If you did it, could you give us some of the numbers.

I don't think that we talked about a new product model.

I think the question was about CapEx and what I said was that almost all of the CapEx, the new CapEx is committed to organic strategies, organic opportunities that are tied to contracts, mostly in the plastics arena, probably some $70 million to $80 million of new products that are food related that will come on I don't know the next probably the next six to eight months with very acceptable returns to us.

In terms of new products in the second quarter of 2010, we had $41.2 million of new product sales for the year, which is down a little bit from the second quarter of 2009.

That's more of a timing situation than anything else.

But basically me would -- would be in line with what we would expect for the year somewhere between $150 million and $200 million.

That's the traditional rolling 24 months you kind of give us?

That's correct.

Second question I had was -- was you know as you look at the volume numbers this quarter they were obviously very, very good and I apologize in advance.

I know this is going to be a difficult question to answer, but normally the underlying markets didn't necessarily perform as well as you guys did in terms of recoveries and things of that nature so that suggested there was some -- whether it be pipeline refilling or -- or consumer level or on the industrial level.

Is there a way to help us with what you think underlying market pull rates were on the industrial and consumer side to help corresponds to how long we can continue at these rates that -- I guess where inventory levels are as a whole through the system and what you think underlying market rates are?

Well, Chris, my reaction to that -- and obviously my crystal ball is probably not a lot better than yours -- but traditionally in all of our businesses there are not a lot of inventory kept at our level or at the customer's level.

So I think what you are seeing is basically primarily demand pull from the consumer pulling through to our customers.

And it continues to be pretty good.

Now, Charlie mentioned in the textile area -- I want to be careful here because you almost have to give market by market specific geography.

Charlie mentioned the textile was up some 30 something percent.

think it was 32% to be exact.

39%.

39% to be exact.

Excuse me, Charlie.

But he also mentioned there was some share pickup.

But I don't think that's -- the inventory build certainly not taking place in Sonoco and I don't believe it's taking place in our customers.

Okay.

So -- so you think this, then, is a reasonable run rate to go forward with through this year and potentially into 2011?

Well, that's what we had forecast the run rate with the seasonality paced into it.

Now, obviously, when you look at the year-over-year comparisons, the year gets more difficult in terms of comparisons in the second -- the third quarter versus the fourth quarter and beyond because we didn't start seeing the economic pickup in 2009 until late May or early June.

So we didn't gets the full impact of that in the second quarter of 2009.

So the percentages will diminish somewhat.

We clearly have a recovery built into -- and we have seen it in -- we saw it last year and then on into this year.

So when I give these numbers like I said with volumes of 11.5% overall, that's a year-over-year comparison against a pretty week second quarter.

I will probably add about a 3.5% increase in the second quarter over the first quarter.

That would be a rough cut number of what the tube and core volume did.

And so roughly I think that our forecast as I said earlier as the recovery built into it and it's more modest than these 11% or 12% kinds of numbers that we're citing because we will grandfather out the -- this low first and second quarters.

All right.

That's helpful.

Last -- actually two last questions.

One is on the past services sides of business it looks like you did much better than I would have thought this quarter.

Can you talk a little bit about the maybe what some of the success?

It looks like promotional activity and it looks like product restaging and things of that nature seem to be picking back up.

But could you give us a little perspective both in North America and Europe as to how -- what drove the success and what you think is sustainable?

Well, we clearly have seen promotional activity pickup as a result with the economy getting better.

I mean there's no question about that.

In Charlie's opening comments, Chris, he said that we have seen a lot of good activity to the fax centers, Gillette with a launch of a new product line and we see a lot more activity through these fax centers and manipulation centers.

But clearly as the commie improves, we have seen improvement as well.

And my last, last question is on the acquisition environment.

You know, you guys were able to complete the APT here in the quarter.

How does the funnel look over the balance of the year, given potential changes in tax laws, things of that nature?

Have you given any consideration to other means of redistributing cash to shareholders?

Chris, you know, obviously we were very pleased to get APT through the quarter.

We have been working on it for I don't know three or four months and had it closed right after the end of the quarter.

Yes.

So we always have acquisitions have been in certain stage somewhere around the world and that is in fact the case now.

Whether any of those will fall into the third quarter or the fourth quarter would be purely speculative on my part.

We continue to drive and use our cash to grow the business organically as well as physically.

By giving cash back to shareholders, we think we do a pretty good job with our dividend policy in giving the cash back to shareholders -- and we will obviously continue that.

I suspect what you are specifically talking about is the stock buyback and my standard answer there is we have a history of doing that, we're not opposed to doing that.

It's not our first primary property of cash use, but we do have a $5 million share authorization that the board is beside at all times and we'll assess that as we get further into the year and look at our use of cash for acquisitions and otherwise.

Okay.

Thank you very much.

Thank you, Chris.

Your next question comes from the line of Ian Zaffino of Oppenheimer.

Hi you guys it's Brian filling in for Ian.

Sorry, I hopped on late.

So I'm sorry if this was answered already.

But what approximately did the industrial volumes grow for the first half of the year?

And what does your revised guidance assume they grow for the full year?

I will let Charlie take that.

He's got his numbers over there.

In the industrial volumes overall grew by 11% in the segment.

In the US, it was 11.5%.

Europe was 15%, Asia was 18% and so I think overall it was about 11% year-over-year growth.

But, again, what we've assumed is that the recovery that we saw in the third and fourth quarters carried on into 2010 and that looks like it's roughly 3% or 4% range.

So I don't know if that quite answers your question.

So for the second half you expect industrial volumes to be somewhat similar to the second half of 2009?

No.

They'll certainly be increased but there aren't not going to, they shouldn't be up by these 11% to 15% kind of numbers.

So overall you expect industrial volumes to be up about 6%, 6% to 8%?

I think that's probably a good number.

Okay.

And just to clarify.

Well, that would be -- probably that would be on the high side.

I would say -- I would say we probably have volume growth of about 4% so then it becomes a question of what else is thrown in there, FX, the pricing and so on.

Okay.

And, again, just to clarify as far as the decrease in operating cash that's 100% just due to taxes and higher taxes and higher working capital?

That's it?

Those are the only three categories that stand out.

That's correct.

Okay.

Everything else has been answered, Thanks.

Thank you very much, Brian.

Your next question comes from Al Kabili with Macquarie.

Please proceed.

Hi.

Thanks, guys.

Hi, Al.

I was just wondering if you could talk a little bit about flexibles, about what you're seeing in your flexibles ends markets in terms of volumes and -- and how much of a resin hit that you might have had there that would alleviate in the back half.

(inaudible).

I actually don't have any volume numbers, which probably implies that the volume was relatively -- relatively flat or not enough to stand out on my analysis.

Okay.

And as far as resin or -- I'm just trying to understand because your escalators are 30 days typically so pretty short.

Is anything in particular this quarter that stood out that would have caused the -- the impact that you saw?

Well, nothing.

That would be -- you know, some is 30 days, some are 30 days, some are 60 days.

None go out farther than that than 90 days.

The resins on the plastic side, so I would say it was nothing more than timing.

Got it.

And then as resins come down -- I know you're kind of looking for flat price cost overall, but with resin coming down like it has I know in the other segment you mentioned lumber, resin, paper, et cetera.

With that all starting to come down I am just trying to understand why you wouldn't get a benefit in the third quarter from this?

I would say to you it's still more of a timing thing and we've still got on the composite can side you've still got higher paper prices that'll carry through until some of the resets of those composite cans.

You also have -- we've seen some pretty significant increases in PET film, which is in pretty short supply, at least as we understand it because of televisions and the use of film.

So we are still seeing some increases that we're still incurring while some of the others are coming down.

I think what Charlie said was when you look at the numbers, we're basically looking a washout in the second half the year, to be basically neutral to the extent that you see OCC could be beneficial to us.

Okay.

Just make a comment about the volume in flexibles.

It was positive.

It was probably about -- it was between 1% and 2%.

So it's about 1.5%.

So that's part of the reason I didn't make a note of it, but it certainly was positive year-over-year.

Okay.

Thanks for the color.

It sounds like what you expect the overall market to have done there.

Okay.

Amount then lastly just wanted to clarify on the tax issue on the cash flow statement.

Should we assume on a go forward basis then this year that -- that your cash tax rate will equal your -- close to your book tax rate?

Was this mostly a second quarter issue then on the tax or how do we think about it going forward for the rest of the year and out at the -- I guess 2011 if you have that color?

I think that the mostly a second quarter -- second quarter so of that 40 some million where would, it $46 million at least $30 million of that won't have any turn around impact.

So it will negatively affect us.

So for the most part, I think your statement that the -- that the cash and the expense side probably -- probably balance out reasonably well and that $30 million is going to stick out all through the rest of the year.

And you have a discrete adjustment or two in taxes in the second quarter that should not repeat themselves in certain state --

That's in the effective tax rate and that would be -- it would have been factored into that 28%.

Okay.

Thank you very much.

Your next question comes in the line of Alex Ovecchi with Goldman Sachs.

Please proceed.

Good afternoon, guys.

Thanks for taking my question.

Hi Alex.

How are you?

I'm doing well, Thanks.

The first question is talked about picking up some shares in tubes and cores and within the textile market.

Can you just provide a little more color on that?

Was that primarily driven by a competitor exiting the marketplace?

And do you expect that benefit for market share to continue in the second half?

The market share overall in tubes and cores was negligible.

We picked up market share in the textiles part of the business.

We lost market share in one of the other categories and it didn't have impact -- any significant impact on that 11.5% number.

Okay.

Helpful.

And then productivity has been a big boost to your results thus far in the first half.

Just talk about the top three drivers that are really resulting in such -- such solid productivity gains for the company in the first half?

Is that sustainable here through the back half of the year?

Yes, it is sustainable and Sonoco has about a ten year history of putting together a process that drives our productivity, there are projects that are capital that is allocated to the project, that people are assigned to the project, black belts, green belts.

And we have a history of driving this and so it clearly is sustainable not only into next year and it's sustainable into 2011 and 2012 and beyond.

If I look back and looked at some of the numbers we had very good productivity in our flexibles business.

And they described that as reduced staff and labor efficiency and that's just our programs having an impact on our paper side both in the US and in Europe.

The machines were running at pretty high utilization rates like 96% in both places.

And running those machines certainly creates productivity and good productivity in our tube and core business again, a lot of this coming from leveraging costs in materials and labor.

So productivity was really across the board and I think it really is a function of these programs that are in place.

Okay.

And the benefits from running the machine at high utilization rates -- why that does not go into the volume bucket and why does that fall under the productivity bucket?

How is that different were operating leverage of the business?

It's in -- well, increased volume would come through as a -- you know, the operating profit level we would take the volume and with contribution margin in that.

So what this is is the cost of producing that ton of paper this year compared to last year.

And last year our domestic operation as an example, our machine utilization was 96% this year, 87.5% last year.

This year we had 111 planned down days, last year was 281 down days.

And so we're just running more efficiently and -- and that reduces the overall cost.

So we'll capture any incremental volume in the volume category but if the cost of produce that goes down we capture that as productivity.

Okay.

Thanks for clarifying.

And on the -- on the container board side you gave is a number on what the benefit of sales was from the outside medium sales that you had.

Can you give us some color on what the benefits of the EBIT line was from the medium sales and whether or not that includes any benefits from a staple price increase?

It would have minimal benefit -- some benefits from the April price increase and I would say that in the quarter that machine was probably slightly positive.

And then just last -- last question on the pension plan with rates being pretty low now.

Is there any hunch for maybe adding some more money to the pension plan to prevent the liability from going up?

Yes.

For 2011?

My guess is that we will monitor that over the balance of the year and make a decision on that later in the year.

Okay.

Thank you very much for faking my questions.

Thank you very much.

Your next question comes from the line of Christopher Chun with Deutsche Bank.

Please proceed.

Yes.

Thanks.

Good day, guys.

Hi Chris, how are you?

Good, thanks.

I know this call is already over an hour so try to keep this brief.

I just had a question on the CapEx.

You mentioned that for next year, you are at least preliminarily looking for maybe the $140 million to $150 million range.

And that seems to be a bit higher than the typical levels in recent years.

I was just wondering if there were some specific projects in there that are contributing to that number or whether we should be thinking about that as the new normal going forward.

You know, when I answered that question I basically pulled a number out of the air because -- and I said that we hadn't rolled things up yet, but I think you could safely assume that we're going to hold it to no more than that number.

That's what I was trying to give was give you an outside.

My guess is it'll come into the -- if I really got pinned down, it'll be in the $125 million to $130 million range, where we traditionally are.

But I was trying to give you and outside number.

Okay.

That's all I needed to know.

Thank you.

I thought it might be.

And your next question comes from the line of David Leibowitz with Horizon Asset Management.

Please proceed.

Good afternoon.

Hi, David.

David.

A couple of unrelated items.

First, the second half is when you put out your new consumer packaging items.

Are there any items you can talk to us about today specifically telling us these products?

David, I've got Roger Schrum over here beating on me saying no, but I really can't but --No, I shouldn't talk about it.

You will see them coming outs in the next probably 60 days.

Do you put out any press releases so that we can understand what we're dealing with or will we find that out ex post facto at the December meeting?

You will see some press releases coming out.

Thank you on that.

Second question -- you had indicated in past conversations that the medical arena is and area you would like to expand into via acquisitions.

Is there anything you can update us with in that respect?

David, there's not.

I said that -- you and I have had conversations in other areas and we touched medical packaging with some of the companies that we deal with such as (inaudible) and things like that.

It could be an attractive for us, from a packaging perspective, but one that I happen to believe that you have to acquire your way into.

And no we're not doing anything in that regard today.

Okay.

And one of Charles if I may -- the question is your pension plan now fully funded and up to date, or do you still have some remedial payments to make?

Well, our pension plan at the beginning of the year was 86% funded after we put that $100 million in and we -- as the result of the fact that -- the way the written calculations were, we had carry forward credit that we brought into 2010.

We made that payment last year of $100 million so we increased our carry forward credit so we don't have to make any pension payments.

And I won't -- we won't really know -- as to Harris's point earlier about the pension plan or our stance related to it still we get towards the end of the year and we have seen our overall pension performance for the year and we know what the discounts rate is.

But 86% is a really the last official number that relates to what our funded status was.

And the last question if I may -- we have always spoken to the goal of 55% consumer, 45% industrial.

Obviously, the economic cycle will move that either way.

But is that still the best ratio you would like to operate with or would you prefer to see perhaps 60/40 or whatever the numbers might be?

David, I think what we said is that basically we would like 60/40, 60% consumer and 40% industrial.

I think we ended last year about 58% consumer and I think that'll continue to gravitate to that 60%.

Maybe up to 65% over time over the next three or four years.

Thank you very much.

Thank you, David.

And your final question today is a follow up from George Staphos with Bank of America.

Yes.

Hi, guys.

Quickly, in using that question as a segue n acquisition strategy.

Harris, if I'm not mistaken, in recent years while you've targeted the 60/40, you've also given the company some room to more industrially depending on the types of acquisitions that wound up crossing the goal line.

Should we take from your comments here that consumer maybe that can be more like 65% that the opportunities in industrial aren't perhaps as good as they might have been a year or two ago?

George, I wouldn't assume that at all actually.

And you made a good point because when we set the goal of getting 60% back in what, 2002, by 2007.

We would have made that goal.

But we actually saw opportunities both in North America -- well, not so much in North America -- but in Europe to consolidate tube and core.

Mm-hmm.

When I said North America I was thinking of the assets we got from [Carostal], but they were all on the consumer side.

But we saw the opportunity to further consolidate the tube and core business in Europe and I think those opportunities still do exist today.

I think it was Chris Manuel who asked in his question about tax rates and liquidity issues out in the market with some folks today.

And I think both tax rates in this country and still liquidity issues for some businesspeople are still issues.

So I think we'll see opportunities that will continue to surface and I'm looking -- we're looking out for what gives us the best return for shareholder within our strategic direction we're trying to take.

Okay.

Quickly, kind of a two part question.

What specifically attracts you about the thermoformed rigid plastics business?

What is it either about the customer profile or the return you expect to get that's positive?

And then the last question related -- in plastic bottles, this new investment that you're making you said the returns are acceptable, and then later you said very acceptable.

Can you give us any kind of quantification or stack ranking in terms of what the returns would like in the whole of Sonoco -- and, you know, hopefully any way whether the terms are consistent with your existing plastic business or is there something different that we will be mindful of or need to be mindful of down the road?

Thanks, guys.

Good luck in the quarter.

First question about the thermoforming, George.

Several years ago, three or four years ago, we were looking at a plastic strategy.

We identified basically barrier level of barrier thermoforming -- not just monolayer, but barrier properties.

And some of our existing customers were truly elated.

So this is not a one-off.

We will continue to see growth in that, the margins attract us to it, as well as the attractiveness of the product that fit or customers.

When I used very acceptable or acceptable in two different occasions, that's wasn't a conscious decision.

I'm very pleased with the projected margin of returns and margins of this new business.

It is basically food-related.

It is all food-related, I believe.

And most of it is with existing customers that we have, and as I said earlier, tied to long-term contracts.

And they are all are at or above -- well above our corporate rate of return.

Okay.

And with the normal pass-through provisions, et cetera, correct?

That is correct.

Okay.

Thanks.

Good luck in the quarter, guys.

Thank you very much.

This does concludes our question and answer session for today.

I would like to turn the caulk balance of the year to Roger Schrum for closing comments.

Thank you, Crystal.

Let me again thank you all for joining us today.

We certainly appreciate your interest in the Company and as always if you have any further questions please don't hesitate to give us a call.

Thank you for attending.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect and have a great day.