Sonoco Products Co (SON) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarterly 2013 Sonoco earnings conference call.

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

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

Later, we will conduct a question-and-answer session.

(Operator instructions).

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

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

Please proceed, sir.

Thank you, Philip.

Good morning, everyone, and welcome to Sonoco's 2013 first-quarter earnings investor call.

This call is being conducted on April 18, 2013.

Joining me today are Jack Sanders, President and Chief Executive Officer; and Barry Saunders, Vice President and Chief Financial Officer.

A news release reviewing the Company's first-quarter financial results was issued before the market opened today, and is available on our Investor Relations section of our website at Sonoco.com.

In addition, we will refer to a presentation that is posted on the investor site during the call.

Let me 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 the Company's website.

With that, I'll turn it over to Barry Saunders.

Thank you, Roger.

I will begin on slide 3, where you see that this morning we reported first-quarter 2013 earnings per diluted share on a GAAP basis of $0.47, and base earnings of $0.50.

This compares to base earnings of $0.52 for the same period last year.

These results were at the low end of our previously issued guidance of $0.50 to $0.54 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, and summarized on this slide.

The difference between GAAP and base is due to restructuring charges and the impact of the devaluation in Venezuela.

Restructuring charges were right at $4 million on a pre-tax basis, related to the decision to close two plants; and the balance of the charges related to previously announced actions.

We also had just under a $1 million charge related to the devaluation on assets in Venezuela.

Turning to slide 4, you find the base P&L, where you see sales were $1,179,000,000, which represented a 2.7% decline over the prior year, driven by lower consumer volumes, which I will elaborate on when reviewing the sales bridge.

Gross profit was $205.7 million, which was $11.1 million lower than last year, driven by lower consumer volume and higher costs including a $2 million LIFO adjustment.

This resulted in our gross profit margin dropping to 17.4% from 17.9% last year.

Selling and administrative expenses and other charges were $119.1 million, which was $3.5 million lower due to some fixed cost reductions in some of our businesses, as well as lower management incentive accruals for the annual and long-term plans.

Thus, EBIT was $86.6 million, which was down $7.7 million or 8% from last year.

And you'll see all the drivers and change in the EBIT bridge in just a moment.

Interest expense was $14.3 million, which was lower than last year due to the repayment of some of the debt from the repatriated cash.

Income taxes of $22.8 million were lower year-over-year due to the lower earnings as well as a lower effective tax rate, which was 31.6% this year versus 33.7% in 2012.

Equity and affiliates and minority interest was in line with last year; thus, base net income was $51.7 million or $0.50 per share.

Turning to the sales bridge, on slide 5, you see a reconciliation of the year-over-year change in sales.

While I will mention that we did have two fewer days in our accounting quarter this year, which could have theoretically resulted in 2% lower volume -- but given it's really difficult to know the exact impact of those two days, all the volume numbers I will provide include the impact of the day difference as well.

You see that the impact on sales and mix negatively impacted sales by $25 million or 2% for the Company as a whole.

In the Consumer businesses, overall volume and mix lowered sales by 5.6%.

In composite cans, units were only off 1%, but volume and mix negatively impacted sales line by 4% in this business, as we sold more small diameter cans this year which have a lower selling price.

For example, refrigerated doughs, snacks, and miscellaneous food cans were all higher year-over-year; while composite cans for coffee, powdered beverage, and powdered formula were lower.

In the associated closures business, total sales were off 6% in unit terms, but trade volume was off 19%.

Flexible volume was down 5%, off of a particularly strong and oversold position in the first quarter last year.

Low molded plastics volume negatively impacted their sales by 8%, while thermoforming was down 5%, and injection molded plastics down 4%.

In the industrial businesses, overall trade volume was down 1.4%.

Tube and core volume in North America was down 1%; but, again, was up slightly when adjusting for the difference in days.

Paper North America total volume was down 3%, as trade tons were down about 1.5%, but inter-Company sales were off 4%.

Corrugating sales were up 9%, and recycling sales volume in North America, 7%.

In Europe, tubing core volume was down just under 3%, as the frontier regions to the east were up about 9%, which was just more than offset by sales in the legacy region being down 6%.

Paper sales in Europe were down about 2%, but recycling sales in Europe were lower as a result of our decision to exit some of the external trading business in Greece.

In other regions of the world, tube and core volume in South America was down 2%, while it was up 8.5% in Asia.

In the Display and Packaging segment, volume was up about 4% due primarily to higher level of activity in the dedicated contract packaging operations.

In the Protective Solutions segment, overall segment volume was up 2.5% as the molded foam business was up 7%; ThermoSafe business up 4%; partially offset by Alloyd being down 9%.

Moving now to sales prices, overall pricing for the Company was negative, but by only $3.8 million, where the prices were just slightly lower than the prior year across several of the Consumer businesses.

Prices were relatively flat in the industrial businesses.

We are seeing the benefit of the impact of the announced price increases in North America.

But given they were implemented in the latter part of the quarter, the full benefit has not yet been realized.

And the benefit in the first quarter was essentially offset by lower year-over-year contractual price adjustments.

Translation, which makes up most of the exchange and other difference, had a negligible impact on sales as there was little change year-over-year in most major currencies.

Turning to the EBIT bridge on the next page, you can see that the lower volume resulted in a $9.2 million reduction in EBIT due to the trade volume shortfall when combined with the impact of the lost profits on lower inter-Company sales in paper and metal ends.

Although you saw in the sales bridge that selling prices were lower year-over-year, when prices netted against material cost changes, energy, and freight inflation, price cost was essentially flat.

Manufacturing productivity was below our historical average this quarter, at only $6.1 million.

We had good productivity in our tube and core operations in North America and in Europe, in our flexibles operations and in our Protective Solutions businesses.

The biggest drag on productivity came from our paper operations in North America, where we took approximately 12 days more downtime this year, much of which was unplanned; and we had an unusual amount of repair and maintenance cost brought forward into the first quarter.

This actually resulted in paper converting costs per ton actually being higher, not lower, year-over-year.

Overall consumer productivity was light due to the deleveraging of the lower volume and from continued operational issues in our plastics businesses.

The All Other category was negative year-over-year by $4 million, driven by nonmaterial inflation, primarily the impact of salary and wage increases; partially offset, then, by lower fixed-cost spending in some of the businesses and the impact of lower management incentive costs.

And lastly, pension and other postretirement benefit expense was higher year-over-year by $1.3 million.

Results by segment are found on slide 7, where you see that for the Consumer businesses, sales were down 6.5% but EBIT was down 15%, due to the deleveraging of the volume; some operating issues in plastics; as well as the impact of increase in our LIFO reserve.

For the Paper and Industrial Converted businesses, trade sales were down 2%, and EBIT was down 4%, as the margin dropped slightly to 6.8%.

In Display and Packaging, sales increased but earnings were essentially unchanged, given that most of the increased sales were in the dedicated contract packaging centers; where with that business model, there isn't a significant change in earnings.

And in Protective Solutions, sales were up 2.7% while earnings improved 22%, and the margin improving to 6% due primarily to synergies and year-over-year productivity.

And now, looking forward, on slide 8, you find our guidance summary.

For the second quarter, we are projecting that base earnings per share will be in the range of $0.56 to $0.60.

This compares to last year's second quarter of $0.58.

For the full year, we are narrowing the guidance by $0.02 on the top end, due to the first-quarter results.

The overall guidance assumes no notable change in the level of economic activity, and that OCC remains in the $120 to $125 range for the balance of the year.

The effective tax rate is expected to be back to approximately 33% for the balance of the year.

The pickup in the run rate from the first quarter to the second quarter is driven almost equally between volume -- mostly due to normal seasonality -- and improvement in price cost and improved productivity.

Moving from earnings on to cash flow on slide 9, you see that cash from operations for the quarter was a record $136 million.

Cash from operations was $39 million higher year-over-year, due primarily from the fact that, as you see at the bottom of the chart, we contributed $35 million less to our pension and postretirement plans, due most notably to not making any contribution to the US qualified fund benefit plan as provided for under the Pension Relief Act.

Net capital spending was $55 million for the quarter, where we continue to have heavy spending for the biomass boiler, and accounts for much of the year-over-year difference.

So, after dividends, we had free cash flow of $51 million.

As a result of determining that the federal incentive for the biomass boiler can be used in advance of project completion to lower our quarterly tax payment, we have updated our estimate for free cash flow for the full year by $20 million, to $150 million.

On the next page, you find our balance sheet.

But I won't spend much time with it other than to mention that, as expected, we did receive $254 million of the repatriated foreign cash in the quarter, which reduced cash and debt by a similar amount.

But in addition to that, free cash flow further reduced net debt, so that net debt to total capital was down to 38.4% at the end of the quarter.

We are still projecting a further reduction through the balance of the year from additional free cash flow.

And with those estimates, net debt to total capital will be roughly 35% at the end of the year.

There are some additional slides in the appendix for your reference, but that completes my overview of the results for the quarter.

And I'll now turn it over to Jack for some additional comments.

Thanks, Barry.

Let me provide some additional color regarding the first quarter and explain why I remain optimistic about the balance of 2013.

As Barry mentioned, we faced both economic and operational challenges in the quarter.

In general, our tube and core operations met our expectations as the North American business continues to show strength, while our legacy European operations are facing continued weakness, offset somewhat by growth in Eastern Europe.

As we enter April, volume is in good shape in North America, and about the same in Europe.

However, both will experience normal improvement due to seasonality.

Our paper operations struggled in the first quarter.

In fact, we recorded negative productivity in our US and Canadian mill system due to unplanned downtime and higher maintenance costs.

I am encouraged by the continued growth in our Protective Solutions molded foam operations.

We dedicated the new molding foam plant in Central Mexico on March 15, and we'll be breaking ground on another plant in the Central US later this year.

Both will be operational by year end.

Consumer Packaging was impacted by continued soft retail sales, particularly in packaged food.

We were also negatively impacted by operational issues in some of our plastics businesses that reduced revenue.

Entering April, packaging volume is better, and we are improving operations and reducing costs.

Our Display and Packaging results in the quarter were flat, but we continue to add new businesses -- new business.

Yesterday we announced we won significant new business with Energizer.

We will be providing about 30 million primary packs, covering more than 150 SKUs annually.

This will include blisters, blister cards, shrink-wrapped trays and cartons.

We will source much of the material through our Alloyd business.

In addition, we will be making thousands of retail displays.

This is a 3.5 year contract with Energizer.

And we're installing more than 50 packaging lines in our North Carolina Display and Packaging campus just outside Winston-Salem.

We're just starting to produce product for the customer, and the project will ramp up through the second quarter.

In looking at the rest of 2013, I remain optimistic about our guidance.

While I can't control the global economy, I believe three factors will help drive our performance for the rest of the year.

The first is pricing.

As many of you know, we implemented a $25 a ton domestic price increase for uncoated recycled paper board, and a 4% increase in tubes and cores.

We are very encouraged, as increases are supported in the market.

While we are not a large producer, we will benefit from the announced $50 a ton increase in containerboard and corrugated medium.

Finally, we have implemented price increases beginning this quarter in both composite cans and plastics.

These increases are to recover raw material and other inflationary costs.

The second factor that will drive our improvement is better operating performance.

Clearly, productivity in the first quarter was not to our historic average.

Late last year, we changed the management team in Paper North America, and their focus on preventative maintenance is much greater than we've had in the past.

As we were conducting both planned and unplanned maintenance during the quarter, we expanded the scope of the work to ensure we fixed the problem and paved the way for better uptime for the balance of the year.

As we enter April, the mills are running better and we're projecting improve run rates and productivity.

Demand remains solid.

In plastics, we're bringing up a third production wheel that will eliminate the bottleneck that impacted volume in Q1, and will pave the way to produce new one volume.

In addition, we're implementing further cost reductions in many of our businesses.

The third factor that makes me optimistic is recent won volume.

Yesterday we announced Energizer, but we also have several additional wins I believe will help us reach our commercial objectives in 2013.

In closing, I want to reiterate our ability to generate strong cash flow from operations.

As Barry mentioned, we had a record cash flow quarter and we have raised guidance for free cash flow to $150 million for 2013.

We are focused on maximizing cash flow to fund growth, pay down debt, and return value to shareholders through dividends and possible share repurchases.

As a reminder, we increased the annual dividend to $1.24 per share, which represents a 3.5% yield.

With that, Philip, I'll turn it back to you to take questions.

(Operator instructions).

George Staphos, Bank of America Merrill Lynch.

Jack, had a couple of questions, to start, on operations.

Can you relay what you found with the mills in terms of some of the new maintenance programs that you're running?

What caused the additional maintenance review?

And within plastics, you alluded a couple of times to operational issues.

It sounded like one of those might have been bottlenecks related to lack of capacity.

But could you provide a bit more color on that, as well?

And I had a couple of follow-ons.

Well, in the mills, it really wasn't a change in a planned maintenance outage.

What actually occurred is that we had a breakdown.

The machine would actually break in some fashion, or you would have an unplanned outage.

So when we went to make those repairs, we did pretty extensive root cause analysis.

And then once doing that, we found that we should probably fix more than just that one isolated incident, so that we can ensure future runability is better.

Hey, Jack, just on that issue, in the third quarter you also had, as I recall, some operational issues at the mills which were one-off and unusual for Sunoco.

Were they related problems -- the third-quarter issue, and what you saw in the first quarter -- or totally different?

Totally different.

What happened in the third quarter of last year was around planned outages, where they -- the entire span of that operation extended beyond the planned downtime, and we began to run into resource issues because we were overlapping planned outages.

Understood.

And on plastics?

In plastics we have a facility with two large production wheels.

The initial wheel that we put in began to have throughput problems.

We need to have that wheel refurbished.

We are bringing up a third wheel in that operation to produce about 50 million new bottles, and that was coming up.

So that wheel is going to be able to help us produce at the current rate that we need to produce.

And then we'll refurbish the third -- the first wheel, so that we can now produce the original volume, plus the 50 million new units.

What do you think the operational issues between those two sources cost you in the quarter?

If you mentioned it, I apologize for missing it.

No.

I think, as we look at it, I would say productivity cost us about $0.03.

My other question on consumer -- and I'll turn it over after this -- you obviously had some things that didn't go the way you would've planned, that you hope are one-off.

But over, say, the last few quarters -- the revenue trend, the volume trend, the margins -- haven't, I would expect, not been where you necessarily would've thought they'd be.

Do you -- I know you've won some business recently, which I guess validates in your view the one Sunoco model.

But can you comment how you think you are specifically getting paid for having the very diverse consumer portfolio that you have?

And can you provide a specific mile marker or guidepost of when we should see 10% margins in that business, both in terms of a quarter and on a sustained basis going forward.

Thank you.

Well, I certainly think that we can show that we're getting paid through new volume that we are gaining; and new volume that we are gaining across the portfolio that we would not have had, of course, if we just had, let's say, composite cans.

As far as margins, I certainly think price cost was a negative impact in the margins this quarter, as well as those productivity issues I talked about; and then, of course, volume.

You put volume back at normalized level, we have a price increase in the market that's going to have a significantly positive impact, and bring our productivity back to normal.

All of a sudden, margins are 10%.

Okay Jack.

I'll turn it over.

Thank you.

Chip Dillon, Vertical Research.

Good morning.

First question is on -- just was thinking about the volume comments in the Consumer Packaging division.

They -- you mentioned that sort of the volumes were down across the board.

I know you've touched on that but.

Would you say -- how would you sort of look at that, in terms of the share of food that's going into your packaging perhaps being lost, versus the whole market maybe being lower?

And that's, of course, making a bigger statement about the food industry.

Well, it's less about the share of the market going into our packaging, and more about the share of our customers have in that particular product.

And I think that that's what we're seeing.

And our customers, by the way, are telling us that they expect improved volumes as the year goes on.

They expect it to accelerate through the course of the year.

And these are our customers using our packaging.

Okay.

And then, you mentioned the benefits you would get -- I guess it's a tax credit.

Was that something -- could you just elaborate -- I guess going into the project, was that a tax benefit you knew about and expected all along?

Or is that something that kind of either came into legislation after you planned it, or it was discovered later?

Chip, this is Barry.

No, we were well aware of the credit, and certainly considered that in our decision to move forward with the project.

And the only new news is the fact that rather than having to wait until the project is completed, and getting the credit back in 2014, we've actually been able to accelerate the recognition of that and bring it forward into 2013.

Got you.

And I guess the last question would be, when you look at your footprint right now and as time goes on, you probably are finding ways to enhance productivity.

Do you -- will we hear more, do you think, later in the year or maybe next year, about anything significant in terms of perhaps finding ways you can enhance productivity by shifting your footprint around, or maybe shutting some facilities and consolidating the production into others?

Simple answer, yes.

We have two closures in this quarter, [Brecon] and Chattanooga.

And we're going to continue to look at this footprint and optimize this footprint, and not even inside businesses but perhaps across businesses.

So ensuring we are a low-cost producer across all of our product lines is critically important to us, and we're going to continue to do that.

Now, having said that, I don't expect a massive restructuring.

But there are opportunities and we're going to take advantage of them.

Got you.

Thank you.

Scott Gaffner, Barclays.

Just one more quick question on the productivity in the mill system.

Has the new management team that you put in place -- have they gone mill by mill and sort of looked at all the equipment that you have, and may be identified a bigger and broader maintenance schedule that stretches over either this year or maybe even into next year, so that we could preemptively catch some of these issues?

Is that part of the plan?

Exactly.

It is a preventative maintenance schedule that will help ensure uptime increases as we move forward.

Okay.

And you noted in the Consumer business -- I think you said you're looking to get some price there.

Can you tell us where those price -- where you are getting price currently?

Currently, it's in composite cans and in the plastics.

Recouping a lot of the plastics is contractual.

And composite cans is contractual; as well as general increase.

And your forecast for resin for that business for the balance of the year?

Flat to trending down.

All right.

And just lastly on OCC, it seems you are saying $120 per ton, I think, is about what your forecast for the balance of the year.

What gives you confidence that that is going to be the number for the balance of the year?

I was right in the first quarter (laughter).

Well, everything that we see, everything that we hear would suggest that there is going to be a normal seasonality to OCC.

And it should follow a traditional pattern, probably creep up as we approach the summer, and then tail off toward the end of the year.

China -- the issue right now with what they called the Green Fence certainly is impacting it.

But they will be back in the market.

They have to be, at some degree, but we don't see a supply/demand imbalance.

All right.

Thank you.

Mark Wilde, Deutsche Bank.

I hope the new seat is working out well there, Jack.

It's fairly hot, Mark.

Listen, I wanted to ask a question about that weakness that you reported in the retail security products.

I think you said Alloyd was down about 9%.

Is that -- is there anything structural going on there?

I think that, over time, there's been a lot of conversations about sort of alternative to clamshells.

And I didn't know whether that 9% drop marked some kind of movement away from the clamshell.

No.

All -- what we did see would be weakness across our entire top-10 customer base.

And when we say weakness, really it's a delay in a launch; that they decided to push back some launches.

And we expect, really, to see some of them occur now in the second quarter that would've normally occurred in the first.

So we don't see that.

I do want to remind you that before we bought Tegrant, they lost the Energizer business.

Well, we just got it back.

So that will be a positive impact on that business.

Mark, one other thing I'd like to take the opportunity to point out -- I know margins were a question on the Protective Solutions side.

If you took Alloyd out, that EBIT margin was about 8.5%.

So, we were pleased with that.

And do you feel, Jack, like you're still on target for your EBIT objectives in Protective Packaging?

We are.

I think fixing the Alloyd situation will be critical to doing that; but, once done, yes I do.

Okay.

And is there any way to kind of put any numbers around what this big Energizer win might mean for you in terms of just revenues over time?

It's hard, because the scope of the project is so significant right now.

We think the entire scope is something probably around $20 million-ish across the entire business.

That's not just blisters though; that's the entire package.

Yes, because you're doing kind of the primary pack.

And then you're doing the display pack along with it.

Correct.

And I guess the last question I had is just back on this OCC.

I mean if economic activity is picking up, wouldn't you expect those OCC prices to just start to rise a little more cyclically?

Yes.

And that's really what I was trying to convey, to see a normal seasonality to OCC rising through the summer, but then dropping during the third -- and in the fourth quarter.

That's what I meant to convey.

All right.

Sounds good.

I'll pass it on.

Ghansham Panjabi, Robert W. Baird.

Good morning, it's Matt Wooten sitting in for Ghansham today.

I was hoping that you guys could comment on intra-quarter trends.

Our sense is that both Consumer and Industrial were okay through January and February before dropping off in March; and if that is the case, how much did weather impact consumer consumption trends?

Honestly, that's hard for me to say.

I can say that, certainly, the colder winter impacted a segment of the composite can business known as powdered beverage.

It's primarily cold drinks.

And so, there's not a lot of cold drinking going on in the snow, so I think that's part of it.

As far as how it unfolded in the quarter, it started slow, and then -- it started slow in January; kind of rebounded a little bit in February; and then flattened out probably a little bit in March.

I would say that's about the best I could give you on it.

Okay.

And then back to productivity for a second.

What are your expectations for the full-year 2013, given the tough first quarter?

Say that again?

In terms of --?

Yes, what are your expectations for productivity for the full year of 2013?

I would expect our productivity to come back to historic levels for the second, third, and fourth quarter.

Okay.

Thank you.

Phil Gresh, JPMorgan.

I just want to follow up on your response to Chip's question about the food volumes.

So, if I were to look at like the Nielsen data as a proxy, it looks like food inflation has been coming down, and food volumes have been improving.

But you're talking about kind of generally more sluggish trends; and you mentioned your customers.

So I guess were you saying that your customers have been losing share relative to the industry?

Or I guess what kind of read do you have about how your volume performance has been, relative to the overall industry data, using Nielsen as a proxy?

Yes, I would tell you that our customers, for the products we package, have been lagging that Nielsen data.

What they are, again, telling us that they expect it to catch up and accelerate for the products that we package for them through the balance of the year.

Okay.

And then --

More in line with Nielsen data.

Sorry?

To come more in line with the Nielsen data.

Got it, okay.

And then, with the price increases that you were talking about -- the general increases on composite cans -- maybe you could just give a little color about what your operating rates are like in that business?

How fully you are running?

Because you've had volume declines for about seven straight quarters.

And so I was just kind of wondering, given those volume trends, what gives you the confidence that you'll be able to get some general price increases through that aren't just the pass-through?

Well, I think, obviously, in that business, we own a substantial share of that marketplace.

The cost increases that we are putting through were designed to recover costs that we've incurred.

So we feel very confident that they will be accepted.

As a matter of fact, they're already out there.

A lot of them are contractual so that they are adjusted per the contract.

Okay.

I and then I guess just the last question.

In the European side for industrial, if I look at the data it seems like it softened a bit in the first quarter.

I just wanted to elaborate on that, if that's the case, particularly on the Western European side; just what trends you're seeing in Western Europe right now, given the macro data.

Certainly to what you're seeing -- that's true, we did see some weakening; and even in some of the stronger markets that we've historically had strength -- Germany, even perhaps the Nordic.

I do want to reiterate that that is offset somewhat by significant opportunities in growth in Eastern Europe.

I think Russia was up 25%, or significantly.

And we have more opportunities to help offset the weakness in the legacy business in Europe.

Got it.

Okay, thanks.

I'll turn it over.

Philip Ng, Jefferies.

It sounds like you are generally a little bit more upbeat about April, from a volume trend standpoint.

How much of that is seasonal?

And how much of that is driven by -- you sounded pretty confident that your customers are going to see an uptick.

Are you doing more promotional activity?

No.

I think what we did really did was take our current run rate; kind of adjust it for seasonality and new-won volume that we know about.

So that's how we got to the number.

Okay.

So you are seeing an uptick, even after accounting for seasonality in April.

Certainly on the industrial side.

Okay that's helpful.

And then from a pricing standpoint, it sounds like you're seeing better pricing in 2Q.

Part of that is contractual.

A few of the bigger flexible and rigid plastic packagers have been pretty vocal about pushing price more aggressively.

Have you seen any real shift in behavior in the industry overall?

I would say no.

But I think that, on our side of the business, a lot of the increases in price for flexibles and for rigid plastics are mostly contractual.

They are prearranged, and there are formulas that they work from.

And then lastly, Jack, now that you are in your current position, what are some of the changes you want to implement, in terms of going forward in how you run the business -- hopefully to reaccelerate growth and generate more cash going down the road?

Well, it would take me probably the rest of the day to explain that completely.

But I would tell you a big part of what we're talking about is really becoming more innovative, creative, and more outwardly focused toward the customer.

We're going to be doing a lot of work around that, taking some of our best and brightest, and benchmarking some of the best companies in the world around innovation; as well as looking to use consumer insights to drive that innovation back through our organization.

I'll be willing to talk to you about that off-line in some detail, about the five institutional capabilities we need to develop.

Okay.

Thanks, guys.

Adam Josephson, KeyBanc.

Good morning everyone.

I have a couple of questions -- one on composite cans.

How would you characterize the state of conversions into and out of composite cans in North America?

And what would you attribute the weakness in certain categories in the quarter to, other than what happened in powdered beverages?

The conversion into and out of, Adam, I would say, is unchanged.

It's not really moving a lot one way or the other.

As far as the volume, it's more product line-specific.

It's specific to a product.

For example our coffee customer or our nut customer, our biggest -- they're just having issues with their particular brand.

And so, obviously, that's impacting us.

Got it.

Two more.

One on tubes and cores -- to what extent do you think you're benefiting from the housing market upturn?

Well, you know, I have to say that it's certainly there.

Again, we've always had difficulty quantifying that because so many different products are used in housing.

And we sell it into the general industry, and what they do with it from that point is very difficult for us to track.

But it's definitively there.

We can definitively see the correlation.

Great, thanks.

And one last one, Jack.

Your EBIT margin in the first quarter was the lowest in a first quarter since 2009.

How much of that you attribute to the pass-through of higher raw material costs?

How much is attributable to other factors, such as lower tubes and cores volume, lower composite can volume, and perhaps other factors that I haven't mentioned?

Well, I think that if we looked at it all together, you'd have negative price cost; you'd have negative productivity and negative volume.

How you distribute it across that, I don't know -- one-third/one-third/one-third maybe.

And you'd also have some higher pension costs over that period of time as well.

Got it, got it.

Thank you both.

I appreciate it.

Chris Manuel, Wells Fargo.

Just a couple quick questions.

One, when you look at -- or based on some earlier commentary you made -- it sound like volumes were maybe a little soft in the Consumer side, the beginning of the business.

And I think you had signaled that earlier when you gave us your annual guidance.

But as the year progresses, even if these price increases and such roll through, do you think you can get back to a kind of flattish or slightly negative for the year volume outlook in the Consumer business?

Absolutely.

2013, we think, will be a bit opposite from 2012.

We started reasonably strong in 2012 in Consumer, and drifted down as the year went on.

We saw a continuation of that in the first quarter.

And now we expect the opposite to actually begin, to see a continued strengthening.

That's what our customers are saying to us; as the year progresses, they expect strengthening volumes.

Okay.

And I guess if you could just kind of take us a walk over the course of the year, and maybe refresh what you are anticipating -- Consumer getting back to, hopefully, kind of flat over the course of the year.

I believe you had been anticipating that on the industrial side you would be flat, but you're already a little bit in the hole here to start the year.

Are you anticipating getting back there?

And then as we talk through the Display and the Protective business as well, kind of --?

Yes, I would -- Chris, I think that by the end of the year, we'll be up slightly in Consumer; and we said flat in Industrial.

I think that's a probability.

It could even slightly be up as well.

It depends -- Europe is an issue for us.

And it's -- I mean, if you can tell me what's going to happen in Europe, then I can give you a better answer.

But I can't.

Okay.

And then Protective Solutions, we expect to be up, of course, year-over-year.

And then, I believe also in the past you've talked about using, this year, your cash flow for -- to get debt down to a more targeted range.

But being you're able to accelerate some of the tax benefit from your biomass boiler, is it reasonable, as we sit here today, to assume that you might be able to accelerate and do a little extra share repurchase this year?

Chris, like always, we will evaluate the opportunities to use cash to generate shareholder value.

If share repurchase is the best alternative we have, it will certainly be on the table.

I can guarantee you that.

All right.

Thank you, gentlemen.

Alex Ovshey, Goldman Sachs.

On the tubes and core side, can you talk about the volume trend that you experienced by end use in the quarter?

Barry has that, I think.

It's really a little bit unusual when you look at the trends by market segment, because there was some share shifting going on throughout the quarter, which is often the case when we are pushing through price increases and so forth.

But, actually, we saw our paper mill segment up 4% year-over-year.

And that was due to some share gains, but also just some underlying improvement in activity in that business.

Actually we saw film, textiles, and tape and specialties down some.

But again, that was primarily due to the share shift going on.

Net-net, very insignificant difference in share; but it did influence some of the individual segments this quarter.

Thanks, Barry.

And you talked about implementing higher URB prices in the market.

Can you help us think about quantifying the benefit of higher URB prices?

Because my understanding is that most of the tubes and core business is contractually tied back to where OCC prices are.

So, what's the potential benefit to the Company from the higher URB prices that you're implementing in the marketplace?

Well, Alex, I want to stay away from specifics here.

But let me tell you that about 60% of our tube and core business is tied to contractual arrangements.

And, the yield from the announced increase -- let me categorize it as strong.

Okay.

Got it, Jack.

And last question is, you talked about what the current appetite for M&A is relative to history for the Company.

I didn't really hear you talk to that point much during the call so far.

It seems the focus is more on continuing to bring the debt level down, potential for buying back stock.

Just talk to where the appetite for M&A is right now.

Yes, well, when the year started, our focus was clearly on paying down the debt.

We have a bond that's coming due, I think, sometime in the November -- October/November time frame.

And we wanted to use the free cash flow this year to pay down that debt and get it back to the normal range for us, that we feel comfortable with.

Now we have some extra cash.

And I would tell you that there are opportunities out there and that we are kicking some tires on a few of them.

But, to the point that was made earlier, or was asked about earlier, we need to ensure that any acquisition we make can generate a better return than we can do by buying back shares.

So that's going to be just a filter that it goes through.

I'd say the appetite for acquisitions is the same as it's always been.

It has to be a solid, value-generating acquisition for our shareholders.

Al Kabili, Sunoco.

Hi.

Thanks.

It's Macquarie.

Thanks for -- (laughter)

I was going to say, wow!

I didn't know!

I guess, Jack, a question on the productivity outlook.

With the shortfall in the first quarter, how are you thinking about the remainder of the year for productivity?

Do you think you can make that up, relative to your original outlook?

Or what's the update there?

Make it up -- probably not.

Get it back to historic levels -- absolutely.

Okay.

And along those lines, too -- I know you talked a lot about penetrating more in the private label side of the packaged food end market.

How does that progressed, do you think?

How do you see that progress unfolding?

Is that something that's going to -- several years out?

Is that something you can do a little bit, move the needle a little bit more, within the next year?

What are the mile markers towards that?

Well, I would tell you that it's just a continual process as we move forward.

I will tell you that, although we saw weakness in coffee, had we not had some further penetrations of private label, it wouldn't have been even weaker.

So we continue to gain some private label sales.

But it's kind of a continual process as we just move forward; nothing that would be out of the ordinary to accelerate it.

Okay.

Final question is on the -- I guess on the displays business.

You know, any read on bidding activity, whether that's appreciably picked up?

Or backlogs -- how are -- oftentimes we kind of think of that, in business, as a little bit of an leading indicator of things.

But what can you tell us on that?

We are seeing some increased activities in requests for designs, and requests for promotional activities.

It is building.

Okay.

All right.

Good.

All right; thanks; good luck in the quarter.

Thanks a lot.

(Operator instructions).

George Staphos, Bank of America Merrill Lynch.

One thing I want to come back to, Jack, in Consumer -- a couple of things, actually.

You had mentioned that this year is maybe a mirror image of last year, where last year started out strongly and declined; and then, this year, we are starting out slowly, at least in terms of your customers and building.

When I look at last year's first quarter, I think composite can volumes were down a couple percent in North America, if I remember.

And here we were down a little bit in the first quarter as well; recognizing that a lot of it, you thought, was your customers' specific issues in the market.

Do you think that there is a greater secular issue within composites right now that you need to contend with, either in terms of the packages' overall acceptance in the marketplace?

Or, for that matter, competition either from others who are trying to get into similar types of packages, or from other substrates -- or is it pretty much status quo and, actually, we should get some benefit over the course of the year as volume comes back?

I think when you look in the aggregate, the volume in composite cans is increasing.

We're putting in -- we just completed -- opened a new line in Malaysia.

That line is coming on now.

We have to add a second line in China.

That line will be in, probably, sometime in the last half of this year.

We're opening a two-line plant in Poland.

And we've been asked to look at other opportunities in Europe for additional expansion.

So, composite can volume in total is going to go up.

Domestically, are there some shifts from formats?

There have been.

We've talked about them.

They've been mostly in the 502 or 603 sizes.

We've seen some shift in plastic to PIF.

But we've talked about that openly; but it's not anything that would be out of the normal flow into and out of a format.

Okay.

Thanks for that, Jack.

Now you mentioned two lines in Poland, and you also mentioned some other activity in Europe.

I remember you saying that you were close to where I had received an award, actually, in Europe in composite cans.

Are those openings associated with that award?

And can you provide a bit more detail on this?

If you have in the past, I forget what you said there specifically.

I'm not sure that we've announced who we won the award from.

But the opening that we're looking at is the award.

Okay.

And that, we'll get more color on sometime in the second half.

Would that be fair?

As soon as our customer says it's okay.

Okay fair enough.

Lastly, as we look at how the Company gets paid within Consumer from all the products that you offer, and the awards that you've been gaining, is your view that the awards and the new offerings that you have are actually margin enhancing?

Or should they be more or less at the average margin for the Company over time, relative to traditional margins in Consumer Packaging?

Thanks, guys.

In the aggregate, George, we think that should be slightly margin-enhancing.

Okay.

All right, Jack.

Thanks.

Good luck in the quarter.

Ladies and gentlemen, that concludes today's Q&A session of the conference.

I'd now like to turn it back over to Robert Schrum for closing remarks.

Thank you, Philip.

Sunoco expects to conduct its second-quarter earnings conference call on Thursday, July 18, 2013, at 11 AM Eastern time.

And we'll be sending out more details regarding the call, and the timing of the release of Sunoco's second-quarter financial results.

And so we'll be communicating that, probably, a couple of weeks before the earnings actually go out.

Let me, again, thank you all for joining us today.

We certainly appreciate your interest in the Company.

And as always, if you have further questions, please don't hesitate to contact us.

Thank you very much.