Sonoco Products Co (SON) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Sonoco earnings conference call.

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

(Operator Instructions).

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

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

Please proceed.

Thank you, Whitley.

Good morning, everyone, and welcome to Sonoco's 2014 first-quarter earnings investor call.

This call is being conducted on April 17, 2014.

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

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

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

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

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

Therefore, actual results may differ materially.

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

Now with that brief introduction, I will turn it over to Barry.

Thank you, Roger.

I will begin on slide 3 where you see that this morning we reported first-quarter earnings per share on a GAAP basis of $0.50 and base earnings of $0.52 compared to base EPS of $0.50 for the same period last year.

These results were within our previously provided base earnings guidance of $0.50 to $0.54 which we provided on February 14.

At that time, we mentioned that the guidance took into consideration the impact of the severe winter weather we experienced in January, but did not really factor in anything specifically for February.

As you know, February was also rough from a weather perspective, and we estimate that absent the impact of the weather in February, we would have been at or just over the top end of the guidance for the quarter, including the benefit of the slightly lower-than-expected effective tax rate.

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

The difference between GAAP and base earnings in the quarter is due primarily to net restructuring charges of $0.02 per share related to previously announced plant closures and other cost reduction initiatives.

Turning to slide 4, you find the base P&L where you see sales were $1,186,000,000, which represented 0.5% increase over the prior year driven by higher sales prices, partially offset by the impact of translation as volume was essentially flat for the Company as a whole year over year.

Gross profit was $212.3 million, which was $6.6 million or 3.2% higher than last year, and our gross profit margin improved to 17.9% as compared to last year's 17.4%.

Selling and administrative expenses and other charges were $123.7 million, which was 3.8% above last year, most of which was just due to wage inflation.

Thus, base EBIT was $88.6 million, which was $2 million above last year.

You will see all of the drivers of the change in the EBIT bridge in just a moment.

Net interest expense was $12.6 million, which was below last year due to lower debt levels, and taxes of $23.6 million were higher due to higher pretax earnings, partially offset by the effective tax rate on base earnings of 31.1% being just slightly lower than last year's 31.6%.

Equity and affiliate earnings was $1.5 million, thus base net income was $53.9 million or $0.52 per share.

Looking first at the sales bridge on the next page, you see here that selling prices were higher by $12 million, primarily driven by the pass-through of higher material costs across many businesses and the benefit of announced price increases in the North American industrial businesses.

Volume was essentially flat for the Company as higher volume in Display and Packaging was essentially offset by lower volume in the Paper and Industrial Converted Products and Protective Solutions segments, and volume in the Consumer segment was essentially flat.

Although difficult to quantify, weather certainly had an impact on some of our businesses, and there was one less day in this year's first quarter, which would represent about a 1% variance.

Thus, without the impact of these two factors, volume for the Company as a whole should have been improved year over year, and we do expect to see a favorable year-over-year variance in the second quarter.

Just to provide a few more specifics about volume, volume in Display and Packaging was up 6%, driven by higher activity really across the segment.

Volume mix was essentially flat in the Consumer segment as higher volume in flexible packaging, blow molded plastics and injection molding was offset by composite cans in North America being down 1%, most notably associated with the lower sales of caulk cartridges, which was weather related.

While trade sales of metal ends were also lower year over year.

Volume was down 1% in the Paper and Industrial Converted Products segment, driven by lower tubing core sales in the US and Canada, lower real sales and lower sales in Latin America, partially offset by volume being up 5% in Europe and up almost 15% in Asia.

Volume in the Protective Solutions segment was down right at 1% as lower sales in the foam-based products and temperature assured packaging was largely offset by higher sales in the paper-based protective packaging.

Two small acquisitions net of a small plant disposition added $4 million to sales for the quarter.

And finally, exchange and all other was negative by $13 million due to the strengthening of the dollar against the Canadian dollar and Mexican peso, partially offset by the weakening of the dollar to the euro.

The EBIT bridge on the next page explains the improvement from $86.6 million in EBIT last year to this year's $88.6 million.

As you saw in the sales bridge, volume and mix was essentially flat with just a slight negative impact of $1 million to EBIT, and this was due simply to sales being up in Display and Packaging but down slightly in the industrial businesses creating the negative mix impact.

Product cost was positive by $8.2 million due most notably to supply management productivity initiatives on the Consumer side and the carryover benefit of last year's announced price increases for the industrial businesses in North America.

Manufacturing productivity was somewhat weak at only $5.1 million for the quarter, much of which can be attributed to weather-related issues in the Paper and Industrial Converted Products and the Protective Solutions segments.

The weather impacted mill uptime and added excess costs.

Productivity was also light in Consumer due to continued operating issues in blow molded plastics and some operating issues at one flexibles plant.

All other costs were negative by $15 million.

Of that amount, roughly $11 million was just due to normal nonmaterial inflation and the balance due primarily to higher incentive accruals year over year based on more businesses projected to reach targeted earnings and some plant start-up costs.

And finally, pension costs were lower year over year by right at $5 million.

Results by segment are found on slide 7 where you see that for the Consumer segment sales were essentially flat, but EBIT improved by 13.8% due primarily to the favorable price/cost relationship, and the resulting EBIT margin improved to a very solid 10.4%.

Display and Packaging sales and earnings, which now includes the Alloyd retail packaging business with last year's numbers restated to reflect this change, saw margins improve to 3.5% with much of that improvement coming from a notable turnaround in Alloyd, which reported losses at the same time last year.

Paper and Industrial Converted Products sales were also essentially flat, but EBIT went down by 4%, due primarily to the impact of the weather on productivity, which then did not offset all other costs changes, resulting in a slight deterioration in the EBIT margin to 6.5%.

Protective Solutions sales were down 4.3% due to the disposition of one small box plant, as well as slightly lower volume, while EBIT was down $4.4 million due to the lower volume, higher material costs, and negative productivity again, much of which was weather related, resulting in a 4.7% EBIT margin for the quarter.

And now looking forward, on slide 8 you find our earnings guidance where we are projecting that base earnings in the second quarter will be in the range of $0.63 to $0.67 per diluted share.

The uptick from the first quarter is a combination of normal seasonality, the lack of the impact of the winter weather, continued improved productivity, and some modest improvement in price/cost in the industrial businesses.

Our range for the full year is unchanged at $2.43 to $2.53 per share, and we are still targeting to achieve $2.51 in base earnings per share, which is equal to our internal budget.

The overall guidance for the full year assumes no significant step change in the level of economic activity, but does factor in seasonality where the second half of the year is generally stronger than the first half.

It also assumes that OCC stays at $110 per ton in April and May, then moves back to $125 for the balance of the year.

Our estimate of the effective tax rate has been brought down slightly to average 33% for the balance of the year.

Moving from earnings to cash flow, on slide 9 you see that cash from operations was $45 million for the quarter, which was $91 million lower than last year's $136 million, but cash from operations was really pretty much in line with what we expected.

More specifically, we knew that this year's first quarter included a pension contribution and lower noncash pension expense, a combined negative impact of $32 million year over year.

And the balance is due to a more normal change in working capital versus last year, accounting for $56 million of the decrease in cash from operations.

During the first quarter, we normally see a significant increase in receivables as compared to year end because of the fall off of activity in December.

The increase this year was greater than last year, due simply to a greater pickup in average daily sales from December to March year over year.

The first-quarter 2013 also saw a greater-than-normal increase in payables as we were realizing the benefits of pushing some terms out with our suppliers, and those efforts were completed last year.

So we did not see much of an increase from December this year, as expected.

Our working capital remains under very good control as our days sales in receivables, days in inventory, and days in payables are actually all better than the same time last year with our cash GAAP days at the end of March at 43.7 days versus 45.8 a year earlier.

Capital spending was $35 million for the quarter as compared to about $55 million last year, which included roughly $12 million in spending on the biomass boiler project we completed last year and other projects at our mill in Hartsville.

So after dividends, we had free cash flow of a negative $22 million for the quarter.

For the full year, we are still targeting free cash flow of $130 million.

Speaking of dividends, yesterday our board approved a $0.01 or 3% increase in the quarterly dividend to $0.32 per share payable on June 10 to shareholders of record May 16.

This represents the 32nd consecutive year that Sonoco has raised its dividends.

During the first quarter, we also repurchased 208,000 shares of stock at a cost of $8.6 million as part of our announced plan to repurchase 2 million shares throughout the year as another means of providing value to our shareholders.

Our balance sheet is found on slide 10, where the only thing I will point out is that our financial position remains very strong with net debt to total capital at 31.3% at the end of the quarter, giving us the capacity and flexibility needed to continue to grow our businesses.

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

Now I will now turn it over to Jack for some additional comments.

Thank you, Barry.

Let me add some additional color regarding the first quarter and what we see going into Q2.

When we provided guidance in mid-February, we were experiencing one of the worst snow and ice storms in the Carolinas in many years.

At that time, we said severe weather had impacted production, sales and operations by about $0.03 per share, and we didn't know what the full impact of the severe weather would be through the end of the quarter.

We now believe had we not had the negative impact from the severe weather in the quarter that we would have been at the high side or even slightly above our guidance.

Much of the negative impact hit our Industrial and Protective Solutions segment, but we did face some down time in certain consumer operations, as well.

As Barry mentioned, first-quarter manufacturing productivity was weak, particularly in our Industrial businesses due primarily to severe weather.

However, as weather moderated in March, customer orders across most of our businesses rebounded, and we did a very good job of leveraging the additional volume.

I really have to complement our team for meeting the critical needs of our customers during the severe weather and then getting product shipped as orders accelerated.

In looking at the performance of our businesses, we were very pleased with the continued improvement in our Consumer operations.

Consumer Packaging grew operating profits year over year for the fifth consecutive quarter, and Display and Packaging continued to show strong growth in sales and profits.

If you listened to our annual meeting yesterday, you heard me announce our investment of $20 million in a new composite can plant in Kuala Lumpur, which will triple our can production in Malaysia starting in 2015.

In addition to global can growth, we're seeing improvements in certain domestic markets, as well.

For instance, we experienced growth in dough, coffee, and nuts, which was partially offset by weather-impacted categories like fiber, caulk, and snacks.

However, both of these sectors are now rebounding.

In addition, flexible volume continues to grow, and we believe we have turned the corner in our thermo molding and blow molding operations.

As weather improved, our domestic tubing core volume showed solid improvement, and orders appear to be following seasonal growth patterns going into April.

In addition, our mills ran much better in March with minimal weather impact.

In Europe the economy appeared to be improving, and our volume was up 5% in the quarter.

Protective Solutions results were severely impacted by the weather, the loss of some one-time orders, and a negative price/cost relationship.

However, we started seeing improvement in margin, and many of our customers have told us they plan to make up the lost production in coming months.

As we enter the second quarter, we feel much of the headwinds of Q1 are behind us, and we're well-positioned to meet our financial and operating targets for the year.

In February we mentioned our base earnings target for the year was $2.51 per share, which is at the high end of our guidance.

We continue to feel good about the year and remain laser-focused on meeting this commitment.

I believe three things will drive our performance in the second quarter and the rest of 2014.

First, it is critical we effectively leverage the volume improvement in our operations and meet our customers' accelerating demand.

Second, we must deliver the productivity improvement we budgeted.

And finally, we need to maintain the momentum we have created that is driving innovation throughout our organization and deliver accelerated organic growth.

The development of our new IPS studio in Hartsville will help us do just that.

I personally believe we could see up to 3% GDP growth in the US for the rest of 2014, and this would help drive incremental volume.

That said, our forecast for volume improvement remains more modest.

Globally we are seeing pockets of strength in Europe and parts of Southeast Asia.

In addition to the new Malaysian composite can expansion, we expect to announce several new consumer-related growth opportunities throughout the year.

Protective Solutions should pick up steam as the year progresses, and we are working to commercialize new capacity in Mexico and Kentucky to meet the growing demand.

While volume remains the most important factor affecting the rest of 2014, we must also manage higher energy and raw material costs as certain resins have increased and OCC may hit a double peak with prices rising this summer.

But overall, I like our chances to meet our commitment as we move through the year.

Operator, we will now take your questions.

(Operator Instructions).

George Staphos, Bank of America.

Jack, I was hoping perhaps you could give us a bit more color on some of the new programs coming from a revenue standpoint, particularly within Consumer recognizing that maybe a quarter ago it was a little bit too early.

Could you give us a bit more color now, or is it still a little bit too preliminary to get into that?

Well, certainly we're still early in the process, but we have continued opportunities to expand composite can and are working those hard.

And we have -- of course, Alloyd had a solid quarter as well, and we have opportunities coming in there, as well as in our Display and Packaging business, and some new flexibles wins that have come on, have some volume improvement in that business.

So it is across the entire spectrum, but we are a little bit early to really talk to some specifics.

Is it too early, too, Jack, to put a revenue on that?

If that's the case, that is fine, but I just figured I would ask.

Well, I think that, George, if you look at what we said last year, we expected to see somewhere around 2% volume growth in Consumer for the year.

I think that number would define where those volume numbers will actually turn out in consumer.

Okay.

That is helpful.

Thanks for the reminder on that.

The next question I had, if I look at the protective segment, obviously, I am assuming it wasn't quite where you had expected it to be from a performance standpoint.

Could you give us a bit more color in terms of when you ultimately expect to get to -- well, maybe not 10% margin, but when you expect to get margins back to a more acceptable level?

Have you seen any drop-off in any particular areas, i.e.

perhaps in auto or somewhere else?

Or what is driving that margin decrement?

Well, in Q1 weather impacted industrial and protective to the greatest degree.

And certainly on the molding business, they have boilers in plants, and all those boilers are gas boilers.

And to a degree, it is like a paper mill.

They use those boilers to create steam and heat that they use to fuse the bead.

And when they go down, it is a very big deal.

It's a big deal to get it started back up.

Not to mention that the cost of gas on a spot basis spiked during the first quarter.

It had a impact, obviously, on our costs, as well as on some bead prices and some other things that we are experiencing.

So a lot of what you are seeing on the Protective side was weather related.

Having said that, the business was about $600,000 or so negative on price costs, on all the cost inputs that came in.

We hadn't covered it yet.

We should make up a lot of that ground by Q2.

And year over year there was a business we sold that generated another, say, about $0.5 million in EBIT that wasn't in the comparison for this quarter, as well.

So after you remove those two, it's much more specific to weather.

And I expect margins to improve in that business back to where we would expect them in Q2 as we continue to drive that business toward 10%.

And I expect them to improve as the year goes on quarter to quarter to quarter.

Okay.

Last question and I will turn it over.

Two part.

One, what are you seeing at all in any of your housing-related end markets?

And then just on the commentary looking at March and April, you said March there was a strong pickup and April is at normal levels.

Does that suggest, and I would understand why, but does that suggest that there has been some deceleration in April versus March, or April has continued at the level that you got to in March?

Thank you.

The only piece that I can pen to, let's say, construction, is the caulk business, on our composite can side.

We certainly saw that took a strong hit during the first quarter.

As far as the March to April volumes, what we're actually saying is that we saw a rebound in March to the levels we were expecting.

And as we move into April, there is a seasonally adjusted improvement on the Industrial side and maybe a little softening on the Consumer side.

Those are normal seasonal adjustments.

And we believe that is exactly what we're seeing.

Okay.

Thank you, Jack.

Ghansham Panjabi, Robert W. Baird.

It is actually Mehul Dalia sitting in for Ghansham.

With Consumer, what are your customers telling you on the volume outlook over the next couple of quarters?

Is there any more promotional activity that is expected?

I would think it is much in line with what would normally be expected for this time of the year.

Normally promotions tend to hit the second half of the year versus the first half.

Great.

Thanks.

And as a follow-up, what are your productivity expectations for 2014 as a whole, given the slow start to the year?

Well, I would expect us for the next three quarters to go back to our more normalized level of productivity.

We say somewhere in that $10 million to $13 million range.

I do want to make one point is that on our paper business in Q2 of 2013, that was the lowest cost production quarter we've had in our history.

So comparable year over year in that business may be a little tough, but we certainly expect to at least be at that level, I would say, but back to normalized levels of productivity.

Great.

And just one last question.

What is your expectation for resin prices in 2014?

Well, we saw some movement during the first quarter.

Gas prices spiking was having impact on a number of different components for resin.

We did see it trickle up a little bit.

My expectation going into Q2 -- I would be hard pressed to predict the year -- but going into Q2, I would expect it to flatten out, maybe level off, maybe even trickle down a little bit in Q2.

Great.

Thank you so much.

Adam Josephson, KeyBanc.

Jack, in consumer, do you expect the continued price/cost benefits for the balance of the year that you experienced the first quarter?

And if so, can you elaborate on precisely what that is related to?

And just along also in Consumer, do you expect a pickup of closer to 2% volume growth in the latter three quarters or something closer to the flat that you experienced in -- I know you had one fewer day this year than a year ago, but what are your volume expectations for the latter three quarters and price costs, as well, and related to what?

Well, let me start first with the price/cost.

I think it was related to year-over-year increases in several of our businesses, as well as some contractual adjustments.

I don't think it's going to be to the magnitude we saw in the first quarter, but I expect costs, price costs on the Consumer side in Q2.

It's harder for me to look into Q3 depending upon what happens with input costs, but certainly expect this to continue into Q2, but to a lesser degree, as I said.

And on the volume side, yes, I do think we are going to begin to see some improvements in volume as the year progresses, more to that 2%-type range on a year-over-year basis for Consumer.

The volume improvement, Jack, will it be specific to flexible, or composite, or blow molded?

Where are you expecting much of that growth to come from, or is it broad-based?

Quite frankly, broad-based.

The other question, with respect to emerging markets, aside from the Pringles expansion that you are seeing, how would you characterize conditions in most of the emerging markets that you operate in?

Well, we're certainly seeing expansion in snacks globally.

But emerging markets, pretty good on both consumer and industrial with the exception of Brazil.

Brazil seems to be struggling a bit, but the rest of the globe was pretty good.

Okay.

And just on OCC, I know you talked about your expectation to flat OCC in the next couple of months and then up to, I think, $125 a ton thereafter.

At one point, are you expecting a sustained increase as a result of improving Chinese demand, or is it just too hard to say if and when that might actually happen?

Well, projecting the price of OCC is very difficult, and I am no good at it.

So I will try to minimize my forward projections.

I certainly think that there is a strong balance right now.

I think that is why you see prices where they are.

To the point that was made, we expected to stay flat a couple of months and then do it's typical rise going into the third quarter and fallout as we entered the fourth quarter.

I would tell you, if China would come back in the market in a sustained way, it might add a $20 premium above existing prices.

But I think the pattern would still follow the consistent pattern.

But again, that is not worth a lot because I'm not very good at predicting OCC.

Got it.

I appreciate that, Jack.

Thank you.

Scott Gaffner, Barclays.

Just looking back at the first quarter, I guess I am a little unclear as to how you guys had such a strong quarter.

I mean you called out the weather impact.

You talked about productivity below expectations, and yet you still came in at the middle of the range.

Can we talk about what came in ahead of expectations in the quarter?

I tried to cover that in my comments just a little bit.

I think our team did an outstanding job in the months of January and February managing all the components and all the issues they had to deal with relative to weather and getting product to our customers and maintaining costs the best they could.

I think they did a great job.

So those months, although they were below our expectations, they performed well.

And then I think they did an outstanding job as March came on.

We saw the rebound in volume.

We leveraged the volume.

As that volume came across the system, it creates the efficiencies that we needed, and we saw a very strong March fall to the bottom line.

So really it was the team and how well they manage the business through the quarter.

Okay.

Thanks, Jack.

And then you mentioned that your customers, it sounds like they are making up some of the missed volume in the first quarter, maybe late in March and then into April.

Does it sound like underlying volume trends are okay and this is mostly production issues caused by the weather?

And I wouldn't normally expect consumer demand to get made up, so maybe the underlying demand was okay and it is just a production issue?

I would tell you, our Consumer demand on whole wasn't bad through the quarter, but we didn't experience some weather-related issues.

And to the point you made, we didn't really see any what we would call significant rebound on the Consumer side.

That was all focus on the industrial side and the protective side.

And particularly to Protective, the automotive manufacturers are very specific about making up this demand.

They are sending out letters.

They are telling their suppliers to get ready.

We intend to make up what we missed.

So that bounce back is there.

I don't think it is an anomaly.

I think it is representative of what the underlying demand actually is.

Okay.

And one last question on Consumer Packaging.

It sounds like more and more beverages are possibly going to go through the K-cup or single-serve type offering.

You talked about possibly missing out a little bit on that trend before, but is there room for you to grow in that category now and to take some of that market share, even though you missed out on the initial trend there?

Well, I would tell you that that is not that I know of, no particular initiative in that area with the possible exception of -- I believe that there is a renewable or more sustainable K-cup model that is coming that would actually drive volume perhaps back to bulk package coffee.

So there is an opportunity may be in that area.

Okay.

Congratulations on a strong quarter.

Chip Dillon, Vertical Research Partners.

Sort of a broad-based question for you guys.

It seems like the cost of doing -- of borrowing money continues to be quite low.

And I was just wondering, has anything really changed in the environment for acquisitions?

I mean obviously you have set it as a priority to buy back stock this year, and you started on that the first quarter.

But we have seen in some of the paper and packaging world where actually making acquisitions and garnering synergies can create even more value.

So I just didn't know if you had any broad comments on what the landscape looks like.

Well, Chip, certainly with inside the framework of maintaining investment-grade credit, which is fundamental to us, we continue to look at acquisition and acquisition opportunities.

I am also extremely pleased that as a management team and as an organization, we're very focused -- flexible packaging in Brazil; consolidating tube and core in composite can; and then any opportunities in Protective Solutions to expand capacity in the US as well as Europe.

So opportunities exist.

We are taking a hard look.

And as long as we can make these acquisitions and make them create solid returns inside investment-grade credit, we are in the game.

Got you.

And then on shifting gears a little bit, on a earlier report today, we learned that the beer volumes in Brazil had really taken off in the first quarter, and I would assume maybe beer keeps longer than snack foods and some of the packaging you make.

And I was just wondering, have you noticed a pattern in the past?

Because certainly if there is a lag, you would seem to maybe be on the verge of seeing a big increase in demand there.

And, of course, I would assume like with beer that would be tied somewhat to the increments of the World Cup.

We have certainly not seen it.

Of course, our Brazilian business is primarily Industrial.

We do have some Consumer in it as composite can is more focused on powdered beverage products.

So we're not connected to snack so much in Brazil.

Got you.

That helps explain it.

Thanks very much.

Alex Ovshey, Goldman Sachs.

A couple of questions for you.

Going back to the productivity numbers, so the more normal $10 million to $13 million figure, would that include the benefit of the biomass boiler?

Yes.

Okay.

And can you just remind us what that benefit should be for you guys in 2014 from that boiler?

About $4 million on an annual basis.

Got you.

Okay.

And then we talked about the spike in natural gas prices during the first quarter.

Can you just talk about what kind of impact that had on the cost structure.

And now with gas pricing moving back down, how should we be thinking about the potential benefit on the go-forward basis?

Well, of course, part of our buy is hedged; part of it is unhedged.

And it had impact on the part that was unhedged.

As far as the absolute impact, it's hard for me to put my finger exactly on it.

But it is certainly in that $0.01 to $0.02 range I would think would be the impact of what that spike in natural gas cost -- just for gas costs.

There was other impacts that translated into some resin price increases that we had to deal with, as well.

But just as far as gas cost increases, maybe that $0.01, $0.015, $0.02 type of number.

Got you.

As you look at your key cost inputs, did any of your key cost inputs go down in the quarter?

None were brought to my attention.

Nothing on the chemical side for you guys?

I know you did a cost stick or a star trend along those lines?

And not that I would have been exposed to, no.

Nothing of significance, I would say.

Got it.

Okay.

And just one last one for me.

Just on the tubes and core business here domestically, can you just talk about how volumes performed across the key verticals for you?

Well, I would tell you that we were impacted in the paper mill segment in the January/ February timeframe.

As you can imagine, there's a number of paper mills in the Northeast, and they were particularly hit hard.

That had a significant impact on us because that is our biggest markets.

Film and textiles probably to a lesser degree, but all to some degree.

But certainly paper mill was the biggest impact we experienced on the tube and core side.

Makes sense.

Great.

I will turn it over.

Thank you.

Chris Manuel, Wells Fargo.

A couple of questions for you.

One, if I can back up and just run through particularly on the Industrial side, what were tube and core volumes like in some of the different regions around the world?

And I am assuming here is where -- in North America is where that was a little more choppy with the weather stuff.

But I'm just curious if there were any issues -- other pieces, too, and then how you are anticipating that tracking balance of the year?

So if we could start with that piece.

Sure, Chris.

This is Barry.

We experienced a volume decline of about 4% in our North American businesses.

Again, about 1% or so of that can just be attributed to the difference in days, and the balance is really associated with the lower volume into the paper mill segment that Jack described.

We actually saw a volume improvement in Europe by 5% in this quarter was not due to the frontier region that actually in the legacy countries due principally to some share gain year over year in that market.

And, as I mentioned, we also saw a significant improvement in Asia.

That business was up about 15% year over year driven by higher sales in China as well as Thailand where we are seeing the business build back from the flood that we experienced a couple of years ago.

And then as we mentioned, it was somewhat soft in South America, as well.

Okay.

So soft being down mid single digits or --?

Well, for the South American region overall, it was down about 4%.

Okay.

So total Company then was probably off a point or two.

For the segment as a whole, volume was down 1% year over year.

Okay, helpful.

And then your expectations of -- Jack talked about GDP for the balance of the year being 3%-ish, but I recognize that is a US number.

But that presumably then flips to a positive number in the balance of the year.

Is that --?

Chris, that is right.

I think going into the year we were looking at 2.5%, 3% up on the industrial side and expect that to play out that way.

I am one of those positive guys that sees a strong economy domestically and an improving economy in Europe and then into Asia.

So I think we're going to see some uptick in volume on the Industrial side for the balance of the year.

Perfect.

I was wanted to see if there were any changes.

In particular, thinking one of your slides at your meeting yesterday, you spoke or you had a slide in here -- I didn't listen, quite frankly -- of looking at opportunities in the Middle East for tubes and cores and some other pieces there.

So what kind of thoughts do you have there -- what size, scale, JVs?

How would you attack something like that?

Well, right now the conversation is centered around the joint venture into the Middle East, and we are in discussions.

It would start out fairly modest, focus on the film and textile industry.

But I think it could grow into something just a typical tube and core plant.

Okay.

Very small.

And then the last question I had was the new product pipeline.

Where are you at right now with the funnel?

Well, new products, obviously we continue to track new products.

It was down about $28 million, I think, something in that range for the quarter.

But one of the things we're actually beginning to transition to is building a funnel of $250 million of what we call the best view.

We have begun to populate that.

I think we're up about $140 million or so right now.

So we feel real good about the opportunities we're generating with the i6 process that we are driving through the organization to increase our ability to organically grow.

So we feel good about populating that funnel.

Okay.

Thank you.

Philip Ng, Jefferies.

Margins were pretty strong in your display pack service business.

Can you talk about what the drivers are?

And I know Alloyd had reshifted into the segment.

Are the headwinds that you have seen in the past pretty much pass this point?

Well, I certainly think that on a year-over-year basis Alloyd contributed significantly to the improvement you saw in Display and Packaging.

Are they pass -- and they had a very good quarter on a year-over-year basis.

That was a significant swing for them.

I think that they are going to continually improve as time goes forward.

There may be some choppiness to it, but over time we envisioned to be able to grow that business because it is aligned now properly in our organization, and we will be able to help grow that piece of the business through the display organization.

Got you.

And then I understand whether future Industrial business is a little harder than perhaps Consumer.

I noticed you bounced around, but you did have a price increase in the marketplace for URB and tubes and core.

Can you give us an update on how you are thinking about that price increase?

Well, I certainly think that now with that price increase, the yield has been fairly good.

There's other costs involved that we are trying to recover as well and feel good about going into the second quarter about having a reasonable price/cost relationship on the Industrial side.

Okay.

That is helpful.

And then just one last one.

Your outlook for consumer is 2% volume growth.

That is obviously much faster than what the packaged food companies are delivering on the volumes front.

Is that mostly driven by share gains in new products?

And obviously, you guys have this new go-to-market strategy.

Can you talk about some of the upside from that front?

Well, it is driven by share gain, an additional one volume.

We are having some success in this i6 -- in our pilot programs.

We are beginning to see opportunities that we have never seen before.

We're picking up volume.

And what I'm most excited about is we are beginning to see some longer range projects where our involvement is at the inception point, and we're really capable of leveraging all that Sonoco brings to bear, our multiple product offerings to really create a complete and total solution for the customer and believe that is going to only continue to grow.

And would that provide any upside on the margin front?

Margins were obviously pretty strong in consumer.

Is there an opportunity to break past that 10%-type threshold?

Well, we did break past.

I think it was 10.4%, wasn't it?

I mean closer to 11%-plus, that is what I'm trying to get at.

I think as we continue to improve operations on our plastics side of the business, that will help.

We have said that that business is somewhere in that 10% to 12% range, overall.

I wouldn't expect getting much outside that range, so you might continue to see some modest improvement.

Okay.

Thanks a lot.

Good luck in the quarter.

Steve Chercover, D.A. Davidson.

Apologize if these have been touched on, but it is late in the Q&A.

But given that you could have been at the top end of the guidance and your statement that there is some pent-up demand, are you just being conservative by reiterating the previous guidance, or is the bias to the upside now?

Well, I would certainly say that -- we bracket the range.

I think we have a $0.10 range, $0.43 to $0.53.

And as we look forward, given where we stand today and what we see, it is reasonable that the range covers our expectations.

I know with the dividend hike yesterday, hopefully we're getting back to the good old days where it was beat and raise.

It was a lot of fun.

I hope so, too.

Yes.

And then the other one, you indicated that your volumes were up 5% in Europe due to market share gains, and you also said that Europe is just getting better.

Is there anything that could derail that?

Are you concerned about Russia or the Ukraine?

You have a lot of exposure there, and could those problems lead into Poland or elsewhere?

Well, we certainly have exposure in the frontier regions of Eastern Europe, and we actually have facilities now.

I think three in Russia.

So is that possible?

Yes.

Do I think it likely?

No.

Are you taking any steps to mitigate it?

Well, it is not impacting us.

We did our work.

We understand where the risk is from the standpoint of the legal aspect.

We are not in any -- we have no violations there, so it's not an issue.

Our customers seem to be very pleased with our performance in Russia right now.

So outside of a political event that I have no control over, there's nothing more that we can do.

Okay.

I appreciate you taking my questions.

(Operator Instructions).

Al Kabili, Macquarie.

I just wanted to follow up, Jack, on Europe, and you are starting to see things getting a little better.

And I was wondering -- is that broad-based, or is that more just in the southern zone, which has some pretty easy comps?

Are you seeing some broad-based pickup in Europe?

Well, to Barry's point, this improvement was more or less driven by what we call legacy or Western Europe, and our business is mostly -- is heavily skewed to France, Germany, Italy and the Nordic.

And it was fairly strong across the region for the month driven by some share gain, probably more specifically related to Germany than any other area, as well as Turkey.

Okay.

That is helpful.

And I know you mentioned there was a -- you have seen some pickup in April.

I was wondering -- and I know it's very early -- but anyway you can help us with what the volume trends are in North America on the tubes and core side in April and, again, realizing it is pretty early?

We haven't really seen enough of April to understand it yet.

I will tell you in March they move back to our expected numbers more or less.

And what we expect to occur in April and what we are feeling right now would be an uptick, a little bit of an uptick as we move into the second quarter.

That is normal, and right now it feels very normal.

Okay.

That is helpful.

And then the last questions are on the protective packaging side, I know that weather was a big factor there and on the cost front.

Were you also still incurring some start-up costs with the new facilities there?

And if so, any thoughts on if that is an appreciable -- that becomes an appreciable tailwind in the second half of the year on the protective packaging side?

And then if you could just also talk about the blow moldings, I know you mentioned there's still some ops challenges there and when you think that also might get better.

Let me talk specifically to protective at first.

Yes, we're still starting up some additional capacity that we have put into that business, a new plant in Mexico.

We are finishing up PPAs down there, so that should be helpful as we load that plant up.

We also have installed new equipment in other facilities.

So I do expect that business to improve as the year goes on as we fill the additional capacity that we put in place and we begin running it at more sustained or expected rates of throughput.

So that will improve as we go on.

We have been investing in that business.

That has been part of the drag, if you will, to the margins.

But, as I said, as we fill that up and maximize capacity, that will help that business netted against whatever we invest to continue to grow it.

As far as blow molding, we are beginning to see some improvement in that business.

We made some changes internally to the management structure of that business and how we are managing it.

And we're beginning to see the improvement that we want.

I expect that business to continually improve throughout the year.

Okay.

That is helpful.

Jack, I did have one more question, just big picture thinking about the year.

With the weather headwinds that you incurred in the first quarter, you are still maintaining your target earnings for the year, and does that reflect maybe modestly increased optimism this year than you might have had three, four months ago?

Well, that I have had?

No.

I think I have kept that level of optimism.

I think -- I do believe it is going to be a little bit stronger.

I said in my opening comments, I am one of those 3%-plus GDP guys.

I think that is what we are probably going to experience as the year goes on.

So I think it is going to create some volume upside.

That is not built into that number you see for us because it rolls up from the businesses.

That is just my own take on it.

That is why I keep the $2.51 out there.

We now have that lower tax rate that we are baking in.

I think that could give us some upside.

But on the whole, Al, I am optimistic.

I think the economy is going to be a little bit better than we generally think it will be, and we will see if I am right come December.

But I am hopeful.

All right.

I hope so, too, and thanks again.

Good luck for the rest of the year.

Thanks, Jack.

George Staphos, Bank of America.

Jack, could you remind us where you stand in terms of paper capacity relative to conversion needs around the world, and are there any places where you have to worry about running out of board capacity, or are you pretty well set?

And would you happen to have operating rate statistics again around the world?

And here I am really referring just to SONOBoard.

George, domestically we have plenty of capacity.

Our op rates were very high, and certainly in March I think that we are toward the upper end of capacity.

But we have the ability to shift volume out to absorb tube and core capacity as necessary, if required.

I would tell you in Europe we're probably a net procurer of board on the open market, but we trade a little bit, so we are in great shape there.

There is plenty of board in Europe to buy.

Brazil, we are in good shape.

So we are not constrained by paper capacity in the tube and core business around the world.

Okay.

The North America shifting, are you just moving that production or shipping that production around the world to your other locations, or are you just trading that on the outside market?

Yes, we would exit the outside business and then internalize the production on tube and core board if we had it.

Understood.

And then lastly, on blow molding productivity, I know you put in new management.

I know you're making progress from the comments that you made.

Is it possible to speak specifically about where you are still having problems with productivity and what the key milestones are for the second quarter in terms of improving the progress or making progress in improving performance?

Thanks and good luck in the quarter.

Certainly the key milestones for us are throughput.

We need to get throughput to the expected rate.

I would tell you, over the last couple of weeks at our facility in Columbus, we have been at that rate, so we're very pleased with that.

In a couple of other facilities, we're driving to get those throughput rates to where they need to be, a very strong focus on it.

So we know what the milestone is, we know what we have to achieve, and we see definitive progress towards the improvement in throughput rates.

Okay.

Thanks, guys.

There are no further questions in queue.

Thanks very much, Whitley.

As a reminder, Sonoco does expect to issue its second-quarter financial results on July 17, 2014 before the market opens, and we will conduct our regular quarterly conference call to review those results at 11.00 AM that day.

Further information on the earnings conference call will be sent out a few weeks in advance of that call.

Now let me again thank you all for joining us today.

We 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.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.