Sonoco Products Co (SON) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Sonoco Products Company earnings call.

My name is Modesta and I will be your co-ordinator for today.

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

Later we will conduct 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 conference over to your host for today, Mr.

Roger Schrum, Vice President of Investor Relations.

Please

Thank you, Modesta.

Good morning, everyone, welcome to Sonoco's second quarter 2011 investor call.

This call is being conducted on July 21, 2011.

Joining me today are Harris DeLoach, Chairman and Chief Executive Officer and Barry Saunders Vice President and Chief Financial Officer.

Our financial results for the second quarter were released before the market opened today and are available via our website at Sonoco.com.

Let me begin by stating that today's investor call may contain a number of forward-looking statements that are based on current expectations, estimates and projections.

These estimates 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 introduction, I'll now turn it over to Barry Saunders.

Thank you, Roger.

This morning Sonoco reported that second quarter sales were $1.128 billion up $117 million or 11.7% over last year's first quarter.

We reported GAAP earnings per share of $0.52 per diluted share and base EPS of $0.60 per share.

The base EPS of $0.60 is $0.01 better than last year's base EPS of $0.59.

We were just below the low end of our guidance of $0.61 to $0.65.

The shortfall to what we expected when our guidance was given was driven by a soft patch that we experienced in May in some of our consumer businesses and due to productivity being lighter than what we expected in a few businesses as well.

We did see improvement in our consumer businesses in June and we ended the quarter with stronger productivity.

Let me first describe the $0.08 difference between GAAP and base EPS.

$0.04 is associated with the unwinding of the Sonoco fourth class joint venture we had in Brazil where we owned 51% of a business that produced composite cans, metal ends, and injection-molded plastics products.

We bought out the former partner's share of the venture, but then sold the injection-molded plastics assets to him and recorded a loss on the sale.

Also included in base EPS was $0.03 per share related to restructuring charges for the quarter, most of which was associated with the announced closure of a flexible packaging plant in Winnipeg, Canada.

Fees associated with acquisitions divestitures cost us $0.01 in the quarter.

We acquired a small tubes and cores operation in new Zealand and a composite can business in the UK.

Last year we only had $0.01 of restructuring expense as an adjustment to arrive at base earnings for the quarter.

All of my comments will be directed towards our base income statement which excludes the previously mentioned adjustment.

You can find the reconciliation of GAAP to base numbers in our press release and on our web site.

As I mentioned, sales of $1.128 billion are up right at 12% year-over-year.

Base income before interest and income taxes, or EBIT, was $92.8 million, essentially unchanged from last year's second quarter of $92.9 million.

I will provide our normal bridge of the drivers of the change in sales and the factors that created flat EBIT in just a moment, but first let me round out the income statement.

Interest was down slightly to $8.2 million versus $8.6 million last year, thus base income before income taxes was $84.6 million compared with $84.3 million last year.

Base income tax expense was $27 million versus $26.8 million last year as the effective tax rate on base earnings was 31.9%, up 0.10% from last year's 31.8% Equity and affiliates and other minority interests was essentially unchanged year-over-year.

Thus, net income attributable to Sonoco was $60.8 million, very slightly improved over last year's $60.6 million.

However, with fewer average diluted shares outstanding, base EPS was $0.01 higher.

I'll first walk through the sales and EBIT bridge, then discuss the results by segment.

As previously mentioned, sales increased by $117 million which can be explained by four drivers.

Volume and mixed accounted for $21 million of the increase.

Price accounted for $33 million of the increase.

Acquisitions net of dispositions drove $34 million of the change, and exchange and other accounted for $29 million of the increase.

Beginning first with volume.

The $21 million increase represented roughly a 2% increase in volume for the Company as a whole.

In the consumer segment we saw nice improvement in flexibles which is up about 8% year-over-year, blow-molded plastics was up in unit terms 12%, and unit volume was up 1% in composite cans in North America, but other rigid plastic volume was down about 5%.

Volume was essentially flat in the tubes and cores/paper segment, literally unchanged in North America and Europe, it was up about 5% in South America and 2% in Asia.

And as you would expect, paper volume in North America was essentially flat as well.

Packaging services volume was strong in Poland, and we had increased activity in the US, some of which was related to a contract manufacturing facility where we previously announced that those activities were being transferred to another service provider beginning July 1st.

But volume was also improved in fulfillment operations in the US and in Poland and in Mexico.

Businesses in all other Sonoco had overall higher volume which was up 11% in molded plastics with significant increases in almost all of the markets they served.

Our reels operation was up 11% driven by higher demand for steel reels for the utility industry, but these improvements were partially offset by an 8% decline in protective packaging due to lower sales to the appliance market.

Now moving down to price.

Price accounted for $33 million of the increase in sales associated with higher input costs which I'll discuss in just a moment.

We saw increases in essentially all businesses but most was certainly in the tubes, cores and paper segment.

The increase in tubes, cores and paper was driven primarily by increases in Europe where prices were up 8% for tubes and cores, and in recycling in north America where OCC prices based on the Southeast Yellow Sheet averaged $143 per ton in the second quarter of this year which was $10 higher than the average price of $133 last year.

Now, overall trade prices in North American tubes and cores were essentially flat as increases on non-contract accounts in North America and freight surcharges were essentially offset by the impact of contracts resetting at lower rates year-over-year.

Now, although I just mentioned that the average prices for the quarter for OCC were $10 higher year-over-year, many contracts have resets that are based on the last month of the preceding quarter so the typical contract last year had resets for the second quarter based on the March 2010 price of $175 per ton versus $140 per ton in March of this year.

Prices were also up in all other Sonocos just due to higher prices in molded plastics to cover resin increases, up in reels for higher lumber, steel and transportation costs, and up slightly in protective packaging.

Associated packaging technology or APT accounted for most all of the increase from acquisitions along with the small acquisition in tubes and cores and one in reels.

Finally, foreign translation and other sales differences had a favorable impact right at $29 million and this was driven by foreign exchange rates as the dollar weakened against most major currencies.

As usual when you get all the weight in net income, translation really had little impact on the year-over results probably adding only approximately $0.01 to the bottom line.

So now moving on to the EBIT bridge, I'll quantify the drivers and then discuss each of them.

Volume and mix combined added $1.1 million to EBIT.

Price increases, net of material inflation, energy and freight costs was negative year-over-year by $7.5 million.

Productivity was positive adding $5.4 million.

Other, which is our catch-all category, was negative $3.7 million, and lastly pension expense was lower and therefore added $4.6 million to EBIT.

With the above variances net to a year-over-year decline in EBIT of approximately $100,000.

Starting with volume, you see that the roughly 2% volume increase for the Company as a whole that we saw in the sales bridge translated to only about a $1 million impact on earnings.

When you otherwise expected to see something more like a $5 million increase, and the difference is due to the mix of business.

In the consumer segment we saw some unfavorable mix primarily in composite cans that negatively impacted results.

The flat volume in tubes, cores and paper was exacerbated by the impact of the mix spread across almost all operations, but most notably driven by tubes and cores North America due to a shift to a higher proportion of film core sales from paper mill cores and due to lower paper mill plug sales, which also have a solid contribution.

Mix was also negative again this quarter in corrugating sales where we continue to see a higher proportion of export business with lower pricing.

The higher activity in packaging services did add notably to EBIT as you'll see in the segment analysis.

Moving on to price costs.

The benefit of the higher prices you saw in the sales bridge was more than offset by raw material, energy, and freight inflation which again was unfavorable by $7.5 millions for the Company quarter-over-quarter.

Freight and energy costs alone were roughly up $7 million for the Company due to rate changes.

For example, fuel surcharges were up from $0.31 per mile last year to $0.47, a 51% increase.

Many businesses have implemented surcharges to recover much of the increase in freight.

We did have a price cost shortfall in the consumer segment as steel costs were up just under 10%, aluminum roughly 24%, coatings and outside processing costs were also up, and flexibles, we saw film prices were up anywhere from 5% to 20% depending on the type of film, and for our plastics businesses, most resins were up 15% to 20%, ABS was up 25%, but CTAC resins and other additives and modifiers were up 25% to 30% year-over-year.

Although you did see price increases in all of our consumer businesses related to those higher input costs, as you would you expect in a rising price environment, contractual resets had not kept up with cost increases but will do so as prices moderate which we expect in the third quarter, and then even move slightly positive in the fourth quarter in plastics particularly if resin costs decline as expected.

A significant part of the price shortfall was the tubes, cores and paper segment, and most all of this can be explained by the impact of the contractual resets based on OCC price in the proceeding month of the quarter versus the average price paid for recovered paper during the quarter.

As previously mentioned in the pricing discussion, in 2010, prices reset at $175 then Southeast Yellow Sheet averaged $133 for the quarter, while they reset at $140 this year then moved to $143 on average.

In addition but to a lesser extent we continue to be impacted by the regional OCC pricing differences where the spread between the Southeast price and other regions was more negative than we've historically seen, but that gap now has essentially been closed, particularly with the increase to $170 per ton for OCC prices in the Southeast which was the price in July.

Productivity was weaker than expected with the shortfall really driven primarily by two businesses.

We had some production issues in our metal ends business that resulted in some excess costs and machine downtime.

Productivity was also below expectations in our paper operation, but the shortfall was isolated to our Hartsville complex.

In addition, we did have costs associated with the start-up with the new paper mill core plant in Germany, a fire at our German paper mill, and continued excess costs associated with the ramp-up of new product launches of blow-molded plastics products.

These factors partially offset the benefit of productivity projects which came through as expected in many business units.

The other is the catch-all category and was negative by $3.8 million which is driven by wage and other inflation that was partially offset by cost reduction and lower pension expense.

And in speaking specifically of pension which is actually broken out on a separate line, pension expense is lower year-over-year by $4.6 million.

Now, when you look at our results in term its of segments, which you can find on page 7 in our press release, you see consumer sales were up $58.3 million driven by the APT acquisition and higher sales in flexibles and blow-molded plastics and the impact of translation, but earnings were down $7.1 million where the benefit of the higher volume was offset by negative mix, the impact of the production issues mentioned in metal ends, continued costs associated with the ramp-up in blow-molded plastics activities, and price costs which had a notable impact particularly on our plastics operations due to higher resin and other costs.

The EBIT percent to sales dropped 7.8% but is expected to improve in the second half as material cost stabilizes and price through contractual resets improves, and productivity gets back to more historical levels.

In the tubes, cores and paper segment, sales were up $40.2 million due primarily to the higher selling prices and translation, but earnings were flat due to the negative year-over-year comparison in price cost when we had a favorable spread last year and a relatively flat spread this year.

Mix was negative and productivity was lighter than expected in paper as I mentioned, and we certainly believe it should improve in the next quarter.

Packaging services sales were up $10 million and EBIT up $4.6 million due to the strong activity in contract packaging.

Some of that benefit came from activities associated with the customer, again who has now transferred those activities to another service provider, so earnings in this segment can be expected to be lower in the next few quarters as this business has transitioned out.

Sales for all other businesses were up $9.2 million, while earnings were up by $2.1 million.

Now, turning to cash flow.

We had cash from operations of $46 million which compares to $42 million last year.

Our latest forecast indicates that we expect to generate approximately $270 million cash from operations for this year as a whole, but that includes total global pension contribution of $130 million, or roughly $400 million in cash from operations if you exclude those pension contributions.

Most of the pension contribution relates to the $85 million made to our domestic plan earlier this year.

This is somewhat lower from an earlier forecast due to the lower projected earnings, as well as an increase in working capital associated with the inflation that we've seen.

Capital spending was $42 million for the quarter, which was up $11 million from last year's $31 million.

Approximately half of the incremental $11 million in spending is associated with higher IT spending where we are in the middle of implementing a new ERP system for our industrial converting business in North America.

The development is going extremely well and roll out is expected to begin later this year and continue through much of next year.

We do expect capital spending to be $150 million for the full year.

We did have, as previously mentioned, two very small acquisitions during the quarter, a composite can manufacturer in the UK, and a tube and core business in new Zealand which cost us about $10 million for the quarter and will add sales of approximately $15 million annually.

And as you know, we paid dividends of $0.29 per share, or $29 million in total during the quarter.

Our balance sheet remains strong with debt to total capital of 31.5% at the end of the quarter and well-positioned to support our growth initiatives.

Turning to the guidance for the balance of the year.

We project that base earnings for the third quarter will be in the range of $0.64 to $0.68 per diluted share.

As normal, this is based on a roll-up of our divisions' individual forecasts.

This guidance is based on a steady economy, but does include the usual seasonality we would expect to see.

This takes into consideration the headwind we are seeing from OCC prices where we have used the current Southeast Yellow Sheet price of $170 per ton as the general range for the third quarter in after many contracts reset at the June price of $150.

But we have assumed that OCC prices will fall off somewhat in the fourth quarter.

It also reflects the normal seasonal improvement in our consumer business, but also reflects the impact of losing the one contract packaging customer, and reflects productivity improving from the second quarter.

This guidance assumes an effective tax rate of 30.6% in the third quarter, but 32.6% in the fourth, so it averages to about 31.6% for the second half.

We changed our full year guidance to $2.46 to $2.50 -- from a range of $2.46 to $2.54 per share, which is down from $2.52 to $2.60 based on the second quarter results, some price cost headwind moving into the third quarter, and steady rather than slightly improving overall economic activity.

That concludes my overview of the quarter and will now turn it over to Harris.

Thank you very much.

We're clearly disappointed that we didn't have the earnings that we expected in the second quarter.

As we mentioned, our consumer and industrial businesses really showed mixed results with some businesses performing very well and others facing some difficulties frankly versus our expectations.

For example, on the consumer side of our business, our flexible business and packaging services performed very, very well, but our composite can and closures business faced market-related and operating productivity issues that clearly impacted their results, and as Barry mentioned, even the markets we served were somewhat mixed during the quarter.

For instance, we saw continued strong growth in composite cans, with coffee up 56% year-over-year, and snacks up 28% year-over-year.

But nuts were down about 18%, powdered infant formula down 7%, fiber caulk cartridges down 13%, juice concentrate down 12%, which offset those positive gains on coffee and snacks.

Overall, the unit volume in composites were up about 1%, and as most of you know, we have strong market positions in all of these segments that we're down and we believe that this is a clear reflection of a lower consumer demand.

In our industrial businesses, the tubes core and paper segment was essentially flat, but again, certain geographies and certain markets were up nicely while others faced difficulty.

For instance, North American tubes and cores were essentially flat as was Western Europe.

Eastern Europe was up 8%, South America up 5%, and Asia up 2%, but even these markets that were up have shown some weakening demand over the last few months.

If you look at our served industrial markets, film cores were up nicely during the quarter, but textiles which had done well over the last several quarters were down as well as paper mill cores, and as Barry mentioned protective packaging which sells into the appliance industry was down about 8% year-over-year.

During the second quarter, clearly we experienced a soft patch in volume, in May, the second half of May mostly, think this may have been reflected, the weakness, continued weakness in consumer spending that we had seen somewhat in the first half of the year.

However, I will say that volume returned in June and as we enter July, volume in both consumer packaging and tubes and cores are holding up pretty well, and we expect them to follow a normal seasonal pattern through the quarter.

Overall I do believe that third quarter to second half will be improved.

We had strong productivity in the month of June after faltering somewhat in May and not having as strong of a first half as I would have expected.

I do believe that in the second half we will be near our historical productivity run rate.

However, as Barry mentioned, we have built into our guidance expected head-winds from OCC pricing.

And we enter the quarter with Southeast Yellow Sheet pricing at $150 per ton, and prices have increased $170 a ton.

Some of our people say there's a chance that prices could increase again in August, but we still do believe that prices should retreat in the fourth quarter.

The regional difference in OCC pricing which we faced in the first half of the year is much less prevalent in July and we continue to work with our customers to make certain that these regional differences do not continue to impact us.

Now, I must admit I'm still a bit uncertain about the overall economy and consumer spending going into the second half, but frankly I don't see a lot in the economy that's going to change in the very near term, but I will say as of right now our customers are telling us that they see some improvement which is reflected in early orders that we're experiencing, and as Barry said, the normal seasonality is baked into our expectations for the balance of the year and our expectations do start with our customer demand and we roll-up from there.

In addition, we have a very robust new product funnel, new product sales in the first half of the year, topped $177 million on track with our expectations, and we have a number of new products hitting the shelves in the second half, particularly in the rigid container area and in flexibles and composite cans, particularly with more coffee conversions to take place.

With that, let me close up and Barry and I will be happy to take any of your questions.

(Operator Instructions).

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

Please proceed, sir.

Thanks.

Hi guys, good morning.

(Multiple speakers) Good morning.

How are you?

The first I had, from your discussions with customers, do you get the sense that they are ordering in much shorter, smaller quantities, may bring lead times in even more given their uncertainty so we're maybe going to see this pattern really persist over the course of the year?

You see a tail-off in orders at the end of a quarter and then a rebound as the new quarter begins.

What's your sense having talked with them?

George, I don't know that order patterns have shortened -- that order quantities have shortened any.

As you know, basically we look at anywhere from a 3 to 4 week lead time.

But clearly when I look back at the first quarter of the year, January was a relatively strong month for us.

February was somewhat weaker.

March was a relatively strong month.

We saw in April the strongest month that we've seen in the year, then May, the second half of May demand fell off fairly significantly, came back in June, and now we're seeing nice demand, a strengthening in demand in July.

So clearly our customers, while we're talking to them about demands and they're more cautious perhaps than normal, what they're actually doing is watching their inventory and watching their consumer demand more close closely so they don't build inventories which is obviously having an effect on us in terms of our overall demands.

Clearly we're seeing something there, George.

Harris, considering that, how do you then have comfort in your productivity goals over the rest of the year, because obviously productivity is going be driven a fair amount by the type of volume and sustainability you have of your orders and in your production runs?

Obviously, there are no guarantees on anything, but how do you feel comfortable about productivity in the back half of the year?

George, clearly I would less than honest if I said to you that volume didn't affect productivity because we all know that it does.

And some of the volume and shortfalls we've seen, particularly in our plastics business where we have a lot of new products coming in and we've talked about (inaudible), about $75 million in new products and we have the equipment in, it's staffed, ready to run.

We have the engineers in place, and this is new products that are coming in with existing brands in a new package, so it's not dependant on the success of a new product, and we know what the traditional volume levels have been in those products for years.

But nonetheless, the volume has not yet flowed into that plan and clearly that's created some negative productivity there.

I will say as I've said before most of our productivity is-- we know well in advance, there are projects that are assigned, capitals that have been assigned, people been assigned to them so we know what they are.

Some of the productivity shortfall, while clearly volume is a factor, but some of the productivity shortfall we've seen in the first quarter, the first half of the year, is basically we made some organizational structural changes over the last number of months to enhance, to make certain that our productivity efforts longer term are just as robust as they've been for the last 10 or 12 years, then focus on longer term continuing our productivity.

Perhaps we've taken our eyes a little bit off of the short-term productivity as we've done that.

We have rejigged that, if you will, and made certain that the focus is equally on the short-term as well as the long-term.

So a combination of that plus just productivity projects we have, cost-related and otherwise, I feel relatively comfortable that we'll deliver the productivity over the balance of the year.

The last question I had and then I'll turn it over; I had expected to see a bit better price/cost performance in consumer based on your dialog in the first quarter.

There were some timing effects related to contracts.

Did price/cost and consumer wind up below your expectations and were there any, assuming that that's the case, were there any particular businesses where it was more difficult than you would have expected and what's the resolution other than time, if you will, to heal that?

Thanks.

Well, I need to-- rather than paint it with a broad brush, I probably need to talk perhaps the individual businesses because in composite cans we are about where we were expected to be on the price/cost side.

We had some resets that took place in June and July, if I'm not mistaken on contracts.

We basically anticipated that, that is in and I would expect improvement on that in the second half of the year.

We chased resin.

We have as you well know certainly, we have about 80% of that business and most all of the plastic business on contracts, and in an inflationary environment where we're chasing resin or inflationary raw material we generally do lag, and we'll obviously get it and as it starts to moderate, we will gain on it.

So we were perhaps a little short of where I expected, George, but as I look at the numbers and look at what's going on, it's about where we expected on the outside side, on both the consumer and industrial side.

The real shortfall is in our contract customers on our outside non-contract customers probably I would say we have a positive price/cost year-over-year.

It's in the contracts where we're lagging that we normally do in an inflationary environment.

Okay, interesting.

I'll turn it over.

Thanks, Harris.

Thank you, George.

Your next question today comes from the line of Ghansham Panjabi with Robert W.

Baird, Please proceed.

Hey guys, good morning.

(Multiple speakers) Good morning.

Harris, the month-to-month trajectory was certainly helpful.

If you were to just look back 1Q vs.

2Q, 1Q I think in aggregate volumes were up mid- to high-single digits across your businesses.

2Q was up about 2% based open what you said.

Commodity costs at the end of the first quarter started moving up quite a bit.

Do you think there's any pull-forward in demand just based on commodity costs going up?

It may have been some, Ghansham, but I would say it was negligible.

It could have been some on the paper side.

We may see some pre-buy of outside sales of paper, but on balance I don't think it would even catch up in the rounding to be perfectly honest.

Okay.

And then a lot of your consumer customers are positioning for price increases for the back half of the year across the board, whether it's food, beverage, or consumer products, and they are sort of tentative in terms of what the consumer will do based on weak consumer spending overall.

They're also exploring new packaging formats to keep the price points constant, perhaps a smaller package or different package.

Are you seeing anything along those lines in terms of product-- project activity?

Actually we are.

I mentioned previously that we had I think about 30 projects in the funnel totaling about $90 million of new projects that we're working on with a number of our consumer customers, and all of them are not going to hit in the second half of this year.

Some of them will be in the first half of next year and into next year, but we still see a lot of activity on new product formats.

Just finally, just a clarification, sorry if I missed this, but what did you say textile cores did during the quarter year-over-year?

They were down 6%.

Okay, thanks so much.

Your next question comes from the line of Philip Ng with Jefferies.

Please proceed.

Good morning guys.

I have a quick question on the consumer margins.

It obviously got squeezed.

With the tinplate prices resetting back half of this year, how much of an improvement should we expect?

As it relates to the consumer margins we would expect that they will improve notably as we move through the balance of the year largely because of recovery of most of the material increases that we've seen, so certainly not full recovery in the third but by the time we get to the fourth, most of the contracts will have reset and we would expect margins to be directionally moving back up in the 9% to 10% range for the consumer business.

And then can you help me, give me a little more color on the consumer business.

It seems like there is a bifurcation in demand byproducts, flexible is quite strong, composite cans is a bit weaker, or what's driving that dynamic?

Can you repeat that?

I'm sorry, I couldn't hear you.

In your consumer packaging business, volumes were quite strong in flexible and then certainly weak in composite cans.

What's driving that bifurcation in demand?

Well, you know I have an opinion.

I think that it's primarily weak consumer demand, but I do think there had been some consolidation in the flexible business and I think we have been a beneficiary of some of that as some people had merged.

I also think that our new product development that we've seen in our flexible packaging driven on the back of technology that we've developed has helped that business grow.

So overall I think consumer demand is down, but I think we've benefited from those two topics on the flexible side of the business.

Okay, thanks, guys.

Your next question comes from the line of Chip Dillon with Vertical Research Partners.

Please proceed.

Yes, good morning.

First question is on the, you mentioned your assumption that OCC would come down toward the end of the year.

I would guess that would mean that would be a benefit that might go away a little bit in the first quarter unless it continues to drop in the first quarter because of your contracts.

Is that a fair sort of guess directionally?

You would hope to have offsets.

And secondly, is that reflected in the way your tax rate goes up in the fourth quarter because I would presume that means you make more in the US in the fourth relative to the third?

Chip, I'm going to defer to my friend across the table about the tax rate, but I would say that's a pretty good educated guess on OCC and what it does.

And the tax rate is based on our expectations of the mix of business in the third versus the fourth quarter, and just the normal activity that occurs in the third quarter.

I don't think much all of it is affected by the change in OCC pricing assumptions in the fourth quarter.

Oh, okay.

And then when you look at the new product development pipeline and just your discussions with your customers, especially the largest ones you've partnered with more closely, are you finding that more of the development is tied to either cost reduction or is it tied more toward, shall I say higher end purposes, whether it's better graphics or ease of dispensing in the case of some of the products that you sell into?

Chip, I think it's in several buckets.

Obviously, cost is always a factor and if they can lower the cost to something they're interested in, but most of these consumer products companies where a lot of this is, they're interested in market share gains for themselves and they looking for better graphics, better ease of opening, and all of the things that you mentioned.

I think technology tends to drive most of it whether it's new product-- whether it is opening and closing features, whether it's appearance on the shelf or any of those things.

Then lastly, Harris, I think over the last couple of years as you witnessed your own balance sheet get quite strong, you've wanted I think to possibly increase the acquisition pace, and we haven't, aside from the deal last year in the middle of the year, hasn't been that robust.

I was wondering do you think it's more function of good properties not being available or is it a matter that they're there, but the price just isn't right?

Chip, you need to think about what we publicly said.

By the year 2014 our goal is to be a $6 billion company and embedded in that is $1 billion worth of acquisitions, and by its nature that says we will make about $200 million worth of acquisitions each year.

We're looking at any give time, we're looking today at things, we're in discussions at any given time, and the things need to meet our criteria.

When we find them and reach them, we'll pull the trigger and when we don't, we won't.

I would say it's not something that keeps me awake at night.

Got you.

Okay, thank you.

Okay, thank you.

Your next question come from the line of Alex Ovshey with Goldman Sachs.

Please proceed.

Good morning.

Good morning, Alex.

How are you?

I'm doing well, Harris, thanks.

Harris, can you share with us what your longer term outlook is for OCC?

Are you concerned that with all the recycle capacity coming on line in China and the sluggish generation in the US that over the next couple of years the world might find itself short of OCC?

I think clearly, I'm not sure my crystal ball of OCC in the future is any better than anybody else's, but as we look at OCC, clearly over the last 5 or 10 years there have been fundamental changes in the demand-- supply-demand balance in OCC with China and India and other places adding all this new capacity, and clearly in that time frame we've seen OCC prices generally trend up a good bit.

I think what I look at from our prospective and clearly today and I think in the future demand may outpace at times supply.

What I worry more about is this Company's ability to pass through price increases to more than cover the raw material costs and I think the business model that we have established with the high percentage under contract, the pass-throughs and our market position around the world allows us to pass-through and have positive price/costs.

With that, I don't really worry that much in the long-term about the price of OCC, whether it is $90 a ton or whether it's $175 a ton.

What I worry about is the fundamental cost position of the products that we make out of that paper, the converted products, and when I look at those versus alternative substrates, paper is significantly cost advantaged.

As long as we manage and have in place mechanisms in our business model that allow us to recover it, it's obviously something we worry and it does keep me awake more at 3 o'clock in the morning than the next acquisition does, but it's something we manage and we traditionally manage it well and I expect us to manage it well.

That's helpful.

To the extent that a deal doesn't come along by year end, can you talk about what your appetite is toward share buy back versus maybe a special dividend versus debt pay-down?

Well, it's not a lot of debt.

We can in fact pay down and need to pay down.

I think our debt-to-capital at the end of the quarter was in the 31% range plus or minus a few basis points.

So traditionally, my expectation is frankly at the end of the year we will have made some acquisitions that won't make the consideration of the discussion that we're talking about a viable alternative, but in the event that it is a viable alternative, we do have a history of buying back stock.

We go back some years, we do have a history of paying special dividends, but I think that's probably a quarter at least away before we get into that consideration, Alex, to be perfectly honest.

Got it.

Maybe one last question for Barry.

What will be the benefit to earnings in 2012 from the $130 million pension contribution in 2011?

How should we think about that?

Well, certainly a big part of that was already factored in.

This year's pension expense since we knew that we were making the $85 million contribution early in the year, it was fully considered in this year to have no additional benefit next year.

The other contribution certainly will have some impact, but again largely considered in what the expense would have otherwise been, so not a lot of year-over-year improvement because most of those are related to the other global plans.

Got it.

Thank you.

Thank you, Alex.

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

Please proceed.

Hi, thank you.

Just a quick question.

As far as some of the business that you had lost, what was the motivation?

Was that because you were higher on the cost curve?

You just didn't want -- how do you think about this going forward?

Actually, the service business that we lost, that we talked about for some time.

The consumer, the company decided that they would use a switch contract manufacturers or use a contract manufacturer to manage the product and that contract manufacturer wanted to do their own packaging, so they moved both packaging and product manufacturing to one person, so that was the basis of it.

Okay.

All right, thank you very much.

You're welcome.

Your next question comes from the line of Mark Wilde with Deutsche Bank.

Please proceed.

Good morning, Harris, good morning, Barry.

(Multiple speakers) Good morning, how are you?

Excellent.

Harris, in your commentary you mentioned that you are seeing some slowing in some of the emerging markets.

I wondered if you could amplify on that a little bit?

You know, I think clearly, I was in a meeting on Monday with our folks from Asia and they were talking about basically what was happening in Singapore, that Singapore would have basically negative GDP in the second quarter, and that Singapore obviously exports a lot of electronics and we put film for plasma televisions and other plasma-type film on our tubes and cores.

Clearly as that demand has fallen in Europe and the US for televisions and other things, that has a throwback effect on us.

But I think the same thing is occurring, Mark, in textile demand which is obviously down from China and other places.

We're seeing in South America, for instance, we're seeing a lot of imported textiles coming in out of China into Brazil, which is affecting their markets.

I think we live in a global economy today which you very well know, so slowing consumer demand in Europe and here has a playback in some of these other emerging markets which I think we are clearly seeing.

Okay.

Related to that, since you mentioned Brazil and we know the strength of the currency is growing more imports in there and I think making exports a little more difficult, are there other places across your business where you're seeing some fallout from FX right now?

I would say what you describe in Brazil is exactly what we're seeing and I would say that's the biggest geography-- biggest country we're seeing that effect in.

Okay, just on input costs.

I think you mentioned that, you know, your third quarter assumption is for the current Yellow Sheet price.

If prices were to move up in August and then sit there at that level in September, would that mean you'd have a higher cost there than you're currently baking in?

It's no question it would be higher cost, and it would be a higher cost, no question about that.

Could you remind us how much the monthly OCC purchase runs?

Across Sonoco?

Well, just to put it in perspective, each $10 change when you look across our integrated business including the benefit we would get in recycling from the higher selling prices would cost us roughly $750,000 a month for each $10 change.

Okay, that sounds great.

What are you guys assuming in terms of resin behavior here in the third quarter and how does that fit into your guidance numbers?

We look at resin as sort of being peaked and it will start trending down.

I don't know specifically, Mark, to be honest what kind of trends because we use so many different resins and they've gone up so much.

To give you an answer to that would be probably inaccurate and I don't know it anyway.

Okay, that's fair enough.

Thank you, Harris, good luck in the third quarter.

Thank you very much.

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

Please proceed.

Good morning, gentlemen.

(Multiple speakers) Good morning, Chris, how are you?

I'm all right, thank you.

Most of my questions have been asked and answered.

I wanted to focus in on one area and that was, as you're thinking about the back half of the year, new expectations versus old.

It sounds like, Harris, you talked about, it was very good color with the month-to-month trajectory, but as a whole it sounds like the back half of the year is slowing a little bit.

What I wanted to get my arms around is, if I look at the downward revision which you made in guidance, it's about $0.06 or so at the midpoint and it's more than what your shortfall was here in Q2.

I'm trying to understand what the difference is.

If it's mostly volume-related, is there also some lingering productivity impact that you're running through there, or is it -- I would think that some of the raw materials are better than you anticipated earlier in the year?

Just trying to understand what's driving the balance of the year variance.

Chris, the variance is primarily volume, and we started the year with our regional guidance, I think with planning volume increases 3%, 3.5% range, if I'm not mistaken.

What we're seeing and we thought we would see slightly continuing volume.

What we saw was basically flat volumes.

In some cases, negative volumes.

What we're projecting for the balance of the year I think we've said, is basically volumes continuing like they were in the second quarter.

Isn't that fair, Barry?

So something in the 2%-ish as a whole Company?

That's right.

And we're expecting the seasonality that we normally would expect in the third and fourth quarter.

So I would say they are puts and takes, but the biggest issue is the volume expectations.

But clearly, the price/cost is also a little bit more negative in the third quarter in particular than we expected before because of the head-winds we're seeing with OCC and the fact that all of the resin price increases we've seen as well.

Right.

Okay.

And then when we think about mix, that was another item that had some impact here as you-- certain components within your composite cans that obviously given they are fully integrated for your high margin business.

Has that-- the trajectory of that as we have worked our way through July improved, that you just looked at it as a temporary thing you absorbed or how do you think about mix as well through the back half of the year?

Chris, I don't know how to answer that other than to say in that mix that I mentioned in my comments early on, you got certain sectors that just by their nature are higher, and I'll take one being fiber caulk cartridges.

It was up last year and the housing starts are up, but it's obviously down to the extent that it improves and obviously we'll get some higher margin mix into the business.

Those are complicated tubes to make and they carry higher margins.

It's a guesstimate on my part just to say what that mix is going to look like.

Okay, that's helpful.

Those are all my questions.

Thank you.

Good luck.

Thank you, Chris.

Your next question comes from the line of Bill Selesky with Argus research.

Please proceed.

Hi guys, good morning.

Good morning, Bill.

Hey Bill, how are you?

I'm fine, thanks.

I just wanted to ask a question regarding contractual resets.

I think you mentioned that some of your contractual resets will hit Q3.

I'm wondering if these resets will allow you to at least catch up to where you want to be in with respect to raw material and input costs, or will the catch-up really hit or occur in the fourth quarter?

Certainly a good bit will be caught up in the third quarter, but we'll continue to see some benefit in the fourth quarter as well, particularly in the consumer businesses, and with the industrial businesses as well based on the assumptions we made for OCC prices.

Okay, great.

The only other question I had was regarding productivity.

Some of the negative productivity issues that happened here in the second quarter, could you discuss what you think will happen in Q3 with respect to some of those?

Other than volume, will most of these tend to play itself out and you should be in better shape heading into Q3 and Q4?

Bill, I would certainly hope that those things have all ready played themselves out.

I think, either I mentioned or Barry mentioned in our comments, that June was the strongest productivity we've seen year-to-date.

It was over our budget and over our planned number for productivity.

In fact, our productivity in June represented about a third of the productivity we've seen in the first half of the year, so my expectation is clearly that we're back on track with our productivity and we'll see a significant improvement in the second half of the year.

Okay, that's great, I appreciate that.

Thanks much, guys.

Thank you, Bill.

Your next question comes from the line of David Leibowitz with Horizon.

Please proceed.

Please proceed.

Good morning.

Good morning, David.

How are you?

All right.

Very briefly, the --- a few questions.

One, your operating capacity.

What percentage were you operating at by major business line?

David, I don't know that.

We generally look at the mill system.

The mill system was operating in the 97%, 98% operating rate.

Most of our other converting businesses operate on one or two shifts on a 5-day shift, so it would be very easy to additional shift, to add additional people to get capacity.

Capacity is not an issue for Sonoco.

Second question, the inventories on the balance sheet were up and I was wondering how much of that is price and how much of that is actual merchandise?

You know, I would say to you that our working capital program while Barry mentioned it is up, our working capital in terms of days where we track it are well within plan or at plan or within plan.

The dollars are up primarily because of raw material costs, input costs, and then both the unfinished goods, the (inaudible) in process, and the finished goods, and I would say I don't know the exact answer, but I would say I would hazard a guess it's 90% to 95% of price and not additional inventories.

And you made mention several times about new product introductions in the second half, especially in the fourth quarter.

As things stand today, do you expect to see more new product sales in this year's second half than you had last year?

I don't know about compared to last year because I don't look at it like that.

What I think we said is that we would have about $150 million to $175 million of new product sales for the year through the first six months it was at $77 million, so I still feel good about that goal of $150 million to 175 million.

We will have some product introductions in the second half which will add to that number.

And the last question, if I may.

In terms of share market, in looking at your major categories, do you believe you've gained or lost share of market by category?

I don't think there's been much change at all in the quarter either way, David.

We haven't loss any market share and I don't know of any significant pick ups that we've had other than the new products which obviously weren't cannibalizing other things that we had.

I apologize for one final one because I had neglected it when I went through my list.

Your target for 2014, in terms of share of market or share of company being retail or consumer-oriented versus industrial, have you had any changes in your thoughts on that score?

We have not.

I still think it will be about 60% or so consumer and the balance industrial.

Thank you very much.

You're very welcome, David.

Your next question come comes from the line of Tom Mullarkey with Morningstar.

Please proceed.

Hi, Harris.

Hi, Tom, how are you?

Doing good, thanks.

My question about the consumer segment.

You talked about a mix, where the composite cans for nuts, infant formula and juice, where the demand for those products were actually lower in this quarter.

Do you see that bouncing back soon or is some of your customers actually switching packaging materials for those products?

I hate to say it's 100%, but I would say it's 95% consumer demand for those products.

We always see some shifting going back and forth in some packaging, but predominant shortfall here is consumer demand.

Okay, thanks, Harris.

You're welcome.

(Operator Instructions).

Your next question is a follow-up from the line of George Staphos from Bank of America.

Please proceed.

Thanks, hi, guys.

Couple of follow-ups here.

I want to go back again to the first quarter, Harris, and the consumer segment.

If I remember correctly, the figure was either $3 million or $6 million.

There was a timing effect, if you will, that was negative in terms of how you did price cost and consumer that should have improved and reversed itself for the second quarter.

If I look at last year's second quarter, you did about $42 million in EBITDA and consumer, this year second quarter you posted something around $35 million.

If I'm correct with that had additional benefit you should have gotten this year, that would make the delta, something on the order of $10 million or more.

If I'm missing some things in terms of that bridge analysis, please fill them in, then in turn if you can help us understand how much of that variance was mix and how much of it was purely cost, resin and film raced ahead of what you thought they would be for quarter?

I don't know the answer to that.

Let us take a look and we'll get to you on that because frankly I can't say, I don't have the information in front of me to figure that.

Okay.

But there was no price competition above and beyond kind of the normal vagaries of the market this quarter that passed; correct?

No, not at all.

What I'm not really referencing is last year.

I don't have that in my mind.

Being compared to the first quarter, what we said we would see is we had some price resets that where we ate the cost in the first quarter that they wouldn't reset until the second quarter.

Right.

We still had that in April and May.

One reset in June and one didn't reset until July, so we actually still had that negative effect rolling through most of the second quarter, although there was one in April, but we still had that negative effect.

Now, that will reverse itself in the second half of the year in the composite can side.

But let me get back to you on all of that information.

okay.

Because some of that effect reversed itself last year in the second quarter so it should have helped your comparison.

It did, however we had some different dynamics going on in the first quarter of last year and the second quarter where we had from the year before we had some positive in last year's first quarter that we did not have in this first quarter of this year.

Let us sort that out and we'll get back to.

Fair enough.

Barry, as we think about the shipping days in the fourth quarter, you know, that move to the first quarter this year.

What will that cost you do you think from an EPS standpoint?

Is that two or three pennies that we should have in the back of our minds as a headwind in the fourth Q?

It's certainly in the guidance.

As we anticipated the shorter year-over-year quarter.

In the first quarter we said it was roughly 6% extra days so it would a similar amount be in the fourth quarter that we would lose this year.

Two last ones on internationals.

Harris did say you had a mill fire in Germany?

Did I hear that correctly and if not, where was it?

And then longer term, how do you accelerate the growth in industrial where you have such great margins and returns above and beyond what you've all ready done?

Thanks, guys, and good luck in the quarter.

George, give me the second question again.

Your tube and core business has such great returns over time for any number of reasons.

How do you accelerate the growth of that business outside of the US above and beyond what you've all ready done?

What are the opportunities, what are the hurdles to being able to do that?

Okay, thank you.

The fire in Germany was at one of our smaller mills, I think it was an (inaudible) mill and it was very minor, but it did create some downtime for a day or so or a couple of days, two weeks, but it wasn't anything of substantial damage.

I think the acceleration there will be some further consolidation of this market probably in Europe and in South America, and clearly in Asia over time which will accelerate the growth of it then I think you do it with particularly in Asia with a lot of the technology that we have in other places around the world as that market emerges but that will come in time.

Okay.

Thanks very much, Harris.

Your next question is another follow-up from the line of Chip Dillon with Vertical Research Partners.

Please proceed.

Yes, thank you.

It seems like on the last call that we were all very surprised, I think happy with how well the services segment was doing.

My impression is it probably wouldn't continue at that strong pace, yet in the second quarter it was another up sequential result which is terrific.

Should we be thinking better of that business or do you feel better about that business than you did say 3 months ago?

I feel better about that business I did three months ago, six months ago, and nine months ago.

I think they're making good progress, Chip, but I think clearly what we've said is the business that we lost we knew was going to go away.

You should not take the earnings from this quarter and extrapolate it over the next couple of quarters, but I do feel much better about the business, we're picking up business and I feel quite good about it actually.

Do you feel like by next year it's reasonable that maybe the earnings ratio we saw in the first half of 2011 could be obtained or is that probably a little aggressive at this point?

That's probably a little aggressive at this point.

Okay, thank you.

Thank you, Chip.

Your final question is a follow-up from the line of Mark Wilde with Deutsche Bank.

Please proceed.

Harris, to the extent that we kind of continue in this low growth mode and we're continuing to face some structural issues in some of your markets for tubes and cores like the paper business.

Have you restructured that business as much as need to or is there potentially you need to down size capacity further?

I don't know if we need to down size capacity, Mark.

We're running at pretty good rates and we have down sized the plant foot print in the tubing core business in North America, but the problem is these are small plants that are dedicated to customers, so you probably don't down size them a lot more.

We've obviously restructured -- we talked where we collapsed the industrial business from a number of business segments into several business sectors, so I'm not going to say that there's never anyway to restructure it, but we've done a pretty good job I believe over the last number of years of adjusting that business to demand and we look at that frankly on a pretty consistent basis, and when the need arises to do it, we do it.

Okay.

On the other side of that, you know, as we see some of these businesses growing so rapidly in places like China, have you been able to put the same kind of business model in place in China that you've had here and in some other parts of the world where you have a small captive tube plant feeding a particular customer?

You may have a small tube and core plant that is dedicated to a customer or multiple customers, but clearly what we've found in every geography it's a little bit of a different business model, such as in Europe we're a net buyer of board, here we're a net seller of board, in Asia we buy all of our board, in South America it's a different business model.

It needs to fit the geography, but the small plants close to the customer because of transportation costs are really the norm.

Okay.

And then finally, have you picked up any share domestically on the business because you've had two big competitors that have gone through restructuring over the two years?

As I responded to someone earlier, I don't think we've seen much gain or loss in clearly this quarter.

We picked up business over the past several years, but we've also lost some business.

Fair enough.

Good luck in the third quarter.

Thank you, Mark.

Ladies and gentlemen, that does conclude our question and answer portion of the call.

I would like to turn it back over to Mr.

Roger Schrum for closing remarks.

Thank you again, Modesta.

As a reminder, Sonoco's management team will be making several investor conference appearances in the months of August and September.

For more information on these upcoming events, simply go to Sonoco.com and click or our investor relations site and look under the events calendar.

In addition we do expect to release third quarter financial results on October 20th, so look please look forward to our announcement before that time.

Let me again thank everyone for participating in today's call.

We do appreciate your interest in the Company and as always, if you have further questions, please don't hesitate to contact us.

Thank you again.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation and you may now disconnect.

Have a great day.