Sonoco Products Co (SON) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Sonoco earnings conference call.

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

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

Later we will conduct a Q&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, Investor Relations.

Please proceed.

Thank you, Tahesha.

Good morning, and welcome to Sonoco's 2012 second quarter earnings investor call.

This call is being conducted on July 19, 2012.

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.

A news release reviewing the Company's financial results was released before the market opened today and is available on our Investor Relations website at sonoco.com.

In addition, we will be referring to a presentation that was also posted on the Investor Relations site during this call.

I will briefly remind you 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 about the use by the Company of non-GAAP financial measures is available in today's news release and on our Company's website.

With that, I will turn it over to Barry Saunders.

Thank you, Roger.

I will begin on slide three, where you will see that this morning we reported second quarter earnings per diluted share on a GAAP basis of $0.50 and base EPS of $0.58, which compares to base EPS of $0.60 for the same quarter last year.

Given the relative softness in economic activity globally and the headwinds we were facing in terms of higher pension costs, a higher effective tax rate and a negative impact to foreign currency translation, we considered this to be a reasonably good quarter and are pleased that our results are within our previously issued guidance of $0.55 to $0.60 per share.

Before reviewing the base P&L for the quarter, I will mention that a reconciliation of GAAP to base earnings is in today's press release and on our website.

The $0.08 difference between GAAP and base is due to restructuring charges, with most charges related to previously announced closures, including a paper mill in Germany, a Tube and Core plant in France, a thermoforming facility in Canada and other smaller cost reduction initiatives.

Turning to slide four, you will find our base P&L, where you see that sales were $1.202 billion, which were 6.6% higher than last year.

But as you'll see in the sales bridge, the favorable variance to last year was driven entirely by Tegrant.

The Tegrant acquisition partially offset the slightly lower volume and lower sales dollars due to the translation of sales and foreign currencies due to the notable appreciation of the dollar against most global currencies.

Gross profit of $216 million was 13% better than last year, with a gross profit percent at 18%, which was improved over 16.9% for the same quarter last year, with the improvement driven by Tegrant, which has an overall higher gross profit percent, but also notably improved by favorable price cost relationships in many businesses and improved manufacturing productivity, partially offset by negative mix and higher fixed costs.

Selling and administrative expenses and other net charges were $118.5 million, which were up $20 million year-over-year, with most of the increase due to the Tegrant acquisition.

Thus EBIT was $98 million, which was 5.7% higher than last year, and you will see the drivers of the change in the EBIT bridge in just a moment.

Interest expense of $15.2 million was higher than last year due to the impact of the financing for the Tegrant acquisition.

Thus, income before income taxes was $82.8 million.

Taxes were $27.1 million, which were higher than last year due to a higher effective tax rate as expected, which was 32.8% on base earnings this year versus 31.9% last year.

Equity and affiliates and minority interest was slightly improved from last year.

Thus, base net income was $59.7 million or $0.58 per share, compared to $0.60 last year.

Before moving on to the specifics were you will see that there are many moving pieces, the lower year-over-year earnings can really be attributed to $0.02 due to higher pension expense, $0.01 due to a higher effective tax rate.

$0.02 due to higher foreign currency translation, $0.02 due to the loss of a contract packaging account and packaging services mid year last year, partially offset by $0.02 in earnings accretion from the Tegrant acquisition and $0.03 improvement in all other businesses.

Turning to more specifics on the sales bridge on slide five, which reconciles the year-over-year change in sales you see that volume was slightly negative for the Company as a whole, impacting sales negatively by $12 million.

In the Consumer businesses volume was down 3% for the segment as a whole.

Unit volume in composite cans in North America was down 1.6%.

In the associated closures business intercompany units down 4% but trade units were down 12%.

Flexibles volume improved by 1.3% versus the same quarter last year, blow-molded plastics was up 3%.

Thermoforming was down 4% and injection and extrusion molding down 4%.

In the Industrial Converting and paper businesses trade volume actually was up slightly due to an increase in recycling and in paper sales in the US and Canada.

However, Tube and Core volume in the US and Canada was down 2.8%.

Total volume in paper North America was up 2%, but again this was driven by trade volume being up 5%.

Recycling trade sales were up 16%, driven by growth initiatives in this business.

Outside the US, Tube and Core volume in Europe was down 4%.

Tube and Core volume was up right at 2% in South America, but off 11% in Asia.

Reels continue to have favorable volume, as it was up 15% year-over-year due to continued strong demand for steel reels for the utility industry.

In Packaging Services a continued increase in fulfillment activity globally was more than offset by lower year-over-year sales in pack centers associated with last year's mid year loss of a contract packaging account.

And finally, in Protective Packaging volume in our legacy business was down 5% due to last year's decision to exit some business in China and some shifts in packaging now being picked up by Tegrant.

Further down on the sales bridge, you see that acquisitions added $124 million to sales.

$118 million of which was related to Tegrant.

Tegrant had a really strong quarter from the top line perspective, driven by continued growth in [Protective] and ThermoSafe businesses, which were up 21% and 12% respectively year-over-year, only partially offset by lower volume in alloy.

Sales prices were essentially flat for the Company as a whole, as you see on the price line, where it only impacted sales for the quarter by $2.7 million.

Sales prices were higher year-over-year in most all consumer businesses associated with higher input costs, as resins, films and other materials were rising through much of last year.

In the industrial businesses in North America, pricing was not notably different on contract businesses, since many contracts in the US had selling prices in the first quarter of 2012 based on an OCC price of $135 per ton, while the price resets for the first quarter in 2011 were at $140.

But average OCC prices for the quarter based on the Southeast Yellow Sheet were about $15 lower, which did negatively impact selling prices and recycling.

Selling prices were higher in Europe as well year-over-year, where increases have been implemented to recover higher material costs.

Translation of sales in foreign currencies and other changes did reduce reported sales by $39 million due to the strengthening of the dollar.

Turning to the EBIT bridge from last year on slide six.

You see the lower year-over-year sales volume combined with mix reduced year-over-year EBIT by $13 million, as we did have a notable impact from mix both between and within the businesses.

Most of the negative mix was in the consumer segment, driven by lower composite can sales, and even within composite can sales where there was a change in mix of business.

Mix was also negative just due to the lower sales of some of the higher value metal ends.

Mix was also somewhat negative in flexibles due to some lower sales of some of the higher margin products.

The EBIT impact in Packaging Services of volume was due to the loss of a contract packaging account, which was, again, only partially offset by increased volume and other fulfillment activities.

And as expected, price cost was favorable year-over-year by $16 million.

In the Consumer segment this year-over-year change in selling price more than offset the material cost changes, as we were chasing rising prices through last year, particularly in plastic.

In terms of the more significant year-over-year cost changes, the market price for steel used in metal ends is up right at 1%, films are up roughly 1% to 4%, and resins down roughly 7% but depending on the type of resin.

Although selling prices were lower in Tubes and Cores and Paper due to the lower OCC prices, material costs were also lower.

We are pleased to report that again this quarter we saw a significant improvement in productivity, where manufacturing productivity of almost $10 million compared to productivity of only $5 million in the second quarter last year.

Productivity remains somewhat light on the industrial side of the business, particularly in Europe, due to the soft volumes.

But was particularly strong in our consumer businesses, where cost reduction initiatives were implemented and plants performed better.

Acquisitions added $9.4 million in EBIT due to Tegrant, which more than offset interest expense associated with the acquisition and thus was accretive by almost $0.02.

We still expect to see incremental operational improvement and the benefit of additional synergies in the third quarter.

Other is our catch all category and was negative by $12.6 million, which includes wage and other nonmaterial inflation of roughly $10 million and $3 million from the translation of EBIT in foreign currencies.

And finally, pension expense is higher year-over-year by $4 million, driven most notably by the decline in the discount rate at the end of last year.

Looking briefly at results by segment on slide seven.

For the Consumer businesses sales were down almost 3% due to the lower volumes as previously described, but margins improved to 9%, up from 8.2% for the same quarter last year, driven by improved price cost and strong productivity.

For the Paper and Industrial Converted businesses sales were down 2%, primarily due to translation, but margins were largely unchanged for the quarter at 8.3%.

The change in Packaging Services was really covered in the bridge comments, and Protective Packaging obviously was most notably impacted by the Tegrant acquisition, but I will point out that we did see notable improvement sequentially from the first quarter, where the EBIT margin improved from 5.8% to 8.2% this quarter, and we are confident that we can get this to a 10%-plus EBIT margin business over several quarters.

And now looking forward on slide eight.

We are projecting that base EPS will be between $0.62 and $0.66 per share in the third quarter.

We are keeping the low end of our full year estimate at $2.34, but given the relative softness that we are seeing we are bringing the top end of our guidance down to $2.39 from $2.44, with the top end still being a challenge in this environment.

This guidance assumes no notable change in the level of economic activity, but it does reflect the normal pickup that we would expect to see due to seasonality in some of the consumer businesses and in Tegrant in the third quarter.

And then again those businesses slowing as they naturally would somewhat again in the fourth.

In terms of the industrial volume, we are assuming that Tube and Core volume in North America will be essentially flat with the run rate that we have experienced over the last couple months, and Europe down slightly from the second quarter, just due simply to the impact of holidays during the summer months.

Price cost will be somewhat favorable in the third from softening resin prices and slightly lower OCC costs, which then we have assumed to be relatively neutral after contracts reset in the fourth.

We expect continued improvement in Tegrant just due to the additional synergies as well.

We [haven't] assumed an effective tax rate of 33% for the second half, both really in the third and the fourth quarters.

I will point out that last year in the third quarter we had earnings of $0.66 per share, where we benefited from a particularly lower S&A costs during the quarter, which were only 7.8% of sales, driven by lower management incentives and some Company-owned life insurance proceeds and an effective tax rate of only 29%.

Again, due primarily to the life insurance proceeds as well.

Gross profit last year was only 16.6% in the third quarter, and we are projecting based on our forecast that this will improve to almost 19% in the third quarter, but again S&A will be closer to our normal levels of almost 10%.

Our cash flow summary is found on slide nine, where you see that we had cash from operations for the quarter of $42 million, which was down only slightly from last year.

I will mention that our second quarter is normally light in terms of cash from operations, because we do make two federal tax payments and have our annual -- semi-annual bond interest payments due in the second and fourth quarters as well.

Net capital spending of $55 million was higher than last year due to the fact that last year we did also have $8 million of proceeds of asset sales in the quarter netted against the spend, but we also did experience higher spending this quarter associated with the biomass boiler project and spending for the new blow molded plastics plant in Columbus, Ohio.

In terms of our expectations for the full year, we are still projecting cash from operations to be roughly $385 million which, is unchanged from our estimate at the end of the prior quarter.

We are now expecting that capital spending for the full year will be in the $200 million range, and after dividends we will have free cash flow of roughly $70 million.

CapEx is up about $10 million or so from our first quarter projection just due to the timing of spending on the biomass project, with more of our spending shifted into 2012 from 2013.

Certainly not a change in the total expected project spending.

There are a few extra pages of material in the appendix for your convenience, but that really completes my overview of the results for the quarter, and we will now open the line up for questions.

(Operator Instructions).

Your first question comes from the line of Scott Gaffner from Barclays.

Please proceed.

Good morning.

Good morning, Scott.

I just wanted to dig a little bit deeper into the Protective Packaging, especially the margin commentary there.

You obviously put up a strong quarter there, but can you talk a little bit more about the variance between the first and the second quarter?

How you were really able to improve the margins so much sequentially?

Yes, Scott.

Two things really drove it.

Obviously during the first quarter we had a lot of costs going into that business to bring it up to our safety standards and some of the other things that we try to do, as well as the business was just operationally a little weak.

In the second quarter the synergies began to start kicking in now.

We are beginning to see the benefit of all those.

The business is running much better, and volume is also much improved.

You heard the year-over-year improvement in volume.

So all three of those things really are driving the margin closer to where we see it should be, and will continue to drive and go up as we get more synergies and we continue to run the business better.

Okay.

And looking at productivity, I mean you had the guidance out there for $50 million in productivity.

You have gotten about $20 million so far in the first half.

Do you still feel comfortable, even with the European weakness, that you can get to the $50 million of productivity for the year?

Yes, Scott, I believe we are about $22 million right now in productivity.

I think that we would normally expect to be somewhere around $25 million.

We expect somewhere between $45 million and $50 million.

We are going to push to that number, and we will be pretty close to that.

Okay.

And just lastly if I look at the midpoint of the guidance for the full year, and I look at the midpoint of the guidance for the third quarter, it ends up it implies that fourth quarter EPS is somewhere around $0.63, which would be up 35% year-over-year.

Obviously you have got the easy comparison in, I think, the Tubes and Cores business just from the lower production levels in 4Q 2011.

Is there anything else that is a big variance year-over-year that gets you that type of earnings growth in the fourth quarter?

Well, certainly Tegrant and the synergies in Tegrant are what helped drive that number as well.

Okay.

Scott, this is Barry.

I also ask, if you remember last year we had a very high effective tax rate in the fourth quarter as well.

Okay.

Thank you.

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

Please proceed.

Thanks, everyone.

Good morning.

I just wanted to follow on that question for Scott.

Should we expect that third quarter we may still be seeing an Industrial segment that is down year-over-year on EBIT, but by the fourth quarter would be up?

Would that be the right way to think about the segment directionally in the quarters?

I would think basically that is accurate.

Yes, that's right.

Okay.

Second question, kind of taking a step back.

Over the last couple of years there seemed to be maybe a bit more in-roads being attempted by competing companies with competing packages relative to the composite can markets and the traditional markets that you have had.

Even to some degree you were doing it with your own plastic package within nuts.

Has that had an appreciable effect on volume and/or mix, and is that one of the things that maybe was affecting the business in the second quarter?

And I guess related question, was the second quarter more impacted just by what we have seen out of the scanner data that retailers are not shipping a lot or not selling a lot out of the center of the store and dry goods, and that's really what's really more affecting your composite volume?

Well, certainly I would tell you that the scan data -- the volume is the primary impact.

As far as competing formats, George, yes, but there have always been competing formats and there are always going to be competing formats.

Did we lose volume to some competing formats?

Yes, but not anything of significance.

It comes and it goes.

We win some and we lose some.

So, Jack, would it be fair then that has not had a mix effect in composites then, or has it?

Yes, it did have an impact on the mix effects for composites.

Yes.

Okay.

How do you -- in an environment where there is going to be this on again, off again competition, how do you regain that mix?

Is there any market you are happy about or optimistic about, maybe to say it better, for composites that should be able to claw back that margin that you might have lost to a competing substrate or package?

Well, the one thing I want to make sure of is I'm not implying that the entire mix issue was driven by that one event or a loss of some business.

There was some mix shifts among the different end-use segments in general that had a negative impact to the overall margin.

I would tell you that how you get that back is that we he talked about it for some time.

There is a global opportunity for composite cans in powdered infant formula and we are very -- we're in discussions right now and have some positive outlook for that opportunity.

Okay.

Jack, two last ones, I will turn it over, and they are quick.

On the mix side, again in composites, can you talk about what some of the end market changes were that shifted mix?

And then more in the coreboard business, are you seeing any impact from your customers perhaps looking to over time get out of cores within the towel and tissue market?

I know you don't actually make a lot of those cores, but you do sell some of the coreboard.

Is that having any kind of ripple effect through your coreboard and industrial markets overall?

Thanks, guys.

Let me answer the coreboard first, and then I will turn it over to Barry to tell you a little about the mix in composites.

We really don't see a big impact on that.

As you said, we don't take the tubes and cores for tissue and towel, other than in the jumbo rolls, and of course those are still on large cores.

Is that market moving in that direction?

Some of it has, but you some of it hasn't been that successful either.

We have not seen any impact from that yet and have no signal that we will in the near future.

And Barry as far as the composite cans?

Sure.

In terms of the particular market segments, we saw that in the quarter snacks were up 10% year-over-year, fiber [cost] was up 5% driven by more activity in housing.

Powder beverage was up 6%.

And then this was more than offset by nuts being down about 9%, concentrate down 9%, and then the powdered infant formula segment was down 30%.

Okay.

I'll turn it over.

Thanks, guys.

Your next question comes from the line of Phil Gresh from JPMorgan.

Please proceed.

Hi, good morning.

Good morning, Phil.

First question, just on currency.

You said $3 million headwind in the quarter, about $0.02.

Just trying to get a little better appreciation for the sensitivity you guys have.

What are you guys assuming for the back half?

We have assumed that the rates don't move significantly from where they are at right now.

We've factored that in, so with the Euro being one of the primary currencies, around the [$1.25] level.

Okay.

So would that be $0.02 again in the third and in the fourth basically?

Some place directionally in that area.

And, of course, it has been factored into our guidance, but if you are looking at a year-over-year comparison.

Right, yes, okay.

And consumer, you said the volumes were down 3% in the quarter year-over-year.

Looking at the back half, you said you expect it to pick up seasonally, but I'm just curious what you are kind of assuming on a year-over-year basis there.

Does it pick up on that basis as well, or is it really just the seasonal?

Well, it is basically what we have taken is our current run rates and information from our customers and adjusted them to the seasonal averages that -- the seasonal change that we would normally expect.

Okay.

So it is still kind of -- on a year-over-year basis still kind of trending in that down low single?

You don't expect it to turn positive I guess is what I'm asking?

I would say more flattish.

Okay.

And then just on the CapEx with the pull forward, do you have any sense at this stage of what 2013 CapEx might look like?

Really nothing very specific at this point.

Okay.

But again, the increase that we have talked about earlier in terms of that $10 million over our previous expectations is really just pulling some back from 2013, not an implied pickup in our overall run rate going forward.

So, because of the biomass boiler, would 2013 be up over 2012?

No, it should be down, because about two thirds of the biomass spending will actually take place in 2012.

We are very much interested in spending as we can to ensure that the project is completed by the end of 2013 to be able to get the credits that would come back to us in 2014.

Got it.

Okay.

And then my last question, just on the OCC, you talked about it trending lower in the third quarter.

I have heard out there that we might actually have incremental downside from what we even saw in July over the next up couple of months.

I'm curious if that is what you are seeing out there, and how you are thinking about it in terms of the third quarter.

Certainly we have heard that same information.

There is no upward momentum for price in OCC right now, and we believe it could trend down slightly as the third quarter goes on.

That would have some positive impact to us overall, of course, depending on timing.

It all depends on when it happens.

I also want to -- Phil, if you don't mind, I want to comment and say one other thing on consumer volumes.

Our plant at Beauty Park is starting up right now, so that will have a positive impact on our volumes in the third quarter on the blow molding side for certain as that facility comes up you to speed.

Got it.

Thanks a lot.

I'll turn it over.

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

Please proceed.

Yes, and good morning.

Good morning.

Looks like the Tegrant deal is doing quite well, and I guess two questions.

One, did you have a guesstimate as to how much it was accretive in the quarter?

And maybe you mentioned a number and I missed it.

And secondly, given the success of Tegrant, are there likely to be more -- not that you can promise anything of course, but more sizeable acquisitions in the next year or so?

Well, we are certainly very pleased with Tegrant.

It is doing what we thought it would do, and it is continuing to escalate.

It did -- it was accretive in the quarter, about $0.02, and we -- when we looked at that industry, there are certainly opportunities to continue to roll up and consolidate that industry, so we are going to continue to take a look at those opportunities and see how they play out.

And on the accretion?

$0.02 in the quarter.

$0.02.

Got you.

Thank you.

And then as you look at -- you mentioned that the Protective Packaging business, you think you could get to like a 10% margin in several quarters.

Could you just give us again the -- if you didn't, specifically how you expect to get there?

Like volume price, cost control?

Well, right now the synergies in that business, as I said, we really didn't get much synergies in the first quarter.

They started to build in the second quarter, and they will continue to build throughout the year.

We originally said we expected to be at a run rate of about $12 million by the end of the year.

I think we are actually going to beat that run rate year-over-year.

That volume -- that business is continuing to grow.

As you saw, the sales were up significantly.

There is significant opportunities on the molding side of that business as well as the cool chain shipping side of that business.

The flu season is upon us for the -- that cold chain shipper right now, so that business is growing.

It is going to continue to grow.

We are going to get synergies, so it is going to be a leverage play as well.

And then there is also a synergy between our Corrflex business and their Alloyd business that is going to have a positive impact for both businesses.

Okay, and then last real quickly.

You mentioned Tubes and Core volumes down 11% in Asia in the quarter.

How much of that do you think is actual slowdown in the business versus maybe an inventory correction taking place over there?

Well, our overall Asia was impacted by two issues.

One is that we had a flood in Thailand, and so that facility came offline and it is only partially back online.

That is impacting it.

But volumes were down about 10% in China, and I'm not sure how much of that is actual inventory, but volumes are slower in China without a doubt.

Okay.

Thank you.

Your next question comes from the line of Phillip Ng from Jefferies.

Good morning, guys.

Your consumer business from a volume standpoint was a little lighter than I would have expected.

Just want to get a sense of what your customers are saying and how they have been reacting in terms of managing inventory?

I think you read as -- you read what we read.

Consumer spending is projected to be down slightly, so that is kind of factored into our forward look.

Okay.

And quite honestly, that is the reason we took the top down a little bit, because we don't see the momentum to get to the top side of the guidance . If we are wrong, we will be back in that -- we will have the top side back if that happens, but we just don't see that right now.

Okay.

So I guess relative to your guidance, the weakness in the volumes is more so coming from consumer rather than industrial relative to what you were expecting heading into the year?

I would say, yes.

Okay.

Industrial slightly, but it's more around the consumer.

When I say the top side, I meant the top side at 244.

I got you.

Any concerns about food inflation going forward, just because corn prices obviously moving higher with the Midwest flood?

Certainly that is out there, but other things are moving in the opposite direction, so hopefully that is an offset.

Okay.

And then when you look at your pack services business, obviously sales were down with that contract loss.

Would you be able to parse that out?

I just want to get a sense how the base business is doing without that.

Be able to do what?

Parse out the contract loss for the contract packaging business for pack services?

Yes.

If we took that out, sales and EBIT would be up on a year-over-year basis.

And I also want to point out that the comparison is difficult because in that particular account that we lost we had an incentive to make a very effective transition, and it actually occurred over the first half of the year.

We did an outstanding job of transferring it and got 100% of the incentive, so it artificially inflated what that business would have earned otherwise had we just kept that business going forward through that first half of last year.

So there are two things there.

That extra incentive and, of course, then losing the volume all together.

This is Barry.

I will also add when you are just looking at the top line for that business alone, you really need to realize that there was a significant impact of translation.

[Because] about 60% of that business for the segment as a whole is outside of the US now, in both Mexico and Poland, and those currencies depreciated significantly against the dollar, almost 20% year-over-year.

Okay.

And then just focusing on the display business.

Not a big competitor, but I believe they have a small display business.

You kind of mentioned how they have seen a pickup with their customers looking to be a little more creative to drive growth.

Are you seeing that type of pickup on that business as well?

Yes.

Okay.

And then just one last question, I guess for Barry.

Any thoughts on this new highway bill in terms of how it is going to impact your pension contribution next year?

Yes, we would expect that it would impact our previous estimate of what pension contributions would be next year, not this year.

And it would essentially, based on some preliminary analyses that we have seen, it would allow us not to make a contribution to our domestic qualified plan next year.

Okay.

Perfect.

Thanks, guys.

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

Please proceed.

Hello?

Mr. Zaffino, check your mute feature.

I guess we will move on.

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

Please proceed.

Good morning.

It's actually Matt Wooten sitting in for Ghansham.

Hi, Matt.

How are you?

So you guys have talked about the run rate in terms of volume.

I was just wondering if the volume trajectory has been consistent month to month in 2Q, or did you see significant weakness in June?

I would tell you that April is the first month of the quarter, so it is a five week quarter, so it may have been a little bit stronger on a run rate basis.

And we actually took the June -- the May and June average, and that is the number we used forward.

Okay.

Understood.

And then as far as free cash flow allocation, I think you mentioned about $70 million in after-dividend free cash flow.

Have you guys given any thought on share repurchases in the back half of the year?

No, we are going to pay down debt.

Great.

Thank you.

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

Please proceed.

Good morning, guys.

Good morning, Alex.

I think in the past you talked about in your Tubes and Cores business there was some exposure to the US housing market?

Can you talk about how we should be thinking about that exposure, if my premise here is correct?

And again, if my premise is correct, what are you seeing in that part of the business right now with housing appearing to be bottoming and picking up from very low levels?

Yes, I want to be clear that was a theory I had, and the theory is simply based upon that there is a lot of wound goods that wind up in construction from upholstery, carpet, house wrap, film that's used to package most those products sent to market.

And the concept is that as housing picks up, I believe that our Tube and Core volume will move along with it.

It is very difficult for us to quantify that, because we would have to get into the sub-segments of our customers.

If you think they are packaging paper, and that paper could go into wallboard, that is very difficult for us to draw a connection between housing and Tubes and Cores directly.

It's just a conceptual idea that there is wound goods that wind up in construction.

That is helpful, Jack.

Shifting gears, on the consumer side, based on your conversations with the customer base, is there any sense that maybe we will be seeing some promotional activity picking up in the back half?

Because it does seem like you should see a little bit of deflation.

[For those that model] yes, corn prices are spiking, but like you said earlier, some of the other inputs are going down, so at least in the back half of this year they should have a little bit of relief.

And any sense there may be promotional activity happening in the back half on the consumer side?

I would certainly tell you in the conversations we have we certainly see a lot of pressure from the customer to help them be innovative, to help them create ideas that will actually improve their volume.

I agree with you that the deflation in some commodities could potentially create some upside for them as well, and we are seeing activities around promotion as far as display and those type of things.

Thank you very much.

Your next question comes from the line of Adam Josephson from KeyBanc.

Please proceed.

Good morning, everyone.

Good morning, Adam.

First question on composite cans.

Do you view the declines in nuts as secular at this point, similar to frozen juice concentrate?

And secondly regarding composite cans, do you expect continued declines in PIF owing to product substitution?

I didn't hear the second part of the question.

Declines in powder infant formula owing to product substitution?

Package substitution?

The secular decline that is occurring in composite can we talked about in the past, certainly on frozen concentrated orange juice.

I don't really see it in other markets.

As I said earlier to George, we compete with different formats, and sometimes we get a conversion and occasionally you lose a conversion.

But nothing secular going on there I don't think relative to the composite can.

And the negative mix in flexibles that you referred to, Jack, can you help me understand it?

That was very minor.

It was just a matter of some shift away from hard baked goods and confection, where we tend to have a bit higher margins, and an increase in pet food and frozen foods.

But it wasn't major.

And lastly in Protective Packaging, Protexic volume was up significantly, if I heard correctly, but the legacy business was down a bit volume-wise.

Can you help me understand the discrepancy?

Part of it actually was a shift from the products that we were making to the products that Tegrant were making when we redesigned a package for a customer.

And China.

We also had a facility in China that we decided to close and exit on Protexic packaging.

Thank you, Jack.

The next question from the line of Mark Wilde from Deutsche Bank.

Please proceed.

Good morning, Jack.

Good morning, Barry.

Good morning.

Barry, just a question for you first.

On that EBIT bridge you showed, just going back to that other category, which was pretty large this quarter, you said a lot of that was just increase in wage and other.

But it is so much larger than the first quarter.

Can you help us understand what went on between the first quarter and the send quarter?

I will mention again that also is where we would show the impact of translation on EBIT, and from EBIT being translated from foreign currencies into the US dollar negatively impacted it by --

$3 million didn't you say?

That's correct.

Just seems like it was not a very big number in the first quarter, and then all of a sudden it exploded in the second quarter and only $3 million of that was FX.

It's just a lot of other moving pieces, but certainly nothing of any significance in that change outside of translation.

Okay.

And then the second question I have, the SG&A, as you point out in the release, up about 110 BPs year-over-year.

I think probably about a third of that is the increase in pension, and some of it is also probably higher SG&A at Tegrant.

Are there other things in there as well, and where might we expect that SG&A to kind of settle out as a percent of sales over time?

You've mentioned certainly the two key drivers of that, and then again, just normal inflation on S&A.

But the 10% range would be kind of what our average long-term target would be.

Okay.

All right.

That's helpful.

Another question, it seemed like your European industrial business, while it was off, it actually held up a little better than what we are hearing from some other industrial packaging companies.

Do you have any thoughts on that?

I think you said you were down in the Tube and Core business in Europe about 4.5%.

Well, I think that we are actually -- the Tube and Core volume we are actually down 4%.

4%, okay.

But I would tell you that we have had share gain in Europe as of late, and during the course of last year that team did a really good job of taking costs out of that business and getting it prepared.

We shut down the Nordhorn mill, and so we have improved our operating efficiency.

Even in that quarter it was at 96% for the mill system -- the utilization rate.

So they have done a good job getting ready, and we continue to gain share, so I think that's why we continue to fare well in Europe.

Okay, and then just a couple of last ones.

As you build more and more of these MRFs, I assume that you are going to have more movement vis-a-vis commodity prices, just because you sell aluminum, you sell scrap plastic, and you have got the recycled paper coming out of those.

Can you give us an order of magnitude about how big the swings are that we might expect out of that business?

Well, in totality the MRFs as a total percentage of our collection is very small.

And of course we still are primarily a paper collector, even in the MRFs.

But I will say that those prices -- those commodity prices are certainly swinging like you see in OCC.

They are true commodities, and they go up and they go down.

But when you aggregate it all we are still heavy, heavy weighted to paper.

All types of paper.

All right.

Then the last one I had.

There have been some announcements out in containerboard.

Have you announced anything?

Well, we are kind of a small player in containerboard --

Yes, I know.

We don't announce in containerboard, but we if the market increases and we seed the need to increase, we will follow.

All right.

Listen, good luck in the third quarter.

Thanks.

Your next question comes from the line of Chris Manuel from Wells Fargo Securities.

Please proceed.

Good morning, gentlemen.

Most of my questions have been answered, but just a few follow-ups.

When you look within the trajectory of business in Europe, if I remember last quarter you talked about as you moved month to month to month -- January, February, March -- that things had continued to get a little bit better each month.

As you move through this quarter, have you continued to see any further progress forward, or have things kind of stalled?

And recognizing that you also have to make an adjustment for seasonality, but I think in earlier prepared remarks you mentioned that your assumption for the balance of the year was off a 1%, so that seemingly would be a little bit better than where things were certainly this quarter off 4%.

Can you maybe talk about the path and what you are seeing there?

Well, our actual volumes were up slightly in the quarter.

Quarter over quarter.

Sequentially in the second quarter, as we would expect due to seasonality.

What we simply did was to take -- again, we looked at those May and June run rates, kind of averaged them together, and then adjusted that for volume, adjusted that for the period.

This is the holiday period going into the third quarter, so we see that trending down slightly.

And then probably holding maybe up a little bit in the fourth quarter.

So that is kind of how we came up with that number.

Is that more when you are getting to -- is that the comps that are getting that much easier when you get to the back half of the year, or are you seeing any changes in the climate or the environment over there?

No, not any change in the environment.

The comps will get better to the fourth quarter.

Okay.

And North America continues to be off a bit.

And I think it has been off a bit for the last couple quarters.

But is there a point at which -- I know you did some restructuring over in Europe.

And this is a question you get each quarter, but is there a point at which you go back and maybe reassess and look to do a little bit more restructuring, either in Europe or potentially a little bit of restructuring here with either capacity rationalization or moving around footprint to get utilization levels where you want them?

Yes, Chris, I would simply say that we look at that all the time.

We wouldn't necessarily use a downturn as a time to do that.

We are constantly trying to match our footprint to demand, and so it is always there.

Okay.

Last question is, if I go back to some of the elements -- or two questions.

Last time I was in the consumer side you specifically mentioned, I think, [trade] closures [off] 12%.

That sounded like a really, really large number.

Is there anything -- remind us maybe of what categories or what things you are principally serving there, and why it might have been such a large number.

It just sounds abnormally big.

I think there was some high end closure sales that drove some of that, and then we also had sales into South America as well.

We are down from that business.

So that is something that you anticipate persisting at that sort of a level?

Is it --?

Just timing.

Restocking or --?

I would tell you it is just timing.

Order timing.

Okay.

And last question is you usually give us an update on the new products funnel.

Where you are.

Any new interesting things in the quarter you have developed, et cetera?

Well, I will tell you we had about $40 million in new product sales in the quarter, so we are well on path to at least be $150 million.

I think we will be over that.

And I will tell you that includes nothing from Tegrant.

We are not involved -- we are not putting their new product sales in yet.

I did mention that Beauty Park opens up.

We have already won some new volume there.

We have a new shampoo bottle we recently won as well from another filler.

And I would tell you at Tegrant we have some really, really strong opportunities in automotive section to continue to replace metal and other components using expanded polypropylene foam.

So still strong on the funnel, and a lot more to come.

Okay.

Thank you.

Your next question comes from the line of Steve Chercover from D.A. Davidson.

Please proceed.

Hi, Steve.

Steve, are you there?

Why don't we go on.

Please check the mute feature on your phone.

Sorry, can you hear me?

Yes, Steve.

I apologize.

I just had one at this stage in the call.

When Tegrant is finally integrated and the Columbus plant is complete, is there going to be a step function increase in your free cash flow?

Well, I think that there would be an increase in free cash flow because of the added sales and revenues that come from those businesses, but step change, it would be hard for me to define that.

Okay.

They are going to have some spending associated with them as well, but they are going to generate EBIT.

But we won't see CapEx decline dramatically?

Alternatively, when you paid down Tegrant you said there was some other kind of roll-up opportunities in that line of business.

I mean, are they much smaller than Tegrant was?

Yes.

They are what we call tuck-in type acquisitions where you leverage volume over your footprint more or less.

And as far as capital spending, of course, as they come online there will be less capital spending, for example, in Beauty Park.

Once it is in, it is in, and that will be that facility.

But the opportunities for us going forward to continue to grow the business are there, and so we are going to continue obviously spending capital to grow the business going forward.

Sure, I mean I'm just trying to kind of quantify how much cash is going to be available.

Someone asked about share repurchases, but to me it seems more like debt repayment or growth are the initiatives that you will pursue.

That's correct, but I would say that spending $200 million in capital is -- that is not something we normally do.

We are normally in that $160 million to $180 million range and would expect that to come back around once the biomass is beyond us, et cetera.

Got it.

Thank you very much.

Your next question from the line of Albert Kabili from Credit Suisse.

Please proceed.

Hi, thanks.

Just a question on the volume mix on the EBIT bridge.

How much of that -- if you have that, could you help us with how much the composite can component of that -- I know you called out a lot, but you on composite cans, how much of that $13.6 million on the EBIT bridge would have been composite cans roughly?

It is a part of that, but we wouldn't be in a position of providing the exact amount for any of our product lines.

Okay.

The -- and I guess along those lines on the negative mix, is that something that you see near term progressing at about the same kind of rate, or is there anything that appreciably would change recent -- the recent trends we have been seeing along these lines?

Al, no, that is random.

Sometimes mix works for us and sometimes it works against us.

Okay.

All right.

I guess what I'm getting at is composite cans, we have seen kind of negative volumes here for a while now.

And I know certainly we have talked about the headwinds on the packaged foods side.

So assuming that trend stays the same, is there anything ramping up that would offset some of that?

Maybe some of the new blow molding business that you talked about that is ramping up in the second half?

How should we be thinking about that?

Certainly inside consumer flexibles in our blow molding business are up year-over-year, and we expect them to continue to grow.

Again, but I will also say on the composite can side we are in the final stages of an opportunity for the global expansion of composite cans.

So we expect that to continue to grow as well.

Okay.

We'll stay tuned there.

And on the new capacity you called out with the blow molding, can you maybe help us with how -- the new products that you have got in the back half, how appreciable would that be to your overall consumer segment volumes?

Is it as much as 1% lift, or how should we be thinking about the contribution there?

The easiest way for me to talk to that is what we expect in new product sales for the year, and I would tell you that year-to-date we are at $77 million for the year.

We talk about being at least $150 million, so that's -- my expectation is that we will be at least $150 million for the year.

Okay, that is helpful.

And then the last question is along -- Tubes and Cores, and just looking at the end markets, whether it be textile or paper or specialty films, were there any things that stood out to you that were meaningfully different or noticeably changed up or down versus the average volume run rates you have been seeing?

Not really.

I think what I'm most pleased with was the share gain that we see in Europe and the opportunities to continue to gain share -- to help offset the total decline that is occurring in Europe we continue to look for opportunities both domestically and in Europe to pick up share.

Very good.

Good luck in the upcoming quarter.

Thanks.

Thank you.

And your last question is a follow-up from the line of George Staphos from Bank of America, Merrill Lynch.

Please proceed.

Thanks.

Hi, guys.

Just a couple of last ones.

If you mentioned, I missed it.

Did you call out why powder infant formula was down fairly sharply in the quarter, guys?

And if not, what was the background behind that?

No, we didn't call it out because we don't know.

It is random.

Sometimes it is up and sometimes it is down.

As far as just the general demand for powdered infant formula, it goes with their inventory.

I don't ask -- I don't know how they do it.

Okay.

I guess second question, you have talked about the 10% margin goal for Tegrant.

I think last quarter maybe the prior quarter you had maybe pushed out the timing -- I think at one point in time you had expected when you first announced the deal to be at 10% by 2013.

Should we now, given be the progress you have seen in Tegrant in the last quarter, expect that you can hit a 10% run rate at some point in 2013?

When I said that, George, what I was talking about was consistent run rate above double digit.

Is it possible that we will hit double digit prior to that?

Yes, but I want to make sure by giving a timing that we are at a consistent rate of hitting double digit returns across that business.

So that is really what I'm saying.

We do expect continued acceleration in that business.

If we step back and I look at the quarter in general, it was a darn good quarter.

Given all the macroeconomic conditions we are facing for the industrial businesses as well as our consumer businesses, they were well run, productivity was solid, price cost was good.

So we feel good about the quarter.

Feel very good about Tegrant, the run rate on Tegrant, the integrations we are getting.

So all in all we're looking forward, not only for Tegrant, we think that those margins are going to continue to improve as we try to drive all our businesses back to that double digit rate and have cash flow across the business.

Jack, two last questions related to the two points you just made.

One, from an end market standpoint for Tegrant, obviously there are several businesses within Tegrant as a whole.

From an end market standpoint what was most positive or positive versus your expectations?

Was it auto, was it white goods, was something totally different?

And then on cash flow and returns, something that we have talked about in the past, the free cash flow for the Company over a decade plus, it has been up, it has been down but it has trended relatively flat.

EBITDA has compounded maybe at 2% annually over the last decade, so I guess maybe touching on what Al's question was getting at, do you think you are getting to a point where you are going to see material improvement in return in free cash flow in growth rates beginning in 2013?

Thanks very much and good luck in the quarter.

Okay.

Thank you.

As far as the first part of your question about Tegrant and what was the surprise, certainly automotive is up strong in Tegrant -- and that is a specialty product and very much a niche product -- as well as the ThermoSafe business was up strong.

And moving into the third quarter, this is what is called flu season.

All the vaccines are now being prepared and shipped, so we expect a strong third quarter going forward.

And if you didn't get a flu shot last year, please get one -- go ahead and get two.

It would probably be better for you.

That would be good for you to do.

As far as --

I don't know what you are suggesting there, Jack but anyway.

As far as -- obviously we want to grow the business.

We want to grow the bottom line faster than we have grown it, and we made expansions into protective packaging and these other businesses to continue to drive the improvement in our growth rate as well as cash flow.

And plastics as well as is new flexibles coming in as well.

So absolutely that is what we are focused on and what we are trying to do.

Okay.

We'll pick it up next quarter.

Thanks, guys.

Thanks.

And, gentlemen, we have no more questions in queue at this time.

Thank you, Tahesha.

As a reminder, Sonoco's third quarter 2012 earnings conference call will be conduct at 11 AM on Thursday, October 18, 2012.

Let me again thank you all for joining us today.

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

Thank you for par participating.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.