Sonoco Products Co (SON) 2011 Q3 法說會逐字稿

Good day and welcome to the third quarter 2011 Sonoco Products Corporation earnings teleconference.

My name is Candice, and I will be your coordinator for today.

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

After management's remarks we will conduct a Q&A session.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's conference, Vice President of Investor Relations, Mr.

Roger Schrum.

You may proceed, sir.

Thank you, Candice.

Good morning and welcome to Sonoco's third quarter investor call.

This call is being conducted on October 19, 2011.

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

The news release discussing the Company's third quarter financial results was released after the market closed on Tuesday October 18th, and is available on our Investor Relations section of our website at Sonoco.com.

Let me begin by stating that today's 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 of the use by the Company of non-GAAP financial measures is available in today's news release, and on the Company's website.

With that I will turn it over to Barry Saunders.

Thank you, Roger.

After the close of the market yesterday Sonoco reported that third quarter sales were $1,124,000,000, up $72 million, or 7% over last year's third quarter.

We reported GAAP earnings per diluted share or EPS of $0.76 per share, and base EPS of $0.66 per share.

The base EPS of $0.66 is one penny better than last year's base EPS of $0.65 and within our guidance of $0.64 to $0.68.

Let me first describe why GAAP EPS was $0.10 higher than base EPS.

The most significant item impacting this is the net $18 million reduction in tax expense or $0.18 per share associated with the reduction in the valuation allowance against deferred tax assets.

This was comprised of two separate events, the first being a $24 million relief of evaluation allowance against deferred tax assets in Europe.

The deferred tax assets results from cumulative net operating loss carry-forwards in one legal entity that had been fully reserved for through the valuation allowance due to the uncertainty of being able to use NOLs.

However, due to improved operating results in that entity, we are comfortable that the NOLs will be useable and thus have released the full reserve.

Partially offsetting this is the increase in the valuation reserve by $5 million in Canada, as a result of the decision to close a thermoforming plant.

The business will be transitioned to other plants in the US to better leverage capacity, and to be closer to the customer base, but since this was the primary activity of this particular legal entity, we have to create a valuation reserve against the deferred tax assets that were on the books.

Restructuring and asset impairment charges of $12 million pretax, or $0.07 per share after tax, is primarily related to the closure of a tube and core plant in Europe, the closure of a thermoforming plant in Canada that I just mentioned along with additional charges related to previously announced restructuring actions.

Fees associated with acquisitions and divestitures cost us about $1.5 million after tax in the quarter, or a penny a share.

Thus the net impact of the lower income tax from the net release to valuation reserve partially offset by the restructuring expense and acquisition fees accounted for the $0.10 benefit that has been excluded from base EPS.

Last year we just had $0.07 of restructuring and asset impairment charges and $0.01 of acquisition related costs.

All of my comments will be directed towards our base income statement which excludes the previously mentioned adjustments, and as Roger mentioned, you can find the reconciliation of GAAP to base numbers in our press release and on our website.

As usual I will first walk through the P&L then talk about the drivers of the change.

As I just mentioned sales of $1,124,000,000 were up $72 million year-over-year.

Base income before interest and income taxes or EBIT was $98.6 million unchanged from the prior year, as gross profit was lower by $13 million offset by a favorable variance of the same amount in selling, general and administrative expenses, both of which will be discussed when we review the bridge.

Interest was essentially unchanged at $8.3 million thus base income before income taxes was also unchanged at $90.2 million.

Base income tax expense was $26.3 million, versus $26.6 million last year as the effective tax rate on base earnings dropped to 29.1% for the quarter, versus 29.6% last year.

Let me take a moment to explain the change in effective tax rate and why it was lower than what we expected when we provided our third quarter guidance last quarter.

During the quarter we recognized about $2 million in income from some company owned life insurance policies and such income comes without tax expense.

Equity and affiliates net of minority interest of $3.2 million was about $400,000 less than last year.

Thus net income attributable to Sonoco was $67.1 million and with slightly fewer average shares outstanding and rounding EPS was $0.01 higher.

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

The $72 million increase in sales can be explained by four drivers.

Volume and mix was down or negative by $4 million.

Price was favorable and accounted for $54 million of the increase.

Dispositions net of acquisitions lowered sales by $1 million.

And exchange in other added $23 million to sales.

First focusing on volume, volume in the consumer segment overall was up just around 2% driven by continued higher volume in flexibles and plastics.

We continue to see nice improvement in flexibles, which was up 8% year-over-year driven by both demand in base business and new business awards.

Low molded plastics was up 16% in unit terms, and in terms of other plastics activity in this segment this was partially offset by thermoforming activity which was down about 2%, and tube and extrusion, tube extrusion for the adhesives and sealants market was off 19%, due to continued softness in building and construction.

In terms of the largest business in the consumer segment, composite canned volume in North America was down right at 1%, as higher volume in coffee and powdered beverages was offset by declines in the other market segments.

Trade sales of metal ends were also down about 8%, primarily as a result of underlying demand of our customers.

Outside North America composite canned volume was up modestly, but not enough to make a real difference for the segment as a whole.

In the tubes, cores and paper segment volume was down approximately 2% overall.

Tube and core volume in North America was down 4.7% due to demand by served customers, as there was no notable overall change in market share.

In terms of market segments, textiles were down almost 8%, film was down 7%, paper mill packaging was down 4%, and tape and specialty down just 1%.

Molded plug sales were also down year-over-year.

Most of the volume downturn occurred in September.

July was a little softer than what we expected but then improved notably in August, then dropped much more expected in September.

Year-over-year volume for the month of September was down 8%.

Customers seem to be very uncertain of their own demand over the very near term, and we are seeing significant swings in order patterns.

In terms of the impact on paper, even with the internal paper demand being down in North America, as a result of 7% increase in trade tons, total tons in paper North America were essentially flat year-over-year.

Corrugating volume was up about 1%, and activity and recycling was up about 1%.

Outside of North America tube and core volume in Europe was down 2% for the quarter year-over-year, as it was down about 4% in the legacy countries to the West and then that was only partially offset by sales in the eastern frontier region being up almost 4%.

Paper Europe volume overall was down 5% driven by lower trade sales.

Although much smaller and therefore does not notably impact the results, tube and core volume was off 8% in South America due to both market softness across the region and some from what we expect to be temporary share loss associated with some price increase implementations.

Volume was up in Asia but only up 3% driven by higher sales in Malaysia and Indonesia.

Packaging services activity was also higher year-over-year compared to the same quarter last year as the previously announced loss of one contract packaging account was more than offset by volume growth in the US, driven by fulfillment activities and manufacturing as well as an increase in international activities.

However, mix negatively affected the top line as well as a result of the move of some of the activities for blade and razor packaging to Mexico, where the lower cost environment results in lower billings.

Business in all other Sonoco had overall volume increase as well, as molded plastics volume was up about 4%, reels volume was up 12% due to the higher demand for steel reels for the utility industry, and this was partially offset by protective packaging volume being down 16% associated with the lower demand in appliance industry as compared with last year, when last year benefited from the economic stimulus program.

Then moving down to price, price accounted for $54 million of the increase in sales associated with higher input costs in most all businesses.

In the consumer businesses prices were up in composite cans, flexibles and plastics, as a result of rising material costs.

Overall trade prices in North American tubes and cores were about 3% higher, due to higher reset points on contract tons as many contracts reset at June's OCC price, based on the Southeast Yellow Sheet of $150 per ton, versus $125 per ton in June of 2010, as well as the benefit of increases on previously announced price increases for businesses not subject to contractual reset.

Prices for paperboard sold externally were also higher due to contract resets and other market increases.

Recycling prices were of course higher as average OCC prices based on the Southeast Yellow Sheet were $173 per ton versus $123 per ton for the same quarter last year.

Price increases have also been more successfully implemented now in tubes and cores Europe, where the weighted average price which might have a little currency and mix impact in it was up 7% year-over-year.

To round out the sales bridge, the impact from acquisitions and dispositions was just the net impact of the sales associated with the disposition of the small injection molded plastics business in Brazil, partially offset by the acquisition of a small composite can manufacture in the UK, both of which were mentioned last quarter.

Finally, foreign translation and other sales differences had a favorable impact right at $23 million, driven primarily by as foreign exchange rates on average for the quarter as a whole, where the dollar was weakened year-over-year about 9% against the euro, 6% against the Canadian dollar.

As usual, when you get all the way to net income, translation had little impact on the year-over-year results probably adding only about a penny or so.

Moving onto the EBIT bridge, I will quantify the drivers, then discuss each of them.

Volume and mix was negative by $12 million.

Price net of material, energy, and freight inflation was negative by $3 million.

Productivity was positive by $6 million, and other which is our catch-all category was positive this quarter by $7 million, and finally, pension was favorable by $2 million.

The above items net to zero, and explain why EBIT was essentially unchanged year-over-year.

Starting with volume, you see that the slight volume mix shortfall in sales translated to even a bigger impact on earnings due to a notable change in the mix of products sold within several businesses.

Examples of this mix include in tubes and cores North America where we had lower sales of molded plugs which had good contributions.

In paper North America we had more trade sales part of which was in edge board, which generally has a lower margin.

Sonoco recycling had negative mix just due to the mix in materials and more Sonoco sustainability services or S3 activity.

Composite cans had a negative mix as coffee sales were up, but sales in the nuts PIF and adhesives and sealant segments were down.

In Flexible packaging we saw some negative mix just to where some of the growth currently came in at a lower margin than some of the other business.

Finally, in protective packaging there was just a shift in the customer mix in that business.

Moving onto price cost which again was negative by $3 million, as a benefit of the higher prices you saw in the sales bridge, was more than offset by material, energy and freight.

Although not big shortfalls in any particular business unit or segment, they did add up to $3 million negative variance.

Although prices were up in consumer as I mentioned, materials were also up and just slightly more.

Steel was up just under 10%.

Aluminum roughly 16%, coatings and outside processing costs for metal ends were also up.

Flexible film costs were up between anywhere between 13% and 20%, and resins were higher year-over-year anywhere between 15% and 30% depending on the type.

In the tubes and cores paper segment although I describe that overall price increases, costs were up even more as average OCC prices as I mentioned based on the Southeast Yellow Sheet were $173 per ton this year versus $123 last year.

Just to clarify, last year many contracts reset at $125 then actual costs averaged $123, while this year those same contracts would have reset at $150 then averaged $173 for the quarter.

I will point out that we do expect this to move favorable in the fourth quarter as OCC was at $175 in September, and subsequently dropped to $160 in October, with further softening anticipated so we would expect to be price cost positive in the fourth quarter in the segment, and we have assumed an average OCC price of approximately $145 for the fourth quarter.

Productivity of $6 million was once again somewhat weaker than we had expected.

As opposed to previous quarters, where there were really a handful of issues that were identified and corrected, this time the shortfall is more widespread, particularly in the industrial businesses where we continue to see the benefit of productivity initiatives, but it was notably masked by the increased operating costs associated with more volatility in our customers' order patterns, which makes labor optimization much more difficult.

Productivity also continued to be light in flexibles and blow molded plastics, due to the impact of bringing in the amount of new business that I mentioned earlier.

Productivity was also light in paper operations in North America where our machines overall were running well, and tons per day were actually up 3% year-over-year, but with flat demand we had to take more down time.

We had 105 days down this year versus 87 last year.

Capacity utilization was about 97.7% this year versus 99.6% last year.

Other is the catch-all category and was actually positive year-over-year by $7 million due primarily to lower S&A costs.

S&A costs were lower due to lower management incentives, fixed cost reduction and control initiatives, income from company-owned life insurance, a favorable net foreign currency exchange, all of which was notably higher than inflation on fixed costs.

Finally, pension expense was lower year-over-year by $2 million.

As I previously mentioned, all of the above essentially nets to no change in EBIT year-over-year.

Now when you look at our results in terms of segments, which you find on page 7 in our press release, you can see that consumer sales were up right at 7%, driven primarily by the higher selling prices, while earnings were up 2%, with EBIT at 10% of sales versus 10.6% last year.

The margin was lower due to the mix of slightly negative price/cost relationship and the continued cost associated with bringing in the new business in plastics and flexibles, as well as simply the impact of the higher sales base associated with the price increase as in the margin calculation.

Trade sales were up 10% in the tubes, cores and paper segment due to the higher selling prices and the impact of foreign exchange partially offset by the lower overall volume.

EBIT was down due to the impact of lower volume, the related impact on productivity, which did not offset inflation, and the impact of mix.

Resulting segment margins were therefore down to 7.5% this year versus 9.2% last year, but like mentioned in consumer, the margin percent is also affected by simply a higher sales base from price increases, which probably made about a half a percent difference or so in the EBIT margin itself.

Sales were down slightly in packaging services due primarily to the change in mix as I mentioned earlier, while profits improved due to lower selling and administrative and other costs.

Sales were up in the businesses in the all other category by just over 4%, and margins, EBIT margins, remained strong at 14%.

Now turning to cash flow, we generated right at $100 million in cash from operations during the third quarter, which was $45 million lower than the same period last year.

The change can really be summarized by $24 million increase in working capital, $11 million in higher pension and post-retirement contributions this year versus the same quarter last year, and $6 million in lower dividends from affiliates.

The increase in working capital was due to the impact of inflation, as well as a slight change in our cash cap days during the quarter, but we are still at our cash cap goal for the year.

Our latest forecast indicates that we still project to generate approximately $260 million in cash from operations, which includes the impact of contributing approximately $140 million to all of our pension and post-retirement plans.

Capital spending was $44 million for the quarter, which was up only slightly from last year's $42 million, and we still expect capital spending to be roughly $150 million for the full year.

As you know, we paid dividends of $0.29 per share, or $25 million in the quarter, which represents just under a 4% yield on an annualized basis.

Our balance sheet remained strong through the quarter, with debt to total capital of 32.2% at the end of the quarter, and as previously announced, we expect that it could be in the mid-40s at the end of the year following the closing of the announced acquisition of Tegrant.

Turning to guidance for the quarter, for the fourth quarter, we project that base earnings will be in the range of $0.59 to $0.63 per diluted share, thus making our full year guidance in the range of $2.41 to $2.45.

As normal, this is based on the rollup of our division individual forecast.

This guidance assumes economic activity is basically unchanged from the current level, which is somewhat softer from the previously reforecast adjusted for seasonality.

This also takes into consideration that we should have a favorable price/cost relationship in the industrial businesses in North America as I previously described.

This also excludes any impact from the Tegrant acquisition, which depending on the closing date could be a few cents dilutive this year, and also excludes any restructuring or acquisition related costs.

The guidance does assume an effective tax rate of 32.5% for the quarter.

As a reminder, because of the change in this year's accounting calendar, there are six fewer days in this year's fourth quarter versus the same period last year, and as you probably recall we actually had six more days in the first quarter this year versus last year.

So that completes my review of the quarter, and we can now take questions.

Thank you, sir.

(Operator Instructions).

Our first question will come from the line of George Staphos with Bank of America Merrill Lynch.

You may proceed.

Hi everyone.

Good morning.

I wanted to dig into trends exiting the third quarter into the fourth quarter.

Given the pickup that you should be seeing from price costs in tubes and cores paper, yet we overlay that with the reduction in guidance overall for the year and I guess implied in the fourth quarter, does that suggest that the change that occurred in September, the deceleration or decline continued into October, and if you could if that is true or not for that matter, can you provide some color around the businesses early in October?

George, I am not sure that we can give you a lot the color on October at this point in time, other than to say we continue to see the fluctuation that we have seen since probably the mid-second quarter, where we will see that one week it is up and the next week it is down, and we have seen that pattern continue into October, with one week up and one week down, and I would say that the guidance as Barry said, was based on the run rate that we were seeing in the third quarter, which obviously was exacerbated by a more significant decline in September than we had anticipated in the previous guidance.

I think Barry said that while July was relatively weak, August was relatively strong, and September was pretty weak.

So just to comment, one week up, one week down, the best you can see October is flat with September?

That is a fair statement.

Okay.

I guess the second question would be, Harris, when you speak with your customers about why they are doing that, obviously to some degree it speaks well of their view of Sonoco's ability to meet them in the supply chain.

I know it must wreak havoc to some degree with your own efficiencies as you mentioned, but what is going on in terms of this sawtooth pattern we are seeing in terms of demand?

You are not alone.

We are seeing it in other sectors.

Right.

I am going to let Jack Sanders talk to that.

Hey, Jack, how are you?

Good, George, how are you?

Doing well.

We have asked that question of our customers and the answer we get back is simply, we get orders when they get orders.

I think that we have skinnied the inventories up so much between the companies that we are seeing an absolute pull-through of demand, and that is the best explanation that we can get and it has been consistent from several customers.

Okay.

Two last ones and I will turn it over.

One, can you comment as to why you were able to take a couple million dollars of income from the Company on life insurance this quarter?

Was that planned?

Were there any special circumstances, and realizing it is not part of base earnings, can you comment as to what improved in Europe that allowed you to release these valuation allowance reserves that you had previously built up?

That's maybe doesn't help you now, but certainly positive for the future.

Thanks.

George, let me take both of those.

The first thing, you incorrectly stated that the Company owned life insurance was not in base earnings.

It was in fact in base earnings.

The expense of the company owned life insurance has been in base earnings since the program started back in the--

I know that, Harris, I was referring to the valuation allowance reserve.

But keep going.

I am sorry.

I thought you were referring to the Company owned life insurance.

No problem.

Well, we funded through company owned life insurance a lot of some of our SERP, and some of those items and actually we had two former executives that passed away during the quarter, so I hope that doesn't recur in the next quarter.

Understood.

That is the Company owned life insurance.

Back in I think the 1990s or early part of this last decade, we put these reserves in in one of the European operations, and these NOLs really originated back in some acquisitions that we made in the 1990s, and we weren't getting the kind of returns, the profitability out of that business that we thought that could guarantee those, so we reserved against them.

The profitability of that business has improved fairly significantly over the last couple of years and we felt that we could take the reserves and obviously did.

Okay.

Thanks.

I will turn it over.

You are welcome.

Thank you.

Our next question will come from the line of Phil Gresh with JPMorgan.

You may proceed.

Good morning.

Good morning.

A couple of questions.

On the productivity side of things you talked earlier, last quarter about kind of getting the numbers back up to the range you have been targeting, but it seems to continue to track more in line with the second quarter, so sounds like from the commentary some of these changes sound a bit structural, in terms of the way you are having to manage your business because of the customer order trend.

Would you agree with that and would you say that maybe in the near term we should be thinking something more along the lines of what you have been achieving the past couple of quarters, and is that kind of what is embedded in your guidance at this stage?

Bill, this is Jack.

I certainly think that what we were saying was that in the first half of the year we had some issues around unusual events that were affecting productivity.

This quarter we really didn't see that.

We saw productivity that was consistent with what we have tried to do in the past.

We saw the projects that we were working through in the past come through as we expected, and that is what we were really saying, productivity is back on target from that aspect.

As you said, our order pattern is changing, and what we have been able to do in the past, when we would see an order pattern change, you would see it change for an extended period, we would release labor and then begin to recoup some of what would be negative productivity.

The volatility creates an inability to do that, because we don't really know if the next week is going to be weak or strong just yet, so we have to hold those labors, that labor and the other costs on a little longer.

Is that a structural change?

It is too soon for me to say that.

It is certainly something we are dealing with now and we are looking at ways very aggressively to how do we deal with that assuming it continues for a while?

I am not certain it is a structural change just yet.

Okay.

And then just I guess on the cost reduction measures that you talked about taking, is there a way to quantify how much you are thinking at this stage, and would those be more temporary saves or permanent measures?

They would be more permanent measures and I think it would be a bit premature to quantify that at this point.

We will give you more color on that in December at the Analyst Meeting and the impact on next year.

Okay.

So it is not something we should think about for 4Q at this stage?

I don't think it will have an impact, Phil, to be perfectly honest in the fourth quarter.

If it is, it is baked into the guidance.

Okay.

Just one more question on the guidance, the mix side of things looks like it was probably the majority of that negative $12 million impact of volume mix I am assuming, and if that is the case what are you assuming for next quarter?

Are you assuming the trends continue in a similar way, or does that reverse itself?

I think we can continue to feel the mix will continue to certainly in the fourth quarter, and I don't know how much of that $12 million was mix and how much of it was volume.

I would guess that the bigger portion of it was volume itself.

Okay.

But you are assuming that the mix continues this way?

I would think the mix will continue.

Okay.

Alright.

Thanks a lot.

Our next question will come from the line of Ghansham Panjabi with Baird.

You may proceed.

Good morning.

Good morning, Ghansham.

On the interquarter commentary September being the weakest, how would you parse that on a geographic basis?

Was Europe just as weak as North America in September, or was it weaker?

How should we think about that?

Ghansham, I will just give you some numbers actually.

Tube and core in North America was down, as Barry said, I think slightly over 4%, Europe was down about 2%, and South America was down about 8%, and Asia was up about 3% which was down from a year, I guess up 3% year-over-year.

That was in September?

That was no, excuse me, that was for the quarter.

The quarter.

I don't know that I have all the way around, September, in North America was down about 8%, Europe was basically about 2% to flat I guess Europe was flat year-over-year, and I really don't know what South America and Asia were in September.

Got it, that is helpful.

On the consumer packaging business, it seems very, very strong in the face of very weak numbers for branded food volumes in the US.

Apart from flexible packaging were there any specific areas that you picked up some market share maybe?

Ghansham, this is Jack.

I think we have picked up market share in both flexibles and in molded plastics, blow molding.

And Jack, if you could just comment on new product activity of the customer level there?

I can.

We did have new product activity that was in line with our expectations for the quarter and came in at about $35 million.

We expect to see somewhere in that range of $150 million to $160 million this year for new products, and that is inclusive of the conversion of Maxwell House actually dropped off in the quarter, so the program we have to continually roll this forward, and only keep it on two years, we continue to build new products and roll them off, roll others off into legacy products, so we were pleased.

Okay.

Just one final question.

Maybe for Barry on the pension side for 2012, how should we think about just an early glimpse on expense and also cash contributions?

Thank you very much.

Certainly.

We are still in the process of putting our outlook for 2012 together, and including pension expense, so I really don't have an update for you on that at this time.

We certainly will be providing that update in the New York meeting as well.

In terms of the pension obligation, we have published that each 25 basis point change in the discount rate affects the obligation by roughly $30 million or so, and the discount rate at least at this time is down about a percent year-over-year, so again we will have to get to the end of the year to know exactly where the discount rate ends up, and then look at our funded status to determine what if any funding might be required for next year, but again a little bit too early to predict that.

Got it.

Thanks so much.

You are welcome.

Our next question will come from the line of Chip Dillon with Vertical Research Partners.

Yes, good morning.

Good morning, Chip.

I know Harris in the past you mentioned that in 2007 somewhere around the third quarter you noticed a pretty significant change in the tube and core business, that obviously was in hindsight a terrific precursor to what was to come, and as you look at the September fall-off in that business, does it feel like that, or does it feel more like something less severe at this point?

Well, you are referring to the May 2007 timeframe when we saw a downturn.

I would say it wasn't dissimilar to that, but I think that, I don't know what it means, Chip, to be perfectly honest, and that is reasonably cautious in our fourth quarter guidance, but we in early 2007 we had seen a continued uptick that had gone back for probably 12 or 18 months before that, and then we saw the precipitous fall-off.

What's different this time is I think we have seen this bouncing up and down for probably four or five months, and this was a little more, it was more than we had seen.

I wouldn't read that this is an equivalent of 2007 at this point in time, but it is something obviously we are watching.

Right.

Again, the big difference being that you weren't up at such a lofty level like I presume you were at the end of 2006 and the beginning of 2007.

That is exactly correct.

That is good color.

On the recently announced Tegrant acquisition, I know you have said a little bit about that already, but when you look at that business, and you look at some of the other things you have done internally, do you see the potential to accelerate some of the new product flow?

In other words, are there products that Tegrant is working on and what you all are working on that might allow you to accelerate that new product introduction goal that you have as a proportion of your growth going forward?

Absolutely.

I think what I will do, Chip, is let Jack talk about that, because Jack is a protective packaging expert, having grown up in that business.

Chip, yes, let me kind of talk to that.

I have got a couple of points to make there.

Certainly there is a half of that business is broken into thirds.

Half of it is what we call fits more in line with our protective packaging division, fits very nicely, some similar customers but it also expands us into other markets like electronics, and also medical and diagnostic equipment.

That fits well with that particular business.

I would also say another part of that business is a component manufacturing, we are doing a lot of EPP, expanded polypropylene for components in automobiles, as well as in diagnostic and other medical and electronic equipment, so that business fits well with our protective packaging business.

The ThermoSafe business really is a pharma and medical business, and we believe that is a strong opportunity for growth unto itself, and we also believe there is a strong link to our own flexibles business.

We believe we will be able to pull our flexibles into pharma and medical.

They have an excellent reputation.

We believe that is a strong positive for us, and then finally another third of that business is actually 25% of the alloy business's retail security packages, that is really aligned with our services business and we use some of their equipment today and some of the packaging today, and some of the products that we package for our customers, and some don't.

So we believe we are going to be able to pull that along quite nicely through our packaging services business, and vice versa.

Some of the customers they have do a lot of promotion, and we believe we may be able to pull backwards from their business, and our promotional business into their business, so definitely some strong links to our existing business, and an ability to accelerate the growth for that business in general.

So the answer being we think is good/great possibility for new product introductions in that business and pulling into ours as well.

And could there be some sort of change in the long run growth rate that you all typically give us when we meet in December, that would incorporate, not to jump the gun, but I would imagine that could be a positive factor in terms of how you look at the next five years, when we meet in New York?

We certainly think it is a positive, and we will give you a lot of color in New York on Tegrant, and moving forward with that.

Terrific.

Thank you very much.

Thank you, Chip.

Our next question will come from the line of Phillip Ng with Jefferies and Company.

Good morning, guys.

I had a quick question on your recent acquisition.

How are trends shaking out in that business?

At least part of it would be a little bit more cyclical in nature so just to want get a sense?

Yes.

I didn't hear the question.

The cyclicality of the Tegrant business.

We certainly think that the protective packaging piece of it, again, you have to break it into its three components, it is probably aligned with our protective packaging business although the component piece of that might not be.

But the trends for the medical and diagnostic as well as the alloy are much different than the trends in the protective packaging piece.

That medical and diagnostic piece is very strong growth going forward, and then the alloy piece is more consumer like.

Okay.

That is helpful.

If I look at your presentation a few weeks back, there seemed to be handful of new customers.

Is there going to be an opportunity for you to do some cross-selling where you will be able to sell some of your Sonoco legacy products into those new customers?

Yes, there is, Phil.

I think that as I said, ThermoSafe we believe will pull us into well, it is medical and pharma and it should pull flexibles in with it.

We believe we will be able to do more bundling inside that business once we get established, and when you look at the alloy business, that is retail security packaging primarily.

That is functionally what we do today inside our services business.

We use some of their equipment and some of their products.

Sometimes we don't.

We will be able to again move that product on a greater basis using our services business, and vice versa.

Some of their customers use services and don't deal with us today, so we think there is a solid opportunity there.

Okay.

Switching gears a little bit, on your flexible packaging business, it seems like you have done a good job taking share as well as some of your other plastic business.

What are you doing there?

Is it just more new technology or are you leveraging your existing relationships with your big customers?

Both is the answer to that.

Certainly our corporate customer program continues to gain strength, and we continue to get opportunities working not only in corporate customers and others, but primarily corporate customers are bringing a lot of opportunity.

In addition, our flexible business really is technology based.

We are using some proprietary laser scoring and precision die cutting and new applications that is bringing new business, one being the steamers bag application that we recently won.

That was a technology base, and that is the way we go to market inside that flexible organization.

Okay.

And just lastly, do you have a sense of how tin plate price is going to shake out next year, just because first half this year it has been a headwind if tin plate would decline or flatten?

I would imagine you would get a nice little margin expansion opportunity in the first half of next year.

Philip, I think that is what we will wait and see, and we will give you more color on that as well.

Thanks, guys.

Thank you.

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

You may proceed.

Good morning.

Good morning, Alex, how are you?

I am doing well, thanks.

I wanted to ask you on the APT acquisition and how that is fitting into the business.

I know you were excited about that CPET technology, and being able to penetrate new markets that you weren't in before, so I wanted to just get an update on how that acquisition is fitting in?

Alex, I think the acquisition is fitting in well.

If you recall, we said that obviously we like the position they had in the CPET, the dual level trays and that market is not growing a lot, but it is doing about what we expected it to do.

We also one of the reasons for buying it was the fact they had sort of thermoforming technology that we could mirror with some of the thermoforming technology that we have, and I think that is going along reasonably well, and we are working on some products that hopefully will be introduced fairly shortly, some shelf stable type products, and some steamer type products that we will be able to share with you fairly quickly, but it is going on nicely, thank you.

Appreciate that color, Harris.

Wanted to ask a question on the price cost spread in the industrials part of the business where there is not a pass-through mechanism, so the open market tonnage, just looking at the third party trade publications, doesn't look like URB prices have changed much throughout the year.

How are you seeing that price cost spread on the open market tonnage within the industrial?

We have gotten price increases, and we are satisfied with where we are.

We can be better, but we are not totally, we are not dissatisfied with that.

Okay.

Alright.

Thanks, Harris.

You are welcome, Alex.

Our next question will come from the line of Chris Manuel with Wells Fargo.

You may proceed.

Good morning, gentlemen.

Good morning, Chris, how are you?

Terrific, thank you.

Good to hear from you again.

Thank you much.

Just a couple of quick questions I wanted to ask.

I jumped on a few minutes late.

If I missed this, I apologize.

SG&A was down quite sharply in the quarter, and I just wondered if there was anything unusual embedded within there, what is a reasonable run rate to expect going forward?

Chris, unfortunately that was some reduced management incentive bonuses in there because we are not hitting the targets that we set for ourselves for the year which is a piece of it, but we have been controlling costs, I think extremely well in the Company.

The last thing, and you may not have heard there was some company-owned life insurance that was in that S&A figure that won't repeat itself going forward, and that was about $2 million, so that was probably the biggest piece of it.

Okay.

The next question I had was, as you look at the demand patterns that have been very, very choppy, really this is a phenomenon that has persisted since 2008 or even preceded that a bit.

I know in many ways you go to market and price your products and put structures in place to ensure certain returns.

At what point do you have to take a step back and possibly rethink some pricing strategies to incorporate more volatility?

In other words, structurally improve margins?

Is this something you think that will persist longer term that may cause you to rethink how you extrapolate value from the market?

First of all, I wouldn't say we have seen choppy order patterns going back that far.

I would say primarily the choppy order patterns are more the tube and core side than we have seen any place else, and that really has been a phenomena that is probably six or eight months old, Chris, rather than dating back as far as you said.

As Jack said earlier, this is week to week.

This is month to month.

We are looking at what are some of the mitigating things we can do to alleviate that.

One is to frankly build some inventory.

That has an impact on working capital, but we are looking at what is the cash impact of that versus the earnings we get from efficiencies.

Over the past four or five years we have done a phenomenal job I think at the Company in driving down our days of working capital, and to a point where I think Jack said earlier we get orders when the customer get orders, and they are not getting orders in the steady pattern they normally get.

Having said that, we know what the historical order patterns on an annual basis are for most of these customers, and we may have to do more running to inventories to alleviate some of that problem, and if that doesn't solve it, then we will look at the pricing structure as well.

Okay.

That is helpful.

When you are talking about some of the opportunities to pull some of your flexible business into medical opportunities, can you maybe expand upon that a little?

When I think of some of the medical opportunities, those require some pretty significant technology while some are I don't want to say more mundane, but you could probably use some of the same stuff you used so effectively in confectionary and snack.

Can you maybe give us an example or two of target market or an opportunity you might see there on the flexible side moving into medical?

Sure.

I would say it is a little early for us to really be specific about that, and we would plan to give you more color on that in December.

Suffice to say that they have a number of customers that we share, and we know that the relationship with those customers we can pull over into the medical and pharma side of those customers, where we probably could not have before, and we see a lot of their, a number of their customers, not a lot, a number of their customers that we are not suppliers to today, and I would say that the reaction at least early on of this acquisition from the pharma side has been quite enthusiastic, that Tegrant is getting a broad based packaging company with good financial strength that can follow these customers around the world.

We are working that pretty hard right now, and we will give you some color on that in December.

Okay.

Do you see opportunities there as well for things that we might show up on pharmacy shelves in terms of blister packs, and other protective packaging that way, or is that getting the cart in front of the horse as well?

Well, Chris, this is Jack.

We have to get all of that finalized, but yes, we do see opportunities in some of that.

As a matter of fact, they do sell today into some of their blister packs into over-the-counter pharmacy and that type of thing, and you asked about packaging or you asked about the application of film or flexibles.

Certainly brick bags, pouches, and some of the phase change material is laminated inside flexible packaging, so those are the types of opportunities we see immediately.

Long-term we would like to do something even more significant in medical, so this could be the opening we were looking for.

Okay.

Thank you.

You are welcome.

Our next question will come from the line of Bill Selesky with Argus Research.

You may proceed.

Thanks.

Good morning, and thanks for taking my call.

Hey, Bill.

I just, actually most of my questions have been answered but I just had one question with reference to repricing on contracts.

I know a couple of quarters ago it had been a slight issue, and I just wanted to see going forward kind of where you stand on that?

Bill, this is Jack.

The OCC issue is a reset.

We had a reset in the second quarter, or for the third quarter that began at $150, and OCC went up to $175 during the quarter.

For the fourth quarter it is the opposite of that.

It reset at $175.

It has now dropped to $160 and quite frankly we expect some further drops of significance to follow, so it will be somewhat reversed on the tube, core and paper side.

Okay.

In general typically how often are contracts reset as far as pricing goes?

Typically on a quarterly basis we have some on the consumer side that are shorter in duration, but on the industrial side the bulk are done quarter to quarter, and depending upon where the point locks and changes after that, that will determine those ups and downs in price costs.

Great.

That is all I have.

Thanks.

Thank you, Bill.

Thanks, Bill.

We have a follow-up question from the line of George Staphos with Bank of America Merrill Lynch.

Thanks.

Hi, guys.

First within consumer packaging, is it possible to discuss directionally which of the businesses were up in profits year-on-year, which if any were down in profit dollars year-on-year, and particularly was interested in what the flexible percentage margin change might have been, when we look year-on-year directionally?

George, I don't have that in front of me.

Bear with me a second.

Let me rephrase the question.

Were there any businesses that were down that you can think of that were meaningful in consumer year-on-year?

Obviously you had a pretty good quarter in consumer from a volume standpoint.

I would say across the board, George, the performance was pretty good out of the entire flexibles business, not anything really notable.

Okay.

Are flexible margins, let me ask the question differently.

Are flexible margins getting to double-digits this year, or in any of the next couple quarters that you can look out to?

They are not in double-digit at this point in time.

They are continuing to move up.

Okay.

You mentioned I think in answering Chris' question, this was Jack, talking about opportunities in blister packs and bread bags.

Maybe I am triangulating here a little bit, but historically these have not been the world's most lucrative margin businesses at least from our research.

Would you expect that the Tegrant technologies that you would be able to employ here would actually margin up your flexible business?

I don't think he said bread bags.

I said brick packs which is something inside the box.

They have phase change materials we see using that early.

What I did say was that longer term, yes, flexibles is a very good market for, or medical is a very good market for flexibles, and it is a market we have our eye on.

That is a difficult market to qualify for.

It is not easily entered, but we have an excellent start, and an excellent position with this acquisition, so certainly it is on our radar screen.

Jack, what about on blisters?

Blisters, they are already selling blisters into the retail pharma market today, and again we continue to expand in that market.

That is a target market for them as well.

Would that be an up margin market for you in flexible, or would that be kind of consistent with what you are getting already?

George, I really don't have that type of information just yet.

Okay.

Last question and I will turn it over.

If we look at tubes and cores paper, and I realize there is seasonality at work here, but if we adjust for seasonality the best that you can, would you say that the current run rate that you are at is the lowest over the course of the year that you have experienced?

What I am trying to think about is how we look out to 2012 and what kind of trajectory that you may or may not have?

Thanks and good luck in the quarter, guys.

George, this is Jack.

It is hard to say, the way we project it, it is kind of just more of the same.

We projected that volatility going forward.

It is not significant changes one way or the other.

I would say what we are not seeing is the normal seasonality that we would have expected in the beginning of the fourth quarter in carrying out, and we normally see an uptick in the September timeframe.

We have not seen it; in fact it went the other direction and he with haven't seen that, so you obviously could say it has declined, but it has been basically flat for the year until September, George.

Right.

I guess also if you are not seeing the normal seasonality that could mean that you wind up with a bump in demand at some point when you least expect it which would take the trajectory back up?

That is a fair assumption.

Okay.

Anyway, good luck in the quarter.

Thanks for the details.

See you in December.

Thanks, George.

I show no further questions in the queue.

I will turn it back to you for closing remarks.

Thank you again, Candice.

Sonoco will be conducting its annual Analyst Meeting for the financial community in New York on Friday, December 2nd 2011, at the Grand Hyatt Hotel.

Breakfast will begin at 7.30 AM.

Eastern Time in the Manhattan Ballroom on the lobby level of the hotel, and the presentation will start at about 8 AM.

The meeting should conclude about 9.30 dependent upon your questions.

The Company will provide an overview of its strategy and expects to provide guidance for 2012.

Members of the Company's Executive Committee will be attending and will be available for discussion.

Electronic invitations are being mailed today, emailed today to interested participants.

Those interested in attending should email their name, the company they represent, and if they will be attending in person to corporate.communications@sonoco.com.

Those who cannot attend in person can join the meeting via telephone conference call or webcast.

The webcast and presentation will be made available at Sonoco.com under the Investor Relations tab.

Let me again thank you all for joining us today.

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

Thank you again.

Thank you, sir.

Thank you for your participation in today's conference.

You may now disconnect.

Have a great day.