Sonoco Products Co (SON) 2013 Q3 法說會逐字稿

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

My name is Celia 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 conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Roger Schrum.

Please proceed, sir.

Thank you, Celia.

Good morning and welcome to Sonoco's 2013 third-quarter earnings investor call.

This call is being conducted on October 17, 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 third-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 on the investor site during the call.

Some of you may be experiencing some technical problems receiving -- getting on our website right now.

We have sent out a link to most people over Thomson Reuters as well as a press release that indicates where that link for the presentation is.

However, if you would like to contact us directly we will be able to send you the presentation.

Just call us at 843-383-6748.

I will briefly remind you that today's call may contain a number of forward-looking statements that are based on current expectations, estimates and projections.

These statements are not guarantees of future performance and are subject to certain risks and uncertainties.

Therefore, actual results may differ materially.

Additional information about factors that could cause different results and information about the use by the Company of non-GAAP financial measures is available in today's news release and of course on our website.

Now with that I will turn it over to Barry.

Thank you, Roger.

I will begin on slide 3 where you see that this morning we reported third-quarter earnings per share on a GAAP basis of $0.59 and base earnings of $0.63.

These results were at the top side of our previously provided base earnings guidance of $0.59 to $0.63 per share as we had a very solid quarter and we did have a little tailwind from a lower than expected effective tax rate.

Before reviewing the base P&L for the quarter, I will mention that a reconciliation of the GAAP to base earnings is in today's press release and summarized on this slide but the difference between GAAP and base earnings in this year's quarter is due to restructuring charges of $0.04 per share related to previously announced plant closures most notably two thermoforming plastic plants.

Turning to slide 4, you find the base P&L where you see sales were $1.228 billion which represented a 2.7% increase over the prior year driven by both improved volume and higher selling prices, both of which will be discussed in our review of the sales bridge.

Gross profit was $224 million which was $17.8 million or 8.6% higher than last year with our gross profit margin improving to right at 18.3% versus 17.3% a year earlier.

Selling and administrative expenses and other charges were $118.5 million up 4.4% due primarily to merit and other inflationary increases.

Thus EBIT was $105.5 million, up almost 14% over last year with our EBIT margin at 8.6% compared to 7.8% last year and you will see all the drivers of the change in the EBIT bridge in just a moment.

Net interest expense was $14.3 million which was slightly lower than last year due to lower debt levels.

Income taxes of $28.5 million were higher year over year due to the higher earnings as the effective tax rate on base earnings was unchanged at 31.3%.

Equity and affiliates and minority interest was pretty much in line with last year, thus based net income attributable to Sonoco was $65.1 million or $0.63 per share, almost 15% better than last year's $0.55.

Looking first at the year-over-year change in sales on the next page, starting with volume, volume for the Company overall was up just under 2% and favorably impacted sales by $22 million.

This was driven most notably by a strong quarter for our display and packaging business which was up 12%.

Much of the growth in this business came from the US which benefited from the business awarded earlier this year by a battery manufacturer but also good growth in manufacturing of displays, resale of materials and fulfillment operations.

Volume was also up in Europe and in our dedicated pack centers.

So in summary, a very strong quarter for the display and packaging group.

Volume was also up 1.4% in our paper and industrial converted products segment.

Tube and core volume was up 1.5% in the US and Canada driven by the overall pick up in economic activity year over year.

While volume was up 5% in tubes and cores in Europe, we actually saw a 4% improvement in the legacy countries but this was driven primarily by share gains not a pickup in economic activity and will have a 10% improvement in the frontier region due primarily to our expansion into Russia.

Volume was also up about 5% in Asia.

These positive variances were then partially offset by some weakness in South America where volume is down 6% due to lower demand in Brazil, our real sales in North America were down about 5% and we had a net reduction in global recycling sales due to our decision late last year to exit some recycling trading activity in Europe.

For the protective solutions segment, volume was also higher year over year by 3% where the foam-based business was up 7%, the paper-based business principally for the appliance industry up 14%, then partially offset by the temperature-assured business and the Alloyd business each being down about 4%.

And finally, consumer segment volume when combined with mix was down right at 1%.

The decline can really be attributable to three businesses, trade sales of metal ends were down 18%.

The volume impact to the sales dollars was also negative in composite cans in North America even though units were essentially flat as more smaller diameter cans were sold for snacks and several other categories and conversely fewer larger cans most notably powdered beverage and coffee.

And sales were also off in our thermoform plastics business due to the continued lower demand for the frozen food trade.

Other businesses in the consumer group had nice improvements.

Flexibles had another very strong quarter with volume up 7% and blow molded plastics saw sales improve due to volume and mix by 6% due to a significant increase in molded components and the good mix in bottle sales.

Moving down to price which improved the topline by $16 million, we saw a significant increase in industrial businesses' selling prices, much of that coming from our recycling operations where OCC prices averaged $128 per ton in the third quarter this year as compared to an average of $92 for the same period last year.

Our corrugating operation also benefited from higher selling prices.

Prices on contract sales in paper and tubes and cores were actually down slightly year over year as the June OCC price used to establish many contractual resets was $120 this year versus $125 last year.

Prices were also higher in the consumer segment due to some contractual and noncontractual passthroughs.

Moving down the bridge, you see acquisitions, dispositions, translation in sales in foreign currencies and any other miscellaneous changes had a negative impact of only $6 million on the overall topline for the quarter.

The EBIT bridge on the next page explains the improvement from $93 million in EBIT last year to this year's $106 million.

As you saw in the sales bridge, volume was up $22 million with a contribution of $7 million favorably impacting earnings.

This is in line with what we would expect with such an improvement in sales.

Price cost was favorable by $3 million.

Much of this was in the consumer segment driven by both supply management productivity and other price increases.

Although we had higher selling prices in our industrial businesses in North America, the benefit was largely offset by higher material cost.

As pointed out earlier, OCC averaged $128 per ton this year versus $92 last year.

Timing also had an impact on the year-over-year comparison as last year sales prices were set at a relatively high level at the beginning of the quarter then OCC dropped off considerably where this year prices have actually held relatively constant.

Moving down to manufacturing productivity, we had a very strong quarter with EBIT improvement of $14 million due to productivity.

We saw good productivity across many businesses including as expected, a significant turnaround in paper in North America.

Consumer productivity would have been even stronger except that blow molded plastics still experienced some manufacturing inefficiencies resulting in negative productivity for that business but their results were improving through the quarter.

All other costs were negative by $10 million due primarily to normal nonmaterial inflation on wages and other costs.

Pension costs were only slightly higher this year by less than $1 million.

During the third quarter last year, we finalized the actuarial valuation for the beginning of the year and that resulted in a higher charge than normal in the quarter and this year's final actuarial valuation was received in the second quarter and such adjustments put through at that time and that really explains why we didn't see a similar increase in higher pension cost this year versus what we have been seeing the rest of the quarters.

Results by segment are found on slide 7. We see that for the consumer segment sales were down only slightly but EBIT improved by almost 12% due to the improved price cost and solid manufacturing productivity which more than offset the impact of the slightly lower volume.

The EBIT margin improved to a very solid 10.4% versus 9.2% last year.

Paper and industrial converted products topline improved by 3% due to the pricing and volume while earnings improved by almost 14% due to the volume and solid productivity with EBIT margins up from 7.3% to 8.1% this year.

Display and packaging had another very strong quarter with sales and earnings up and their EBIT margin up to 6.2% on an improved mix of business.

Results for the businesses within protective solutions were somewhat mixed with sales up slightly but earnings down slightly and a drop-off in the overall segment margin to 6.9% where it is fair to say that the retail packaging business continued to underperform our expectations.

And now looking forward on slide 8, you find our earnings guidance where we are projecting that base earnings per share will be in the range of $0.55 to $0.59 in the fourth quarter.

This compares to last year's $0.56.

We are moving the bottom end of our guidance up by $0.01 and tightening the top side by $0.01 as well.

This brings our full-year base earnings guidance to $2.27 to $2.31 per share.

The overall guidance assumes no notable change in the level of economic activity but does factor in seasonality including a normal drop-off in activity in December.

It also assumes that OCC remains in the $125 range through the balance of the year and our effective tax rate is expected to be back up to around 33% in the fourth quarter.

Moving from earnings to cash flow on slide 9, you see that we had another very strong quarter in terms of cash from operations and free cash flow.

Cash from operations was $176.8 million, up $25 million from last year.

The year-over-year change was due to several things including $10 million in higher payroll accruals since our accounting quarter cut off this year before month end payroll was made and we had lower cash tax payments of roughly $15 million.

Spending for property and plant and equipment was $44 million and we are projecting that to be around $200 million for the full year although some of the anticipated spending might roll over to early next year.

So after dividends of $31 million, we had free cash flow of $101 million for the quarter.

So after this strong quarter, we are updating our projection of free cash flow from the previous estimate of $150 million to $190 million.

The overall increase is due primarily to working capital levels being managed very effectively and are better than our original expectations and due to lower than originally projected cash tax payments.

On the next page you find our balance sheet and I won't spend much time discussing it today other than to point out that our net debt to total capital improved further down to 33.8% from 37% at the end of the second quarter and compared to right at 40% at the end of last year.

We will expect that it will stay around this 34% level for the balance of the year.

As mentioned throughout the year, we do have $118 million in notes maturing in November that will be repaid at that time.

Of course, that will have no impact on this ratio since it is presented on a net basis.

There are some additional slides in the appendix for your reference but that completes my overview of the results for the quarter and I will turn it over to Jack for some additional comments.

Thanks, Barry.

Let me add some additional thoughts on our third-quarter performance and talk briefly about the remainder of the year.

Obviously we were pleased with the quarter as our portfolio of businesses produced record sales, record gross profits, a 15% increase in base earnings and very strong cash flow and free cash flow.

Through the first nine months of 2013, we have produced $421 million in cash from operations and $187 million in free cash flow, both of which are records.

As Barry mentioned, the strong performance has resulted in our raising our expectations for full-year free cash flow to around $190 million.

We should have available cash on hand to pay off the $118 million in maturing notes on November 15 and along with the other debt repayments we made earlier this year, we should meet our commitment to reduce our debt levels back to a level consistent with our credit rating.

Our efforts to optimize our business has resulted in a 100 basis point improvement to gross profit margins in the quarter to approximately 18.25% and this is our highest gross profit margin in three years.

A key driver for our margin improvement came from nearly $14 million in productivity of which more than half or about $7.8 million came from our industrial businesses.

In addition, our consumer packaging and protective solutions segments also produced strong productivity during the quarter.

Let me make some specific comments about our businesses relative to the quarter.

Consumer packaging EBIT margins improved to 10.4% which was up more than 100 basis points from last year due to strong productivity and operating efficiency.

Our flexible packaging operations continue to show improvement with volume growth helping leverage productivity.

Composite can unit volumes were essentially flat year over year but the business benefited from a strong operational performance and strong productivity.

In our rigid plastics business, our thermoforming and injection molding businesses performed well in the quarter but we continue to struggle with some operational issues in our blow molding business.

We do have a strong team of people working on these issues and I expect improvement in future quarters.

We were particularly pleased with the gains made in our display and packaging segment which benefited from new business activity during the quarter including the Energizer battery business we earned earlier in the year.

In addition, several of our large CPG customers kept us very busy with new product launches and strong seasonal promotion.

We experienced a negative price cost relationship in our North American and European tube and core businesses but volume improved in both geographies.

We had a good year-over-year improvement in our North American mill operations and our recycling operations benefited from higher recovered paper pricing.

Finally, our protective solutions business continued to show strong volume growth in both consumer and industrial-related businesses and our ThermoSafe business showed year-over-year earnings improvement as well.

Results from this segment would have been even stronger if not for the continued issue in our retail security packaging business and the startup costs associated with our new automotive component plant in Mexico.

In looking to the fourth quarter, I remain optimistic about our prospects.

That said, we are cautious because we continue to see signs of economic uncertainty in many of our served markets and no one really knows the impact of the political stalemate in Washington.

Obviously we can't control the economy or politics so we remain focused on what we can control.

This includes continuing to optimize our portfolio of businesses and drive cost improvement.

Specifically we need to drive productivity through our more historic range of $12 million to $14 million per quarter and this means continuing to improve execution in all of our businesses but particularly in our blow molding operations.

Second, we must continue to ensure we cover any increase in raw material cost with offsetting price recovery.

We have done a pretty good job of this through the first three quarters of the year but we must continue these efforts in all of our businesses.

Finally, we must commercialize new won business as quickly as possible and continue to fill our funnel with new innovative products and services.

For instance, this means completing the qualification process and starting to produce automotive components from our new protective solutions plant in Mexico.

And it also means continuing to grow our new relationship with Energizer as well as commercializing new business in flexibles and in composite cans.

In closing, let me say how pleased I am with our team's effort this year, not only in terms of our improved execution and financial performance but in paving the way for future growth.

Our leadership team looks forward to meeting with you in New York in December to talk more about the work we are finalizing to further grow Sonoco into a solutions Company that just happens to sell packaging versus a packaging Company that just offers multiple solutions.

With that I will turn it over for questions.

(Operator Instructions).

George Staphos, Bank of America.

How are you, can you hear me okay?

We can now, yes.

George?

George George George of the jungle -- Operator, I can't hear the question.

Mr. Staphos withdrew his question.

Mr. Staphos?

Hello?

Mr. Staphos, one moment.

Ladies and gentlemen, hold on one moment.

We are waiting for Mr. Staphos He was asking a question and he removed his question.

So Mr. Staphos, if you have a question, please press Star 1.

Why don't we go on to the next question and then we will come back to George.

Okay, thank you.

Alex Ovshey, Goldman Sachs.

Thanks.

How are you guys?

Good, Alex.

How are you?

Good, thanks.

So on the productivity line, a really solid performance, $14 million and Jack, you mentioned that $12 million to $14 million is what the historical run rate is.

As you look forward over the next four, six, to eight quarters, do you think you could drive that $12 million to $14 million productivity number over that timeframe per quarter?

That is exactly what we expect to do.

Okay.

And then on the consumer side, I believe we are in quarter seven of volume erosion.

What are your customers telling you on the volume outlook over the next couple of quarters?

Any light at the end of the tunnel to actually see some volume growth in your key end markets?

Well, you know actually we actually saw some volume growth on the consumer side in Q2 and then we saw some flat -- obviously it was flat this quarter.

Anecdotally as well as some other companies have reported, they are continuing to see some flattish consumer volumes out there.

I have got to believe that the uncertainty that is being created in Washington about the future is impacting how people look forward to spending and what they are actually spending and where they are spending their money.

So until that gets resolved, I can't really see significant movement in volumes.

Got it, Jack.

And one question for Barry.

Barry, do you have any initial feel for what your pension expense may look like in 2014 given the move up in rates and pretty strong equity market performance this year?

We have not updated our estimate for 2014 at this point.

We will be doing so over the next month or so, Alex, and be presenting our preliminary estimate of that at our Analyst Day in early December.

It is fair to say with the higher discount rates that we would expect some improvement in our pension expense, lower pension expense next year versus this year but we are not at the point of quantifying that because there are so many moving pieces that impact that calculation.

Thanks, Barry.

I will turn it over.

George Staphos, Bank of America.

Hi, guys, can you hear me now?

We can hear you now, George.

It sounds like a promotion for Verizon I believe.

I should get a commission.

I guess I will ask three questions and I am not sure if maybe you already covered this with Alex.

I guess the first question in consumer in the press release, you mentioned that you had some difficulty with volumes.

I thought you said injection and thermoforming but then it sounded during your remarks that really the issue if you had one in consumer -- and you actually you had nice margin, I am not disagreeing with that -- was more around productivity with blow molding.

So which of those items was really your bigger consideration and problem in the quarter?

No doubt it was the operational issues in blow molding was bigger than the volume impact in both injection molding and thermoforming.

Okay.

Now I thought from the last quarter you had put some of your best folks on plastics to resolve some of these operational issues.

Are you where you had expected to be and it is just a slow ramp or did you not make as much progress in plastics as you had expected?

Well, I think you have to put that into context.

We did put some of our best people to improve plastics and part of improving plastics was thermoforming.

Thermoforming is very much improved operationally and we are pleased with where that business is and the direction that it is heading.

The operational issues on blow molding we have put a lot of good people in place.

We believe that we are going to continue to see improvement quarter over quarter but those things take a little time.

I would tell you we have done it before, we did it with flexibles.

We did it with the protective packaging services business that you now see so it is coming.

It is just a matter of them getting their feet on the ground and getting things going in the right direction.

I believe as I said we are going to see continued progress going forward.

Okay.

Jack, my last question and I will turn it over, you mentioned that you have some caution as we go into the final quarter of the year.

Is it because one of your businesses or a few have dropped off in October versus what you were seeing in third quarter or is it more what you were seeing I think before in answering Alex's question -- you are just trying to build in some shock absorber here because who knows what kind of impact the discussion let's call it that in Washington will ultimately have on the consumer and your business?

Thanks.

Well, it is much more the latter.

We are just looking forward trying to understand the environment we are operating in, taking the information we have about our current run rates and just projecting them forward.

It is common however for us to see a drop in run rates on our industrial businesses as we get into the November-December timeframe as well as consumer businesses tend to have some fall off after the holidays or right as we get into that November, early December.

So we are just projecting forward based upon our history.

Ghansham Panjabi, Robert W. Baird & Company.

Good morning.

Can you hear me?

We can hear you.

Good morning.

Okay, just making sure.

On the positive price cost in consumer during the third quarter, should we expect a reversal in the fourth quarter?

And I guess I ask because resin prices did pick up towards the tail end of the quarter and some of your competitors have sort of called our resin impact for them specifically.

Yes, certainly we did see a positive impact on our plastics business in resin for the third quarter that we don't see repeating in the fourth quarter.

Actually it may turn a little negative on us as we look at that but then some of what we saw is positive price cost on the consumer side will remain as we move into the fourth quarter.

Okay.

And then on the -- sticking with consumer and diving into the flexible packaging side, it seems like one of your large customers made an announcement in July about a large plant in Monterrey, Mexico.

I guess it was biscuits and cookies and it is quite a large investment for them.

How should we think about that as a potential opportunity for Sonoco?

Do you have plans to follow them down there or are you going to ship from North America?

How should we think about that?

Well I certainly think there is going to be opportunities for us to work with this customer to supply their new facility in Monterrey and I think it is going to potentially a combination of both.

We will have to see how it develops over time.

Okay.

And then just one final clarification.

I am sorry if I missed this but what is driving the free cash flow upside?

For the full year, our free cash flow estimate has been improved largely because working capital has been very effectively managed, rolling below our targeted levels.

But we have also had lower cash tax payments than we expected when we started the year.

So that is been adding notably to our cash flow throughout the year as well.

Is that half and half between that $40 million improvement?

Year to date I would say the cash tax improvement has been about $45 million.

That will probably improve to almost $60 million by the end of the year and a lot of that is due to the credits on the biomass boiler that we are putting in place to accelerate it and depreciation for that project, the benefit we get from that, etc.

So there is about $50 million or $60 million of unusual items in this year's estimate for cash from operations and free cash flow that we wouldn't necessarily have going forward.

Okay, thanks so much.

Al Kabili, Macquarie.

Hi, thanks, good morning.

I just wanted to get a quick -- the caution that you highlighted in piggybacking on George's question, how is the trajectory in intra quarter?

Did you see a little bit of tail off at the end of the quarter that makes you a little more cautious or was it pretty steady?

How would you characterize that?

Well I would tell you, Al, it was -- it is classic.

It starts out strong in July, August probably drops off as it normally does and it picks back up in September.

So it was almost a classic pattern for us.

Okay.

And then on the tubes and cores side where you had seen a little bit of growth in Europe and US, as far as end markets is there any appreciable variances between the various end markets that you are seeing that growth?

Is it pretty broad-based or are there some that you are seeing greater strength than others there?

Well I think if we look at it specialty and textile were up in the quarter probably the most and then film and P&P were up slightly.

Okay.

Thank you.

And then final just questions was on the blow molding and Alloyd business.

So on the operational issues on the blow molding side to the degree when you get your operations where you essentially want them to, what do you think that contributes in terms of upside?

Or another way of asking it, sort of how much do you think blow molding issues on the operational side cost you in the quarter?

Well, I think if you just think about what that inefficiency cost us in the quarter, it was some $2 million to $3 million.

So when we get those online, you can calculate that impact.

Okay.

And then on the Alloyd business which is still continuing to run but a bit below your expectations, is there any -- what is the plan in place and opportunity to sort of improve that trajectory going forward?

Well as we have done in other cases, we have introduced some new talent into the business, some proven talent inside the Company.

And so we expect that to begin to improve as we work together to improve that business with the traditional staff there.

We are also looking to grow the topline.

That is a major focus for us is to get out and get some more revenue into that business.

I think it is going to follow the trajectory of the other businesses but I do expect it to start improving as we begin to grow the topline more effectively as well as looking to reduce some of the cost in the business at the same time.

Okay, thanks.

I will turn it over.

Phil Gresh.

Hey, good morning.

Good morning, Phil.

Just one clarification question following up on Ghansham around the free cash flow.

I guess to ask it a slightly different way, if you were to think about the free cash flow outlook you gave us at the Analyst Day in December, you gave us a three-year look.

Is there anything in these working capital or cash tax benefits that you actually see as kind of sustaining into 2014 or is it truly kind of one time across the board?

I would expect that most of what we have seen this year is really one time.

Obviously we have got our working capital managed pretty aggressively right now and to see significant improvement year over year from that would be pretty unlikely.

It would just be expected to grow as sales grow.

And as I mentioned just a couple of minutes ago, we have had quite a few unusual cash tax payment benefits this year that wouldn't continue into next year as well.

Okay.

That is helpful.

And then just on capital allocation, I realize you are going to be paying some debt down here in the fourth quarter.

On a net basis you are kind of approaching your target levels.

So how do you think about capital allocation moving forward?

Are you thinking about kind of more of an M&A focus?

Might you start thinking about doing share buybacks?

Is there any opportunity here to get a little bit more aggressive on the leverage at some point if you were to do buybacks or maybe just talk about your philosophy around that at this point.

Well, I always appreciate the opportunity to talk about this particular subject.

As I have said many times, I think that for now we see the portfolio as being complete.

So we are looking to make bolt-on acquisitions and fill in capability as well as geography in the different businesses where we see that to be necessary.

So we are actively looking for those types of acquisition and acquisition opportunities.

Having said that if you just think about changing from growing a business with different technologies to improving the different technologies that you have, a number of opportunities that we are probably going to see are going to be somewhat less than we have seen in the past.

So that should generate some free cash flow over time which we have to determine exactly how we create the greatest value for shareholders with that excess cash.

We are in the process of doing that now.

I suspect by the time we get this note paid off in November we will be at a point of beginning to talk about how we will utilize any excess cash.

But what we see going forward is certainly continue to focus on acquisitions designed to help build our technologies and improve our technologies that we currently have.

And then returning any excess cash in a way that creates the greatest value for shareholders.

Okay.

So you would rather I guess continue to stay on the more conservative side on leverage to be flexible around those opportunities I guess.

Is that the way to think about it?

Absolutely.

Maintaining investment-grade credit is a foundational tier for this business and we continue -- we will continue to do that.

Got it.

Okay, I will turn it over.

Thanks a lot.

Adam Josephson, KeyBanc.

Thanks everyone.

Good morning.

Good morning, Adam.

In composite cans, can you talk about what led to the declines in powdered infant formula and coffee and also the decline in trade sales and metal ends and whether that is sustainable?

Well, I think that -- let me talk to metal ends first.

Metal ends is really driven by one of our larger customers who made the decision to go to a sanitary end versus an easy opening end.

And that is economy driven.

I mean that is really driven by this current situation in the economy and trying to save a few cents on a can.

So I think that that could potentially reverse itself if the economy improves and I think that was an unusual item.

As far as composites, I think last quarter powdered formula was actually up year over year.

It is down.

That is going to move all around.

I certainly think coffee and powdered beverage, there are some implications or there are some format changes that are kind of more single-serve focused.

I think we have seen that now for several quarters and it will change quarter over quarter depending upon how that works.

But I don't see any major moves across going forward in those formats.

Okay so you don't think those shifts affect your ability to take net pricing or just to raise prices to offset inflation in the quarters to come?

Well, no, not as against the competitive format as we need to.

I also have to point out that we are aggressively growing the can internationally with opportunities.

We see Poland, a new line going into China, a new facility in Malaysia as well as many more opportunities we are currently pursuing and domestically looking at converting some self-manufacturers out of self-manufacture to allow us to do it for them.

So we are aggressively working on growing sales in composite cans as well.

Thanks, Jack.

And just one more.

You have obviously been in your current role for a few months now.

What opportunities do you think still exist to improve the Company's operations?

And I guess on pricing, how would you compare your approach to that of your -- to the Company's previous approach and whether it is any different now than it was before?

Let me talk to pricing first.

I don't think it is any different than it has ever been.

We want to try to recover costs that we incur, raw material costs as well as other costs with pricing where we can.

So that is consistent.

I believe we can get better in productivity.

I believe this $12 million to $14 million per quarter is our target.

We are not going to change that target.

It is available to us.

And we are spending considerable times and money training to implement what we have called Sonoco Performance Systems or SPS.

It is a multiple platform method to systemically drive productivity over time.

So I think as we roll that out and we better train our people in standard work and analytical troubleshooting and all the components of it, we will get better and better over time to be able to maintain that $12 million to $14 million per quarter.

So that is our focus and I believe that is the way we are going to continue to drive the Company.

Great, thanks a lot, Jack.

Thank you.

Scott Gaffner.

Good morning.

Good morning, Scott, how are you?

I am pretty good.

I just wanted to follow up on pricing.

Can you talk a little bit about the passthrough mechanisms that you have in either flexible business or in more of your rigid plastics businesses, how much of your contract or businesses are on automatic passthrough mechanisms or -- and what might the lag be there?

Yes for the most part, I will talk to consumer in general because it would encompass those and they are right in the same range.

It is a 75% contractual pass-through basis and it is usually lagged about a quarter.

Now it goes from 30 days to five months but on average, it is about a quarter, not dissimilar to the same mechanism you have on the industrial side except that more of the business is under contractual passthrough.

Okay.

And then when I look at OCC, I think you mentioned you expected it to be flat here in the fourth quarter.

I did.

(multiple speakers) I was wrong.

Is there anything you are seeing with OCC currently that gives you more or less confidence in the forecast for OCC in the fourth quarter?

Well, I think what I actually said is from the third quarter I expected it to be flat.

I think it actually went up about $5, didn't it?

Yes, so that is why I was saying I was wrong.

I think right now it is fairly priced to the market; supply/demand seem balanced.

What would normally happen in this situation is you would see a drift down in November and then again in December as volume demand kind of falls off a little bit as it normally does.

If there are a greater number of mill closures than we expect, you will see it fall off more.

If it's an expectation it is either going to be flat or drift down very slightly.

That is my best guess.

Understood.

Just lastly, you mentioned I think in consumer pretty normal strong July, weaker August.

Better September.

But can you talk maybe about the promotional activity you have seen or you saw during the quarter?

And then anything you are seeing now in the fourth quarter?

Well certainly, ramping up with the new Energizer business, I think that that relationship is developing well and certainly see some more opportunities to create value for Energizer.

We will be trying to work with them to do just that but other business as well.

We have seen some strong promotional activity in the third quarter and continuing into the first part of this quarter as well.

So we are very pleased with that.

As I said earlier, we made some changes in personnel in that business.

We have put in some strong talent and as usual people make the difference.

And that is really what we are seeing.

Chris Manuel, Wells Fargo Securities.

Good morning, gentlemen.

I jumped on (inaudible) I have a couple of questions for you.

First, in your industrial businesses I think you spoke about Europe being up kind of mid single digits and North America down a bit.

Can you talk about how you anticipate how sustainable those trajectories are.

Is it just some kind of noise here in the near-term or do you think North America gets back to kind of mid single-digit growth soon?

Do you think that Europe can kind of stay in this range for the next few quarters?

Well I think Europe -- I think that in Europe, we are going to continue to see growth in the frontier.

We have a new facility that we are looking at actually several new facilities in different countries in what we call the frontier of Europe.

So I would expect that to continue in that double-digit range.

That is certainly what we are trying to push that through.

What we call legacy Europe has been flat.

It was flat again.

We were up about 4% I believe in legacy Europe somewhere along that lines but that was share gain.

I do think the economic situation in Europe created some instability in the market.

I think that there might be some structural changes that occur in that marketplace.

So if that does happen I think that those gains will be sustained not continuing to improve at that rate but sustained from where we have them today.

And I do think you are going to begin to see a longer slower improvement begin in Europe.

I think you will begin to see the economies grow much like they did here over the last couple of years that 1% to 2% type range is what we would expect in the legacy parts of Europe.

Domestically we continue to see these types of small gains.

I do think that is sustainable.

Actually I think if the federal government would get out of our way and solve the budget issue and just give us some clarity to the future, we would see an accelerating rate of growth on the industrial side of the businesses.

South America is the one area that is probably the weakest area around the globe right now and when I say that, I am more specifically talking to Brazil.

Their economic situation now I would say compounded by their social situation is going to create a pretty rough environment we think for the foreseeable future.

That is very helpful.

If I could just switch gears one second to the consumer side of the business, what are your -- if you were to take the pulse of your customers, what is their tone or tenor?

Are they going full steam ahead with new product introductions (technical difficulty) back a bit?

Have they started to -- any changes in how you would perceive their tone for the next several months over where it has been?

Any perceived change -- I would say probably not.

I would say it is cautious optimism.

I think they are optimistic about what can be.

Again I will repeat, it is up to Washington to provide some leadership and give us some certainty about what is going to happen in this economy.

Chip Dillon.

Hey, good morning still.

First question is just and you might have reviewed this but could you just give us some idea of where you see full-year CapEx going next year and what is the budget -- what you see it coming in this year when all is said and done?

I think it is about [205] this year or somewhere in that range of we would expect that to drop next year between [175] and [180].

Okay.

And again, I guess the biggest difference there is the biomass boiler being completed?

Correct.

And then you know in the past you all have talked about having new products account for a certain proportion of your (technical difficulty) $250 million has rung a bell sort of as a five-year plan in the past.

And you mentioned, Jack, that you guys -- that is one of your key -- three ways of going forward is continuing to develop new products.

Where do you see that in the future in terms of how much of the growth that we see from Sonoco you think will come from products that aren't in exact existence today?

Well, certainly one thing we have not done yet is to begin to capture the new products that we have coming out of our protective solutions business which are significant.

We need to begin to do that so that we can publish this number accurately.

I would tell you right now flexibles growth is pretty strong there.

Plastics not as good as it should be and that is really self-determined.

We want to (technical difficulty) our ability to manufacture in that business first which we have talked about that.

Once we do, we expect that will ramp up very quickly because it grew very fast in the first two years that we had it and now we just have to kind of get back on level set.

So I expect new products actually to ramp up going forward especially as we roll out our end-use market concept and being kind of more consumer -- or excuse me -- yes consumer-oriented and understanding what the consumer wants in packaging.

Our new seal tab is out now in the marketplace.

I think Goldfish is now out in that so I can say that that you can buy it that way so we are pleased with that.

But I would expect that to ramp up.

I think that $250 million number is where we need to move toward and I expect we will be there.

Phil Ng, Jefferies.

Hey guys, you know protective has actually grown pretty nicely since you made the Tegrant acquisition but margins are probably a little lighter than we would've expected.

I understand part of that is a mix issue around Alloyd but when we look out to 2014, should that correct itself and how should we think about the margin profile?

Well again, you are right it is Alloyd centric and part of the margin this quarter was the startup cost of the plant in Mexico to get it up to speed.

Quite honestly I would like more of those and we are going to have another one coming on in Kentucky.

So that doesn't bother me because we get the positive.

That will be coming shortly.

But if I look at the business of the three units, the two units, the ThermoSafe unit and then the industrial and consumer protective business as we define it, very pleased with those businesses, their growth rates and their margin profiles.

It is about solving the Alloyd piece and we are focused on solving the Alloyd piece.

Should we expect the Alloyd piece to reverse itself in 2014 or still going to be a headwind going into next year?

It will be improved in 2014, yes.

Will it be where we expect it to be probably not but it will be improved.

Got you.

And then your display business was quite strong during 3Q.

Can you kind of help us parse out what part of it was tied to contract packing versus display and going into 2014, how should we think about the normalized run rate in that business from a growth standpoint?

I would tell you it is a combination of both.

I am very pleased with our display business domestically and how well it is doing.

Very pleased with the pack center business in Europe and what we are doing there.

I think part of the -- by the way part of the solution for Alloyd is this connection with our pack centers.

We are having some success pulling business through our pack centers.

That is a very strong positive; I expect that to ramp up.

But I'll tell you, the display and packing business is across the entire business.

The reason why I ask is if you look at the packaged food volumes lately it has been softening a bit, but your displays business historically has been a pretty good leading indicator for promotional activity.

So I just want to get a sense -- is that what you are seeing?

You are seeing pretty active promotional activity from your customers?

We are.

Okay.

And then just one last quick question.

I know there is not a ton of overlap.

One of the bigger flexible packaging guys out there have announced pretty significant price increases I think starting in Q4.

One, are you seeing that in the marketplace and does that benefit you at all?

Any time that we see price increases in the marketplace if it is to recover cost it is a positive thing.

And I can assure you we will do our share.

If we see our costs increasing we will have to move our prices.

But most of that is contractual, so it will happen as it should happen.

Todd Wenning, Morningstar.

Hi, good morning everyone.

Good morning, Todd.

Most of my questions have been answered, but could you provide us with an update on any competitive changes you are seeing from composite cans in Southeast Asia?

Not a lot of competitive changes.

The opportunities are significant however.

There is certainly the opportunity to continue on what we call the upper end stacked chip market which is the more branded stacked chips that we know but there is even a greater opportunity in the domestic chip market and we have come up with a pretty inventive solution and the numbers there are significant.

So we expect to be continuing to develop that domestic chip can and looking for conversions in that over the course of 2014.

But nothing competitively of significance.

Got you.

And then in terms of tubes and cores in that region, have there been any trends in that area?

Our tube and core business throughout Southeast Asia and particularly China has improved and we expect continued growth through the 2014 timeframe.

Okay, great.

And then just finally, what demand trends are you seeing from beverage customers in plastic packaging?

Well we have a very limited amount of beverage in plastic.

Mostly just nutritional type drinks and that demand remains strong.

Steve Chercover, D.A. Davidson.

Thanks, good morning everyone.

Just a couple of quick ones and I know we have talked a lot about consumer packaging.

I was wondering if you have seen any shifts into frozen juice concentrates and doughs because it is my impression that when consumers are trading down that is when those things start to perk up.

Yes, I would tell you that dough has been pretty strong and certainly pleased with that.

Frozen orange juice concentrate not so much.

We are continuing to see the ongoing trend that we have seen for the last several years now of year-over-year reduction.

Okay, but that is kind of a megatrend as opposed to any kind of secular issue associated with consumers tightening their wallets.

Yes.

Okay and my second question is are you seeing any tangible improvement in your businesses that cater to construction and infrastructure I guess specifically the Sonotubes and industrial reels?

Well, I have to go back and look a little bit deeper for tangible but I have said for some time that I believe the increase in housing is probably what is propping up our tube and core business to a degree domestically.

I believe that as manufacturing activity actually picks up, it kind of trended down in the middle of the year.

I believe as it picks up as we go into 2014 and housing stay strong, it may have a positive impact on our tube and core business a little bit above what it is now.

So certainly looking for housing activity to continue strong in 2014 and looking for a greater pickup in general manufacturing activity.

George Staphos, Bank of America.

Thanks.

Hi guys.

I just want to continue -- so at this juncture aside from normal seasonality, you haven't seen actually any of your business performing below that in terms of what drove your guidance for 4Q, is that fair?

That's fair.

Okay, and then secondly, one thing I noted in the release, SG&A was up depending on which version I use either the slide deck or the press release between I think 4% and 7% and obviously revenues weren't up nearly that amount.

Could you remind us what was in the increased SG&A and do you expect it to continue trending at that rate relative to the other line items in your P&L and for that matter just business in total?

Yes, it is up just over 4%, about 4.5% and that is again primarily due just to normal wage inflation.

Incentive accruals for the quarter are actually running just a little bit higher than they were for the same quarter last year just due to the performance against plan and just other increases.

Certainly nothing unusual in there.

Okay.

And I like the part of about incentives, George.

What is that?

I said we like the fact that incentives are up in our business.

We are doing a better job of managing this business and certainly want to make sure that we compensate our employees fairly for doing just that.

Sure.

That's fair.

Understood.

The last question I had and I know there have been a lot of questions asked understandably on Alloyd.

Is there a way to quantify what your margin or profit dollars or both would have been for the segment as a whole if Alloyd had been running as you would have wished?

And I don't know if that is more a revenue problem because of the consumer environment or an operational issue.

Any thoughts or clarity there would be helpful and thanks and good luck in the quarter.

Well, it is running what we would like.

I would have to go back and take a look at that -- running to kind of expectations.

I think it would improve the entire -- and if you took out or considered the startup in Mexico, it would have probably improved operations $1.5 million.

On a combined basis?

Yes.

Okay.

All right, guys.

Thank you very much.

Thanks.

There are no other questions at this time.

Thank you, Celia.

Again, I am going to apologize for any technical issues we had starting with the call.

We will certainly see if we can work on those in the future.

As Jack mentioned, Sonoco will hold its annual analyst meeting in New York on Friday, December 5 and again it will be at the Grand Hyatt Hotel.

Breakfast will begin at 7.30 AM Eastern time and the presentation will start at 8 AM.

Jack, Barry and members of our executive committee will be present and we will provide a strategic overview along with financial updates and outlooks.

We will conclude with questions and expect to be done by no later than 10 o'clock.

Electronic invitations are being sent out today.

Hopefully you won't have any difficulties with that.

Those not receiving an invitation should contact my office by email at corporate.communications@Sonoco.com at by calling my assistant, Robin [Heider] at 843-383-3450.

For those who cannot attend in person, we will webcast the meeting and post the meeting's presentation on our website at Sonoco.com.

Again, let me thank you for your participation today and your patience.

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

Thank you very much.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.