Sonoco Products Co (SON) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 Sonoco earnings conference call.

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

(Operator Instructions).

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

And I'd like to turn the call over to Mr. Roger Schrum, Vice President, Investor Relations and Corporate Affairs.

Please proceed, sir.

Thank you, Stephanie, and good morning, everyone, and welcome to our 2013 second-quarter earnings investor call.

This call is being conducted on July 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 second-quarter financial results was issued before the market opened today and is available on the investor relations section of our website at Sonoco.com.

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

I'll 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.

Thank you, Roger.

I will begin on slide three where you see that this morning we reported second-quarter earnings per diluted share on a GAAP basis of $0.53 and base earnings of $0.59.

These results were towards the upper end of our previously provided guidance of $0.56 to $0.60 and improved from last year's base earnings of $0.58.

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 summarized on this slide.

But the difference between GAAP and base is due to net restructuring charges of $0.06 per share, related primarily to the announcement of the planned closure of the thermoform plastics plant in Ireland and other reductions in force and additional charges for previously announced actions.

Turning to slide four, you find the base P&L, where you see sales were $1.226 billion, which represented a 2% increase over the prior year, driven by higher volume, which will be explained on the sales bridge.

Gross profit was $222.6 million, which was $6 million, or 2.8%, higher than last year, with our gross profit margin at 18.1%.

Selling and administrative expenses and other charges were $121.8 million, which was a 2.9% increase above last year, which can essentially be explained by merit and other inflationary increases.

Thus, EBIT was $100.8 million, which was 2.8% above last year, and you'll see all the drivers of the change in the EBIT bridge in just a moment.

But I will take a chance to mention that pension and postretirement expense was $5 million higher year over year, $2 million of which was related specifically to the final recognition of some changes made to our Canadian defined-benefit plan related to the settlement of liabilities for employees that moved from a defined-benefit to a defined-contribution plan at the beginning of the second quarter.

Absent the total year-over-year increase in pension costs, EBIT would have improved by 7.8% as our EBIT margin would have been 8.6% for the quarter and EPS would have been $0.03 higher.

Moving down to net interest, you can see that was $14.4 million, which was slightly lower than last year due to lower debt levels.

Income taxes of $29.4 million were higher year over year due to the higher earnings, but also due to a higher base effective tax rate, which was 34% this year versus 32.8% in 2012.

And that's just due simply to more earnings in higher tax jurisdictions.

As information, earnings would have been about $0.01 higher at last year's effective tax rate.

Equity in affiliates and minority interest was in line with last year, thus base net income was $60.8 million, or $0.59 per share, up 1% year over year.

But again, absent the higher pension cost and the higher effective tax rate, earnings per share would have been up just a little under 9%.

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

Here you see that the impact on sales from volume and mix was favorable by $30 million, or 2.5%, driven by a higher level of activity in Display and Packaging, as well as Protective Solutions.

In the Consumer segment, volume was essentially flat for the segment as a whole as a 1.7% increase in unit demand in composite cans North America, a 2% increase in flexibles trade volume, and a 7% increase in blow-molded plastics was then offset by a decline in the trade sales of metal ends and lower sales in thermoform and injection-molded plastics.

Volume in the paper and industrial converted products segment was also essentially flat.

In North America, tube and core sales were up about 0.5%, driven by a slight pickup in sales into the paper industry.

Tube and core volume in Europe was up 1.2%, due to continued growth of 17% in the frontier countries to the east, most notably Russia, which was then largely offset by a 3% decline in the legacy countries to the west.

These increases in North America and Europe in tubes and cores were then largely offset for the segment as a whole by lower recycling sales in Europe, where we decided to exit some trading activity, and we had lower sales in reels in North America, which were down due to a difficult comp with very strong sales last year in the second quarter.

The volume increase we saw in Display and Packaging, which was up 18%, was due to a higher level of activity in the dedicated pack centers, but also due to recently awarded business and overall stronger business activity.

Volume in the Protective Solutions segment was up 7%.

This was driven by a strong quarter in the foam-based business, which was up 11%, primarily driven by auto components, while the paper-based legacy protective packaging business was up 14%, due to strength in the appliance packaging sector.

Alloyd retail security packaging was up 3% year over year, all then just partially offset by the temperature-sure packaging business being down 4% in the quarter.

Moving down to sales price.

Overall pricing for the Company was slightly negative by $3 million.

Consumer pricing was essentially flat, but pricing in the paper and industrial converted products segment was down as many contracts reset this year at March's OCC price in the Southeast of $120 per ton versus $135 per ton last year.

And then, recycling sales were based on an average OCC price for the quarter this year of $118 per ton, down from an average of $128 last year.

The lower contract pricing was then partially offset by the benefit of price increases realized from announced increases earlier this year.

Translation and all other was negative by $3 million, and this was due to the disposition of the Protective Solutions box plant, a single-plant operation, as foreign exchange had a negligible impact on sales and certainly no significant impact on earnings.

Turning to the EBIT bridge on the next page, the overall volume increase added $5 million to earnings, with the incremental contribution margin being somewhat lower that our overall average margin since much of the increased volume came from Display and Packaging activities.

Although you saw on the sales bridge that selling prices were slightly negative, when prices netted against material, cost changes, energy, and freight inflation, price cost was favorable by $5 million.

This is even after considering that we saw a negative price cost relationship in the industrial businesses in Europe, where the continued slow economic activity has resulted in continued competitive pricing pressure.

Manufacturing productivity was light again this quarter at only $5 million.

Several businesses reported strong productivity, including the industrial businesses in Europe and thermoform plastics.

This was somewhat diluted by the fact that year-over-year productivity was negative in our North American paper mills, but this was due to an extremely strong second quarter last year, making for a difficult year-over-year comparison, as well as some heavier repair spending as part of our maintenance excellence initiative.

Conversion costs in our paper operations were much improved from the last few quarters, and we should show positive productivity through the rest of the year.

The other drag on productivity came from blow-molded plastics, due largely to some unusual items in the quarter, including the impact of the tornado that hit the St.

Louis plant and a mechanical failure with one blow-molding wheel.

The all other was negative year over year by $7 million, driven by nonmaterial inflation, primarily the impact of salary and wage increases, partially offset by some lower fixed-cost spending in some of the businesses.

And lastly, as previously mentioned, pension and other postretirement benefit expense was higher by $5 million.

Results by segment are found on slide seven, where you can see for the consumer businesses sales dollars were essentially flat, but EBIT improved by 11% as the EBIT margin went from 9% to 10%, driven by favorable price costs, favorable mix, and productivity.

For the Paper and Industrial Converted businesses, trade sales were essentially flat, but EBIT dropped 9% as the EBIT margin decreased from 8.3% to 7.6% due to the higher pension costs, which disproportionately impacted this segment, and relatively light manufacturing productivity, which did not completely offset all other cost increases.

In Display and Packaging, sales increased $21 million, or 20%, and earnings improved 34%, due primarily to the higher level of activity.

And in Protective Solutions, sales were up 5%, while earnings improved 4%, and the margin essentially flat at 8.1%.

And now looking forward, on slide eight you find our guidance summary where we are projecting that base EPS will be in the range to $0.59 to $0.63 in the third quarter.

This compares to last year's second quarter (sic -- see Presentation -- third quarter) of $0.55.

We are leaving our full-year guidance unchanged at $2.26 to $2.32 per share.

The overall guidance assumes no notable change in the level of economic activity and that OCC remains in the $130 range.

The effective tax rate is expected to be approximately 33.5% for the balance of the year.

Moving from earnings to cash flow on slide nine, you can see that cash from operations was $108 million, which was in line with our expectations.

Cash from operations was $65 million higher year over year, due primarily to a beneficial change in working capital, most notably accounts payable, where last year we saw some decreases in payables due to a certain change in terms with a particular vendor.

But this year, we actually saw an increase in payables due to higher level of activity in the second quarter versus the first.

But working capital was also favorably impacted by actually reducing inventory levels in the quarter, even with the higher level of activity; thus, days of inventory improved.

We also had lower tax payments year over year due to being able to reduce current taxes payable in the second quarter by $16 million, related to the federal incentives for the biomass boiler investment.

Net capital spending was $42 million for the quarter, which was a little light just due to the timing of investments, since we are still expecting to spend right at $205 million for the full year.

So after dividends, we had free cash flow of $35 million for the quarter.

We are still projecting free cash flow for the full year to be right at $150 million, $118 million of which will be used to repay the notes that we have maturing in November.

On the next page, you find our balance sheet, and I really won't spend much time discussing it today, other than just to point out that our net debt to total capital improved further to 37.3% and we're still projecting it will be down to roughly 35% by year-end.

The only other thing that I'll mention is that although we do not change our pension liability for the impact of discount rates quarterly, rates thus far have moved back up from year-end, and if the current level of rates would hold through the balance of the year, the funded position on the domestic qualified plan will have improved to about an 85% funded status, as compared to right at 80% at year-end.

There's an additional slide on OCC prices in the appendix for your reference.

But that completes my overview of the results for the quarter, and I'll now turn it back over to Jack for some additional comments.

Thanks, Barry.

Let me add some additional color on our second quarter and talk briefly about my optimism for the second half of 2013.

As Barry mentioned, we had a pretty good second quarter that, quite frankly, could have been a little better if not for some discrete, one-time items, specifically the Canadian pension issue, which cost us about $0.01 per share.

Overall, we had record sales, record gross profits, and record second-quarter cash flow.

Year-over-year free cash flow improved by more than $100 million, and we're comfortable we will exceed $150 million in net free cash flow for the year after we pay dividends.

We are also encouraged by what we see in some of our individual businesses.

Our tube and core operations continue to show improvement, with the North American business registering the highest production volume on a tons-per-day basis since mid-2010.

European tube and core volumes also improved, due to strong double-digit growth in the frontier markets of eastern Europe and share gain in our legacy western European markets.

As we enter the third quarter, volumes remain in pretty good shape, although I will point out that on a per-day basis, normally volumes decline somewhat from Q2 to Q3 in both the US and Europe, so we remain cautious in our assumptions.

Our Paper operations in North America rebounded during the second quarter and volumes remained strong entering the third quarter.

We do face negative price cost headwinds as OCC prices have already increased in July to $130 a ton in the southeast, and we could see additional upward price movement during the quarter.

To help offset the increase in fiber cost, we have implemented a $40 a ton increase in uncoated recycled paperboard and a 5% increase in tubes and cores.

These increases should help partially cover some of the raw material inflation until contracts reset in the fourth quarter.

We are pleased with the continued growth in our Protective Solutions business as volumes were up 7%, while the industrial side of the business, both transport packaging and automotive, remains strong.

And on the Consumer side, our legacy appliance packaging business showed good volume growth and benefited from new won volume at General Electric.

We made good progress in our new molded foam plant in central Mexico and recently announced a new facility to be built in Kentucky to serve the automotive market in the central US.

Our Consumer Packaging segment showed double-digit improvement in operating profit, as well as improvement in EBIT margins by about 100 basis points to 10% on a sequential basis.

In composite cans, we experienced strong gains in nuts, dough, powdered infant formula, and coffee, with some of these segments showing growth for the first time in more than a year.

In addition, we have solid momentum entering the third quarter.

Our flexible packaging business reported a record profit quarter.

We'll be starting up a new rotor reviewer press in Tennessee in the third quarter and we are working to commercialize some recently won business over the next few months.

In Plastics, both our injection molding and thermoforming business showed improvement in the quarter, but we continue to experience problems in several of our blow-molding operations.

We experienced a temporary outage in our St.

Louis facility due to tornado damage during the Memorial Day weekend.

Fortunately, no one was hurt, and our team did a remarkable job and we were able to restart with limited production within five days, and all operations are now online.

That said, Rob Tiede has his team working hard to improve performance in our blow-molding operations, but it's going to take some time to effectively address all of our issues and perform at the level which we expect.

Our Display and Packaging results in the quarter were strong on both the top and bottom line as activity in both our contract packaging and US display business improved as our customers stepped up promotional activities.

And the new Energizer business, which was won last quarter, is ramping up as we enter their busy season.

In looking at the second half of 2013, I remain optimistic about our prospects, and our team is intensely focused on three key areas.

The first is pricing.

We are implementing a $40 a ton price increase in uncoated recycled paperboard and a 5% increase on tubes and cores in the US and Canada.

We're encouraged that these increases are being supported in the market.

In addition, while we are not a large producer, we are benefiting from increased pricing for containerboard and corrugated medium.

Finally, during the third quarter and throughout the balance of the year, we will benefit from increased prices in our Consumer businesses to help offset increased costs.

The second factor that will drive our improvement is continuing to optimize our portfolio of businesses.

As Barry mentioned, productivity was again below our historic average, but some of that came against some very difficult comps and discrete operating issues, including the St.

Louis tornado and the higher-than-expected startup costs at our new tube and core facility in Thailand.

To overcome some of the shortfall, we are implementing further contingency cost reductions in many of our businesses, including the planned closure of our thermoforming operations in Ireland and additional rationalization of our industrial footprint in Europe.

We will continue to take a hard objective look at all of our businesses and will make these kinds of decisions if we determine we can redeploy capital and resources in other areas that offer the potential to deliver a higher rate of return.

The third and final factor that makes me optimistic about the second half is seasonal volume improvement in Consumer, as well as recently won new volume.

In closing, let me say I'm very encouraged with the focus of our team on improving overall performance, especially in controlling working capital, generating strong cash flow, and improving productivity.

Finally, during the quarter we paid off all remaining commercial paper and began accumulating cash to pay off the $118 million note that comes due in November.

Once the debt repayment is complete, we'll be looking to deploy capital in the most efficient way to not only grow our business, but also maximize value to our shareholders.

With that, operator, I'll turn it back over to you and we'll take some questions.

(Operator Instructions).

George Staphos, Bank of America Merrill Lynch.

Thanks for all the details.

I guess the first question I had, and again, I appreciate all the color during the presentation.

The press release spoke a number of times to both higher labor costs and also higher maintenance costs.

I am guessing that perhaps some of the maintenance spending is related to this new maintenance program, but could you give us a bit more detail as to what was driving those two factors?

Was that the Affordable Care Act?

Was it related to the Canadian pension issue you mentioned?

What was driving those two factors?

George, good morning, and I would tell you there's -- I would say there's two basic fundamentals driving those factors.

One is that higher repair and maintenance spending, there's also labor included in higher repair and maintenance spending.

In other words, we have to --- we use our people to make the installations.

So as they make those repairs, we get a little bit higher maintenance spending -- or a little bit higher labor cost.

But also, the pension cost is disproportionately skewed probably to the industrial side of our business because of just the population.

So some of that higher labor cost is the pension increase, year-over-year pension cost, that you're seeing, as well as wage increase that actually went in effective June or July 1, June 1.

Okay.

And the maintenance program itself, how is that progressing?

And would it be easy enough that we'll lap whatever increase in expenditure you're seeing from that by third or fourth quarter?

Well, I do think it's going to continue throughout the year, but I think it will continue at a decreasing pace as the year progresses, with one caveat I want to talk about.

I'm very, very pleased with where it's going and the results we're going to see.

We're making good progress, as well as bringing the equipment back up to where we want it to be.

But I do want to point out and kind of recast productivity in Paper just a moment.

If you look at unit cost to produce, which is really what we're chasing, every month this year the unit cost of producing paper has gone down.

And in fact, the unit cost to produce in July --- in June, excuse me, was less in 2013 than it was in 2012 in Paper.

And that's one of the first times we've seen that this year, and of course, that's what we're looking for.

So it's going in the right direction.

I think it's going to continue to go in the right direction and we're going to get easier comps as the year goes on.

But I'm less concerned about the comp and more concerned about the actual unit-cost reduction on an ongoing basis.

Okay.

Thanks for that, Jack.

Two last quick ones, then I'll turn it over.

And maybe you gave part of the answer to the question I'm going to give you here first.

I mean, if I look at the Paper and Industrial segment, EBIT was down versus Q2, which was down versus the prior year.

And you're more or less flat to slightly down, frankly, versus Q2 2010.

So what changes that pattern?

How much of it is driven by improving productivity, a new maintenance program, and anything else you can think of?

And then, you went through quickly some portfolio and restructuring actions that you've taken, I guess, as the quarter was ending or as third quarter has begun.

Can you just give us a laundry list of what you are working on right now?

I'd missed all of the details, thanks.

I would certainly say that what we just spoke of is certainly impacting those numbers, those higher pension costs.

We need productivity to improve in not only Paper, but certainly in the ICD tube and core business in North America as well.

I would tell you that probably the biggest drag I see is the rest of the world.

Europe, South America, and even Asia are not doing as good as the rest of the world on the industrial side.

And that to me is the biggest drag and that will rebound as the global economy picks up.

But that's really what we have to drive, and I would tell you in Europe we are looking at some options, as I mentioned -- I'm not really ready to speak to them just yet, but to continue to improve our cost structure for our industrial business in Europe.

Scott Gaffner, Barclays.

Jack, you mentioned better prices in the Consumer business.

I was hoping maybe you could just break that down a little bit.

Was that in the composite cans or maybe on the flexible packaging?

Where are you getting most of the pricing in Consumer?

Well, I would tell you we put in price increases -- most of Consumer is contractual, so the price increases that are going through, for the most part, are contractual increases based upon increased costs.

We did have a general increase in composite cans that we put in, I think, sometime in the second quarter actually that we're now beginning to get full traction on.

But Scott, it's hard for me to do that because it's basically contractual adjustments that we're putting through.

And just looking at the growth strategy within composite cans, I think at the Analyst Day you mentioned new shapes as being sort of a growth area for you within composite cans.

Can you talk about what you've seen with those offerings?

Has there been a lot of customer uptake or are you still working on those projects?

Well, I would tell you there was two areas I talked to, Scott.

One was a conversion out of self manufacturer, specifically in salt and salt-like products.

And we have had some solid success there and we're very pleased.

As far as shaped containers, we still have some very strong work going on and some interest there.

We're looking at technology that exists in other areas of the world and looking at how we apply that back to the North American market, and what new products we could actually put into a unique shaped can, powdered stuff like flour or something like that.

So we're still very optimistic about opportunities and continue to aggressively pursue them.

Okay, and then just lastly on composite cans, I think you mentioned -- you mentioned nuts, doughs, and a couple of other categories that were relatively strong in the quarter.

Are you taking market share there or is this underlying growth in the market that's rebounding?

Can you just provide a little bit of color on what was providing that uplift?

It's just demand, how demand flowed through in that particular product for the quarter.

Okay.

Thanks, guys.

Ian Zaffino, Oppenheimer.

Just quickly on the pension, the underfunded amount, is there a potential to maybe or have you thought about doing some type of buyout or pre-funding of the pension or trying to maybe sell the liability?

Ian, this is Barry.

Certainly with the level of discount rates being where they are, we wouldn't give consideration to a buyout or doing anything else with the plan design.

As I did mention, we've already seen, just with the uptick in rates thus far, a notable improvement in that to almost an 86% funded status on the qualified plan.

So, we are comfortable with where it is and where it's likely to go as with any eventual rate increase.

And as far as the pension assets, where are they invested in?

What's the breakout between (multiple speakers)

Sure.

We've got about 50 -- 52% in global equities, about 35% in fixed income, and then 11% or so in other classes, real estate, alternative investments, et cetera.

Okay, so I guess as the market moves up and we kind of inflate our way out of it, that both those things fix themselves?

That's correct.

And thus far this year, certainly it's fair to say the equities have performed well, but with the uptick in rates, that's been partially offset by the fixed -- negative fixed income return.

Okay.

All right, thank you very much.

Philip Ng, Jefferies.

Your volume for Consumer Packaging has been soft for quite a bit.

It's finally stabilizing and it sounded like your Display business is seeing some momentum.

Is that a pretty good read-through for growth down the road and do you have a better line of sight now from a volume standpoint?

Well, I certainly think activity in Display is a good read for future activity of products.

So we are pleased with that as well.

I would also tell you we put in some very strong talent in that business several years ago and expected to improve that business.

That's exactly what they've done.

We recently won that Energizer business, which is a bit of a different model for us, and that's ramping up, as well as we continue to do well in our pack centers and our blades and razors.

So we are pleased and do see increased activity there as being a positive for future product volume.

Got you.

And then, just switching gears a little bit, your Protective packaging business, at least from a growth standpoint, has been pretty solid post the Tegrant acquisition.

And you're obviously adding capacity for the auto business.

But from a margin standpoint, it's been kind of flattish.

I was expecting more of the synergies to flow through a little more fullish.

Can you give us a little update on what your thoughts are from a margin standpoint going forward?

Well, I think I've been pretty consistent with this from the beginning.

I believe it is a 10% margin business and I believe it will be a 10% margin business.

It certainly has improved since the first quarters we've had it and now been running at this 8%.

I think one of the biggest issues we're having in this business right now is certainly the Alloyd business continues to not perform at a level of expectation, and that's pulling those overall margins down a little bit.

So we need to improve on Alloyd.

And I think ThermoSafe, they are somewhat seasonal in their makeup and they are entering their strong season.

So I think that as they enter a very strong season, you'll see some impact, I think, on margins as their business picks up.

Got you.

And just one last question, you mentioned how at least on the industrial side the rest of the world is seeing somewhat of a slowdown.

I know in the past you've talked about potentially getting bigger in Brazil and southeast Asia.

Do the recent slowdown in the macroenvironment in those regions give you pause on expanding or would you look more at deploying growth capital in the US instead?

Well, I would tell you that right now for Brazil, and our growth, if you will, is really focused right now on flexibles.

We're looking for opportunities in flexibles and Brazil still remains on our radar screen.

Okay.

And I would tell you in southeast Asia, our southeast Asian business, absent Thailand, which is a restart from a flood, is not bad.

It's the China business that's a little bit weak.

But southeast Asia is not bad and we'd look for consolidating tube and core opportunities or additional growth opportunities in tube and core and/or our flexibles and composite cans as well, in that we just opened a new plant in Malaysia for composite cans.

And even in China, we're putting in a new composite can plant perhaps in southern China, so we see good composite can growth throughout southeast Asia.

Okay, thanks, guys.

Good luck on the quarter.

Ghansham Panjabi, Robert W. Baird.

It's Matt Wooten sitting in for Ghansham today.

If we went back to the Consumer business for a second, I know that's been an area of concentration on the call.

But in the areas that are generating year-over-year volume gains, like blow-molded packaging and flexible packaging, how much of that growth is based on new business wins or share gains versus an underlying improvement in industry trends?

It certainly a combination of both.

I would think blow molding would tend to be more share gain, as well as some underlying growth, and flexibles probably similarly.

The exact split is hard for me to say.

It's a bit of both.

Okay.

And then as a follow-up, it certainly seems like some of the larger CPG companies are getting more aggressive on their focus on volume growth in the back half of the year, including some increased promotional activity.

Have you seen an uptick in orders or any anecdotal evidence that supports this?

Well, certainly we see it in the Display and Packaging business.

We see the activity in that business, which is a precursor to some of that.

This is normally the time that we move into a consumer trend of upward volumes, and progressively increasing as the quarter goes on is what we would expect to see.

We're real early into it.

I really can't say yet, but it's certainly what we expect to see.

Okay, thank you very much.

Chip Dillon, Vertical Research Partners.

First question is on as you look at the OCC costs creeping up, obviously that's one cost that you need to recoup.

You mentioned the price cost issue with your pricing.

Are you seeing other costs we should note maybe in the resins area that in your particular -- with your particular needs that also need to be recouped?

I would tell you on a consistent basis, resin is kind of flat.

We do have some modified --- excuse me, we do have some specific instances where some resins may be rising, and of course, outages impact that for short periods of time.

But I would say for an extended period, we see resins as kind of flat.

And OCC is the only other one that would really be volatile for us right now.

Okay.

And then, I guess taking a step back, it's been a few years since you did Tegrant.

And from everything I can see, it looks like that is -- I would assume has probably exceeded what you expected, certainly has met what we were expecting just sort of with the read-through and the Protective Solutions segment, et cetera.

Financing costs, even though there has been this little pickup in some of the longer-term rates seem to still be pretty low, and I was wondering what you are seeing out there.

Could there be another situation like that or are you focusing more on those first two objectives where it's more of an internal focus?

I would tell you that we certainly are internally focused to improve our existing operations, but also what we've said specifically is inside the platforms that we've now defined, Protective, Consumer, and Industrial, we will make bolt-on acquisitions and we want to grow certain businesses.

Protective Solutions is definitively a business we want to grow, and if an opportunity comes up for us to make a consolidating acquisition in Protective Solutions, we're going to make it, if it makes sense and it's something we feel we should do.

That said, there's also flexibles, some consumer areas as well, emerging market tube and core.

All those things are still in the growth pipeline for the business, and we will look at leveraging the balance sheet if an opportunity comes along that makes sense for us to do so.

Got you.

And then, the last question is, I'm not sure if you mentioned this before, but it looks like CapEx is trending toward about a $200 million number this year, at exactly pretty much what your depreciation rate is.

Do you see that, first of all, being the case?

And then, let's say if we exclude any major acquisitions or divestitures, would that number change a lot as you look into next year?

I mean, you did mention you have some growth opportunities in Asia, for example, in composite cans.

Would that maybe cause a ramp up in CapEx next year?

Well, I would think that one of the things that's driving CapEx up this year is the completion of the biomass boiler project here in Hartsville.

That was a $75 million project in total spread over a little over two years.

So we're finishing that.

I would expect capital to drop to its normalized level between $170 million to $180 million, $185 million, somewhere in that range, going into 2014, yes.

Got you.

Okay, thank you very much.

Alex Ovshey, Goldman Sachs.

If I look at your EBIT bridge, and I take the productivity number and take out the other line, the other costs, that number has actually been negative over the last couple years, which is a material deviation from where the Company has been maybe over the last five to seven years.

And so, just as you look forward, is there any visibility on when that productivity other line really begins to improve for the Company and begins to be additive to the EBIT line, instead of a drag?

This quarter.

I expect you're going to see a positive comparison this quarter, and certainly as we've said, it's our goal to have productivity --- to cover all other, and I would throw in pension as well.

We would like for it to cover that.

I'm not sure it can, but certainly that's what we're trying to accomplish.

Okay, Jack, got it.

And I expect it's coming very soon.

Got it, okay.

We'll look for that.

On the URB side, I believe there's a price increase out there in the marketplace right now.

Can you talk about your expectations for URB pricing and what kind of leverage you would have in the industrial business, the changes in URB pricing in the market?

We finished up a $25 increase from earlier in the year.

That's now completed and this increase is really to recoup continued cost increases and rising OCC prices.

It was out at $40 a ton.

We're just in the early phases of it.

I will tell you, however, it's been supported in the marketplace because, again, I think all the players in the market understand the need to recoup costs.

They keep escalating.

Okay, got it.

And then, last one for me, just what is your crystal ball telling you on OCC pricing for the balance of the year?

As long as you realize this is worth absolutely nothing, I expect it to trend up a little bit, maybe go up one more time during the summer, and then flatten out and then start trending down.

That would be my expectation.

But, you know, it may --- if China comes back in the market in a big way, it could bump up in the fourth quarter, but I just don't believe that's the case from what I see with the Chinese economy right now.

But again, that's worth absolutely nothing.

Well, I appreciate you taking a shot at answering it.

So thanks very much, Jack.

Okay.

Phil Gresh, JPMorgan.

Just wanted to ask a couple questions here.

One is just on the emerging market expansion plans that you talked about a decent amount at the Analyst Day.

In light of what we've been seeing out there with the slowing growth in emerging markets, do you feel any differently about that than you did six to nine months ago?

Not really because it's product line specific.

Our emerging market look is to expand our capability right now in flexibles, and we have a pull from our customers to be capable in these emerging market areas.

So that's a big part of it.

And I will tell you tube and core opportunities, as well as composite can opportunities in emerging markets, are really for us somewhat customer driven now.

So that's not changing.

So we're still looking for those opportunities.

Okay, got it.

And then on Protective, I was just hoping you could give a little bit more color around the Alloyd situation.

Obviously, you talked about how that is a drag.

But exactly what's going on, and time to resolution of any particular issues, if they are operating or what have you?

Yes, I think as we've said from the very beginning, right after we -- or right before we acquired that business, they lost a significant piece of business that was impactful to them, and we need to regain new business and new volume.

We recently put in some very talented people in the organization on the sales and marketing and engineering side.

They've now come up to speed.

We're beginning to see some increased volumes coming into that business, which is exactly what we need.

In addition, we continue to work very closely with our Display and Packaging business because we do a lot of Alloyd work.

We actually do a lot of sealing on Alloyd machines and use a lot of blister.

We're now being able to sell the blister as well as seal the blister through the Alloyd business.

So as that continues to ramp up, those are the things we're looking for.

I suspect that it's going to take us through the balance of this year to continue to grow that volume, but I expect it to grow incrementally as we continue to go through the balance of the year and then be in a position next year to begin some positive contribution.

Okay, and then last question is just on the price cost on the industrial side in the second half of the year, the announced -- some of these announced price increases have been out there for a little while.

So I guess I would assume you would've gotten some traction on realization as we progress into the third quarter to offset some of these OCC headwinds, which seem pretty modest, I mean, relative to the price that you guys are going after.

So maybe just if I'm wrong on that, let me know, but it seems like you should be able to be more neutral, according to my math.

Well, we've got to look time point to time point.

I would say the price increases that we went after at the first of the year were really designed to recoup other costs that escalated over the years, and we have --- that was a good price recoup and kind of brought us back to where -- a more normalized level.

The latest increase just now happened with OCC resetting at $120 and now it's jumped $10, so that's the one that's out there that would cause us to go price cost negative as we look quarter to quarter.

And again, that's what we are trying to overcome.

Okay, all right.

Thanks a lot.

Mark Wilde, Deutsche Bank.

Just batting a little cleanup here.

Just one other question I had in Protective, Jack.

I think you mentioned that the temperature safe business was down 4% in volume year over year.

And I wondered if you could put a little color around that.

Yes, that business is --- it has a complete range of offering from filled bags of water that people freeze all the way up to these very, very sophisticated temperature-controlled shippers.

And it's really the temperature-controlled shippers that have the best margins and the one where we are concentrating our effort.

As we look at that, some of that volume in the more -- the lower-end product, the more simple product, if you will, is down somewhat year over year.

So that's really what's driving that.

Now again, that tends to be offset as we go into the flu season, which is now, which we expect some improvement.

All right, and the other pieces of business there, the higher-end stuff, how's the volume there?

Fine.

What we would expect it to be.

Again, they're a little bit behind in the flu season as far as their -- when they begin to build, but what they are now saying to us is that because of the rain and the extended rain, they expect a longer flu season and a more intense flu season, so we expect some significant volume recovery.

Yes, how much would you expect just over time, Jack, that the growth rate in that piece of the Protective business look like?

The entire Protective business, we've said, is going to grow somewhere in that 4% to 5% range over a five-year horizon.

That's all the data that we have would suggest that.

Okay.

And then, the other area I wanted to just follow up on is the Display business.

It sounded like you're starting to see kind of seasonal pickup, which I assume is stuff that's tied to kind of back-to-school and even looking out toward the holidays.

Are you seeing anything that's kind of stronger than normal in that pickup right now?

Does it really tell us anything about kind of promotional activity over the next six months by the consumer products companies?

Well, certainly there is some seasonal pickup, which would be normal this time of year.

There's also some volume gains that we're seeing, but there is also an increase in what we would call base-level activity, greater promotional activity across a larger number of customers.

So that tells us that general activity is moving upward.

Okay, all right.

That's very helpful.

Good luck in the third quarter.

Thank you.

Chris Manuel, Wells Fargo.

Just a couple quick follow-up questions.

If I can actually go back for a second to a question I think George asked to kick things off, in the Industrial and Paper segment, when I look at the performance there, even if I go back and I put almost all of the higher pension from your bridge year over year in that segment, profits are -- would be essentially, then, flat.

And I look at what you talked about there with having a little bit of productivity and having volume price be a little bit better, and in particular volume up a touch, I would've anticipated that business to have done -- as a whole to have done a little better.

Maybe could you have --- give us some color as to, are there some pieces within there that are doing better or worse?

I know you noted in particular just on the Paper side, you got your lowest cost per unit that you've had in a long, long time.

Maybe is it -- do you have anything in recycling or in some of the other operations that are offsetting that?

You're speaking just to the industrial businesses (multiple speakers)

Well, I'm looking at the Paper and Industrial Converted product segment in particular.

Yes, certainly there is a global impact to that.

You have to factor in the global picture as impacting that, to a degree, as South America is down.

Of course, Europe is not as strong as it has been in the past years.

Also, domestically, I would tell you that the recycling business is being impacted by the lack of selling price for non-OCC product.

The other products --- the other paper fiber that we recycle, ONP, et cetera, as well as plastics and other things, the pricing on those products is down somewhat, so that's impacting recycling.

That's a part of that as well.

Okay, so as you move through the balance of this year, some of those things might not abate, but I recognize you've got higher labor and some other elements that will continue.

But I think to an earlier point, productivity should kick in through the balance of this year that will help offset some of that.

Would that be a fair way to think about it?

Yes.

Okay, that's helpful.

Last question I had was new product funnel, something you usually talk with us about.

Where are you at as you look today?

What do you anticipate over the balance of the year?

And then, customer activity and new product development, are you seeing --- how would you gauge it vis-a-vis in the past?

Are you seeing customers more receptive today to launching and bringing out new products, kind of a similar type level or even potentially a little worse?

How would you gauge that?

Well, the new products funnel for the quarter was around $30 million.

It typically runs $35 million.

So it's in the ballpark of where we typically run.

We're probably at about $65 million for the year right now, maybe a little bit higher.

But that's in the range of normal.

I will tell you, however, that as we talked about at the Analyst Day in December, we're changing our focus a little bit here and becoming more of a market-focused company, and trying to define and develop wide-area solutions that cover multiple customers, not just single customers.

And that's a big focus of what we're doing, trying to have insights with consumers, what consumers are interested in doing with packaging, and then driving that back across a larger number of customers versus single customers.

And that's going to have a little bit of play into the new product funnel perhaps in the short term, but I would tell you longer term it's going to have a bigger impact because you're going to be able to sell that product across multiple formats and multiple customers.

If I explained that right.

Okay, that's helpful.

That's all I had, thanks.

Okay.

Adam Josephson, KeyBanc.

Jack, what would you attribute the strength you're experiencing in North American tubes and cores to?

I mean, how much of it --- I know I ask you this every call, but how much do you think is tied to housing?

Obviously, the ISM data hasn't been indicating much expansion, but you are seeing business stronger than you've seen it since I think mid-2010, you said.

Yes, and I'm going to answer it the same way I've always answered it, Adam.

I think it's a blend between just industrial manufacturing and housing.

And I think housing being as strong as it is is simply offsetting industrial manufacturing being a little bit weaker and kind of keeping us somewhat flat, and that's what's happening.

What I am hopeful of is that as we move into the third and fourth quarter, you're going to begin to see both of these indices move in the same direction, and that would drive some additional volume.

I would like to see that.

And can you tie your comment earlier about base-level activity increasing in your consumer business to that earlier discussion?

Was that something --- how long have you been seeing this for or were you expecting it going into the year?

Well, we've said all year we expected consumer volumes to be the opposite of what they were in 2012.

They started out strong and got weaker as the year went on, but what we were hearing from our customers is they are going to start out slow and get stronger as the year went on.

That's playing out more or less like we expected.

And I think that it's --- I would say it's kind of within the range of what our expectations were.

We're not seeing the activity that says consumer volumes is going to jump off and be outstanding.

We're saying we're just going to see those incremental increases much along the lines, I think we said 2% year-over-year up, and that's about what it feels like and what we expect it to be by the time it's all said and done, maybe a little bit stronger, but that's kind of where we see it.

That's helpful.

And just two others, one on composite cans, Jack.

You talked about demand being better in nuts, dough, et cetera.

Is that because prices fell from last year in nuts specifically or is there something else going on?

I certainly think that Kraft last year was involved.

It was a very large customer of ours that was involved in the split of their company, and several of their commodities or several of their products suffered because of that, and they're now beginning promotional activities, and I think that's a part of this rebound.

I'd also have to think the falling commodity prices are having a positive impact on CPGs, and that's somehow manifesting itself at the cash-out line as a form of perhaps lower prices or promotions.

So I think a bit of all that is playing into those types of increases.

That's helpful, Jack.

Just one last one on capital allocation.

Past this year, how do you plan to allocate free cash in excess of dividends, in terms of the relative attractiveness of reinvestment in the business, acquisition, and buybacks in light of the current share price and any other factors?

I think I've been pretty consistent here is that we have now looked at the portfolio.

The portfolio is wide enough.

We want to optimize it across all these businesses.

That means something different for every business.

We have businesses we want to grow, so if opportunities come up, we're going to use cash flow and debt and our balance sheet to grow those businesses as the opportunities present themselves.

Absent that, we're going to look at ways to maximize cash -- maximize return for our shareholders.

That is inclusive of share buyback.

We continue to work toward a more consistent plan, and as we get closer, we'll be talking about that more toward the end of the year.

Really appreciate it, Jack.

Thank you.

You bet.

Al Kabili, Macquarie.

Hi, thanks.

Just two quick ones from me.

On Brazil and China, Jack, could you just -- if I missed it -- help us quantify what your volumes were in those regions and the trend throughout the quarter?

I can.

I can't do China specifically; I can do Asia.

This is primarily industrial.

For Latin America, volumes were down 2.7% on a volume basis for the tube and core business.

So that kind of gives you an idea.

In Asia, they were actually up, but that's going to be driven by the Thailand resurgence in volume.

I would say China was at least flat to down in this quarter.

That's all tubes and cores related.

And the trend through the quarter, was it relatively that stable in those numbers you just gave or deteriorating, getting better, and what are you seeing early on in the third quarter there?

In those two markets?

Yes.

Well, I would tell you that Brazil is kind of a slightly descending trend.

It is weakening a bit as we go, but China is probably more flattish on whole.

Okay.

And then just the second question is just on the blow molding operational issues you are experiencing now, and I know you mentioned it's going to take a little time for Rob and the rest to get it back up to where you want it.

But could you just help us with how much of a drag that is, and once you get that more normalized, what kind of upside that might represent to your Consumer business?

Well, I can tell you that as we looked at blow molding specifically and the issues that happened in blow molding, I would say it was perhaps as much as $0.025.

The issues that we had in blow molding actually cost us, so once we get them behind us, it could be a positive.

Okay, great.

Thank you.

Thank you.

There are no more questions.

I'd like to hand the call back to Mr. Roger Schrum.

Thank you, Stephanie.

I do want to let everyone know that Sonoco will release its annual corporate responsibility report on Monday, July 22.

The 16-page report provides an update on the Company's efforts to improve economic sustainability, environmental stewardship, and social responsibility.

Copies of the report can be downloaded from our website at Sonoco.com.

Also, we expect to conduct our third-quarter earnings conference call on Thursday, October 17, 2013, at 11 AM Eastern time.

More details regarding the call and the timing of the release of Sonoco's third-quarter financial results will be communicated several weeks prior to the call.

Let me again thank everyone for joining us today, and we certainly appreciate your interest in the Company, and as always if you have any further questions, please don't hesitate to contact us.

Thank you again.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and enjoy the rest of your day.