Sonoco Products Co (SON) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Quarter 1 2015 Sonoco earnings conference call.

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

At this time, all participants are in a listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions).

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

I would like to turn the call over to Mr. Roger Schrum, Vice President of Investor Relations.

Please proceed.

Thank you Sean.

Good morning, everyone, and welcome to Sonoco's first-quarter 2015 earnings investor call.

This call is being conducted on April 16, 2015.

Joining me today are Jack Sanders, President and Chief Executive Officer, and Barry Saunders, 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 Sonoco.com.

In addition, we will refer to a presentation that is also posted on the 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 in today's news release and on the Company's website.

With that, now I'll turn it over to Barry.

Thank you Roger.

I will begin on Slide 3, where you see that this morning we reported 2015 first-quarter earnings per share on a GAAP basis of $0.86 and base earnings of $0.56, in the range of our previous guidance of $0.56 to $0.61, and compares favorably to last year's base EPS of $0.52.

Before reviewing the base P&L for the quarter, I will mention, as Roger just said, again, that a reconciliation of the GAAP to base earnings is in today's press release and on the website, but it is also summarized on this slide.

And let me spend a bit more time than usual talking about these since they were significant.

First of all, we are most pleased to have concluded what we believe was the most significant portion of the Fox River environmental litigation as the time period for the appeal of the quota proof settlement we reached last year expired.

As a result, we reversed $32.5 million of the reserve which, after-tax, resulted in a $0.19 per share favorable impact on GAAP earnings.

We also benefited from a gain on the sale of two metal ends processing plants located in Canton, Ohio.

These two locations were not strategic to us since they produced metal ends for trade sales and not part of our other plants which we retain to make ends for our own internal consumption.

This transaction resulted in a pretax book gain as well as a book tax gain on the disposition, having a benefit of $0.16 per share on GAAP earnings.

Offsetting these gains were restructuring charges of $0.04 per share, most notably related to the first phase of fixed cost reductions stemming from our overall organizational effectiveness study.

As previously communicated, we are targeting about $25 million in reductions, which will be phased in throughout 2015 and 2016.

And finally, we had acquisition-related expenses which cost us right at $0.01 per share, including some costs associated with the acquisition of a majority interest in a flexible packaging company in Brazil which closed subsequent to quarter end.

So now turning to Slide 4, you find our base P&L for the quarter where you see sales were $1.203 billion, up 1.5% over the prior year, and you will see all of the drivers of the change on the sales bridge in just a moment.

Gross profit was $223.5 million, which was 5.2% above last year, with our gross profit percent at 18.6%, well ahead of last year's 17.9%.

Selling and administrative and other items were $128 million, only $4.3 million higher than last year.

The impact of selling and administrative expenses related to the Weidenhammer acquisition and normal wage inflation was then partially offset by the translation impact of FX on the line item, fixed cost reductions, and the benefit of some Company-owned life insurance proceeds, thus resulting in EBIT of $95.4 million, 7.7% above last year.

And again, you will see the impact of the various drivers on the EBIT bridge in just a moment.

Below EBIT, net interest up $13.2 million was higher than last year due to the Weidenhammer acquisition which, on an incremental basis, cost us about $800,000 in interest for the quarter.

Taxes on base earnings were $26.2 million, which were higher than last year due to higher pretax earnings, as well as a slightly higher effective tax rate of 31.9%, as expected.

Equity in affiliates when combined with minority interest was only about $970,000, which was down somewhat from the prior year, thus ending up with base earnings of $57.1 million, or $0.56 per share.

I will mention that after interest and taxes, the Weidenhammer acquisition was accretive by just over $0.02 per share and in line with our expectations.

Turning to the sales bridge, on Slide 5, you see volume and mix added $10 million to sales, representing just under a 1% improvement for the Company as a whole.

Volume was up just under 1% in the consumer segment driven by a 5.3% increase in flexibles and a 2.5% increase in our overall plastics business, all then partially offset by lower volume and rigid paper in Closures North America, which was down 3.9%.

Volume in the display and packaging segment was up 3%.

In paper and industrial converted products, overall volume, excluding the impact of a small acquisition, was down 1% driven by a 3% decline in the tube and core volume in US and Canada.

And the protective solutions business had another strong quarter with overall volume up 6% in that segment.

A couple of general points on volume, we did have one fewer accounting day in our first quarter this year, which theoretically could've lowered volume by 1%.

And it is fair to say that the severe winter weather had to have some impact on overall consumer spending.

Moving down to selling prices, you see that they were negative by $7 million for the quarter compared to last year, and that was due most notably to lower OCC prices which had a direct impact on the pricing in the paper and industrial converted products segment, and pricing throughout the quarter was lower in our recycling business across all materials, including OCC.

Acquisitions added $72 million to the top line, driven by the Weidenhammer acquisition in the consumer segment and to a much less extent a small acquisition made early last -- or in the second quarter of last year in the paper and industrial converted products segment.

The negative change in all other of $58 million was essentially all related to translation of sales in foreign currency due to the strengthening of the dollar against most all currencies.

On Slide 6, you see the EBIT bridge is explained, the improvement of $89 million last year to right at $95 million this year.

Although we saw a slight uptick in volume, it really had very little impact on EBIT due to mix, as once again some of the growth was coming from the display and packaging business with lower than Company average margins, and we experienced some negative mix in the consumer segment, most notably in composite cans enclosures North America.

Price cost was very positive for the quarter, favorably impacting earnings by $7 million, the majority of which came from our consumer segment but also some price cost benefit in our protective solutions business as well.

Acquisitions added $5 million to EBIT, primarily from the Weidenhammer acquisition.

Manufacturing productivity was very solid at $10 million, particularly with some good productivity in our industrial businesses.

All other costs were negative by $12 million, essentially due to nonmaterial inflation.

Otherwise, some fixed cost savings were offset by the FX translation of right at $3.5 million negatively impacting EBIT for the quarter due to the strengthening of the dollar.

I'll go ahead and mention that, in terms of bottom-line impact after interest and taxes, the FX impact of translation on that income was just over $0.02 a share, as expected.

And finally, pension costs were higher year-over-year by $4 million.

The results by segment are found on Slide 7 where you see that, for the consumer segment, sales were up almost 12% due most notably to the Weidenhammer acquisition, while EBIT improved a similar percent with the EBIT margin therefore unchanged at a very solid 10.4%.

Display and packaging sales were down 6.6% due to FX translation, which more than offset the volume gain.

Our earnings were down a greater percentage just due to some higher operating costs, resulting in an EBIT margin of 2.7% versus 3.5% last year.

Paper and industrial converted product trade sales were down just over 7% due to the impact of FX rates on translation, lower selling prices, and slightly lower volume, with EBIT down a similar percentage resulting in the margin relatively unchanged at 6.6%.

With improved results in our paper operations, we did have a step up in our reserve for the elimination of intercompany profit of roughly $2 million, and we did have higher pension expense which impacted this segment by right at $2.3 million.

Protective solutions sales were up 5.4%, while EBIT improved 83% due to favorable price cost and strong productivity, resulting in an improvement in the EBIT margin to 8.2% versus 4.7% for the same period last year.

Turning to Slide 8 and looking forward, for the second quarter, we are projecting that base earnings per share will be in the range of $0.64 to $0.69, which reflects some normal seasonal improvement, OCC remaining around $80 per ton, resin pricing remaining relatively flat and an effective tax rate of 32%.

We have not changed our range for the full year where we are targeting to have earnings of $2.60 to $2.70.

It is fair to say that we will have to see some more notable volume improvement to achieve results in the upper end of the range.

Moving from earnings to cash flow on Slide 9, cash from operations was $57.5 million, which was higher than last year due to higher GAAP net income even after discounting the impact and environmental reserve release, which of course had no cash flow impact, and due to lower pension contributions.

Capital spending was $39 million for the quarter, including continued investments in our global composite can expansion efforts.

This was then partially offset by $29 million in proceeds received on the disposition of the two metal end plants in Canton.

So after dividends, we had free cash flow of $15 million versus negative free cash flow of $21 million last year, with the proceeds from the sale of the metal ends plants accounting for much of the year-over-year difference.

For the full year, we are now targeting to deliver about $140 million in free cash flow, down from the $150 million original target, due simply to our free cash flow number is after dividends and as a result of yesterday's announcement that our Board of Directors approved increasing our quarterly dividend by 9% to $0.35 per share, up from the $0.32 per share paid in the previous quarters.

And finally, on Page 10, you find our balance sheet.

And I won't spend a lot of time reviewing it other than to point out that the translation of the impact of exchange rates due to the stronger dollar negatively impacted the overall balance sheet by right at $63 million, and is one of the primary reasons you see decreases in many of the accounts.

And at the bottom, you see that our net debt to total capital improved slightly to 40.9% versus 41.8% at the end of the year.

There are some additional slides in our 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 little color to our first-quarter performance and review what we see entering the second quarter.

First, as Barry mentioned, we are extremely pleased to be able to move beyond nearly a decade of litigation around the Fox River environmental issue.

It's important to understand Sonoco inherited this issue through the acquisition of U.S. Paper Mills in De Pere, Wisconsin, which is located on the Fox River.

Additionally, the mills' involvement was strictly around the recycling of carbonless paper products produced by a third party.

It was important for us to be able to remove much of the potential exposure associated with one of the largest environmental cleanups under the EPA's circular program.

On the acquisition and divestiture front, we are extremely pleased to complete the purchase of a two-thirds interest in Graffo, whose operations are located in southern Brazil.

Graffo adds about $35 million in sales and operates high-quality rotogravure presses as well as sophisticated lamination equipment.

We wanted to partner with Graffo not only to give us a footprint in Brazil, but to allow us to bring our applications capabilities to our multinational companies -- customers.

In addition, to grow in Brazil, yesterday we announced we are investing about $20 million to purchase a new trackless laminator and rotogravure press to service growth in standup pouches and applications enhanced by our easy open and re-close features.

Reflecting on the first quarter, we improved earnings nearly 8%, and that's the low end of our guidance, despite headwinds from severe winter weather, the impact of a stronger dollar, our pension costs and weak volume.

We had another solid performance in our consumer related businesses, particularly from our rigid plastic and flexible businesses, as both had solid volume growth.

I should point out that our consumer packaging segment registered its second consecutive quarterly operating profit record, even before adding accretion from Weidenhammer.

Our efforts to expand composite cans globally continued to gain momentum following the start up of a second line in Kutno, Poland, and we are nearing startup of a new Malaysian plant in Kuala Lumpur.

The plant will ramp up production throughout the rest of the year into early 2016.

Also, we will begin installing a second can plant in southern China during the third quarter, which should be operational by year-end.

Can volume in North America was negatively impacted in the first quarter as some of our customers took downtime and others appeared to have reduced inventories.

Our can division was also negatively impacted by an unfavorable LIFO inventory adjustment of about $1.1 million which reversed later in the year.

Display and packaging had strong volume growth in the US, but that was offset by the closure of a contract packaging facility which we had previously announced.

On the industrial side, volume weaknesses in tubes and cores was mostly offset by positive price cost benefit along with lower fixed cost.

Additionally, we did experience some downtime early in the quarter in a few of our mills due to weather.

However, that is behind us now as we enter the second quarter.

Our recycling operations were significantly impacted by much lower than anticipated fiber resin and metal commodity prices.

In what appears to be an extended period of commodity deflation, we are now focused on supplying our mills with a secure supply of high-quality and low-cost recovered fiber while beginning to scale back operations servicing outside buy and sell activities.

I'm very pleased by the continued improvement we experienced in protective solutions as volume was up in all segments.

Additionally, we had a favorable price cost relationship for the quarter.

While we expect to face continued headwinds over the remainder of the year from higher pension and a stronger US dollar, we continue to believe economic conditions should improve along with consumer confidence and our businesses will be able to respond and benefit accordingly.

As announced last quarter, we've begun implementing a series of actions focused on improving our cost competiveness, optimizing our supply chain, enhancing productivity, and streamlining our corporate and business unit structures.

Entering the second quarter, we anticipate seeing continued improvement in operations due to these ongoing efforts.

In addition, customer orders in all of our businesses appear to be running in line with the volume expectations reflected in our guidance.

We remain focused on achieving the midpoint of our guidance of $2.65 per share and potentially higher if volume is stronger than we currently project.

Finally, we remain firmly committed to our grow and optimize strategy for 2015 and beyond.

This means we are focused on achieving higher than market average growth, improving operating margins, continuing the successful integration of Weidenhammer and now Graffo, maximizing free cash flow, optimizing our portfolio through simplification and improved efficiencies and, finally, targeting capital deployment to grow our business and return cash to shareholders, including the 9.4% increase in dividends which we announced yesterday.

After 90 consecutive years of paying dividends, we believe this remains a true differentiator to our shareholders.

Operator, we will now take your questions.

(Operator Instructions).

George Staphos, Bank of America Merrill Lynch.

Thanks.

Hi everyone.

Good morning.

Thanks for all the details.

I guess the first question, Jack, could you provide us -- maybe you mentioned it, but could you provide us -- what volume expectation is embedded in the low end and high end of your annual guidance?

And then I had a couple of follow-ons.

Well, I think what we came out with in New York was that we had volume growth expected in the 2.2% range.

And that really would take us from the midpoint to the high end, somewhere around that, and operations would be around the rest of it.

So with 1% growth in the first quarter, I think we are now projecting volumes to more or less be back where we expected them to be.

So for the year, I think we will be somewhere a bit less than 2%.

Okay.

Thanks for that.

That will take us to that midpoint number, so that should give you some indication.

That's helpful Jack.

I appreciate it.

And so similarly, should we assume that the primary reason that you wound up at the low end of your guidance range for the quarter was the volume effect?

And in turn, if you had to think about whether it was weather or consumer or, excuse me, customer inventory patterns or something else for that matter, what do you think was the driving force in the less than 1% volume growth in the quarter from where you sat?

I think certainly weather impacted consumer demand probably more that it impacted our operations for the quarter.

We had nothing -- no impact this year like last year on our operations.

So volume was affected certainly on the consumer side I think by weather.

The quarter unfolded very similar to last year.

We had a weak January, it started very slow.

We had a disruptive February, and we had a very strong March, and those volumes have continued now as we go into April at expected levels.

So there's a feel to 2014 here that's very similar, but outside of just saying that volume was impacted, I really can't put my finger on exactly why, other than a slow start to the year in weather.

Jack, that's helpful.

Obviously, even though you have much greater visibility in terms of what your customers are doing and why, certainly you don't have a crystal ball with that regard as well, so that's helpful commentary.

I had two quick ones and I'll turn it over just in terms of housekeeping.

What was the impact of the Company-owned life insurance in the quarter?

Can you go back to what that $2 million increase in the innerco deferred profit reserve was, and were either of these in your guidance going into the quarter?

Thanks.

I'll let Barry answer that one.

First of all, it was less than $2 million of recovery on some Company-owned life insurance in the quarter.

And then, again, that was really largely offset by the increase in the intercompany profit reserves simply due to the improved operational results in our paper operations, which then means we have to eliminate any of the profit recognized on the transfer of paper from that business to a sister division.

And so, again, it's just a kind of a step up in that reserve that we would not expect to therefore change through the balance of the year, again, unless operating results change or inventory levels change.

So it's kind of a one-time step up based on the improved performance in the business.

It's really highlighted to impact the run rate on the segment for the quarter.

Okay, I'll turn it over.

Thank you.

Scott Gaffner, Barclays.

Thanks, good morning.

Just following on some of those volume questions, more specifically within consumer packaging, the volume there I think you said was up 1%.

But it's a little bit bifurcated.

It looks like the plastic packaging businesses did rather well and the rigid containers business not as well in the quarter.

Can you talk about the trends there?

Was that as you expected, to have the plastic packaging businesses perform like that, or is the mix of volume performance a little bit different than you were thinking coming into the year?

Let me make a point of clarification.

Plastics was actually up 2.5%, and was stronger in our blow molding operations in general.

So we were pleased with that outcome.

Flexibles was up 5%.

That's probably around what we would perceive it to be up.

And I would also tell you that bookings in flexibles were strong, which is a solid forward indicator.

The volume weakness was really in the cans business and really in the cans business in North America.

It was kind strong around the world, or at expectation around the world, and it was just weak in North America.

It kind of goes back to something I said in the fourth quarter when can volume was so strong.

It really goes to the products that we are packaging, and how they performed in that particular time, and that's kind of what we saw.

I'd also say that we had some of our major customers that were dealing with their own issues during the quarter, and I know that impacted their sales to their customers and it consequently impacted ours.

Okay.

And if I remember correctly from last year, the weather in the first quarter didn't really impact your sales that much until the second quarter.

Was that the case, and are you concerned at all that the weather issues in 1Q this year will have more of an impact on the second quarter?

No, are you talking in consumer --

In consumer specifically.

No, I don't think we're going to see that repeat this year because the weather was somehow isolated to the Northeast.

I don't know if people in Minnesota would agree with that, but it was more or less isolated to the Northeast this year, so we don't expect that.

And last year, we didn't really get an impact from weather in the first quarter on the consumer side of the business.

Again, the only impact I would put on weather is the impact it had on what customers actually bought.

And I really don't have a feel for what that might be.

Okay.

And then on -- last question, on the input costs for that segment, you mentioned lower resin prices had a positive impact on the segment in the quarter.

Can you quantify that first a little bit, and talk about whether or not you think that can continue maybe in future quarters?

I think we reported that price cost was positive $7 million for the Corporation in total.

About $4 million of that was on the consumer side.

So what would normally happen in our business is that we get the past-due mechanisms that work in a second -- that work from quarter to quarter, so certainly some of that is going to pass through to the customer as we move into the second quarter.

Thanks.

Ghansham Panjabi, Robert W. Baird & Company.

Hi, good morning.

It's actually [Navel Ghalia] sitting in for Ghansham.

Can you talk about overall competitive activity in the consumer market, especially given the lower raw material costs?

Any change in competitive dynamics as a result of that?

Not that we see.

Okay, great.

And it seemed like volumes in industrial were soft during the quarter.

What led to that weakness in particular?

Well, we certainly did see weakness on the industrial side.

It's hard for us to pinpoint it exactly.

I think we saw weakness certainly in paper and some of the other segments as well.

Film was a segment where we did see weakness, and that's an interesting situation with film.

We've always seen the situations where film producers will wait to buy resin and wait to produce when they think it's on the bottom, so we think there was some selling out of inventory on the film side so that they could buy resin at a lower price and then start producing again.

But that's anecdotal.

I wouldn't tell you that's an absolute.

That's what our experience has been.

But just a little bit weaker start to the year on the industrial side maybe impacted by some exports.

But we certainly saw, as I said earlier, the rebound occurred in March, back to expectations and continues now as we get into April.

So we think it's back to our expected level.

Okay.

Thanks for the color.

Just one last one, on the flipside, protective solutions was particularly strong during the quarter.

Was there any one-ons driving that or is that just pure demand?

Not really.

That business continued to improve throughout the year.

They had a very slow start in 2014, got better second quarter and third quarter.

The fourth quarter was pretty strong.

And now their volume is solid and their plants are up and running at expectation, and they are producing the results that we expected them to produce.

They too start a little bit slow but finished very strong in March, but I think that business is ready to roll in 2015.

Sounds good.

Thank you so much.

Chip Dillon, Vertical Research Partners.

Good morning.

I had a question.

I know, on the slides, I just wasn't sure of something.

You mentioned on like Slide 5 that, on the sales bridge, that it looks like acquisitions and divestitures combined were $72 million.

And when I look at the text, it looks like somewhere here it says Weidenhammer was responsible for $67 million.

And so I know -- I guess I just want to make sure I understand the moving pieces that maybe there were other acquisitions, small things, and I wondered what the impact of the divestiture of the two plants were as well.

We did have an impact in the paper and industrial converted products segment related to that small acquisition made in Georgia I think about last May that added roughly $5 million to sales.

So that really reconciles between the Weidenhammer earnings and -- the total Weidenhammer sales and the total as we reported.

The impact of the disposition was pretty insignificant in the quarter.

Got you.

And then I guess the second question is you mentioned that FX had a little over a $0.02 a share impact going in the first quarter.

And I guess obviously things can change from day to day, but we saw a lot of the decline occur in the first half of the quarter.

But maybe given that the euro was still around its low in particular, should we see a greater year-over-year impact in the second quarter?

And maybe you got to that and I missed it.

But what do you think it would be?

If we stayed where we were now, it would be like $0.03 year-over-year, or could it be bigger?

I don't think it would be notably larger than that $0.02 to $0.03 range which is pretty much exactly in line with our expectation.

Again, we based our continued outlook on a rate of right at $1.10 per euro.

So again, if it moves from that, it could move a little bit.

But I think that's still representative of what our expectations would be.

Got you.

And then the last question is you mentioned the accretion from Weidenhammer.

I know that there's the potential to sell more, or I guess to have more internal self supply of your recycled board as a result of that deal.

And has that process started?

I guess that's another way of asking how far along the synergy curve are we with respect to that acquisition?

I think we made progress along the synergy curve, specifically to the internal supply of board.

We haven't even started that process.

In order to effectively do that, we're going to have to make some investments in our mills in Europe to produce the board that we would need to produce.

So that's a much later date type of action that we have on the list.

We are really beginning to look at how do we leverage their technology from a manufacturing perspective to the US, and how do we leverage our material science to them in Europe.

So that's our focus right now, beyond just the initial removal of some costs.

Got you, okay.

Thank you.

Philip Ng, Jefferies.

Good morning guys.

Margins in your industrial business were negatively impacted by the deflationary environment in commodity prices and weather to a certain degree.

Was there anything else that impacted the quarter, and how much of that headwind should we expect to reverse in 2Q and 3Q?

Margins were pretty much in line with where they were last year, and they were affected quarter-to-quarter I think from the fourth quarter.

And that definitely was around really price cost and the price of commodities.

About a third of what we recycle is non-OCC.

And the price for recycled plastics, metals and other fibers is really very, very low.

So it's having an impact, and I would say that's probably the primary impact in that business.

The mills actually performed very well, and between tube and core volume and then that price or that price cost impact I guess on those recycled materials, that really was what is causing that change.

Are you seeing the dynamic change now, or it's still kind of pretty depressed at this juncture?

I certainly think the volume in tubes and cores will improve, and so we will pick that back up.

Right now, we do see our projection for OCC is to be up $10 about midsummer and stay there.

The good news is I'm never right about OCC so (technical difficulty).

And the other materials, it kind of depends upon how I guess what you would call virgin costs for metals and plastics, etc., actually how they react, because those prices will follow what happens to virgin pricing in those materials.

Right now, we don't see particular momentum.

That's helpful.

I would also add to that pension does disproportionately impact that segment, and so the pension impact alone was about $2.3 million.

So absent that, you would be looking at more like a 7.1% EBIT margin for the business.

And the paper profit reserve would have an impact as well, which was another $2 million.

So it's probably not what it appears to be.

Okay.

That's actually very helpful.

And in terms of the favorable price cost spread you talked about in 1Q for both consumer and protective due to lower resin prices, do you expect that spread to narrow in 2Q?

And what is your view on the May increase for polyethylene by the chemical producers?

Do you think it's going to stick or too early to call?

Let me just say that I'm even worse at projecting price increases for plastic than I am for paper.

I certainly think that there is demand out there, but there's plenty of supply.

My guess is that it has a chance to stick, and I would just leave it at that.

And yes, we do expect to pass.

Because of the contract mechanisms we have in place on both the consumer and industrial side, certainly some of that price cost benefit will pass through.

Okay.

And just one last one for me, just bigger picture.

I understand you're starting to transition your tube and core contracts to be tied more to paper board prices rather than OCC.

Has the industry followed your move?

And can you give us an update on how we should be thinking about your RB prices in general?

Obviously, you guys announced something early in the year.

Let me answer the second part first.

We certainly have not seen the support for that increase that we had hoped when we went out for it.

We still stand by the fact that margins have declined in this business over the last five to six years and that we do need to return to more a reinvestment economic type margin situation.

And we'll continue to push that price increase.

I remain very positive that as the year progresses we will see support for that increase because it is needed.

As far as the second or first question which was, remind me now?

You guys started transitioning your tubes and core contracts to be more tied to paper board prices rather than OCC.

Have your competitors matched?

Because longer-term, if paper prices move higher, that would help your effort to drive margins higher.

I just wanted to see if anyone else has matched that initiative.

I certainly think that, as we transition through, we do see support for moving to an indices type pricing mechanism and away from a specific component like OCC, and we continue to work on that.

And I believe the industry will support that as we go forward.

Now, the critical piece is what is the right indices to choose so that it's easily available, people can see it and have faith that it's accurate.

So, we continue to work on that because it is a fairly small industry, not like liner board.

Okay.

Thanks Jack.

Good luck in the quarter.

Adam Josephson, KeyBanc.

Thanks.

Good morning Jack and Barry.

Hope you're well.

Jack, it sounds like you're expecting an improvement in economic conditions as the year progresses, but you're only expecting OCC to go up by $10 a ton I think you said by midsummer, which would still be a pretty low level.

Can you talk about what seems like it's a disconnect between your economic expectations and your OCC price expectations, if there is a disconnect?

First of all, Adam, I want to remind you that I'm never right when I talk about OCC going forward.

So we have to put that on the table.

I also don't see any impetus for China and other markets to look to the US for OCC supply.

So, I think that any increase in demand is going to be local demand driven, so the increase that I see of $10, maybe it's $15, I think that would support the economic level of activity that we would need to see tube and core volumes move up to the levels that we expect.

Sure.

A couple others.

One is obviously there was a large transaction in the packaged food industry of late.

Do you expect that or other such transactions to have any impact on your business?

And if not, why wouldn't you expect more pressure from them, given their increased size and scale?

That's an interesting thought, and I would look at it a bit differently.

First of all, these are very large, sophisticated companies today, and they have sophisticated purchasing models and capabilities.

So how much more advanced they can get I'm not certain.

They certainly have more volume.

But really I think what they are looking for is to reduce their costs, to be more efficient.

And I believe that it actually creates an opportunity for us with our portfolio to create innovation and bring to them new ideas that not only help reduce the costs but actually help drive some topline growth as we did with other customers.

So I see that as an opportunity for us to step in, help them impact their costs positively and drive growth for Sonoco.

Will there be pressure on price?

Absolutely.

But that's nothing different than it is today.

Sure Jack.

Thanks for that.

A couple others.

One is on container board.

I know you're a small producer, but what is your view of industry conditions at the moment?

Obviously the March data came out this morning.

Inventories are pretty high and capacity is getting added.

But can you share any thoughts you have with us?

You're right.

Let me add the word very small player in the corrugated industry.

To me, the biggest impact today is probably the lack of export market for corrugated product because of the strength of the dollar.

If that changes, then I think that you would see that tightening of the market domestically.

But really for us specifically, that's probably the greatest impact, is the strong dollar and the strength of the export market.

Thanks Jack.

Just one last one.

There's been a notable pickup obviously in deal activity and deal speculation in the sector so far this year.

Does that signal anything to you?

Obviously it's cheap money.

That's a part of it.

These tend to be event-driven.

Whenever there is a deal, an opportunity is matched to someone that was seeking an opportunity.

So not in particular.

I think for us it tells me that we are on path.

We are focused on growing flexibles.

We're focused on growing composite cans around the world organically.

We are focused on consolidating acquisitions in tubes and cores and also focused on growing protective packaging.

We did that in Brazil.

That was a conscious decision.

We feel good about that.

And we continue to look for opportunities in other areas as I just outlined them.

So, for us, is it a bigger -- does it mean more?

Not really.

We are continuing to follow our strategy and our path.

Thanks a lot Jack, appreciate it.

Alex Ovshey, Goldman Sachs.

Good morning guys.

A couple of questions.

The ramp up of the composite cans facility is outside of North America, so Poland and Malaysia.

Can you talk about the competitive landscape there for the composite can, how long you expect it will take to really fill those facilities up and how you guys are thinking about when we would see the financial contribution of those facilities?

I would tell you you're beginning to see it now.

Kutno, Poland is doing well.

We added a second can line to that plant at the end of last year.

It's ramping up.

And I think over the course of the next two to three years, we will probably add two more lines to that facility as they ramp up production for Eastern Europe and other areas.

In Southeast Asia, the plant in [Joroho Barru] that we opened in the first quarter of 2014 is now operational.

We are just now starting the plant near Kuala Lumpur, and that will ramp up over the course of the year.

And the plant in China, we're going to be pressed -- Let me back up.

We put a new can line in Taichung.

That's doing very well.

That's basically sold out.

And the can plant that is going into southern China, that's kind of on an expedited path.

We expect to open that sometime third quarter and ramp it up during the course of the year.

So I think that where we are is that the Kutno plant is beginning to produce.

The plant in Thailand in Joroho Barru is producing, are adding economic value.

The one in Malaysia and the one in China will be 2016 events and continue to add beyond that.

Excellent.

Thanks for that color Jack.

And then turning to US flexibles, it seems like that business has grown faster than the overall market.

I'm not sure if that's right, because I don't have the market data.

But if it is, I'm curious to hear why you think you're able to show such strong volume numbers in the flexibles business.

It is growing faster than the market in general, and I think that if you surveyed our customers, they would tell you that we are applications people.

We are not basic in film but we are very good at coming up with ideas that create value for customers.

Pouches is one of the areas of growth.

We have the unique capability in diecutting, those types of things.

Innovations are driving our growth there.

And I'll honestly tell you, I honestly believe this, and I think it's true, is that our understanding of other formats, our understanding of rigid plastics, and our understanding of rigid paper as an alternative is helping drive growth in flexibles.

Got it.

Thank you.

Chris Manuel, Wells Fargo.

Good morning gentlemen.

A couple of questions, the first one for Barry.

I get the adjustment in free cash flow guidance from $150 million to $140 million, given the raise of the dividend.

I guess the piece maybe I'd like your view on is the $29 million from asset dispositions.

Was that -- I wasn't aware if that was in the original number or not, or at least I didn't have it in numbers originally.

So it kind of feels like a $29 million, $30 million reduction if you will.

How would you have us think about that?

It absolutely was in our guidance for the full year, Chris.

Obviously, we couldn't talk about it at that time, but we talked about net capital spending being in $220 million range, and that included the benefit of the proceeds from that.

And again, netting that against the CapEx seems pretty natural because, again, we've got a lot of plant expansion.

So we are adding plants.

That's driving the CapEx number up.

So we've just netted it against the proceeds.

So it was in our original guidance.

Okay.

So maybe help me understand it then.

Gross CapEx this year might be $250 million, net $220 million?

That's correct.

Okay, that's the difference.

Okay.

Jack, you speculated a few minutes ago about maybe some of the softer volumes in your tube and core in particular headed towards folks that make film or other things because as resin prices fall, they are holding back to manufacture, etc.

Would it be illogical maybe that something similar could have happened in your consumer businesses as bottle costs or other flexibles or other products you're making were held back a bit as you pull those through?

So presumably, as you sit now, the lower price resins rolled through into your, most of your consumer business, and you mentioned strong volumes in March and into April.

I mean when you say strong, have you seen stuff beyond the couple points that you would've anticipated that may suggest some of that is being made up or not?

How would we maybe think about that?

Strong would mean at expected level.

So, they came up to what we expected they would be.

And I have some view into the film industry, having run that tube and core business as I did and deal with those customers, so I feel a little more confident that that's something that does happen.

On the consumer side, that would be sheer speculation on my part and I'd just prefer not to do that.

Okay.

That's helpful.

And then last question I had was -- and I appreciate when you talked about the price cost benefit being $4 million.

I think it was a little more towards the consumer than the industrial side.

Can you maybe give us a sense as to -- I know you don't like to get this granular in the divisions or individual product lines -- but how big the swing was?

We've anticipated a pretty good lift from lower OCC in the industrial business.

But the collection business I guess, so the recovered paper and the recycling component, how big maybe on a year-over-year difference was the swing in profitability there?

And I guess I am presuming that it's breakeven or less than that as we sit today for that particular piece.

And is that accurate and how would we think about a year-over-year swing from that business?

To clarify, Chris, what we've said is that price cost was favorable.

By right, it's $7 million for the Company as a whole.

We went on to say about $4 million of that was in consumer, and most notably impacted by lower resin pricing and then about the balance was really in protective solutions due to price increases and some lower materials cost.

In the paper and industrial converted products, it really was relatively flat year-over-year due to the impact of recycling business, which obviously as we've said at these levels reports losses based on current commodity pricing.

Okay.

So it's a pretty good swing in a year.

I think OCC was maybe $110-ish million or so average last year in the quarter.

So it's a pretty big swing year-over-year.

That's helpful.

I recall last year being positive in industrial on price costs in the first quarter.

Okay.

Last question I had, and it kind of falls along an earlier one, the kraft pine is coming together.

I know when kraft split into a couple of pieces, it was pretty disruptive for your consumer business for two or three quarters and had a noticeable impact to volumes.

You talked about the long-term opportunity to go in and potentially win some additional businesses that are doing work.

But in the short run, and I appreciate it hasn't been finalized yet, but in the short run, would it be surprising to see a little bit of disruption again?

No.

I think that we probably saw some in the first quarter.

But again, I can't swear to that, but it would seem logical to me that that's a disruptive event.

Okay.

Thank you.

Al Kabili, Macquarie.

Thanks.

Good morning.

Jack, I just wondered if you could elaborate on the tubes and cores trends.

How are volumes as far as North America and also Europe?

I think Europe was down less than 1%, so it was more or less okay.

North America was the one that had the greatest shortfall in volume.

I think that, as I said, that trend was very weak January, weak February really through disruption but then back to kind of expected levels on a per ton day basis in March.

Around the world, Brazil was down.

China was down as we voluntarily are repositioning that business in China to the more upper end section of the market.

But with the exception of Europe -- and Latin America actually was strong for us, which would be the northern South America and Mexico region was positive.

Outside of that, everything else was fairly weak other than Europe being flat.

Okay.

So it sounds like versus your expectations, it was North America, and you are seeing it get better.

Were the end markets, were there any particular end markets that were particularly soft in tubes and cores that brought it down, or was it broad-based, if you have it handy?

Film was particularly weak, which we would not have normally expected.

And again, I think that there may be some of that resin issue at play there, and it may be a reason why we are seeing the improvement in March and coming into April.

Okay.

That makes --

Paper continued to be weak as well.

Okay.

That makes sense.

On the dividend, the increase -- yes, it's good to see the increase in -- it's actually a little more than it has been the last few years and a little more than the targeted EPS growth this year.

I was wondering if you could just address some of the thinking and the level of the dividend increase?

To your note, it has been running about 3% over the last several years.

The last record earning year we had was 2007.

And at that time, I think we raised it on an annualized basis about $0.08.

2014 was a record year.

We've made some solid acquisitions.

We've expanded the can and feel good about forward earnings momentum.

So a big part of our return to shareholders is dividends.

It has been.

So we felt like it was time to reward shareholders for being a holder and holding the stock, so we did so.

We feel good about it.

It's kind of in the range of what we would normally pay out, that we say 45% to 50% may be a little bit high, but I think going forward over the next year or two, we will be able to cover that and bring it back right into the range, and as I said, reward our shareholders at this time.

Okay.

All right.

That's helpful.

Last -- I guess the last question is just on the displays business.

And I think one of your competitors talked about slowing promotional activity, which it doesn't sound like you saw per se.

But I wonder if you could address displays a little bit, what you are seeing there, how the competitive environment is and how the backlogs in that business look.

Thanks.

When you look at our display business, FX had a significant effect on the revenue in that business, as well as we had reported that one of the pack centers that we operated was going to be closing.

Having said that, volume in that business was up 3% domestically and displays was up double-digit.

So our volume is strong, and we have a lot of activity running through that business and feel good, feel good about the business, and feel good about what's going on there.

Okay.

And the backlogs are looking healthy to support.

Excluding the sort of business loss from the pack center move, how are the backlogs looking?

As we expect, right in line with our expectation.

Okay, great.

Thanks and good luck.

George Staphos, Bank of America Merrill Lynch.

Hi guys.

Just a few cleanup questions on my side.

Jack, we've talked about composite cans being a mature sector for a number of years.

And every so often, you have a tougher quarter.

You keep focusing on innovation and then we get some rebound.

How do you feel about the growth outlook for composite cans not just in emerging markets where it's a new medium and has some advantages, but domestically?

And what can you do and what should we see in the next couple of years from any kind of innovation related to composite cans domestically?

I certainly think composite can domestically is a mature product.

We wouldn't argue with that.

We are looking at innovation.

We are looking at ways to make the product more robust, maybe use some warm fill applications, and those types of situations.

We are looking at different markets for the can.

But at that, there is continued erosion in concentrated orange juice.

So domestically, we are looking at it and trying to grow it to offset that erosion and develop new applications as we can.

The real growth is in the emerging markets and that's where our focus has been.

That's where our investment has been.

Now, having said that, that's the round composite can.

Weidenhammer, when we bought Weidenhammer, they are bringing new technologies, recessed membranes, they're bringing non-round containers.

So we're just now at the front end of bringing those technologies into the US and beginning to show them in certain applications.

And I recall maybe three or four years ago, we were doing a study of something.

It was one of those deals, and every time we showed the package, we showed the multiplicity of packages, plastic, flexibles, etc.

The number one was a non-round paper container that was always viewed as the most positive container by the consumer.

I think our upshot is going to be domestically not so much in round containers, but in the new technology of non-round as well as perhaps recessed membranes and some other things that we will be able to introduce from Weidenhammer.

How far along are you in terms of introducing?

It sounds like it still pretty new, and so maybe we are looking at three years down the road before you start bringing some of these into the market.

I think we are putting the teams together now.

The people are beginning to converse back and forth, both European-based and US-based.

I certainly think it will take all of this year to kind of get the pieces on the chess board and then probably take us 2016 to find the opportunities.

But I wouldn't be surprised to see something actually pop in 2016, maybe after the second half of the year, something along that line.

Okay.

Two others, one shorter-term and one longer-term.

On cylinder board pricing, if you were able to ultimately implement the price increase that you tried earlier in the year, would that get you to reinvestment returns within cylinder board, or would you still need further net price cost in that business?

That particular increase alone by itself, no.

We still need to improve the margins in that business going forward.

Okay.

And then in recycling, it sounded like, and maybe I misheard you, that you are adjusting your strategy.

A few years ago, there was a reasonably large focus by the Company around MRFs and other ways of using what at the time was an inflating commodity environment to grow your own share with your customer and also turn to a P&L benefit.

It sounds like to us that you are sort of retracing from that commentary or that strategy.

Is that correct?

What might that mean in terms of the portfolio if that is correct?

And how much would that actually add, given current levels of commodity inflation, to your P&L on a go-forward basis?

If you can even answer that part of the question.

Thanks guys, and good luck in the quarter.

I really can't answer the last part of it.

I'm not real certain of that.

And you're right.

We are beginning to take a look at that.

I don't want to convey that we made that decision.

We are beginning to look at that.

We did perceive this as an opportunity perhaps that we should have explored several years ago, made some investments.

Some of them are very still very positive.

But as we look on a go-forward basis, the question is really do we want to be a recycler?

The top priority has always been to paper the mill with the best paper and the lowest cost fiber.

And that has got to stay our number one priority, our number one focus.

So, we are asking ourselves are we diluting that effort?

Are we not getting the best that we could get to the mills by trying to do other things?

So that is -- your view of that is correct.

We are asking ourselves those own questions and we will be looking at that over the coming months.

Okay.

Thank you Jack.

Thank you.

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

Thank you again Sean.

Sonoco expects to report its second-quarter financial results on Thursday, July 16, at 11 a.m.

And a news release reporting our financial results will be issued before the market opens that day.

As usual, the conference call will be webcast and you can access that information from our website later on.

Let me again thank you all for joining us today.

We appreciate your interest in the Company.

And as always, if you have any further questions, please don't hesitate to contact us.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.