Sonoco Products Co (SON) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 Sonoco earnings conference call.

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

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

At the end of the conference, we will be facilitating a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr.

Roger Schrum, Vice President, Investor Relations.

Please proceed.

Thank you, Derek.

Good morning, everyone, and welcome to Sonoco's 2010 third-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 third quarter were released before the market opened today and are available via our newly launched and re-expanded 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 information about the use by the Company of non-GAAP financial measures is available in our Annual Report and on the Company's website.

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

Thank you, Roger.

Today Sonoco reported third-quarter sales of $1,051.7 million (see press release) and earnings per share of $0.57 a share.

What we called base EPS was $0.65 per share.

The $0.57 per share is in conformity with US GAAP and of course that means it includes restructuring charges and it includes other one-time income and expense items.

Base EPS excludes those items.

So to reconcile the $0.08 difference between actual EPS and base EPS, we first add $0.07 for restructuring and asset impairment.

The restructuring in this quarter was $12.2 million pretax, $6.9 million after tax or $0.07 a share.

The majority of that related to a write-down of fixed assets in our flexibles division that was a direct result of the overcapacity that was created when a customer told us that a significant piece of business would be phased out over the next two years.

So from a technical accounting point of view, the level of volume in those two locations no longer supported the asset values and so, as a result of that, the write-down was required.

We issued an 8-K on this about two weeks ago and that was largely to alert the banks ahead of the line of credit renewal that we were putting in place at the time.

And in fact, I will talk a little bit more about that at the end.

The other adjustment to arrive at base EPS was $0.01 per share for acquisition costs related to the acquisition of APT.

Those would be costs like due diligence costs, legal costs and so on.

This was a pretax charge of $1.5 million, $1.1 million after tax or $0.01 a share.

So again if we add the $0.08 to the reported EPS of $0.57 we arrive at base EPS of $0.65 a share.

Last year we added back $0.03 a share for restructuring to actual EPS of $0.47 to arrive at base EPS of $0.50.

So the proper comparison on a base earnings basis is $0.65 per share this year, this year's third quarter, versus $0.50 per share last year.

That, of course, is a difference of $0.15 per share or right at 30% year over year.

So it was a good quarter.

We were very well -- very pleased with the overall performance of our businesses.

Taking all the adjustments that I've just mentioned into account, let me read out for you now an income statement for the third quarter this year and the third quarter last year on a base earnings basis.

I'll start with sales.

Sales again are $1,051.7 million.

That is up $121.1 million or 13% over last year's $930.6 million.

Earnings before interest and tax EBIT is $98.6 million this year.

That is up $23.6 million or 31.5% over last year's $75 million.

Interest is, of course, a negative number.

Interest is $8.5 million.

That is favorable to last year by $900,000.

Last year, interest expense was $9.4 million, which brings us to profit before tax of $90.1 million which is $24.5 million ahead of last year, or 37.3%.

Last year was $65.6 million.

Taxes in this third quarter were $26.7 million.

That is $10.4 million higher than last year's $16.3 million.

Then equity and affiliates and minority interest is $3.6 million.

That is $1.9 million favorable to last year.

Last year was $1.7 million, which brings us to the bottom-line net income $67 million, $67.0 million, which is $16.1 million or 31.6% higher than last year's $50.9 million.

And of course, EPS then is $0.65 a share, up $0.15 to last year or 29.7%.

Last year was $0.50 a share.

Let me comment on a couple of specifics.

Interest expense, as I said, is favorable -- $900,000.

That is due generally to lower interest rate and some debt reduction largely outside the US.

Taxes were higher this year versus last, as I said, by $10.4 million.

The effective tax rate in this quarter is 29.6% and that is 4.5 percentage points above last year's 25.1%.

Half of that difference is due to mix, and by that I mean just simply a greater proportion of higher taxed US income in this year's quarter compared with last year.

The gross profit margin on a base earnings basis was 19% in this third quarter versus 18.6% last year.

The margin is pretty consistent with the second quarter.

In the second quarter, gross profit margin was 19.1% and it's slightly ahead of the first quarter's 18.8%.

Base net income as a percent of sales was 6.4%.

This is actually the highest level since the third quarter of 2006, and it is actually the second highest level in the last five years.

So again, it goes without saying that we were pleased with the quarter.

In fact, this was a record quarter.

The previous record would have been set in the third quarter of 2007.

Now let me review the segment we're reporting for you and that is found on page 7 of the press release and I'll start with consumer.

Consumer segment sales increased 9.5%.

Profits of $46.4 million increased 8.6% over last year's $42.6 million.

Now before I go any further, let me note that the $44.8 million that is in the table on page 7 includes a $1.5 million acquisition cost that we've backed out of -- we backed that out for base earnings purposes here.

So you would reconcile that $44.8 million to the $46.4 million that I gave you.

The difference is that $1.5 million.

This is the 11th consecutive quarter of year-over-year increase in the consumer segment.

Tubes and Core/Paper segment sales were up 19% year over year and profits were up 76.5% year over year.

This particular segment, I believe, continued to show the same turnaround that we started to experience in the third quarter of 2009, and it is pretty consistent with the second quarter.

The second quarter's increase year over year was 82%.

Packaging services reported sales down 8/10 of 1% and they reported profits down right at 65%.

All of that shortfall relates to our Corr Flex US operation where we have experienced some year-over-year volume declines with a major US customer.

And then in the all other category, sales were up 25.6% and profits are more than double last year.

Our protective packaging, our molded plastics -- those two businesses were the main profit drivers.

We also saw some increases in Baker Reels.

So to repeat, overall sales were up year over year 13%, and profits at the EBIT line were up 31.5%.

Now let me move to the sales bridge and this is where I reconcile last year's sales of $930.6 million to this year's sales of $1,051.7 million.

That is a difference as I said earlier of $121.1 million.

Volume is the first component I will mention.

Volume is up $34.4 million.

Price is up $39.4 million.

Acquisitions and corrugating medium sales are up $53.3 million and foreign exchange is a negative $6 million.

So again volume $34.4 million, price $39.4 million, acquisitions and corrugating positive $53.3 million and foreign exchange a negative $6 million.

All that should add up to $121.1 million.

The volume gain was largely in two segments.

First segment was the Tube Core and Paper (see press release) segment.

In aggregate that segment volume was up 6.6% year over year.

Our US tube and core volume was up 6.4% and that was generally across all the markets that we serve.

Papermill core is selling into the paper industry, we are up 5.7%.

[Film] cores were up 4.2%, textile tubes were up 20% and that is with some share gain.

In Europe, we saw similar numbers.

In Europe, volume was up 6.2%.

Our paper volume was strong in the US.

It was up 2.5% in tonnage terms.

And Asia and Latin America volume was up as well year over year.

So volume was strong really throughout the Tube, Core and Paper category.

The other category that we saw strength in was all other.

And there we saw a 16% increase in total.

And volume was especially strong in molded plastics.

In fact, it was up around 20% in both the US and in Europe.

Baker Reels volume was up.

It was almost -- it was up almost 20%.

Protective packaging was up a little bit less than 10%.

So again, good volume there.

The Consumer segment showed very modest volume decline.

In fact, it was less than 1% and when I look back behind that, I see that composite cans were down roughly 3% and that is due principally to lower refrigerated dough and lower juice concentrate year over year.

The conventional wisdom there is that these categories were surprisingly strong during the recession due to more stay-at-home eating and so we are seeing a difficult year-over-year comparison.

But I will note that snacks were up year-over-year.

Fiber [caulk] cartridges were up as well as coffee.

And the coffee is up, due to the launch of a private label brand in the quarter.

Metal end volume -- and that is in this Consumer segment -- was up 7% and matrix plastic bottle volume was up a little bit less than 7%.

Services volume was slightly positive at the volume line, and there we saw international volume more than offsetting declines in the US and I will come back to that in just a minute.

Prices, as I've said, increased $39.4 million.

Almost all of that was in the Tube and Core/Paper segment and that related to higher OCC or the pass-through of higher OCC to the converted products.

The average selling price of OCC was up around 60% year over year, with OCC averaging roughly $123 a ton this year versus $78 a ton last year.

Higher OCC triggered contractual resets in the tube and core market in the US.

Last year, our third-quarter contracts reset at $60 a ton OCC.

That would have been the Southeast yellow sheet price.

This year they reset at $125 a ton.

That also triggered price increases in the Paper and the Tube and Core segment.

Tube and Core pricing in the US was raised 5.5% in February.

Paper pricing increased $50 a ton in February and $60 a ton in April.

And of course, again, all that is OCC-related.

The next category is acquisitions and corrugating medium.

That added $53.3 million.

Our sales of corrugating medium were $17.5 million.

If you remember, last year, we were a contract manufacturer of corrugating medium so we didn't have outside sales last year.

Practically all of the difference then of $35.8 million relates to the APT acquisition.

And then foreign exchange, as I said is a negative $6 million.

That is principally the US dollar strengthening versus the euro by about 11%.

I will remind you that all of that is translation exposure so it has an negligible impact on the bottom line.

Now let me go to the EBIT bridge.

This is where I am reconciling last year's EBIT of $75 million with this year's EBIT of $98.6 million and that is a difference of $23.6 million.

Starting with volume and volume mix, volume mix is a positive $6.8 million.

Price cost -- and again, we define that as price compared with material cost as well as energy and freight.

Price cost is a positive $2.1 million.

Productivity is positive $12 million year over year.

Other, which is sort of our catchall category, is a negative $6.3 million and pension is a positive $9 million.

So again, volume $6.8 million, price cost $2.1 million, productivity $12 million, other's a negative $6.3 million, and pension $9.0 million.

And that should add up to $23.6 million.

Let me start with volume mix of $6.8 million.

Again, this represents the profit impact on that $34.4 million of sales volume that I talked about in the sales bridge.

The margin this quarter was lower than usual, and that is due to mix.

I spoke earlier about a modest decline in packaging services sales.

I said they were down 8/10 of a percent.

The drop -- I guess the biggest drop in profit, then, was in packaging services, they were down 65%.

Much of the shortfall that I am describing here, not so much in sales but in profit is in this volume category, and it is due to mix.

The quarter, this quarter, the low margin international volume largely at Corr Flex and principally in Poland replaced the higher margin US sales.

And so we didn't see the impact on sales as much as we saw it on the EBIT line.

And that is what I am describing here.

But absent this change in packaging services, the integrated contribution margin would have been a more normal mid-30 range that we would expect ordinarily.

Price cost was a positive $2.1 million.

$1.3 million of that is favorable year-over-year energy and freight, which means the price material cost was a positive $800,000.

So it was a pretty modest price cost number.

In other words, price has offset some of the fairly large cost increases.

As I said earlier, OCC was up year over year around 60%.

Now I'm talking about the cost.

In Europe, wastepaper costs were up around 70% and we did see resin and film cost that were up anywhere from 10% to 30%.

So all in all, the price increases of $34 million were largely offset by these cost increases.

Productivity was a positive $12 million.

Productivity was a little bit behind the first and second quarter levels.

And that is in part because the comparison in the third quarter, A, is more difficult with last year's third quarter and also because we are making some investments that should add to future productivity.

And I will give you an example of that.

We had negative productivity at our matrix operations and that is due to all the start up costs in St.

Louis.

We did see especially good productivity in our paper mills.

In the US our paper mills ran at a utilization rate of a little bit less than 100, 99.6%.

Other is a negative $6.3 million.

This is our catchall category.

It is made up largely of the year-over-year increases in wages, benefits and incentives.

And then pension.

Pension, as I said, is a positive $9 million.

Like previous quarters, this is due at least in part to last year's 22% investment return.

It is also due in part to the $100 million pension fund contribution we made last year.

In this particular third quarter, we had a $1.5 million positive true up to last year's pension expense after the actuary completed the calculation for the 2009 [expense].

So that accounts for the changes in EBIT.

Let me talk about cash flow.

Again, cash flow was another good quarter for us.

Operating cash was $145.2 million.

That is $30.8 million less than last year's $176 million.

But I will point out the shortfall is entirely due to net working capital and I am describing that now as accounts receivable inventory and payables.

But last year with the economy only beginning to recover in the third quarter, we had a reduction in net working capital that was a source of cash of $23.4 million.

This year, an increase in net working capital is a use of cash of $12.2 million.

So that is a year-over-year difference of $35.6 million.

So that more than accounts for the shortfall in operating cash year over year.

I do need to point out that our working capital program stays under very good control.

We feel good about it.

The increase in dollars is, again like last quarter, due to higher input costs and higher level of business activity.

We have got an aggressive working capital program that is in place.

It has been for some years.

It is working well.

Cash GAAP days and we define that as days of receivable, days of inventory minus days of payables -- were 39.3 at quarter end.

At the June quarter cash GAAP days were 39.8.

So we certainly have not lost any ground in terms of managing working capital.

And, just as a reference point, last year's cash GAAP days were 42.

So even though working capital is consuming some of our cash flow, there are no issues around our working capital program.

I will point out that capital spending was $42.1 million.

Last year, we -- I'm sorry, last quarter rather, we upped our estimate of spending this year to $150 million to $160 million and we are tracking at those levels right now.

Free cash flow for the quarter was $75 million.

Moving to the balance sheet, our balance sheet course is strong.

It remains strong.

Cash on hand was $168 million.

Our debt is up $45 million to a level of $626 million and that is due principally to the purchase of APT.

Debt to total capital is 29.4%, and that is still below December 31, 29.6%.

Let me speak to guidance now.

Guidance for the fourth quarter was $0.57 to $0.61 which will bring the whole year to $2.32 to $2.36.

As usual, our guidance is based on the roll-up that we did in September of our individual -- from our individual divisions.

They give us a forecast and we roll it up to get a consolidated number.

We are assuming that business conditions remain stable in the fourth quarter and that we see the usual seasonal slowdown that occurs for us in late November and on into December.

This forecast does assume a 30.5% effective tax rate.

I will tell you, though, that our paper mills are running full.

Our order book is strong right now for this time of year.

I think the risk to this guidance is OCC.

The Southeast yellow sheet is $145 a ton today.

Our reforecast was put together assuming that it would drop to $135 a ton in November and $125 a ton in December.

We set our fourth quarter pricing at September's $130 a ton.

That is the way most of these contracts reset.

So there is already some price cost squeeze that we have built into this fourth-quarter guidance.

But with that said, I do feel comfortable with the guidance at $0.57 to $0.61.

I think that the range accommodates some modest movement in OCC and that is plus or minus versus our assumption.

And I also feel good about the level of business activity as we move into next year.

But we'll have to wait and give you guidance for next year, and we usually do that and will do that in our early December Analyst Meeting.

All right.

Enough of the numbers.

Let me just finish by saying that since quarter end, in fact just this past Monday, we completed the syndication of a new five-year bank facility to replace the one that would have expired in May of next year.

This letter of credit is what we use to support our commercial paper program.

The facility is set at $350 million.

There are eight banks involved in that led by Bank of America and Wells Fargo and the facility is for five years.

So with those points, let me just turn it over now for questions.

(Operator Instructions).

Ghansham Panjabi from Robert W.

Baird.

Good morning.

You know, on the flexible share loss, why is there a phaseout over a couple of years period?

Was there a long-term contract tie-in?

And can you give us some color on whether the customer is discontinuing a certain product or is it just share loss to a competitor?

It's probably a combination of both share loss and change of structure.

I think the phase-in over the couple of -- over the two-year period comes from just some contractual, but the big piece is the new structure that they may be going into.

And that is what we don't know the timing of that.

Whether it will be successful at all or what the timing of that would be.

Okay and then just in terms of 3Q, as you look at -- look back at the three months, were there any months that were above or below plan in any significance?

No, we were ahead of plan in all the months.

Obviously, we had some -- OCC head winds in the quarter that we didn't expect, but they were above plan and -- an excellent quarter, frankly.

Okay and then just finally, Charlie, if I could, can you just give us some early color on what pension could look like '011 versus '010?

I really can't.

But what I do know is that at the end of September, our pension performance was 8.5% and that has improved significantly from the June period.

And that is right in line with our assumption.

So that assumption is tracking well.

The discount rate has moved down and, right now, I guess what we would have said at the beginning of the year, we were something like 84% funded and we are probably more like 76% funded right now.

And that would be entirely because of the lower discount rate.

I don't know what impact that will have.

I think we will give some guidance in December.

At the Analyst Meeting, we will make our best estimate, but I believe the big driver is going to be if the discount rate moves any more.

Okay.

I would expect, perhaps, if we just froze it right now a modest increase in pension expanse.

Okay, but nothing as significant as '09?

Absolutely not.

Great.

Thank you.

Chris Manuel from KeyBanc Capital Markets.

Good morning, gentlemen.

Couple of questions for you.

First, if I look at the 4Q guidance, on the surface it sounds like price cost is going to be a bit of a negative head wind for you here in 4Q.

Because if -- could you maybe give us a little color around the magnitude?

Do you think that this might impact you in 4Q?

Because if I just look at the numbers that say we have seen a nice pickup, 1, 2 and 3Q, 4Q starts to be a tougher comp.

But the earnings improvement isn't as substantial.

So I guess kind of two parts to the question.

One, how big are the potential head winds on price cost for 4Q?

And then, two, how should I read -- would the lift be better for 2011 than what we would see here in 4Q if I were to extrapolate this out?

Chris, first of all, let me come off the third quarter, which we think is -- was an excellent quarter.

As Charlie said, the business is running well from a volume standpoint.

Our order books are filled.

So what diminishing expectations would be for the fourth quarter would be almost or entirely on OCC head winds that we have seen.

We obviously reset the contracts at $130 a ton for the -- on the industrial side for the fourth quarter.

We are already at $145 and there's probably some expectation that it may drift higher.

Normally this time of the year we see it drifting the other direction.

And so clearly I would say the fourth quarter, the [tepidness] of the fourth quarter is entirely on OCC and what we don't know about OCC.

With pricing on the top line fixed, we obviously are vulnerable to what the prices will escalate.

Of course, we've got our wastepaper operations that will offset some of that, but it is clearly the increase cost.

Anything we do from a pricing standpoint, anything additional we do from a pricing standpoint practically will take 45 or 60 days to get in and we won't see much impact of that in the fourth quarter, if any.

And you mentioned the 2011.

Frankly, we will position ourselves in [2000] and the fourth quarter of this year going into '11 where hopefully we will have recovery of whatever prices we see negative in the fourth quarter and I don't view that the fourth quarter will have any impact on our '11 guidance that we will give and what we've been talking about for '11, frankly.

Well, maybe -- let me step back again to 4Q for a second.

You know, as we've had some pretty good -- some very good volume growth coming back as part of our recovery here in -- you know, your industrial business is up, I think you said up 6%, 7%.

What would you be embedding into your 4Q numbers for some of these different segments?

Are we still anticipating to see a point or two of growth within there?

I think we are basically -- subject to Charlie correcting me here, we are basing the current run rate that we are seeing now affected by the normal seasonality in the fourth quarter.

Remember that the comp gets very, very much more difficult in the fourth quarter because we saw good recovery in the fourth quarter last year on the industrial side.

And Consumer had a very strong quarter as well.

Charlie, is that --?

No, I think that's right.

Back to the whole price cost squeeze, as I said we would have set prices at $130 and it is $145.

That is probably about $0.02 a share overall.

The effective tax rate is a little bit higher and some of the year-over-year difference, I think we will see that some of the shortfall in packaging services in -- that we saw in the third quarter in the fourth quarter, and that would be a year-over-year difference, Chris.

Okay.

That's helpful.

I've got a couple more questions, but I will jump back in the queue.

George Staphos from Bank of America Merrill Lynch.

Thanks.

Good morning.

Couple of questions to start on flexible packaging.

You know, maybe piggybacking on Ghansham's question, you mentioned that there might have been a structure change from what you could see with the customer that will be phased out over the next couple of years.

Can you discuss or are you at liberty to discuss what structure the customer might be moving to?

George, I can't because I don't know exactly what it is.

I mean, we -- to be specific about it, they are talking about a different flexible packaging structure and whether -- I mean, there is some question in our minds as to whether they could be successful.

Now, I think there's some questions in the customer's mind as well whether they can be successful because they are talking about phasing it out over two years.

Interesting.

Okay.

I will leave that to the side for now.

I guess the other question I had regarding the charge which was, I guess, roughly $7 million after tax.

Can you help us size that relative to the overall investment in flexible packaging right now?

You know, within obviously the overall Consumer segment?

I will let Charlie do that because he's opening a book.

I would say that my friend Mr.

Hupfer tells me that when we lose volume on an identified piece of equipment like that, we are required from an accounting standpoint to take an asset impairment.

These are good assets.

They have been running product and I would anticipate moving them somewhere else in the world and somewhere else in our system, but nonetheless, to be crystal clear on an accounting standpoint we took the charge.

And our net asset is in the $200 million range.

Okay.

Thanks for that, Charlie.

I guess the last question I had for now and I will turn it over.

If I look at consumer EBIT and I think you said on a basis you grew about 8%.

If I deduct the pension pickup and the acquisition of APT, would it be fair to say that the base consumer EBIT was relatively flat year on year as basically, your price and volume was offset by higher input costs and other costs?

It looks to me like, you know, if I take price cost, productivity, and those would more than offset any --.

Actually it sort of balances out that they would pretty much offset volume decline and that decline in other, which is the increased wages, incentives, inflation and so on.

So you -- so, Charlie, just to be clear so you are more or less flat X the pension acquisition.

Would that be fair?

That's right.

Okay.

Thanks.

I will turn it over.

Chip Dillon with Credit Suisse.

Good morning.

Could you give us a little extra color, I guess, on the whole Packaging Services segment overall?

Maybe I missed a comment about this, but certainly the margins, I guess, were a little disappointing to you and sort of is there any change in how you think about that business?

Or is this sort of a one-time decline?

Well, Chip, we've mentioned in the past that we have lost some business in that sector and we have -- this was the first quarter that we have seen the full impact of that business that was lost.

And clearly, I am not very pleased with -- ever -- with losing business and I'm not completely -- I'm not pleased with the performance of the services business.

That being said, there's a mix issue in there and the business that was lost was a higher, higher margin side of it and we are picking up and growing in the lower margin side.

We are working very hard to improve this business.

We've taken some cost out of it and looking at the business and the changes, and I do expect it to improve.

Got you.

And I think shifting gears a little bit, one thing that's really value-added is how you all, a few years ago, noted how I think in the third or fourth quarter of '07, you started to really see some pressure, some declines in volumes in tubes and cores well before the rest of us knew there was a recession, you know, with oil going up the next year.

And at this point, you have seen these tremendous volume improvements.

Are you back -- and I know you have to adjust some because some of your mix has changed there, but are you roughly back to the pre-precession levels yet in your tubes and cores business?

Or do you have a ways to go?

We -- so to make sure we are on the same page, we really started seeing the decline in the tube and core business in the second quarter of 2007, about the May time frame of 2007, and started seeing the rebound just about two years later in the beginning of '09.

If I sort of marched you around the world, Asia has recovered back to the 2007 levels.

South America is back to the 2007 levels.

Europe is approaching the 2007 levels in total, Eastern and Western Europe.

North America has not yet recovered to the 2007 levels, although it continues modest improvement.

Got you.

And lastly, I know in the past you've said that -- don't get too hung up on currency, but noticing that just in a pretty sharp fashion in the last five or six weeks, we have seen the dollar fall 8%, roughly, against a lot of other currencies.

Is that factored into your fourth-quarter forecast or could that actually be a small upside?

I wouldn't think it's an upside or downside.

It is not going to affect us one way or the other, being perfectly honest.

Thank you very much.

Sara Magers from Wells Fargo.

Thank you and good morning, gentlemen.

I'm wondering, you know there has been such strength in your industrial businesses and some weaker trends in the Consumer segments, given what visibility you might have in 2011 and you know -- and for near-term, could you comment on if you expect these trends to continue or be sustainable?

Or do you see those turning around at some point or just consumer picking up a bit?

I would say let's take the two sections.

The consumer side is doing about what we would expect it to do.

Normally when we are coming at -- normally when we are going into a recession and it clearly happened this time, the consumer stays at home more and they consume more refrigerated dough, more coffee, more snacks and things, and we clearly have seen that over the last couple of years.

I think starting in about, I don't know, the April or May time frame of this year, we started seeing a, what I would call, the normal consumer operating in a recession.

And normally, we would see those sectors start to go down -- the refrigerated dough, as consumers eating out more and taking vacations, and that is exactly what we saw in the May, June, and July time frame.

We normally would see, beginning about the 1st of September, starting to pick back up again.

We did not see that the 1st of September, but we did pick it up about the third or fourth week in September.

So the normal seasonality in our consumer business started to kick in the latter part of September.

Probably two or three weeks late, but it did kick in, and we are continuing to see that as we speak.

I think that, as I look into October right now, we are seeing about what we would expect from this business.

We see the consumer business, we are seeing the specific market segments.

Let's take dough, for instance.

Dough is probably down over last year slightly, and we would attribute that to the fact that the consumer, A, is eating out more and not -- than he was last year.

And B, that we probably had some colder weather in the October time frame and people tend to eat more of these items.

But October is about what -- not about, October is what we would have expected it to be, given what we see in the economy right now.

That help, hopefully?

It does help.

And just to further expand on that, could you give us a sense of how volumes in the Consumer Packaging segment are trending outside the US?

And I am specifically wondering about if you are seeing any kind of change in the conversion rates?

You talking about the Consumer side?

Yes.

I would say they are trending about where we would expect as well in Asia and South America and in Europe.

Wonderful.

Thank you very much.

Al Kabili from Macquarie.

Good morning.

I guess, start off with on price cost.

If we could just revisit that.

Historically -- just taking the comments, it sounds like this year in total for the full year 2010 the price cost head wind is sizably much worse than what we are typically used to seeing over the last six, seven years.

Has there been anything that has changed this year?

Normally you have been able to catch up to it better.

Has there been anything structurally that has changed or why is it different this year than what we've seen in the past?

Understanding that last year was -- is a very tough comp.

Well, I think if you look back over the number of years that we had this chart that we show many times, you know we saw ebbs and flows and we say that over the business cycle we have positive price cost.

But I would say the biggest change is, there has been a significant change in the OCC trends this year over other years.

Traditionally, we would start seeing clearly in the September's time frame, clearly October, we would start seeing a falling OCC price as generation kicks in, and for lots of reasons, we are not seeing that this year.

In fact, as I look back at a chart that goes back 20 years, this is the first time we have seen an increase in October in 20 years.

And it was a $15 increase.

So I would say if it is a structural change, it is the fact that it centers around OCC.

And we will pass it through because of the way we go to business with contracts and contractual resets and our market presence, where we have always been fairly aggressive raising prices, and our recycling business, which offsets some of that increase.

So we will manage that.

I think clearly in this year, though, that has been the biggest change.

Charlie, any comments other than that?

No.

No.

I think it's -- I don't think there is any structural changes.

We have been a little slower in Europe in getting price cost.

In the US it has really come in pretty much as I would have expected, and even with these increases in the Tube Cores/Paper segment, we -- that's where most of the pricing was.

That is where most of the costs were and they just balanced each other out.

And you were talking of Europe, I think the last projections I saw were the increases that they have in the market that they should be neutral by year-end.

That's right.

And on the other side and the plastics side, those contracts reset on either a monthly or semimonthly or quarterly basis and so we have gotten squeezed there.

But that will come back.

So I don't think there is any structural changes.

Okay.

Because you were down a little over $20 million in the first half of this year and we haven't caught up to that yet.

And I understand the weird dynamic going on with OCC in October.

But I would've thought that you would have started catching up with some of the pressure you saw in the first half.

Does this suggest into '11 that we could see a pretty good tail wind as you are catching up to all of this?

Is it just a delay, and that we can see a tail wind that is pretty sizable in '11?

Let me answer that in two ways.

First of all, I have said, I think on this conference call, that I would expected (sic) in the second quarter for us to end up being close to neutral for the year.

And in those comments, my thoughts were that we would see following OCC, which we normally do and obviously we are not seeing that.

So I don't know where we will end up the year.

But clearly, that is the change.

We are going to continue to be aggressive on the pricing side and we will do what we need to do and I think generally our guidance normally suggests that neutral price cost through the year.

We've had favorable price costs in the past whether we have a tail wind really depends on how well we manage that OCC.

And I think history suggests we manage that pretty well.

Okay.

Fair enough.

If I could just switch to volumes a bit.

Assuming normal seasonality in the 3Q to 4Q, can you help us with what that means on a year-over-year basis from volumes and tubes and cores?

Does that imply up slightly, flat?

Can you just help us with that?

Year over year?

Yes.

It will be up.

I don't know how much.

Charlie may have the number over there.

I don't have the number.

I don't know any reason why it would differ.

It was clearly up.

Like the third quarter over the third quarter.

Okay.

And then final question is on composite cans.

If I heard you right, you were down 3% and you attributed a lot of that to refrigerated dough declines.

But, I mean that sounds like that would have to be a pretty sizable decline in that category to drive your overall composite cans down 3%.

I'm wondering if you talk a little bit about that, maybe when the comps started getting easier in that dough category?

If you looked at the quarter, there are three factors that grow composite cans year over year.

One was the dough which you missed -- which you mentioned which is a fairly big number.

But you also had powdered beverages and coffee, and that's generally a seasonal item.

And think back to what I said to Sara's question.

A year ago the consumer was staying at home and consuming more at home and so the comp was very difficult.

The only business that has really changed in that is, I hate to mention brands, but, Comet was a cleaner that we have done composite cans on for years and the new purchase of that went to self manufacturing of that product.

We phased it out, I think entirely, in this quarter.

We still sell the metal ends into that business, but that's basically the only change in the business out.

But that was offset, as Charlie mentioned, by coffee conversions.

It was offset as well by fiber caulk cartridges.

It was up.

Thanks.

I'll turn it over and get back into the queue.

Thanks.

David Leibowitz with Horizon Asset Management.

Good morning.

A few quickies, if I may.

First, looking at the overall business for the third quarter, were there any contracts that got pushed back from the third into the fourth quarter or were brought forward from the fourth quarter into the third quarter?

Any volume?

There is no notable volume that would have shifted from quarter to quarter for any one reason.

Okay.

Also the fourth quarter tends to be the big quarter for new introductions by many of your clients or at least new packaging on older products.

Has this year been running ahead of last year for the fourth quarter on that basis?

David, we -- in the third quarter, we had year-to-date about $124 million, $125 million worth of new product introductions which is within what we thought.

We will probably talk about, in December, some new introductions.

But I'm not, I'm not at liberty to talk about those right now.

But we certainly will at our December Analyst Meeting.

I don't know if it is any more or any less than we had in any other year though.

And are any of the new items breakthrough packaging for you folks that would carry higher margins as a consequence?

Hopefully all of them carry higher margins.

They are probably more breakthrough from our customers than they would be for us because there are some new items in there.

But they all should carry higher margins, David, once they're running.

Okay, and the last question, in looking forward to the new year, do you believe that the Consumer sector will be the faster grower?

Or do you believe it will still be Industrial?

I think the -- both sectors will show growth next year.

I think there is still headroom for the industrial side to grow faster because it's assuming that the economy continues its slow improvement in North America and around the world, that headroom is probably higher there for the Industrial side to grow a little faster than the Consumer.

Thank you very much.

Christopher Chun with Deutsche Bank.

Good morning.

You know, even after the APT deal, you guys still have, as Charlie mentioned, a very strong balance sheet.

Some might argue that you're still quite a bit underlevered.

Can you talk about how you view your balance sheet and what the acquisition priorities and opportunities might be?

I would be happy to, Chris, and I would agree with you that as I have in the past that our balance sheet today is probably underlevered.

We -- any time you've got four or five acquisitions in certain holding patterns or certain areas of discussion, and that's no different today, could we be something smaller amounts before year end or after that?

But our priorities continue to be trying to grow the business.

The Consumer side of the business would be the preference to us, but there are consolidation opportunities on the Industrial side in certain geographies including North America, that we might be interested -- we would be interested in pursuing and we will continue to pursue those.

We have a history of buying back stock particularly the amount of dilution that we have from the equity compensation that we haven't done that in several years.

And so that is something we will also consider, going forward.

Okay.

And then I have a question on a couple of the items below the line.

Your equity income and minority interest numbers moved around quite a bit year over year.

Can you talk a little bit about what those are and what caused them to move?

We will be glad to.

I will let Charlie give a little more color if you want it.

But basically those are businesses that mirror the industrial economy.

And so I think that's the big change year over year.

That would include our petitions business that we have a joint venture with with Rock-Tenn Corporation.

It is a joint venture that we have with Cascades for certain papermill products.

Charlie, what am I missing?

Conitex.

Conitex, which is our cone business, textile cone business.

We joint ventured about 10 years ago and that goes into the textile industry around the world and (multiple speakers) products is a Japanese --.

But I think it's -- the changes are reflective of an improving industrial economy around the world.

Okay.

Very good.

Thanks for your help.

Alex Ovshey from Goldman Sachs.

Good morning.

I have a couple of questions.

On the -- in the Consumer segment, can you just talk about how the integration of the APT asset is coming along?

And what the contribution to the bottom line of that segment was from APT in the quarter?

I will let Charlie talk about the contribution, I will talk about the integration.

The integration is going extremely well.

I saw a presentation earlier this week from those folks and we are ahead of schedule with it.

We are just delighted with the talent level of the people we got in the acquisition and they are fitting in very well.

And as I said previously to many of you, one of the reasons that we looked at this was to expand our thermal forming technology.

And we are absolutely convinced that we have an asset that is going to help us do exactly what we wanted to do and I've used the term that this -- I think it is a grand slam, a home run.

That's what I used with the people.

So integration is going quite well.

And you set me up.

We are not going to give the profit number on the acquisition.

It is included in that net number that I called other.

But it is meeting (multiple speakers).

It is -- it is -- it's certainly positive.

It is meeting our goal.

And would you expect that to improve not from just any improvements in the business, but from the fact that this is the first quarter out of the gate that you have the business and maybe there's some inventory write up that you have to take?

So as you look at the fourth quarter, the contribution should be better from APT?

There was some inventory write up that we had to take in the quarter, and I think we will start seeing [them bringing] the synergies out that we anticipated.

And you'll see better -- we will see better performance out of that business in the next quarter and going into '11.

Helpful.

And then there's discussion in the marketplace that steel tinplate prices may go up in a big way in 2011.

And correct me if I'm wrong, but in the past that's been a positive catalyst for the composite can business from the point of view potentially it moves more product towards composite cans from metal or it lets you raise price to maintain the spread between the composite and metal.

Harris, can you just talk about how you guys think about rising steel tinplate prices and the impact on the composite can business?

I'd be happy to.

First of all, we heard the numbers about the big increase and that -- we are in negotiations and I don't know how big the increase is going to be.

I have heard double-digit numbers.

I think it is going to be single-digit numbers.

So we don't know what -- it will shake out wherever it shakes out.

We have contractual passthroughs on that side of the business where we pass through steel increases.

But to your point, it just widens that differential between a metal can and a composite can and gives us more opportunity and creates more value for our customers to make the move from a steel can to a composite can.

Not only do you have the cost differential, you have the shipping cost, you have all the other advantages of the composite can.

Helpful.

And just two last questions.

On OCC, Harris, you mentioned that this was the first time in 20 years that you saw prices move up in October and you said there's a number of factors that may be causing that.

Just wanted to get your perspective of what you think is actually the reason for why this is the first time in 20 years OCC prices have moved up in October?

You give me more credit than I deserve because I think what I said to you guys that I thought OCC was going to be at $110 a ton in the fourth quarter.

So obviously I'm not so good.

You have got basically supply and demand issues.

You are coming out of a recession where the generation at the back of the wall marks the back of the grocery stores, particularly the retail, the Wal-Marts, the Targets and others, is flat to down over the last couple of years.

At the same time you have the North American linerboard guys that are the biggest consumers of this, running at very, very high rates right now and you've got exports -- not only China, but to other places of OCC, I think I saw a number up about 7%.

So you have seen the demand grow pretty significantly in this country as well as out.

And I think last year at this time you had most of the linerboard guys running virgin pulp for black liquor credit.

And then they started filling the pipeline in December.

I don't know this, but I suspect you are seeing some filling of inventory levels by the paper guys, the linerboard guys in anticipation that there is going to be bad weather like we saw last year in the first quarter.

They don't want to be caught with low inventory.

So I think it is a combination of many of those factors that are driving this price, but I think at the end of the day, OCC is going up because we are collecting such a high level of it in this country and there's more demand on it.

So I think you will continue to see OCC with an upward bend to it.

Okay.

Helpful.

And just last question on the cash flow for Charlie.

I wanted to understand how you guys think about the free cash flow that is available to return to shareholders.

I don't believe you changed your guidance at about $210 million of free cash flow for this year, net of CapEx and your dividend is about $100 million.

That leaves you about $100 million.

Does that -- the $100 million note that comes due in November as well as the APT acquisition count against that free cash flow that is left to buy back stock or return it to shareholders in any other way for the year?

It doesn't.

We will just look at that whole mix.

You know, we clearly will finance that bond to come due.

That will just roll into our commercial paper program.

We have got cash, but we will just look at that whole mix and I don't think it changes our priorities at all and you know, after dividends, after capital spending.

You know, Harris talked about the stock buyback.

That certainly something that we consider, especially buying back dilution.

We will look at whether it is important to fund the pension plan any further and that again will get back to the question that was raised earlier about where we are toward the end of the year.

Acquisitions come into play, but I don't think -- the fact that we've got this bond coming due doesn't affect that thinking at all.

We just have a capacity on the balance sheet.

So we are looking at that in terms of all of the above.

Buybacks, pension funding, acquisitions, capital spending, and we make decisions around each of those through the course of the year and then especially toward the end of the year around things like stock buybacks or pension funding.

Great.

Thank you very much and we look forward to catching up with you at the Analyst Day in December.

Steve Chercover with D.A.

Davidson.

Thank you.

Good morning.

I hope my questions aren't too redundant at this point, but I wanted to also ask a question on packaging services.

You indicated that there's a mix shift towards Poland.

The business that you lost domestically, is that because the business vanished or due to some competition?

I'm sorry, I missed the question.

The downside in packaging services domestically.

Was that due to the business simply going away?

Or due to competitive activity?

No.

It was subject to a bid several years ago that we've talked about and as a result of that and it did not go away.

It went to competition.

Thank you.

And second question, about six weeks ago you were wondering if we were returning to normal seasonality.

Obviously we are not seeing that in OCC, but would you care to opine on the rest of your business?

You know, I do think -- and that's what was my response to Sara's question earlier, I think we are returning to normal seasonality.

I think the consumer is acting more like they acted in '07, '06, '05, without a recession.

So I view that as positive and I think clearly we are continuing to see a recovery in the industrial side of the business, albeit a little bit slower recovery in North America than we are seeing in Europe and the other geographies.

Thank you very much.

Bill Selesky with Argus Research.

Good morning, actually afternoon.

I just have two quick questions I wanted to run by you.

I think the first is probably for you, Harris.

Can you talk on the industrial side of the business?

Basically what the overall landscape is on a competitive basis right now and how that applies to the pricing format these days?

And whether or not anything has changed significantly over the last six or 12 months?

I don't think anything has changed on a competitive side.

I think if it's anything, it's probably more positive in that I think as I look at North America, most of the mills are all running reasonably full.

And so people are more concerned about the cost factor and margins when that happens and so I view that as a positive.

In Europe I think the same phenomenon has taken place.

We've got -- well, we've got price increases in the market in North America and in Europe.

And generally around the world, the mills are running reasonably full and that generally bodes for better market conditions.

How about on the pricing side?

Pricing side.

We are seeing, I would say, positive pricing.

Okay.

Let me ask you one last question on the Consumer side and how it applies on the composite products.

I know on the last question, you mention Harris that the consumer was getting a little bit, feeling a little bit more better, maybe opening up the purse strings a bit more.

I know you have some exposure on the composite side with some generic products and we have big-box retailers and so forth and I am wondering, do you see the generic craze, so to speak, starting to fade a bit with consumers feeling a bit better about things?

Or do you see generics maintaining their role -- maintaining their position or maybe strengthening just based upon what they have been able to accomplish over the last 12 months or so?

I think clearly we are seeing the branded people are feeling a little better.

They are picking back up some of the shares that they lost to the private label side.

So I think that clearly is taking place as the consumer opens those purse strings a little bit.

But I do think over time, as I've said previously, I just think we are going to see in this country more and more movement towards the private labels.

And we are focusing some of our packaging in that arena and going to market to cover some of that.

So while I think the branded people are picking up, gaining back some of what they lost, I don't think they will gain back all that they lost.

And I think that that clawing will continue over time.

Thanks very much.

Tim Burns from Cranial Capital.

Sorry.

The call has run a little late I just wanted to get one in if I could, Harris.

You guys have invested a lot of time and money in the one phase to customer strategy.

I think there is like 11 very, very large consumer product and beverage companies and how does one investor determine if you are making good progress there?

I mean right now, we can look at the consumer numbers as a whole.

But you know you've added a lot.

You've added APT.

You've added some capacity in flexible, greenfield, for Ross, matrix.

You know there's been a lot of moving pieces.

I guess I'm just curious is it working?

It is working and it is working quite well.

And you hit the best proxy and that is from the reported, the consumer side, the consumer numbers.

I can tell you.

I said before that that there are actually seven or eight of these customers that we focus on and that doesn't mean that we don't focus on every one, because we do.

But these customers have seen nice improvements in sales volumes and margins through them over the period of time we've been doing it and perhaps in December, we can articulate that with some numbers to support that.

Great.

Thanks so much and have a good fourth quarter.

Thank you, Tim.

Chris Manuel from KeyBanc Capital Markets.

Actually my question has already been answered.

Thank you, gentlemen.

George Staphos, Bank of America Merrill Lynch.

I guess the question I had, you talked about the structural changes occurred in OCC.

Certainly we've seen it in our own research.

Do you manage the business any differently over time given what is going to be an upwardly sloping cost curve or cost trend would really better say it in OCC.

Is there any way to mix any other kind of furnish into your cylinder board to make tubes and cores, realizing that always paper is probably somewhat shorter supply than might have been the case a few years ago?

And that's -- I guess the last question is do you have any room for expansion and converting capacity in tube and core around the world?

Thank you.

Good luck in the quarter.

Thank you, George.

I think you asked maybe three questions.

The first one is additives that you can add to it.

There are possibly some of those, but I think the bigger thing really centers around our material science and our [finite] element of analysis work that we do, making certain we've got the right paper grades to go into these converted products.

And so I think making a stronger product with less paper obviously is the key to that.

The second thing, do you manage it any differently?

As you know, we have about 60% of that business is under contracts which has the passthroughs which obviously are helpful, the market position is helpful.

But I think you also look at trying to capture more -- I think this speaks to the strength of our recycling business where we are able to capture more of OCC through our MRFs and through other things that enables us to make money on that as we sell it outside.

We also make certain that we have the lowest cost furnish for our internal operations as well.

So I think it -- as it changes it probably does play to Sonoco's strength in all of those categories that I mentioned.

Box shipments are up.

Why is generation down?

Or has it just not shown up yet at the back end of the Wal-Mart, etc.?

George, I don't know whether it just hasn't shown up yet or whether there's some inventories building in there.

I mean we've heard from the appliance side of our business that some of the appliance guys think the inventories are high and you are right about the local Lowe's or Wal-Mart or Home Depot when you see a truck outside with appliances in it and so around those appliances are corrugated boxes.

So you know, I think it's a lot of some of all of the above.

All right.

Thank you very much.

David Leibowitz from Horizon Asset Management.

One very quick one.

Charlie, how much of your cash on the balance sheet is overseas versus US?

Whenever I've said it's about $160 million worth of cash.

The majority of that will be overseas, and that is because we run our commercial paper program in our US cash net.

So if we have cash, we pay down CP.

We only had $40 million worth of commercial paper outstanding at the end of the quarter and that is after buying back or paying for APT $120 million.

So it's mostly international.

And lastly, do you hedge currency?

We do hedge currency.

We hedge it as a part of our budgeting process at the beginning of each year.

We will look at an estimate of what we think the cross-border transactions are.

For example, our Canadian businesses will buy some raw materials sourced from the US.

They will produce in Canada and there are some other businesses that will sell into the US.

So we will look at all of our net exposures and we will hedge to the budgeted rate.

That is relatively modest.

When I talk about $6 million worth of impact on the top line, that is translation and we made a rough calculation of that negative $6 million had a $100,000 negative impact.

So whenever we talk about FX not having a big effect on us, that's clearly the case.

So again, we hedge cross-border transactions as a part of our budgeting process and that -- we will hedge specific transactions.

For example, if we are going to buy a piece of equipment that's denominated in euros, we will hedge that.

And we hedge receivables and payables, but whenever they get denominated in a foreign currency.

So we do some hedging but it's defensive hedging.

Okay.

Thank you very much.

At this time I am showing no further questions in queue.

I would like to turn the call back over to Mr.

Roger Schrum for any closing remarks.

Thank you, Derek.

And as Charlie and Harris mentioned, please place December 3rd, 2010 on your calendars.

Sonoco will be conducting its annual New York Analyst Meeting beginning at 8 o'clock in the Manhattan ballroom of the Grand Hyatt.

Invitations will be sent out early next week to all interested investors that would like to attend in person and for those that cannot attend, you can listen to management's presentation via the webcast on our website.

We will serve breakfast starting at 7.30 and then management will provide an update on the Company's growth strategy and provide financial guidance for 2011.

As we have done in the past, we will also preview some new products and services that will add to sales in 2011 and as we always do as well, we will provide some of those new products for you to take home.

So please let us know in advance if you plan to attend so that we can make the appropriate accommodations.

Thank you again for your participation on the call and we look forward to seeing you in December.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.