Sonoco Products Co (SON) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-three 2014 Sonoco earnings conference call. My name is Sheila and I will be your operator for today. At this time all participants are in a listen-only mode.

(Operator Instructions)

As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Roger Schrum, Vice President of Investor Relations. Please proceed, sir.

Thank you very much. Good morning and welcome to Sonoco's third-quarter earnings investor call. This call is being conducted on October 16, 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 financial results was issued before the market opened today and is available on the investor relations section of our website at www.sonoco.com.

In addition, we will refer to a presentation that is also posted on our investor site during the 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 on today's news release and of course on the Company's website. With that I will turn it over to Barry.

Thank you, Roger. I will begin on slide 3 where you see that this morning we reported third-quarter earnings per share on a GAAP basis of $0.69 per diluted share and base earnings of $0.72, $0.02 above our guidance of $0.66 to $0.70.

Before reviewing the base P&L for the quarter, I will mention a reconciliation of the GAAP to base earnings is in today's press release and on our website but also summarized on this slide where you can see that the difference this quarter is due to charges related primarily to previously announced restructuring activities and a small intangible asset impairment charge.

Turning to slide 4, you find our base P&L where you see sales were $1.264 billion, up 2.9% year-over-year. And you'll see all the drivers of the change on the sales bridge in just a moment.

Gross profit was $227.7 million with our gross profit margin declining only slightly to 18% due to the mix of business and light productivity. Base S&A expenses and other items were a net expense of $111.4 million, which was lower than last year due to the settlement of a lawsuit resulting in a net $5 million pickup after related expenses as well as lower management incentive accruals in this year's third quarter, thus resulting in EBIT of $116.3 million, which was 10% over last year.

Below EBIT interest was $12.9 million and favorable to last year due to lower average borrowings. And taxes of $30.7 million were higher than last year as higher pretax earnings were partially offset by a lower effective tax rate of 29.7% this year versus 31.3% last year. Equity and earnings of affiliates was $2.3 million and essentially in line with the prior year, thus resulting in base earnings of $74.69, or $0.72 per share.

Turning to the sales bridge on the next page, you see volume added $22 million to sales representing a 1.8% improvement for the Company as a whole. Volume was up 1% in the consumer segment driven by a 3.7% increase in flexibles.

Display and Packaging activity was up 6.7%. Paper and industrial converted products volume was essentially flat year-over-year while protective solutions was up 4.8%.

Moving down to selling prices, you see selling prices were up $4 million with no significant change in any of the individual segments. Acquisitions made earlier in the year, specifically a small recycling business and a small tube and core business, added $14 million to sales.

The translation of sales in foreign currencies and other items had only a $4 million negative impact on comparisons year-over-year and I will go ahead and mention essentially no impact on earnings as well. The dollar has obviously strengthened recently but the average for the quarter when all currencies are combined was not notably different year-over-year.

Turning to the EBIT bridge on slide 6, you see the impact of the different drivers of our results and the net improvement in EBIT. As you saw on the sales bridge, volume favorably impacted the top line but we did not see the normal dropthrough due to the mix of business between and within businesses with volume and mixed combined only adding $2 million to EBIT driven by negative mix in the consumer and display and packaging business, which more than offset the favorable mix in the paper and industrial converted products and protective solutions segments.

The negative mix in consumer was driven by the mix both within and between the businesses. And the negative mix in display and packaging was due to an increase in resale activity with a very low contribution while seeing a slight decline in the sale of displays, which has a higher contribution.

Price cost was positive by $6 million due almost entirely to the industrial businesses resulting from realized price increases on noncontract businesses, the timing of OCC related contractual resets and lower overall OCC prices, which averaged $100 per ton this year in the third quarter versus $128 per ton last year. Manufacturing productivity was weak at only $2 million for the quarter and this was driven most notably by continued operational issues at one flexibles plant, which cost us approximately $3 million in negative productivity in the quarter.

We also continued to have light productivity in our paper operations particularly on the corrugating machine this quarter. All other costs were negative by only $5 million. We would normally expect that to be roughly $10 million to $12 million due to normal nonmaterial inflation but it was offset by the previously mentioned legal settlement and lower management incentive accruals in this year's third quarter.

And finally pension costs were lower year-over-year by $5 million.

Results by segment are found on slide 7 where you see that for the consumer segment sales were up slightly with a corresponding slight improvement in EBIT with the margin unchanged at a very solid 10.4%. Display and packaging sales were up 6% while earnings were down due to the previously described change in the mix of business with the resulting EBIT margin of 4.1%.

Paper and industrial converted products trade sales were up just under 3% due primarily to the benefit of acquisitions while EBIT improved by 30% due to the favorable price cost, lower pension cost and the benefit of the legal settlement resulting in an EBIT margin of 10.2%. Even without the legal settlement earnings would have been up 16% and the EBIT margin up to 9.2%.

Protective solutions sales were up 5% due to improved volume but EBIT down 6.8% as the volume improvement and favorable mix was more than offset by higher operating costs and a negative price cost resulting in an EBIT margin of 8.2%.

Turning to slide 8 and looking forward, we are projecting that earnings in the fourth quarter will be in the range of $0.59 to $0.64. The earnings are projected to be lower than the third quarter due to normal seasonality, not having the benefit of the legal settlement and a more normalized effective tax rate of 32.5%. This results in full-year base earnings guidance of $2.46 to $2.51 per share.

Moving from earnings to cash flow on slide 9, see that cash from operations was $158 million, down $19 million from the same period last year. Most all of this can really be explained by the timing of payments versus accruals year-over-year and will normalize out by yearend. In fact the most significant driver was related simply to the difference in the timing of payroll within the quarters accounting for right at $10 million of the year-over-year change.

Capital spending was $46.5 million during the quarter up only slightly from last year. We paid dividends of $32 million during the quarter, or $0.32 per share, which represents right at a 3.5% yield on an annualized basis based on our current stock price. So after dividends we had free cash flow of $79.6 million.

For the full year our free cash flow projection remains unchanged to what we provided in July being around $110 million. In addition, we did repurchase 439,000 shares at a cost of right at $18 million during the quarter as part of our announced plan to repurchase 2 million shares, which we do expect to complete by yearend.

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 net debt to total capital of only 31.2%, which of course will be changing with the completion of the Weidenhammer acquisition planned for later this month. Directly related to the anticipated closing of the acquisition, on October 2 we entered into a new bank facility which includes a commitment for the $250 million, three-year term loan which will be used along with available cash and commercial paper to fund the acquisition. And at the same time we took the opportunity to replace our $350 million revolving credit facility that supports our commercial paper program with a new five-year facility.

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

Thanks, Barry. Let me make a few comments on the quarter, talk more about the Weidenhammer acquisition and finally review what we see going into the fourth quarter.

First let me start with the Weidenhammer acquisition. We received approval from the German regulators on September 30 and expect to close on the acquisition by November 1. You've heard me say this before, Weidenhammer is truly a premium asset with well invested and highly automated operations, solid customer relationships and a talented workforce to meet the future needs of our combined customers.

In addition, we are anxious to begin exploring opportunities to leverage Weidenhammer's technical expertise in non-round paper cans, recessed membrane closures, paper bottom cans and finally thin-walled injection molded containers that utilize in-mold labeling for barrier capabilities.

At our December Analyst Meeting in New York we will further detail our expectations for this acquisition and the benefits these assets bring as we grow the composite can into the emerging markets of Southeast Asia, China, Eastern Europe and South America.

Now let me switch gears and talk about Sonoco's performance in the third quarter. As Barry mentioned, we did benefit from a legal settlement and a lower effective tax rate, which when combined with our operating performance produced record results for the quarter.

Also for the first time in 12 years, operating margins in our paper and industrial converting segment exceeded 10% and we're 9.2% without the European legal settlement included. North America tube and core volumes grew 6% on a tons-per-day basis. This improvement is primarily due to the recent acquisition of a small tube and core operation in Georgia and solid year-over-year improvement in our tape and specialty segment which more than offset declines in the paper industry.

Tons per day sold in Europe in the third quarter were essentially flat; however, our served markets in legacy Western Europe and frontier Eastern Europe were up slightly due to share gain which was offset by slower film demand primarily in Italy. Our paper operations had mixed results in the quarter as we produced more tons year-over-year but we struggled with a maintenance outage at our corrugated operation in Hartsville, which resulted in about 6,000 fewer tons being sold and higher operating costs. As a result of this outage productivity in our paper segment was well below historical averages.

We are running better entering the fourth quarter. We've hired the Sinclair Group to help us improve the rollout of our SPS manufacturing process to drive productivity at our Hartsville Mill Complex.

In consumer packaging, operating margins for the quarter rebounded from the second quarter to the 10%-plus range as volume gains in flexibles, blow molding and closures somewhat offset modest declines in composite cans. We are very encouraged by the significant year-over-year improvements in our plastics operations. Operating margins in our combined plastics businesses improved to 300 basis points year-over-year.

We had strong volume and productivity gains in blow molding, good productivity in thermoforming and continued solid overall results in injection molding. As Barry mentioned, this improvement was unfortunately offset by $3 million in negative productivity from our flexible operations where we continue to deal with a material related issue at one of our facilities. The issue has required us to reallocate production to different facilities in order to meet the needs of our customers and this has led to higher labor, operating and freight costs.

As a result productivity in the consumer packaging segment was negative for the first time in years. We are addressing this issue head on and we are seeking restitution for our excess costs.

In display and packaging volume growth and productivity improvements were more than offset by a negative mix of business. Finally in protective solutions, we continue to see sequential improvement in volume and margins but operating profits were slightly behind last year as productivity lagged in the quarter and we continue to work through a negative price cost relationship.

We do expect molded resin prices to fall in the fourth quarter. And when combined with recent market price increases we should continue to see improvement relative to price cost.

Looking forward, we remain optimistic the US economy will continue its positive trend through the fourth quarter but we really don't expect any notable improvement in consumer demand for packaged food. We are also cautious about the near-term state of the economy in Europe and in some emerging markets.

The fourth quarter is always a tough quarter to project due to seasonal order patterns before and after the holidays. We've updated our full-year guidance to $2.46 to $2.51 a share and as I have said for the past several quarters, I remain committed to $2.51.

We are primarily focused on three areas for the coming quarter. The first is growth. This includes closing the Weidenhammer acquisition and moving quickly on integrating our European operations.

In addition, we are encouraged by the traction we are experiencing utilizing our proprietary i6 Process. We are featuring these efforts at PACK EXPO in a few weeks and we will talk more about some of our significant successes in December.

Next we must improve productivity, particularly in our paper mills and flexible packaging operations. As mentioned earlier, we have experts helping us to improve our paper operations and in flexibles we continue to work with our suppliers to resolve the material issue. Both areas are seeing progress but we must further accelerate improvement.

And finally we are focused on analyzing our organizational structure to better manage fixed cost. To assist us in this effort we have engaged a leading global business consultant to help us improve our organizational effectiveness and to optimize our cost structure.

We've completed a three-week rapid assessment to define and quantify the opportunities and we are now in the process of vetting the identified actions. Our goal is to begin to implement changes by yearend and we will be in a position to discuss this in greater detail at our Analyst Meeting in New York.

Operator, we will now turn it over for questions.

Thank you. (Operator Instructions) George Staphos, Bank of America.

Hi, everyone. Good morning. Thanks for taking my call and thanks for all the details.

I guess first question I had was on overall the lack of incremental margin that we saw this quarter and you talked through some of the details, Jack and Barry. There has been -- and correct me if you disagree the premise -- there's been this trend over the last couple of years where one, we have operational problems that will pop up either in the paper mills or in flexibles. You have this mix issue.

What would you relay to us that would make us confident on the operational front, Sonoco will continue to be what it has historically been, which is a real good board manufacturer? Specifically what do you expect the consultants to tell you about making paper better that you don't know already?

And on the mix side in consumer I wasn't quite sure exactly what had gone negative for you in the mix in this quarter. Then a couple of follow-ons and I will turn it over.

Okay, George, let me address the first part relative to productivity. I can't disagree. Obviously over the last couple of years we've been pretty inconsistent.

I think last third quarter was pretty strong but that's really the last one we have had. I do want to point out that when we talk about productivity to the community we are actually talking about manufacturing and capital productivity.

And we are not talking about material productivity. We are not talking about fixed cost productivity, which we also track and those have been doing reasonably well.

But specifically to manufacturing productivity, what we expect the Sinclair Group to bring us is really a way to accelerate the deployment of SPS through the mill. I will also tell you that the biggest issue relative to productivity on a consistent basis has been this Hartsville Mill Complex. It is by far our largest complex.

And the issues have kind of been isolated here on the industrial side. And they have a method to really help us speed up the deployment of SPS and stitch together all the pieces so that we can get results faster.

As they look at the SPS process and how we make paper, they understand like you that they really can't help us do that but they can help us deploy a process that does drive productivity and does drive it forward. Specifically to the issue in flexibles right now, it is a unique issue confined to one plant and one specific material. And we have an idea about the root cause and we understand it but we are driving to fix it and as I mentioned, we are going to drive for restitution.

Okay. On the mix side -- what is happening in consumer, you said there were some issues within and without the segment. And then I guess my follow-on would be, could you give us a bit more color in aggregate and then within the business in terms of how tube core and paper volumes are trending, I think you said flat but then there were some acquisitions in there. Thank you.

Certainly from a mix perspective in consumer there were several things going on. As Jack mentioned, composite can volume in North America was down a little less than 2% or so and even within composite can there was a little change in mix within that business.

And of course that was partially offset by some higher sales of metal ends, which just happened to carry a lower contribution. So those were two of the factors affecting that as well as some negative mix just between customers in blow molded plastic. So it's that sort of noise that impacts us in any particular quarter as it relates to mix.

And as it relates to the volume in the individual categories, as Jack mentioned, volume was up slightly in tubes and cores North America driven primarily by the acquisition. Because excluding that we actually saw total volume in the paper related business being down almost 3% for the quarter. Again that was then partially offset by some improved volume in tape and specialty and some of the other categories.

You don't have those numbers, Barry, for tape specialties and some of the others?

Yes, tape and specialty was up 4.4% year-over-year, film largely unchanged for the category as a whole and textiles down just very slightly.

Thank you. I will turn it over.

Ghansham Panjabi, Robert W. Baird.

Jack, can you just first off characterize what you're seeing on the macro side across the major regions that you have exposure to? Did any month look materially different from a volume perspective?

No. I think it's been kind of a continuation of what we have seen. We see the US getting -- the economy actually getting a little bit stronger and then that underlying tube and core demand firming a little bit.

As Barry said we were up in tape and specialty. That is of course being offset by paper.

Europe, a little weaker in general, that's certainly what we see. Asia, Asia is up a solid 10% on a year-over-year basis so that's solid. Then the continued weakness in Brazil that we don't expect to kind of improve anytime soon until we are probably through the elections.

And then just on Europe, just for clarification, how did that progress throughout the quarter?

Normal. It was obviously we start in the summer month when everybody is on holiday and it strengthens into the end of the quarter.

Okay. And then just on Weidenhammer in terms of the earnings accretion that you laid out when you announced the acquisition for 2015, I think it was $0.09 to $0.14 initially, how does that change post the devaluation of the currency recently? And I guess I'm asking because we can sort of calculate the translation exposure but what about are there any cross currency transaction exposures you have in that business?

Not a substantial amount. Of course as we get this closed we will have a better idea as we go through. We don't expect much impact from the acquisition for the balance of this year but by the time we get to New York we will have a better feel for what the actual impact will be in 2015.

Okay, thanks.

Adam Josephson, KeyBanc.

Thanks, good morning everyone. Just on composite cans in North America, can one of you discuss what led to the 2% or so volume decline in that business and share your expectations for future quarters in that business in terms of volume?

Well, I think we can go through segment by segment and I can give you a quick look at it. PIF and coffee each were up substantially, as much as 9%. Snacks were down 6%.

The real categories down is frozen concentrate, that was down 12%. And I think one of the issues that we are having in frozen concentrate is that they did not have a good crop this year due to some winter weather. And what that translates into is less orange juice and normally that goes into ready to drink and not into concentrate.

So a bumper crop would mean more concentrate. A weak crop would mean less. I think we are certainly experiencing that.

That is down about 4%. And miscellaneous food down 12%. So some up, but some down.

Also, we are finally seeing some increase in fiber caulk, which is -- I should say caulk, we have been plastic caulk is up, but fiber caulk has been pretty weak. But we are seeing some pickup in that as well.

Thanks, Jack. Just a couple others.

One is in terms of your full-year guidance now, I estimate it came down by about $0.03 at the midpoint using the previous tax rate. What led to your lower pretax income expectations for the year? Is it simply the production problems in paper and flexible that you talked about earlier, or is there something else going on?

Well no, I certainly expect our production problems to begin to mitigate certainly in paper, and also in flexibles we can see is beginning to happen. It is volume related, Adam.

We have expected all year about a 2% volume improvement and we simply haven't seen it. I think that I don't expect to see it now since we are kind of into the holiday season.

If we were going to see it would've been here. So we are just not projecting that 2% increase for it.

Got it. Thanks, Jack.

And then just, Barry, I know you are not giving 2015 guidance at this juncture, but just in broad terms you've got the accretion of $0.09 to $0.14 from Weidenhammer, is there anything else we ought to be aware of at this point in terms of pension expense, the tax rate, etc., just in light of what has happened to the 10 year and in light of the fact that your tax rate is coming in a bit lower than expected this year?

Certainly in terms of the pension we will be updating our estimate of what pension expense is projected to be for next year and providing that at the meeting in December. Of course that won't even then be finalized until rates are established and asset values finalize at the end of December.

But it is fair to say certainly at this point with the rates falling that we would see some impact on both pension expense and the funded status as a result of the lower rates at this point. We provide in our 10-K guidance on that where each 25 basis point change and rates impacts expense by right at $3 million for our US plans and impacts the funded status by right at $40 million.

So that is just kind of a ballpark estimate of the impact on those two elements. We are also expecting to have to adopt some new actuarial tables that will also impact both expense and the funded status of the plan.

Right now rough projections indicate that that mortality impact would be about $7 million on expense and about $60 million on the liability. Again all very rough numbers just providing some frame of reference around what we'll be looking at as we move through the balance of this quarter.

Thanks a lot, Barry. Thanks, Jack.

Philip Ng, Jefferies.

Good morning, guys. With oil falling pretty sharply can you give us a sense of how that impacts your business? I know it's going to be different for each segment.

And then on your resin exposure, polyethylene is up a bit in September but I would imagine that is going to correct. Just want to get your view on that front and how are you set up contractually.

Well, I think oil is going to have a positive impact on the consumer side of our business. I continue to believe that new jobs coming into the market has been consistent. Wages are actually rising in some parts of the country, that is a positive.

And now one of the major expenses for all consumers, oil -- gasoline here in South Carolina is under $3 a gallon, so that has to be positive on consumer and consumer spending. So I envision that, and on industry as well, on our freight costs, etc. So I think that's all going to be positive.

As far as specific oil derivatives, I do think that in the protective business we do expect EPS prices to drift down maybe even EPP prices during the quarter. So that will be a positive when you net that against the price increases that we've been able to get in the market. So we should have a better price cost situation in the fourth quarter.

And as far as our plastics and film business, most of that is on a quarterly price change mechanism that is driven by the CAMI, or whatever that thing is called. And that moves quarterly, so whatever it reset at, it has already reset if it falls during the quarter we may get some gain from that.

Got you. That's very helpful. And then your margins in industrial were actually quite strong.

I know you did get like the one-time benefit from Leigh going to OCC prices, they pulled back a bit. I just want to get your thoughts on how are you thinking about your margin profile for industrial in Q4 and just higher level what is your view on price costs overall?

Certainly as I said, if you take that legal settlement out it was around $9.2 million. We also have some positive pension costs in there that is aiding that margin.

I do think, however, we have been a good job with price costs. We've managed to push through some open-market price increases and we are keeping those. Of course the contractual agreements push through, but I think we are doing a pretty good job there.

I think inside the tube and core business they are doing an excellent job virtually in every facet of that business in North America. Great job in productivity, price cost management, etc. I do think we are going to be able to hold onto some of these margins even as we go forward into 2015 because of the way they are managing that business.

Okay.

If I could add one thing, it certainly is fair to say we wouldn't generally expect them to be as strong in the fourth quarter just due to the impact of December on the margin.

Got you. And then just one last question. I know you sounded a bit more cautious on Europe overall, which isn't surprising.

Can you give us a sense how that impacts your various businesses, especially Weidenhammer, which is obviously big in Europe? Does that business tend to be a little more insulated, or it's pretty broad-based that you are cautious on?

Well, to tell you the truth I'm not exactly sure I know but I would assume that it would impact them somewhat if consumer spending falls off given that to a large degree they're packaging similar type products to what we package in the states. So I would estimate it would be similar.

Okay. All right, thanks guys.

Chip Dillon, Vertical Research Partners.

Yes, good morning. First question is, could you just update us on your thoughts about the buyback.

It looks like you bought back a little over 1 million shares so far this year and do you think you're going to get to the 2 million by yearend? And how do you think about buybacks as we look into next year and of course recognizing that you are incurring a little bit more debt here with the German acquisition?

Yes. Chip, normally the fourth quarter is usually a pretty good cash flow quarter for us. We have kind of laid out a strategy to buy them back and certainly our intent to get to that 2 million share count. So a normal fourth quarter from a cash flow standpoint we should be able to achieve that number barring any unusual circumstance.

As far as next year we have committed to use free cash flow to pay down the term loan that we -- pay down the monies that we borrowed for Weidenhammer. So next year I don't see us doing any share buyback but coming out of 2015 we are back into the metrics that we want to be into and we will have optionality as to what to do with the free cash flow.

Okay. And then speaking about Weidenhammer and, I think it is in Malaysia, I might have the country wrong where you are adding a new plant for composite cans, are there going to be any changes to either the way you will scope that project, or may be the output, based on some of the new technologies you expect to attain through the Weidenhammer deal?

Not specifically in the Malaysia plant. But I will tell you that their technology is pretty strong, and what we're going to do is combine our capabilities, our material science and their manufacturing technology, so that the plants we do install going forward are as good as they can possibly be.

So there may be some. We're down the line a little bit in the new plant we opened up. The one that we will start to open up next year, maybe. Maybe some of that will flow into they're.

We're certainly going to be putting in potentially a new line in a new plant in China that will have some of the advantages of the Weidenhammer technology as well.

Okay. One last quick one. When you look at the industrial papers business, if we, let's say, see a change in uncoated recycled board prices, is that something that benefits you? Or do you somehow have to pass along those benefits to your customers?

Well, I would tell you, Chip, on the uncoated recycle board side some of our external customers are under contract and some are not. So those that are under contract, they get the pass-through of the cost changes; those that are not don't.

Got you. Okay. Thank you very much.

George Livadas, BMO Capital Markets.

Good morning. Thanks for taking my questions. I guess just on the consumer side your margins were pretty strong despite some of the continued production issues in flexibles. Wondering if you could provide a little color on I guess what is driving those margins and if you have any sense for when those operational issues might be resolved.

Again, outside of that one flexible issue, I think the business is ran pretty well given the situations they were facing. I'd also tell you our plastics business continues to perform well and is improving and so that's a positive.

Okay. And then no sense I guess at this point for when those operational issues might be resolved?

In flexibles I will tell you it is a very strong focus area. It is a work in process. As I mentioned earlier we believe we understand what the situation is and we are trying desperately to get back to ground zero including quantifying other suppliers to help us to do just that.

Okay, great. And I guess just one other follow-up question on Bill's question before regarding some of the recent volatility and energy prices. Wondering if you might expect any impact down the road within your reels business in terms of demand from falling oil prices?

Not right off the bat. I will tell you that some of the decline we have seen in the reel business this year has been in the steel reel market and it has been in the steel reel market for the shale gas business. So we've already experienced this year some of that impact.

Okay, great. Thank you very much.

Chris Manuel, Wells Fargo.

Good morning, gentlemen. A couple of questions for you.

First, if we could start on pricing. I think you had several price initiatives through the quarter. I think there were some in protective and I believe there may have been some in industrial converted products as well.

Could you maybe give us an update as to where you are in that process? Do you have those in as you sit here today? Is there more yet to go or kind of -- sort of a tally of where you are?

On the industrial side no, we wage very solid price costs, of course it presets in the fourth quarter but the noncontract items are still have the same prices they had going in from the third quarter. So it's not on industrial.

We did have some -- the protective issue was negative price cost again. I think it improved $200,000 or $300,000 from the third quarter and prices continue to go in and that is going to be combined with a falling resin price.

I think one thing that happened in the third quarter is that prices actually continued to rise for resin so that we didn't make up as much as we had hoped. But what we see now is that resin prices will fall into the third quarter -- fourth quarter -- and we should be able to hold our pricing.

Okay. For some reason I was thinking I saw announcements of like a 5%, 6% increase there but I may be mistaken.

Okay, so if I could switch gears for a second and talk about what you are seeing most recently as we look at some of the industrial production trends of what you used to call, or maybe still call Frontier Europe, it seems as though some of those regions are off deep in the double digits, 10%, 20%-plus. Have you seen any similar type falloffs in your businesses in those regions?

Well, no. I will tell you we've not seen that type of falloff. But certainly those regions are not growing at the rate they were maybe a year ago at this time when we were seeing solid double-digit numbers.

But they are still up. They are up in the mid-single-digit range. But not like a year ago they were up 10% or so, maybe even a little bit more occasionally.

And I am absolutely certain that we are seeing some impact of the situation in the Ukraine impacting textile shipments into that area as well as other areas of Eastern Europe.

Okay. That's helpful. Thank you.

And then one last question I had was -- actually two last questions, but the first is, the 360 Ideation process you are now 18-plus months or so working through that. Any wins that you can talk about or opportunities that you have unearthed?

If you could give us an update on that? Give you confidence that maybe heading into 2015 and beyond that your growth rates can get back to -- if GDP is a couple percent that we could still have something close to that or better within your growth rate?

Well, first of all Chris, it's only about 12 months old since we actually kind of pieced the whole thing together so it's only been effective for about 12 months. And yes, there are some significant opportunities that are manifesting themselves and expect to be able to talk about that more in New York.

I can say that we recently had a Board meeting and one of the customers that is involved in this process actually came to the Board meeting to talk to the Board. So I think that's a very strong endorsement of the process. But we will have more to say in New York.

Okay, that's helpful. Thank you, gentlemen.

Hey Chris, one other thing is that if you ask about price increases we did put price increases into the protective packaging market and we are getting some traction with that. And I was saying the combination of that with falling resin prices should have a positive impact in fourth quarter.

Okay, and then just maybe as a kind of cleanup along those lines, you talked about -- what are your anticipations for resin? We have seen some sizable nominations in polypropylene working their way through the system.

I want to say $0.10, $0.11 in that range and some polyethylene as well. Have you seen those maybe received, that you are now anticipating that they fall, or help us maybe put the two --

You know, projecting resin prices is even more difficult then projecting OCC prices. And I am no good at OCC prices, but logically --

If you have a really pretty crystal ball?

But logically with increasing oil production and increasing capacity to produce resin coming on in the Midwest, etc., I would expect that resin pricing should be somewhat stable to down over a longer period of time. That is about as good as I am at projecting resin. I do think it should trend down.

Okay. Thank you very much.

Al Kabili, Macquarie.

Hi, thanks. Good morning.

Jack, I just wanted to clarify the incremental caution in Europe in some of the emerging markets, which seems prudent. And I guess the clarification I would like is is it something that you are currently seeing right now that gives you some of that extra caution, or is more just from some of the macro data we are seeing, you haven't seen it yet, but given the macro data we are seeing that's what's driving it?

And if you have any color on -- I know it's very early -- but if there is any color on October trends that you could give us, that would be helpful too.

For the most part it is more macro trend oriented and I really don't have a window into October. I can tell you I have heard of nothing extraordinarily bad or extraordinarily good. So I would assume it is trending as it normally would.

Okay. All right, that's helpful. I appreciate that.

And on the raw materials production issues in flexible, any idea as far as a timeframe of when you think you will resolve that? I think it was a $3 million hit in the third quarter. Is it that order of magnitude you are assuming in the fourth quarter and any update as when you think you might get that resolved?

Well certainly actually there was a hit in the second quarter and the third quarter and -- like I said, we do understand what is causing it. We are making some strides.

I expect it to be down as far as the incremental hit to the P&L should fall noticeably into the fourth quarter and then by the time we expect that to continue to go down as we open up the first of the year. We are working diligently on it and understanding it was point one and we are there. So now getting this fix in is the critical part.

Okay, great. All right, thank you for that.

And then a follow-on to that is I think you indicated you weren't expecting too much improvement in packaged food per se. But given the momentum you are seeing on the flexibles side, do you think you can grow your volume still year-on-year with the momentum you are seeing, or given the slightest packaged food end markets you are thinking it is more stable? I just wanted to get a clarification on that one as well.

I think again as we look forward and project into the fourth quarter, we are projecting volumes to be up on a year-over-year basis probably in that 1% range, something along that line. A little more conservative than we were when we started the year.

Okay. All right. Then final question on the protective packaging, in addition to sort of the price cost I think there is some start-up cost as well. And I don't know if that is something you can help us with magnitude of and when the start-up cost from the new facilities tail off, which should also help the earnings of the segment down the road?

Those start-up costs are there and they are real and they are in Mexico and now of course Kentucky we are beginning to start that process as well. On a quarterly basis somewhat less than $1 million, Al, is what we would probably experience but we need to be getting better in Mexico.

That has been online now long enough but we will experience some from Kentucky. But that shouldn't -- we are doing that a bit of a different way so I expect that to improve a little bit faster than we saw in Mexico.

Okay. All right, I appreciate it and good luck the remainder of the year. Thanks a lot, Jack.

Alex Ovshey, Goldman Sachs.

Thank you. Good morning, everyone. A couple of questions for you guys.

One is just on the EBIT bridge and the other category, which is a $35 million drag so far year to date. Can you expand a little bit on what would fall under that other category and has there been anything unusual this year that would make that category a bigger drag than what it would typically be?

Generally the other category is inflation on everything other than materials. And we would expect that to normally run between $10 million and $12 million a quarter. So really there hasn't been anything of an unusual nature of any significance.

The most notable one that would actually be what I mentioned earlier about the fact that we did have the favorable legal settlement in this quarter and is one of the reasons that it's only $5 million negative for the third quarter this year.

Got it, Barry. And I think I heard you mention that there was some drag to earnings from the containerboard mill in Hartsville, was that related to lower price for containerboard given the reports around some discounting for recycled container board? What was the main driver, if I heard you correctly, that there was a drag from the containerboard mill to earnings?

No, that was correct. The main drag was that we had a major rebuild of a winder for that particular operation and it took us a little bit longer to bring that back up to speed. We struggled a little bit bringing the mill back up as fast as we wanted and that resulted in those 6,000 fewer tons.

Okay. Got you, Jack, so it was operational.

And just one last one for me, kind of looking at the overall volume environment for you guys, also the packaged food pretty flat for a little while now especially on the plastic side, the competitive landscape is pretty fragmented. Have we seen any pickup in churn as a result of sort of being flat volumes and -- well, I would characterize it somewhat fragmented supply base -- and then is there any meaningful parts of your business that are coming up for renewal where there is some concern around making sure you can keep the business at the right price?

Well Alex, I would tell you that that is probably true across all our businesses, all of the time. Is it any different than normal? Not really.

We are seeing, like I said we expect about 1% up on the consumer side into the fourth quarter. But nothing any greater than normal activity relative to churn.

Okay. That's what I was looking for. Thank you, Jack.

Steve Chercover, DA Davidson.

Good morning, everyone. I just had one quick question.

You mentioned the Fox River litigation as being a charge in the third quarter. As a understand it the judge vacated a ruling on Fox River also during the quarter. So I'm just wondering did that reopen a liability for you guys?

No. I don't think that there was a charge. We did enter into a potential settlement of that with the EPA and the judge's ruling simply kind of put that on hold for a little bit until a further ruling can be issued.

And the judge asked really the fundamental issue is he asked for clarity about how the ruling judge got to his decision point. So it has just been, I guess, sent to a lower court for clarification and then we will see how it phases out. How it comes (multiple speakers)

So it is unlikely to increase the magnitude of your potential liability?

That is correct.

Very good. Thank you.

Scott Gaffner, Barclays.

Good morning. Just want to follow-up a little bit on the resin commentary. Jack, you did mention obviously the margin pickup in 4Q if resin prices started to come down but I wanted to look at it a little bit longer term.

What do you normally see in a declining resin environment? How quickly do you have to give those reduced costs back to your customers in lower prices? What have you seen over time?

Well, again, on our traditional plastics business consumer and flexibles -- excuse me not consumer, plastics and flexibles -- those are quarterly adjustments so we have about a quarter window. One of the issues in protective solutions is that they don't have that many contracts that have passthrough mechanism.

It's more of open market announcement. So inside that industry it will simply be adjustments to market price versus contract adjustments.

Okay. And do you know if that business historically has been able to maintain pricing even in a down-cost environment?

Probably it would have a tendency to expand margin in a down-cost environment because of the way the industry works. Now I think I've said this publicly, we are trying hard to be the leader in that industry and build the discipline around recovering costs as they go up. And we tend to be getting more and more support in that industry to do that.

But that just takes time to teach everyone that we think it's imperative that you recover the cost that you experience -- the inflationary costs that you get.

Okay. And then in display and packaging, anything that you are seeing around holiday promotional trends? My understanding is a lot of the display and packaging products for like the end caps comes through that business. Anything you are seeing there so far that gives you a read on North American holiday promotional trends, or anywhere else in the world?

Nothing of that significance other than we are probably being pushed closer to the actual promotional time than maybe we have in the past as opposed to building in September, October we may be sliding into October, November to build out the displays.

Okay. And which of your businesses would you normally look to as leading indicators? You have talked a lot about macro and as far as your leading guidance but any businesses that we really should be looking at as the primary leading indicators for you?

I'm not really sure what you are asking. Leading indicators for?

I am asking if any of your businesses, do you look at anyone of your business segments as a leading indicator of where the rest of your business is going?

Well certainly on the consumer side we tend to look at display and packaging and the volume that is flowing through there to kind of tell us where are the CPGs going with promotions and what that would eventually mean to the products that we sell. That's one where we would look. And tubes and cores historically continue to be one of our leading indicators on the industrial side of our business.

Okay. Just last question then on display and packaging, is there anything -- have the trends changed at all with CPG volumes within display and packaging?

We saw some good activity early in the year. As I said I think some of it is being pushed right now. We'll have to see how it manifests itself over the next couple of months but nothing of significance that would tell me that we are going to see 2% to 3% consumer growth going forward.

Okay. Thank you.

Adam Josephson, KeyBanc.

Thanks for taking my follow-up. Jack, just one longer-term issue.

Obviously the volume in US packaged food has been consistently weaker than you and many others expected over the past few years, really since the recession. Does this protracted weakness influence how you are thinking about your businesses, particularly flexible, blow mold, thermoforming in any way? And what if anything can you do to adjust for what seems to be a consistently lower than expected volume in these businesses?

Well, certainly it does impact how we think about the business and it turns our attention to the international markets. Obviously we are expanding and growing the composite can fairly rapidly and that is going to be our footprint, our anchor consumer business in many of these markets.

As I have said before we are actively seeking an opportunity to expand our flexibles business outside the US and looking for that right now as we speak. So certainly we see the need to expand our consumer business and our consumer franchise on a global basis in a more expeditious rate.

But in terms of managing the US business, there's nothing appreciably different you can do short term, or even medium term to adjust the footprint or what have you?

Well, I think that as I mentioned we are taking a look at optimizing what we call the fixed cost structure in the Company and how we sell and go to market, so we are doing that right now. But I also point out that our flexible business is growing. We've had some solid volume growth in that business over the last couple of years and expect it to continue to grow, so promoting and building our flexible capability in North America is also very high on our radar screen.

Great. Jack, thanks a lot. Best of luck in the quarter.

George Staphos, Bank of America.

Thanks, everyone. A couple of quick cleanups. One smaller, one bigger picture.

Just in terms of your guidance for the fourth quarter, can you relate to us what kind of price cost you are looking at within industrial and specifically tube and core? If you had some positives in the third quarter, as it sounds like, in that business might the recent changes in OCC mean some at least transitory margin compression in 4Q?

Yes. Obviously prices reset for contracts but did not reset for noncontract volume, which is about half of what we do. And if OCC trends down during the quarter we will tend to pick some of that up throughout the quarter.

So I mean, Jack, would $1 million be a reasonable price cost negative, $5 million -- is there any way to ballpark it, recognizing that it all depends on what happens with your favorite commodity?

On a year-over-year -- you are talking about on a quarter-over-quarter change basis, obviously that is real hard to project but between $1 million and $2 million, maybe.

Fair enough. That's good enough for government, as we say here, Jack.

I guess the last question I had bigger picture and taking a different swing if you will on what Adam was getting at, given how difficult it has been for your customers to move the ball on volume with promotion, with rebranding, with innovation, does it make you rethink perhaps the i6, 360 strategy? And if not how are you going to measure the return on investment off of that program in an environment again where it is going to be seemingly more difficult to get any of your customers to do something new and for that matter be more effective in generating volume growth? Thanks, guys and good luck in the quarter.

Thank you, George. Well actually, I think i6 and our customers in this environment want to do more things differently. They want to use packaging to help promote their product and distinguish it on the shelf, so I think that actually plays to the i6 process.

I think that we hear us saying is we believe in i6. We believe it will generate the opportunities. We are seeing it happen.

We are seeing ourselves being brought to the table early in processes and evaluating options. For us the biggest thing is what are the best options, what are customers seen and what do they like when they see it?

What are the types of formats that they prefer? And so we want to make sure that we are in a position to be able to supply those formats in a very cost-effective position relative to the others.

So that's how we are evaluating it. But i6 is definitely generating opportunities across the portfolio. And I think that this environment will actually cause more opportunity than a fast growth environment.

Okay. Thank you very much.

Thank you. I would now like to turn the call over to Roger Schrum for closing remarks.

Thank you very much. Just a couple of comments before we close.

We do invite the financial community to join us at PACK EXPO in Chicago from November 2 through the 5th. We will have a number of events and some news coming out throughout the week. So come by at any time.

You can join us at our booth, which is booth number 2153 in the South Hall in Chicago's McCormick Place.

In addition we invite the financial community to attend our Annual Analyst Meeting on Friday, December 5. We've changed the venue this year as it will be held in the Villard Ballroom at The New York Palace, which is located at 455 Madison Ave.

Today we are sending out electronic invitations and we ask that you RSVP whether you can join us in person by November 14. As usual breakfast will be served around 7:30 AM and presentations will begin just before 8:00. And we should conclude there about around 9:30 AM.

The meeting will be carried live via teleconference and webcast and as always we will provide some samples of our more well-known products. Again thank you for joining us for the call today and if you have any further questions please don't hesitate to give me a call directly. Thanks again.

Thank you for your participation in today's conference. This concludes the presentation.

You may now disconnect. Good day.