Sonoco Products Co (SON) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Sunoco earnings conference call. My name is Tony and I will be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Roger Schrum, Vice President of Investor Relations. Please proceed.

Thank you, Tony. Good morning and welcome to Sonoco's 2014 second-quarter earnings investor call. This call is being conducted on July 17, 2014. Joining me today are Jack Sanders, President and Chief Executive Officer; and Barry Saunders, Vice President and Chief Financial Officer.

A news release reviewing the Company's second-quarter financial results was issued before the market opened today and is available on the investor relations section of our website at sonoco.com. In addition, we will refer to our presentation that was also posted on the investor site during this call.

Let me remind you that today's call contains 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 today in our news release and on the Sunoco website.

And 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 second-quarter earnings per share on a GAAP basis of $0.59 and base earnings of $0.63. These results were within our previously provided base earnings guidance of $0.63 to $0.67, which we provided on April 17.

Before reviewing the base P&L for the quarter, I will mention that a reconciliation of GAAP to base earnings is in today's press release and on our website. The difference between GAAP and base earnings in this quarter is due to restructuring charges of $0.03 per share related to several different cost reduction initiatives and previously announced plant closures and $0.01 for acquisition-related expenses.

Turning to slide 4, to look briefly at the base P&L, you see sales were $1.247 billion, up 1.7% year over year, driven by higher selling prices and a few small acquisitions, and you'll see more detail on the sales bridge in just a moment. Gross profit was $231.7 million, which was $9.2 million or 4.1% higher than last year.

Our gross profit margin was 18.6%, which was improved over last year's 18.1%. Selling and administrative expenses and other charges were $125.2 million, which was right at 3% above last year due primarily to merit increases. Thus, base EBIT was $106.5 million, which was $5.7 million above last year. Again, you'll see all the drivers of the change in the EBIT bridge in just a moment.

Below EBIT, net interest was $13.1 million and lower than last year due to lower average borrowings. Taxes of $31 million were slightly higher than last year due to the higher pre-tax earnings, partially offset by slightly lower effective tax rate of 33.2% versus 34% last year.

Equity and affiliates, when combined with noncontrolling interest, was $3 million, which was $700,000 lower than the prior year. Thus ending up with base earnings of $65.4 million or $0.63 per share.

Turning to the sales bridge on the next page, you see that volume was essentially flat for the Company as a whole as the pickup in the display and packaging segment was offset by a slight decline in the consumer packaging, which was off just under 1%. So just to provide a little more color about volume, volume in the display and packaging segment was up 2% due to more manufacturing and fulfillment activity in the US.

Volume in the consumer packaging segment was down slightly due to composite can volume being down 5% in North America, which more than offset composite can growth of 11% in Asia and 3% in Europe as well as flexibles volume being up 6% for the quarter.

In the paper and industrial converted products segment, volume was flat for the segment as a whole, as 11% decline in demand for reels, in fact more specifically steel reels, which are related to offshore oil and gas activity, was essentially offset by a 3.6% improvement in tube and core volume in Europe and a 8.4% volume improvement in Asia.

Excluding the impact of a small acquisition, tube and core volume in the US and Canada was largely unchanged year over year. And volume in the protective solutions segment was also unchanged, as an improvement in both the paper-based business and the temperature-assured packaging business was essentially offset by a decline in the phone-base business related to lower dunnage sales.

So moving on down the bridge [align] to selling prices, you see that higher selling prices added $12 million to the topline, most notably in the industrial businesses due to the benefit of announced price increases on noncontract business as well as higher prices on contract business related to the timing of OCC resets.

Acquisitions added $13 million to the topline due most notably to a small West Coast recycling business and a small tube and core business in the southeast, both part of the paper and industrial converted products segment.

The translation of sales in foreign currencies and other changes negatively impacted sales by only $3 million, and I will go ahead and mention that the impact on earnings from translation was certainly insignificant as well.

Turning to the EBIT bridge on the next page, you see the drivers of the change in EBIT year over year. As you just saw on the sales bridge, volume and mix was essentially flat, but we did have a positive impact of $1 million on EBIT, just due to the favorable mix.

Price cost was positive by $5 million, almost entirely in the paper and industrial converted products segment due to both again the benefit of the announced price increases on noncontract business as well as the benefit on contracted business, where actual OCC prices were lower year over year, yet many contracts reset at a March price of $125 per ton, which was higher than the $120 price a year earlier.

Manufacturing productivity was favorable by $7 million for the quarter, but clearly lighter than what we were targeting, due most notably to operational issues at one flexibles plant, which cost us approximately $3 million in negative productivity in the quarter. All other costs were negative by $14 million. Roughly $12 million was due just to normal nonmaterial inflation, with the balance due to plant start up costs and other cost changes, including the impact of a fire at one of our composite can plants in June.

And pension costs were lower year over year by $7 million. The year-over-year variance is particularly large this quarter, as last year's second quarter included a $2 million settlement charge relating to certain participants transferring out of a defined benefit plan in Canada into a defined contribution plan.

Results by segment are found on slide 7, where you see that for the consumer packaging segment, sales were essentially flat, but EBIT was lower by $4.6 million or 9.6%, due primarily to a negative mix of business as well as light manufacturing productivity, plant start-up costs, and the impact of the composite can plant fire, resulting in the EBIT margin dropping to 9%.

Display and packaging sales and earnings were both up and with the EBIT improvement being even stronger than the improvement in sales, resulting in EBIT margin improving to 4.6%. Paper and industrial converted products trade sales were up 3.5% due to the benefit of acquisitions as well as higher selling prices, while EBIT improved by 29% due to favorable price costs, solid productivity, and lower pension cost, resulting in a strong EBIT margin of 9.5%.

Protective solutions sales were flat, but EBIT was down due to negative price cost and higher operating costs that were not offset by productivity, resulting in a EBIT margin of 8%, down from last year, but improved from the 4.7% in the first quarter this year.

Turning to slide 8 and looking forward, we are projecting that earnings in the third quarter will be in the range of $0.66 to $0.70 per share. The sequential uptick from the second quarter is a combination of normal seasonality, volume returning to more normalized levels in the consumer business, and improved productivity, particularly in flexibles.

This improvement is expected to be partially offset by a less favorable price cost relationship in the paper and industrial converted products segment, given that many contracts reset based on a $105 OCC price in June and we are projecting that OCC will average about $112 per ton in the third quarter as opposed to the favorable spread in the second quarter that I described earlier. We continue to project that our effective tax rate will be 33% through the balance of the year.

Moving from earnings to cash flow on slide 9, cash from operations was $60.1 million, which was down $48 million from the same quarter last year. The decrease can be explained by a few key drivers. The most significant being that US paper mills, a wholly owned subsidiary, transferred approximately $15 million during the quarter to a court-sponsored trust account to fund the unit's portion of a proposed settlement related to the Fox River environmental issue.

In addition, cash taxes are also higher this quarter by $11 million, as last year, we had the benefit of some credits related to the biomass boiler project in the second quarter, thereby reducing our federal tax payments. And lastly, working capital consumed $7 million more in cash this quarter versus last year, largely for the same reason as I mentioned last quarter, where we benefited in the first and second quarters last year of our efforts to increase terms to our suppliers without a similar change this year.

Capital spending was $47 million for the quarter as compared to $42 million last year. So after dividends, we had free cash flow of a negative $19 million for the quarter. For the full year, we are now projecting that free cash flow will be $110 million, down from the $130 million in the previous projection, with the change due most notably to the $15 million proposed Fox River environmental settlement.

As a reminder, we expected free cash flow for the full year to be notably lower than 2013 due to higher pension plan contributions, higher cash tax payments, more of a normal use of working capital, and now the impact of the proposed settlement of the environmental liability. We did repurchase 441,000 shares of Sonoco stock at a cost of $18.5 million during the quarter as part of our announced plan to repurchase 2 million shares. Year-to-date through June, we have repurchased 649,000 shares at a cost of $27 million.

And finally, on page 10, you see our balance sheet, where there is not a lot to mention other than it remains very strong, with our net debt to total capital at 32.3%. 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 now turn it over to Jack for some additional comments.

Thanks, Barry. Let me add a few comments regarding the quarter and talk more about our expectations for the third quarter and specifically why we remain optimistic about the remainder of the year.

Results for the second quarter were actually pretty good. We have record sales, gross profits, and a solid 7% improvement in base earnings. In fact, results for the quarter were at an all-time best for a second quarter.

That said, we were disappointed we only met the low-end of our guidance. On the positive side, our industrial-related businesses had a near record quarter. Sequentially, operating profits in the paper and industrial converting segment were up more than 55% and year over year, were up 29%. More importantly, EBIT margins grew year over year by nearly 190 basis points to 9.5%, which is the best performance in the segment in nearly 8 years.

If you turn to slide 12 in the appendix of our presentation, you will see that tons of tubes and cores sold in North America increased to more than 1400 per day in the quarter, which is the highest level since the great recession. Now some of this improvement is a result of the small acquisition we made in the quarter, but we have also gained share.

In Europe, tube and core volume grew 3.6% as we continue to benefit from share gains in Western Europe. And in addition, Asia volume was up some 8%. Our paper mills ran very well in the second quarter and productivity in the industrial segment was solid.

Unfortunately, we stumbled in our consumer packaging segment, as volume in composite cans in North America was down due to weak consumer demand and inventory destocking by several of our customers. And finally, one of our can plants experienced damage from a fire, which impacted productivity, as we had to distribute business to other operations.

We resumed production from the facility this week and never negatively impacted our customers. And looking back at the quarter, I believe we may have actually experienced a hangover from the tough weather in the first quarter, as inventories in certain categories were built earlier in the year and consumers were unable to make purchases.

For instance, volume for fiber caulk cartridges was down in the second quarter, when normally they would have been up in response to seasonal home construction and do-it-yourself improvement activity. Today, however, our customers are resuming orders and telling us to be ready for the second half.

But volumes were not depressed in all our consumer packaging formats. We experienced solid volume growth in flexibles and rigid plastics volume was at plan. In fact, bookings in our flexibles business were at a record level for the second quarter and results in rigid plastics were dramatically improved year over year.

However, as Barry mentioned, we did experience a material-related productivity issue at one of our flexibles facilities, which cost us about $3 million in negative productivity in the quarter. Offsetting these disappointing results in the consumer packaging were continued volume growth and operating profit improvement in our display and packaging segment.

And finally, volume in protective solutions was flat in the quarter, but operating margins improved sequentially to 8%. Margins are still down year over year due primarily to a negative price cost relationship, but we have raised prices and expect to reduce the negative variance in the third quarter. Looking forward, we feel good about the second half of the year and are maintaining our guidance at a range of $2.43 to $2.53 and I personally am still focused on $2.51.

Overall, it comes down to achieving three things to meet this commitment. First, we must continue to commercialize recently won sales and leverage volume improvement our customers say is coming as they rebuild inventories. For instance, we were at our display and packaging operations yesterday and I can tell you we are exceptionally busy for this time of the year and this is a great start for the quarter.

Second, we must maintain a positive price cost relationship, including clawing back some higher material costs in our protective solutions segment. And finally, we must deliver productivity improvements in the $10 million to $12 million range. This means substantially improving in our consumer packaging segment, particularly in flexibles, and continuing the strong performance in our industrial businesses.

We have every reason to believe we will deliver a solid improvement in the second half. And with some additional improvement in consumer spending, we could definitely come closer to our $2.51 target.

Operator, we will now take the questions.

(Operator Instructions) George Staphos, Bank of America.

I wanted to start maybe with a couple of bigger picture questions and then maybe I'll turn it over. I guess the first question for you, Jack, why are your customers saying for you to, in quotes, get ready? What is giving them confidence that after -- for example, a hangover effect in the second quarter relative to the first quarter, you should see improving volumes in the second half of the year.

The second question, and I realized to some degree this is part of your overall strategy as a Company, but it seems like in many quarters, you have good performance in one segment and then, in this case flexible packaging, has a bad operating quarter and it cost you some money. Or composite cans really lights it up, but industrial is weak.

Do you think there's any notion that perhaps Sonoco's diversified portfolio does it more negative than good? Why are you so comfortable with that portfolio strategy, even though it at times can neuter the good results in one segment because of issues you might have in another? Thanks.

Okay, thanks, George. To the first question, why are our customers saying get ready, I think that there's two basic parts to that. The first part is that this is a normal seasonal uptick that occurs as we enter the third quarter and the beginning of the fourth quarter. That's normal for that side of the business.

I think there's also an implication that because of the downtime that they took, they have drawn down inventories and they do plan to bring those inventories back to a more normalized level. So if you push those two together, I think that's why they're telling us you need to be ready with additional volumes.

As far as the portfolio effect, there's no doubt that I can argue that at times, one being up and one being down does balance out the performance. However, when the performance of all the businesses is as it should be, it has a very strong positive effect. And of course, our goal is to continue to drive strong performance across all the businesses and not have this up and down that we've had.

Okay. Maybe I'll turn it over just with one final question. Or actually two. One, could you give us a volume expectation for the third quarter, either in consumer -- in aggregate -- that we should maybe pencil in? And then could you go through what the negative and price cost was in protective? Thank you.

Okay, as far as volume in consumer for the third quarter, I think we're looking at an uptick -- for the Company as a whole, somewhere a little bit less than 2%. And I would say that it's going to be a little bit more in consumer and just a slightly less on the industrial side of the business and that was how that balanced out to about 2%.

As far as the negative effect of price cost on the protective solutions side, it was about $1.3 million, which was basically the miss on a year-over-year basis.

But what caused it? Which materials -- that's all I was getting at. Thanks, again.

Oh, I see, I'm sorry. Both EPS or expanded polystyrene and expanded polypropylene bead escalated during the quarter, so we are behind the recovery curve. And we did putting prices during the quarter and so we expect to catch up to the increases we experienced during the second quarter and the third quarter. Now we will have to see what happens with bead pricing in Q3.

Thank you.

Scott Gaffner, Barclays.

Just a follow-up on the consumer trends for minute here. So are your customers saying that they saw a return to normal demand in the second quarter and that they would have normally expected a pick up, given the weather issues in 1Q and therefore they had too much inventory? Can you just kind of walk through that a little bit again -- what would be the normal pattern of inventory correction?

No, I think that the intimation was that perhaps -- if you go back to the first quarter, our consumer business wasn't that affected by the weather, so I think that they continued to run and make product.

I do think, however, the consumer was affected by the weather in the late second and early -- late first and early second quarter and probably didn't pull volume as much as expected. Consequently, inventories for our consumer customers built during the second quarter as they continued to produce.

So they decided to stop production or curtail production to bring inventories down to a more normalized level, which they did.

We had a couple of customers that have maintenance schedules throughout the year that actually did block maintenance. They pulled it all forward and shut down for an extended period of time to get all their maintenance done during this period.

As they expect volumes to return to normal, they will need the production later, but they just took this time to do that now. So they used the time to bring inventories down to meet the demand they actually saw.

Okay. And how much of your optimism for the second half is around some of these new products? I think you mentioned some of the new product introductions in the press release. Can you talk more specifically about those? Anything we might be seeing coming down the pipeline that's of size?

Well, certainly, some of the optimism is around new won volume that we continue to get. Flexibles has experienced some solid volume gains and that's obvious in the numbers that you see for them.

Plastics as well; we've had some solid wins and we expect some volume returning in that arena, because one of our customers is simply having some filling issues of their own, which they don't expect to continue, in a fairly high demand product, so we have some of that.

I will tell you on the protective solutions side, we have had a major win on the ThermoSafe side of the business, as well as we're heading into flu season, which is expected to be pretty, I don't know -- strong is probably a bad word when used for the flu season, but from our perspective, demand is going to be fairly high.

In the molding side of that business, we've had several wins of major contracts at -- in automotive companies, so much so that plants that we opened -- the new plants we opened in Mexico and the one that we talked about starting to build in Kentucky are basically full, based upon those volume wins that have come across as of late. So we're pleased with some of the things that are going on and some of the volume wins that we are seeing.

Okay. And just last question on composite cans, specifically in North America -- what drove the 5% decline in composite cans there?

Well, really, it was across almost all the segments. So there was no dramatic drop in one single segment, which makes it, to us -- it brings it back to that more weather-related type situation. But it was equal -- it was across all the different segments.

All right, thank you.

Ghansham Panjabi, Robert W Baird.

Hi, good morning. It's actually Mehul Dalia sitting in for Ghansham, how are you?

Good morning, how are you?

Good. How sustainable is the positive price cost that boosted paper margins in 2Q just going forward?

Well, certainly, they are subject to the changing prices of OCC in any quarter. They are not sustainable from the levels they were as we begin the quarter. If OCC drops during the quarter, then we'll go back into positive price cost situation. It rises during the quarter, we will probably trend more toward a negative price cost.

Great. And can you just remind us what normalized productivity should be per quarter on average?

Productivity is somewhere in that $10 million to $12 million range, so at $7 million, if we would've had that $3 million in flexibles that we would normally have and positive productivity across consumer relative to volume, we would have been well within that $10 million to $12 million number, probably to the upper side.

Okay, great. And just one last one -- can you update us on your capital allocation priorities and what your appetite for M&A is? Seems like relative to historics, you guys haven't done a deal in a while. Thanks.

Well -- I'm sorry.

No, just what your capital allocation priorities are and what your appetite for M&A is.

Okay. Capital always is kind of very consistent dividends first, then making the investments in our business to improve operations as well as grow the business. Then acquisitions. We are focused on acquisitions and we've been very consistent in talking about acquisitions of flexibles in Brazil and Southeast Asia.

Consolidating opportunities in tubes and cores and composite cans and expansion of protective solutions. I will tell you that we are pursuing opportunities in all three of those areas. That remains a focus area for us as well as we are continuing on our path to buy back 2 million shares of stock over the course of the year.

Great, thank you.

Adam Josephson, KeyBanc.

Jack, with respect to the recent merger between Caraustar and Newark Group, how beneficial do you think that could potentially be for you, given that the two companies are close to 70% of the North American URB market?

Well, Adam, I certainly think that Caraustar and Newark were both good companies and good competitors. I think coming together, they are going to be a better company and the better competitor, which means for us, the direct impact for us, is that we're going to have to ensure that we get better and maintain our low-cost producer position and maintain our position as the quality and service leader.

It's got to enhance our focus, sharpen our focus, and make us better at what we do in order to effectively compete with this combined company. And I think it's -- in the end, it will be good for the marketplace due to this increased focus on better quality and service at lower costs.

Got it, thanks for that. In terms of your tubes and cores volume in North America, I think you said it was about flattish organically. What were your expectations going into the quarter, if you don't mind reminding me, and what would you attribute the flattish volume in tubes and cores in North America to?

Well, going into the quarter -- now, it's -- we say flattish as it compares to -- on a year-over-year basis, there's usually -- this is our lowest, our slowest quarter of the year, so it was more or less at expectation. We had expected it to have been up just a little bit more than it was, but it wasn't dramatic one way or the other. Wasn't down dramatically.

Okay, just -- Got it. Okay. Just a couple of others. In terms of economic conditions in your major markets, did you see any notable changes, either positive or negative, in developed and emerging markets?

I would just tell you in Europe, we do see that slow grind that we've talked about. I think that that remains consistent. The one marketplace that, to me, has had the most movement would be in Brazil. I think that market continuing -- is continuing to slow. And I would tell you that Southeast Asia -- the countries of Southeast Asia have continued pretty strong, so those two areas would be the most notable.

Great, thanks. And then just last one in terms of your crystal ball on OCC. Obviously, they're not going any -- prices are not going anywhere. They are down year over year. They've been defying expectations along those lines. Do you expect any upward movement later this year or for that matter, into next year for any particular reason?

Well, as we go through the year, I'm expecting what I would call a very normalized year. As we enter July and August, it's a low generation month and a higher demand month, so I think that you're going to see some uptick in OCC prices as we get into the later summer months and then falling off toward the end of the year.

And right now, I don't know what good this is worth, but as we look into next year, I don't see an impetus for substantially different trends in OCC prices. I would probably expect them to be a little bit stronger on a year-over-year basis, but the trend should be about the same.

Thanks a lot, Jack, appreciate it.

Chip Dillon, Vertical Research Partners.

Jack, I wanted to just drill in a little bit on -- you mentioned the fire issue. I don't think you quantified it, unless I missed it. What would you say the impact of the fire in the composite campuses was, if there is a measurable like pennies per-share impact that you would make a guess at?

Well, I can tell you that the impact to us immediately was $0.5 million.

Okay.

We could quality $0.5 million. There's also some further impact that we will deal with later in a different manner. But $0.5 million even.

Okay, I got you. I guess therefore -- one thing that sort of strikes me is when you look at the decline in the margins in the consumer segment, it would seem to sort of highlight with the volume decline in North America that there is still quite a widespread between the profitability in North American composite cans, on one hand, versus flexibles and other plastic-based packaging and perhaps even in that same second category, the non-US composite cans. Is that roughly fair or how would you -- or am I missing something there?

Well, no, I mean, we've always said that the integrated nature of the composite can obviously creates margin for us across the Company. And I would simply tell you that the margin change that you see on the consumer side is driven primarily by two things. One -- the volume in composite cans, and then two, the extremely negative productivity situation that occurred in flexibles. So those two, actually, are what impacted the margin on the consumer side.

Got you. And then do you see any significant changes in the future, especially in the industrial segment on the tubes and cores area, based on, I guess, the merger activity we heard about this week or last week?

Well, as I said earlier, I think that Caraustar is going to be a formidable competitor and we're going to have to get better and ensure the quality and service we provide creates value for our customers. It's going to enhance our focus.

Okay. And the last thing -- I guess it's fair to say you've kept your range for the year and Jack, you mentioned you're focused sort of on that $2.51 number, which certainly seems within grasp.

But it also sort of suggests just to me that you might need a little bit of a stronger fourth quarter than maybe you thought before, kind of given that you are guiding into sort of the same range that we thought you would for the third quarter. Is that fair to say?

That is fair to say. I think that we're going to have to have an improved fourth quarter to make the number -- to make my number. And I think it's going to have to come from improved consumer spending.

I'm one of the ones that happens to believe that we are moving in a positive direction. And as I look at the job creation that we've seen since the first quarter -- and it's been trending up month over month and it's been building. It's not off the chart great, but it's consistent and it's building.

It's getting a little bit better. And one of the things that I feel is that if you've been out of work for a while and you get a new job, you don't immediately rush out and start spending money. You kind of get back on your feet, you kind of get a little more stable, but then you probably return to more of a consistent pattern.

And I think that some of the things -- I think some of the issues we're going to see in the second half or some of the volume that we're going to see in the second half is going to be based upon people in the first half who got jobs that are now kind of coming a little more stable and start spending in a more normalized pattern for themselves. At least that's my personal belief.

I hear you. Thanks very much.

Alex Ovshey, Goldman Sachs.

In the industrial paper business, can you tell us what the benefit was from a favorable price cost spread and how much of that was a function of the reset of contractual business relative to lower OCC prices versus the Company being able to implement higher selling price in the open market?

Well, it was about $2 million total -- in total and that split is hard to kind of calculate.

So the total benefit was only $2 million from favorable price cost in that business -- in the entire industrial segment?

Al, I think we're really talking about the change in OCC during the quarter. The --

Okay, I got you. So that favorable benefit from the reset in OCC was $2 million. Okay, got it.

Right, right. $2 million. Year-over-year benefit would've been higher than that.

Got it, okay.

As I mentioned in my points, most of the favorable price cost change came in the industrial -- in the paper and industrial converter product segment.

Understand, understand. Okay, and then you talked about the flattish tubes and core volume number in North America adjusted for the small acquisition. Can you provide a little more color on how volumes are trending across the key end uses for tubes and cores in North America?

In general, I think that we see that the volume in films is solid, textiles flat, and then it would be -- and then in general paper, kind of flat to up a little bit, but it's the newsprint and printing and writing grades that have trended down.

Makes sense, Jack. And then just last question on the buyback -- so you're targeting 2 million shares this year. Would that result in a net reduction in the share count by the end of the year versus the end of last year or is that largely through offset dilution related to long-term incentive plans?

Well, I think that what our objective was was to reduce the share count by about 2 million, but you have to take into account options that are outstanding and the relative price of the stock and all those other things. So how it washes out at the end of the year, we will just have to see.

Okay, great, I will turn it over, thank you.

Philip Ng, Jefferies.

Quick question on protective. I'm surprised topline has been somewhat muted. I figured the inroads you have been making on auto would've driven stronger demand. Can you talk about what you're seeing in the marketplace and should we see that business pick up in the back half?

Yes, thanks for asking the question, because I did want to have the opportunity to explain it. One of the things that happened last year is that we got a significant order for what we call dunnage. And what dunnage is is its internal totes and trays used in a closed loop system in assembly. They are molded to hold specific parts.

And as you can imagine, order for that type of product is random. It occurs sometimes, sometimes it doesn't. And for the first half of the year -- that was an $8 million order last year that did not repeat this year. So sales are actually better -- as we reported flat in the rest of the business to offset the fact that we didn't have a repeat that dunnage sale.

Having said that, dunnage is a good business and we are aggressively looking for opportunities in expanding our scope, if you will, and to look for dunnage opportunities across the industry.

Got you. And then from a price cost standpoint, it's continued to be less bad and expectation is for to improve in the back half. Should we expect it to be price cost neutral or still slightly negative in the back half of the year?

Well, we've already been informed of a potential price increase in one of the bead components, so we'll have to chase that a little bit. So that would create some negative, but as far as catching up to what we saw on the first half, I think that we put in some price -- we put in price increases that should go a long way to recovering most of that.

Okay. And then I guess bigger picture -- on your tubes and core and URB business, consolidation is always good in matured business, so the industry dynamics seem to be improving as the deal goes through.

You've historically done a great job passing raw material prices through -- you had it pegged off of OCC, but is there an opportunity down the road where you can kind of rejigger those contracts, where you get more market-based pricing similar to the container board producers, where you could drive margin upside?

Well, I certainly believe that as we can establish a more consistent and a more readily available market price for uncoated recycle board, that would be a logical conclusion and a logical direction we'd like to go.

Okay. And then from a capacity standpoint, I know capacity is pretty tight on the URB side, but on the tubes and core side, there's probably still some excess capacity with this combination. Is there room for more capacity come out down the road with overlap?

Well, I certainly think that -- I don't want to speak for Caraustar and what they're going to do -- but as we look at the footprint, I imagine that consolidation of tube and core facilities is a part of their plan.

Okay. Thanks a lot. Good luck in the quarter.

Mark Wilde, Bank of Montreal.

A couple of questions. Barry, can we just go back -- the comments you made around consumer packaging, you talked about the weakness in the composite can business, but I think you mentioned that in some of the other segments there, your volumes were actually pretty good on a year-over-year basis. Can you talk about that a little bit?

Sure. That's correct, Mark. In fact, in Asia, we saw an 11% percent improvement in volume in composite cans and the European volume was up 3%. And as we mentioned several times in the call today, we actually had a very good quarter in flexibles, which was up 6% year over year.

How do you reconcile that? That strength in the flexibles and weakness in the domestic composite can business?

Mark, it really becomes specific to product and product type. It just happens to be what is packaged in those products. Now in flexibles, specifically, that's some share gain. We've been winning some volume in flexibles and that's a part of what you're seeing. And, of course, the international growth in composite can is built around snacks.

Okay, all right. Second question I had -- Fox River. Can you just update us on sort of where the tail is on your exposure up there right now?

Well, certainly. As we described, there is a proposed settlement and we transferred roughly $15 million into a trust account with the courts this quarter related to the proposed settlement. And really, as you are well aware, the Fox River is a pretty complex situation and that's really pretty completely described in both our annual report and we did an update with the latest in the first quarter 10-Q, including the impact of the proposed settlement.

Okay. And as I recall, there's different sort of segments of the river that are under different settlements. Is that right?

That's correct.

Yes. And are you like -- do you have issues in multiple segments or just in one particular segment?

This, as we described, is really overall and the proposed settlement is certainly as it relates to the overall exposure as well.

Okay. All right. Then on the last question, just -- we've talked a little bit about some of the consolidation that's going on in the North American tube and core market. Do you see, Jack, likelihood of this in other parts of the world?

It sounds to me like you've got some competitors that are probably struggling over Europe. And I know the European market has been historically a much more fragmented market.

Mark, yes, I do think that there's going to be consolidation in Europe and I think it's fairly imminent. The degree of that consolidation is yet to be determined, but I do think it will occur.

All right, and you said you are picking up share over in Europe right now, right?

We have picked up some share, yes.

Okay, all right, sounds good. Good luck in the third quarter.

Chris Manuel, Wells Fargo.

A couple questions. Most of mine have been answered, but I really wanted to come back to -- Jack, when we look at what's transpired over the last, call it, 24 months or so with the consumer in the economy. And we've had job growth, we've had different elements, but aside from a few months year, for the most part, consumer spending for nondurables, food type products, other different elements, where a lot of your packaging is touching have been relatively flat despite that.

And underlying your kind of view that we'll pick up to -- I think you used something a little bit above 2% -- in the back half of the year is -- along with the notion of weather or some other things that may have disrupted things earlier in the year would be implicit that that changes. And while we've seen very good spending for other nondurable categories == cars, houses, etc. -- it hasn't trickled through the consumer.

What do you think necessarily changes the last couple of months to the next couple of months that will precipitate such a pickup?

Well, part of that, remember, is a rebuilding of inventories that where taking down during the second quarter. So they are bringing inventories back to a more normalized level, I think is going to be part of that, certainly on the can side.

And as I said, I think what's going to change is -- I think that as people have come back into the job market, and it's been consistent and steady now for several months, I think that they are going to begin to go to a more normalized pattern of spending as they get a little stable.

It's just been within the last five months that we've seen this kind of consistency, so -- and I think it's been building month over month. So as they get a little stable, I think that's going to be -- and create a little more spending, because it's really occurring in the income level that happens to buy packaged foods.

Okay. So Barry, could you -- I think you've given us some of the volume levels for composite can. What were they in plastics and maybe some of the rigid plastics or some of the injection-molded trays and things? What were those pieces like?

Yes, it's -- really, volume for the plastics business as a whole was relatively flat year over year. Not a lot of movement in any of the three platforms.

Okay. So aside from -- okay, so we had some rigid -- I'm kind of coming back now to Mark's last question. It sounds like where you saw the need to rebuild is more in the composite side. That the flexibles were pretty good as you've won some business, but across your other categories, rather flat.

So is there anything different with the mix of customers there that they are building inventory where others aren't. Or how do you see that supply chain sort of lay out?

Well, on the plastic side, I think that one of the things that we saw -- and I mentioned it very briefly -- is we have a major customer on the plastic side that has had some issues relative to filling bottles with their product, and so it's impacted our demand.

I think that that's going to -- certain that's going to correct itself and it's going to have a positive impact on volume into the third quarter. In addition, we have won some new volume in our thermoforming business that should have a positive impact on us as we move forward as well.

Okay, so you have a couple of specific things, that's helpful.

Go ahead, I'm --

Yes -- we also had some wins in the health and beauty segment as well. So we have some new wins that are coming on as well as what you're going to see in a normal pickup as you go into third quarter.

Okay. And then on the composite side, it should get back to flat or even -- any wins or can you give us some thoughts there?

No, I think that it's going to be -- the normalized pattern that you would see for composite cans -- that you normally see that pick up as you go into the third and into the beginning of the fourth quarter.

Okay. Last question -- in flexibles, you mentioned some material issues. Could you maybe give us a little color there? Was there a grade where you had difficulty getting materials, some bad film that came in that you would convert or -- you sound pretty confident it's not going to recur, that you've got it behind you, but could you maybe give us a little color there as to what happened?

Well, let me just say that it's a part of -- its one of our core materials and it's the way that we combine materials. And it's created a problem that has gone on now for a little bit longer than the quarter.

And we did some early investigation trying to understand is there something that we had changed in the process. And our answer to that is no, so now we are working with the supplier to address any changes that they might have made in how it's impacting our business.

So it's a big deal, but we've had a lot of people focused on it. We think we're getting it behind us. We certainly see an improvement in the last month or so, so a lot of focus is on it and we have our supplier involved now to help us fix it.

Okay, so this is not outside film that you're buying. This is something that your converting yourself or --

Well, it's outside products we're buying and then we're kind of combining materials together.

Okay. But --

That's as much as I can say.

That's -- but implicit into your return back to the low double-digit of productivity was that this was behind you. So it's not all the way yet, we're still have some certainly lingered here, probably into July, but you are hopeful that as you exit this quarter, work your way through this third quarter, that it will be behind you?

Significantly improved, yes.

Okay. Thank you, Jack.

Al Kabili, Macquarie.

Jack, first question is on capital allocation. To the degree that we are -- to the degree that the sort of sluggish macro environment and low interest rate environment remains more protracted and lasts longer than expected, would that change your capital allocation, either priorities or appetite?

Because you did touch on the strength of the balance here, either via increased buybacks or other items. Thanks.

Well, I certainly think that remembering that investment grade credit is a primary focus of ours and maintaining that, with inside the category of investment grade credit, we are willing to leverage the balance sheet for the right opportunity to expand and grow the business.

I think as far as leveraging the balance sheet for stock buybacks, that would probably be less -- have much less interest to us, but we would be willing to leverage the balance sheet for an acquisition that could have a positive impact on the Company, within the framework of investment grade credit.

Okay. All right, understood, thanks. And then also wanted to touch upon the share gains on the tubes and cores side in Europe. Are those incremental -- or correct me if I'm wrong, but I think I recall that perhaps you are lapping some of those share gains in the second half of the year. Do I have that right or have you picked up additional shares since then?

You are correct. We are beginning to lap some of those share increases, but I would tell you there's been some nominal wins that have continued.

Okay. And then on the -- you alluded to working with over a dozen projects with customers with the i6 development program. At this point -- you've always got a number of new products initiatives in the backlog. How would you characterize the new product backlog right now at this juncture versus how it typically has been this time of the year?

Well, Al, I think that first we would have to go back and -- we certainly still track new products and I would tell you it's been trending kind of flattish now. But as we look at i6 and how we use it, we are more interested in total revenue versus new products, because it just gets too hard to delineate what a new product is and isn't. It's more focused on a new revenue.

I can tell you that the amount of opportunity we have in what we call the best few, which has a higher success of closing, has accelerated and is continuing to accelerate. And that was the whole purpose around i6 is to create opportunities to grow the business organically and that we are doing.

Okay, and that's what I was, I guess, trying to get at is -- so that the revenue opportunity you see from new products is accelerating versus what you've seen in some years? Is that fair?

Well, the opportunity to grow the business organically is accelerating, yes. Is it a new product or is it another flexible bag for whatever the application may be -- you could look at that either way, but just -- I don't want to get that confused with what we used to call new products. We are now just looking at organic revenue.

Okay. And from a (multiple speakers) -- okay, got it. And from a -- and then dovetailing on this, I know you mentioned some new product wins on the health and beauty side and some others.

Can you help us size that up as far as what that means from a -- growth? Does that add 1% volume growth to consumer packaging or any way to help us think of the size of the new wins that you are alluding to?

No, I don't think those wins would add 1% to the growth of the Company. But if you begin to aggregate them, they are solid wins inside their business and certainly help utilize the capacity that we have installed.

But it's difficult to kind of quantify all that at this point in time, because some of it is kind of based upon projections and projections of volumes that we don't know if they are understated or overstated.

Okay, and I was referring to within consumer, not total company, on the 1%, but --

Well -- and I would tell you that some of what we're talking about have been solid wins. They are not $10,000 worth of business. It's a good wins.

Okay, all right. That's helpful. And final question is just on the protective packaging and I know with the new plants and you mentioned that you're looking pretty full already from a volume -- from a utilization rate in those plants.

Were those positive contributors in 2Q or were there start-up costs in 2Q related to those plants and do they start contributing from an earnings perspective coming up here in the third quarter or how should we be thinking about the new plants on the Protexic side? Thanks.

Well, some of the revenue certainly is beginning to flow through the business; however, we are still having start-up costs associated with the plant in Mexico. It is taking us a little bit longer to get first part approvals, which is a big part of the process, but we are continually working on it.

We need to improve our throughput in Mexico as well. It's another area that we are working on. But we are making progress; we're gaining on it. I think we're going to continue to work through that in the third quarter.

But as we get toward the latter part of this year and in the first front of next year, that's when we should really begin to see the benefit from the Mexico operations start to kick in. Then we're going to have to experience the Kentucky start ups, but I think we've learned a lot and that should go a little bit faster for us in 2015.

Okay, great, thanks. Good luck the rest of the year, thanks.

Steve Chercover, DA Davidson.

It's kind of late in the Q&A, so you've kind of touched on some of this stuff, but I wanted to first ask about volumes in North American consumer packaging. And I'm wondering if it's lower, perhaps, due to a migration in the supermarkets from the center aisles to the perimeter -- or put alternatively, from packaged food to fresh fruit, vegetables, and proteins?

Certainly, I would say some of that is probably impacting the numbers. It's very difficult to quantify how much and I think it's not wise to kind of view that as a trend. That was an event, perhaps, that happened, then you just have to see how it occurs over time.

All right, so that's something to watch. And then with respect to the price cost relationships that I think were generally favorable, should we think about it that when it comes to the paper stuff, low OCC is something that you can basically keep, but when it comes to plastics and resins, those are more subject to the escalators and deflators with your client relationships?

Well, yes, it's -- let me put it this way -- more of the contracts on the consumer side have pass-through mechanisms in them. So consequently, on a quarterly basis, those material adjustments are being passed through to the customer, either up or down.

On the industrial side, about half the business is not under some sort of contract, so consequently, price movements up or down are kept in the business for the most part. I think that's the best way to think about that.

Very good. Thanks for taking my question.

George Staphos, Bank of America.

I wanted to pick up on, I think, a line of question that Chris had. And I just want to make sure that I understood. The $3 million or so of productivity loss in flexibles -- was that mostly or entirely driven by the material issue or is it entirely unrelated?

If there were other elements that were driving it, was any of it driven by the fact that you had such strong volume in flexibles that perhaps your manufacturing couldn't keep up with the demand and that created some issues for you?

No. Let me be very specific. It was specific to that material and moreso, it was specific to one site.

Okay.

It's very, very focused and targeted.

Okay. Next thing, could you remind us or give us additional color, if you haven't talked about it in the past, where you are doing some of the select restructuring that you mentioned in the press release and why?

Well, those have been in specific businesses that -- we had some in Europe that we undertook. I think that we've also looked at some individual plant locations as well around the world, so they've been small, scattered across a number of different businesses.

Okay, thanks for that, Jack. Have you seen any effect or do you think there's been any effect on demand related to the fact that's been so difficult getting railcar loadings and shipping things from one part of the country to another? Have your customers talked about that at all being an issue that's quantifiable or has that really not been an issue in terms of their ultimate demand of your products?

I have not heard anything specific to that issue. I do know that in the southeast, there's some truck traffic issues that we have to experience from time to time, but they are more internal to our own supply.

Okay. Last question and I'll turn it over, Jack. So realizing there are no guarantees in life, if you -- if we're having this conversation in December or at your at your analyst in December, how likely do you think it is that you will have done an acquisition that is reasonably sizable, say, $50 million to $100 million?

I don't know if you feel comfortable commenting to that, but I wanted to get your thoughts on that. And then, the other question I had, given the cash flow in Sonoco, given the fact that growth rates are still fairly anemic around the economy, what would be incorrect about levering up, perhaps to do some buyback?

Because you get the growth and then also you'd have an opportunity to get further growth as you pay down the debt associated with doing a leverage recap like that. So two questions for you there. Thanks guys, and good luck in the quarter.

George, I really appreciate the way you asked the question. I thought it was very creative. Let me just say it like this -- we are focused on growing our flexibles business in the Brazil and Southeast Asia area. We are focused on consolidating tubes, cores, and composite cans wherever the opportunities exist. And we are focused on expanding protective solutions.

And let me add the word very focused on that. We are not adding new technologies and there are opportunities we are pursuing. As far as will it be done by Christmas, I can't say, but certainly, there are opportunities we see to have a positive impact on the business and we are pursuing them.

And I think that that is probably what keeps us from going out and levering up to buy back shares is we don't want to preempt ourselves from opportunities we see around the world to really add to our base and core businesses, where we know we have a very strong knowledge of what we are doing. And we feel like we can have a positive impact by making that acquisition. So that's really what keeps us from doing that.

Okay. We will continue the dialogue next quarter, but thanks, guys.

There are no further questions in the queue. I would now like to turn the conference back over for closing remarks.

Thank you again, Tony, and thanks, everyone, for participating in the call. We will release our 2013, 2014 corporate responsibility report on Monday, July 21, so please look out for that. The report reviews the Company's performance and economic, environmental, and social issues. Copies of the 34-page report can be downloaded from our website at sonoco.com.

In addition, we do expect issue our third-quarter financial results on Thursday, October 16, 2014, before the market opens and we will conduct our regular quarterly conference call to review those results at that time. Of course, further information on earnings conference calls will be sent in a few weeks in advance of that call.

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

This concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.