Sonoco Products Co (SON) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sonoco third-quarter 2015 earnings call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Roger Schrum, Vice President of Investor Relations.

Sir, you may begin.

Thank you, Kaylee.

Good morning, and welcome to Sonoco's conference call to discuss our financial results for the third quarter of 2015.

This call is being conducted on October 22, 2015.

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

A news release reporting our financial results was issued after the market closed on Wednesday, October 21 and is available on the investor relations section of our website at www.Sonoco.com.

In addition, we will reference a presentation on the quarter's results which was posted on our investors' relations website.

Before we get started let me remind you that 2014 consolidated financial results referenced in today's call and in our press release and our investor presentation have been restated to reflect adjustments associated with previously reported statements of the company's Irapuato, Mexico, packaging center.

Information on the restatement is available in the Company's 2014 annual report on Form 10-Ka.

In addition, 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, of course, on our website.

Now with that, I'll turn it over to Barry.

Thank you, Roger.

I'll begin on slide 3, where you see that yesterday afternoon we reported 2015 third-quarter earnings per share on a GAAP basis of $0.43 and base earnings of $0.65, which was at the low side of our previously issued base earnings guidance of $0.65 to $0.70 per share and compares to base earnings of $0.69 for the same period last year.

It is fair to say that earnings were at the lower end of our guidance due to volume being somewhat softer than expected, particularly in our industrial businesses.

The difference between GAAP and base earnings is fully described in our press release, but the biggest driver is the fact that we adopted a new exchange rate for the translation of activity in Venezuela resulting in a $12 million write-down in assets on a pre- and after-tax basis.

We also had $7 million pretax in restructuring costs and $6.5 million pretax in professional fees incurred in the quarter related to the Irapuato accounting issue which we excluded from base earnings.

Moving on to slide 4, you find base income statement, where you see sales were $1.243 billion, down $19.9 million from the prior year, with the variance explained by the sales bridge in just a moment.

Gross profit was $229.4 million, right at $7 million improved over the prior year as the gross profit percent improved 18.5% versus the 17.6% in the same period last year.

S&A and other income and expense items were $103.5 million, which was $12 million higher than last year, which can really be explained by the increase due to the Weidenhammer acquisition and the fact that last year's results included a $6 million gain from a legal settlement in Europe related to a patent infringement case, resulting in EBIT of $105.9 million in the quarter, down $5.2 million from the prior year.

And, again, you'll see the drivers of the EBIT shortfall in the bridge in just a moment.

Below EBIT, net interest expense was $13.7 million, up slightly for the quarter due to the financing of the Weidenhammer acquisition.

Taxes on base earnings were $28.4 million with an effective tax rate of 30.8%, as compared with 29.9% for the same period last year.

Equity and affiliates, when combined with minority interest, was $2.9 million, somewhat better than last year, thus ending up with base earnings of $66.7 million, or $0.65 per share, again, compared to last year's $0.69.

Turning to the sales bridge on slide 5, you see organic volume growth added $13 million to the top line, or right at 1% for the Company as a whole.

As a 1% improvement in consumer packaging, a 3.9% improvement in display and packaging, and a 7.5% improvement in protective solutions was partially offset by a 1.8% decline in the paper and industrial converted product segment.

Within the consumer segment, global composite can volume was essentially unchanged as organic growth from the expansion in Europe and Asia was offset by North America can volume being down about 3.6%.

Plastics volume was essentially flat for the quarter as well, so the net volume improvement was due to flexibles having another strong quarter with volume up 5.7%.

The 4% growth in display and packaging was driven by growth in Europe spread across several of our main customers there.

The 7.5% growth in the protective solutions was driven by an improvement really across most all of the portfolio.

But, most notably, paper-based protective packaging was up almost 13% and temperature-assured packaging being up 9%.

In the paper and industrial converted product segment, the decline was due to lower tube and core sales in North America, which was down 2%, and Asia volume was off 14% in the quarter.

Volume in Europe actually improved by about 1.5%.

We also had lower activity in recycling and continued softness in our reels business associated with lower sales of steel reels used in the oil and gas industry as that industry continues to struggle.

Moving on to prices, you'll see they were unfavorable by $11 million, most notably in the consumer segment this quarter, almost entirely in the plastics business related to lower year-over-year resin prices.

Net acquisitions added $64 million to the top line, primarily due to the Weidenhammer acquisition.

And finally, all other was negative by $86 million, mostly due to the translation associated with the stronger dollar against most all currencies globally.

Looking at the EBIT bridge on slide 6, you see that although we saw a slight improvement in sales volume on the top line on the sales bridge, the impact on EBIT was slightly negative by approximately $2 million due to mix, particularly in the consumer packaging segment.

Price cost, including the benefit from procurement productivity, was once again favorable this quarter by $9 million, most notably in the consumer segment spread across many of the businesses, but proportionally a nice improvement in protective solutions as well.

Acquisitions added $7 million to EBIT, again, primarily from the Weidenhammer acquisition.

I'll go ahead and mention they had a solid quarter after resolving a material pricing issue with one supplier that we mentioned last quarter.

The acquisition was accretive to earnings by $0.04 for the quarter and $0.08 year to date.

Manufacturing productivity was positive, adding $9 million to EBIT.

But it is fair to say that productivity is still running behind our stated targets, certainly in part due to the lighter-than-expected volumes, particularly in our industrial businesses and in composite cans in North America.

The change in all/other on a year-over-year basis had a negative impact of $24 million.

This includes normal inflation of roughly $12 million, and $6 million is directly related to not having the gain on the technology-related legal settlement from a competitor last year in Europe in the paper and industrial converted products segment results.

And for the Company as a whole, roughly $5 million is related simply to translation of earnings due to the stronger dollar.

In terms of the bottom-line impact, FX translation had a negative impact on EPS of approximately $0.03 per share year over year.

And as expected, pension costs were higher by $4.5 million.

On slide 7, we find the results by segment, where you see that for the consumer packaging segment sales were up 8.7%, due most notably to the Weidenhammer acquisition.

While EBIT grew at a faster rate of 11.1% with another very solid quarter from a margin percent perspective, improving to 10.6% versus 10.4% for the same period last year.

Display and packaging sales were down, due most notably to translation, but earnings improved by $3.4 million, with the EBIT margin back up over 3% versus 1.1% in the same period last year.

Paper and industrial converted products trade sales were down 11% on lower volume and the impact of translation, but earnings dropped by $16.8 million, or 34%.

The most significant contributor to the decline was the previously mentioned $6 million legal settlement.

But as you saw in the EBIT bridge, results were also negatively impacted by lower volume and light manufacturing productivity which did not offset inflation and other cost changes as well as higher pension costs, which disproportionately impacts this segment.

All resulting in an EBIT margin of 7.5% versus the reported 10.2% last year.

Protective solutions had another strong quarter, with sales up 4.5% due to volume growth, while EBIT improved by 25% due to the volume and some price/cost improvement resulting in a solid EBIT margin of 9.9%.

Looking forward on slide 8, we're projecting that base earnings per share for the first -- fourth quarter will be in the range of $0.59 to $0.64.

This brings our full-year estimate to $2.46 to $2.51 per share, which is $0.02 lower on the bottom side of our previously issued guidance and $0.07 lower on the top side as we narrowed the range moving into the final quarter.

The lower guidance is due to the results in the third quarter being at the bottom end of the guidance.

And our volume expectations somewhat reduced for the fourth quarter were other than normal seasonality -- we are not expecting a significant change in the run rate from what was experienced in the third quarter.

This also assumes no significant change in price cost and an effective tax rate of 30.5% for the quarter, bringing our full-year effective tax rate to right at 31.5%.

Moving from earnings to cash flow on page 9, you see the cash from operations was $145 million versus $161.9 million for the same period last year.

Cash from operations is lower due to the lower GAAP earnings, including higher restructuring and the legal and professional costs.

In addition, this year we saw more of an increase in working capital, specifically accounts receivable versus the same quarter of last year, some of which is just simply the difference in average daily sales from June to September in the two respective years, but some due to a slight uptick in days and receivables due to the mix of business terms.

But our compliance remains strong, with more than 90% of our global receivables in the current category.

Capital spending was right at $54 million compared to $46 million last year.

Spend in the quarter included continued investment in our global composite can expansion and the completion of our innovation center, known as the IPS studio.

So after dividends of $35 million, we had free cash flow for the quarter of $55.9 million and $106 million year to date.

For the full year, we are still targeting to deliver about $140 million in free cash flow, consistent with our projection last quarter as the impact of lower earnings is being offset by CapEx running at somewhat of a lower pace than our previous projections.

You find our balance sheet on slide 10, and I won't spend a lot of time with it other than to point out that we did make a $50 million payment on the term loan used as part of the Weidenhammer acquisition financing.

And our financial position remains very strong, with our net debt to total capital at 40.2%.

That concludes my financial review for the third quarter.

And we'll now turn it over to Jack for some additional comments.

Thanks, Barry.

Let me add some color about the quarter, then talk briefly about what we see going into the fourth quarter.

We remain encouraged by the continued solid momentum achieved in our consumer packaging and protective solutions segments.

These targeted growth platforms delivered strong year-over-year sales and EBIT improvement, with operating margins in those segments at or better than 10%.

Consumer packaging delivered another strong quarter; in fact, the segment's fourth consecutive record quarter.

We saw volume gains in flexibles and international composite cans.

During the quarter, we continued ramping up production in our Kutno, Poland, can plant.

And in September, we officially opened our new can plant in Kuala Lumpur, Malaysia, and we started producing cans during the quarter.

Additionally, we expect to ramp up production over the course of 2016.

Results in our North American can business were weaker than we expected.

And if you look at the market that declined in the quarter, they continued to be juice concentrate, refrigerated dough and powdered beverage.

This was offset by solid gains in snacks and miscellaneous food products.

The integration of our European can operations with Weidenhammer picked up the pace in the quarter, and we now expect to be at the high end of our EPS accretion target.

This is due to the excellent work of our European team in resolving a supplier dispute, concluding the UK regulatory review in July, and starting to achieve some of the operational and back-office synergies.

Also, we'll continue to drive for additional synergies, which should have positive results for the fourth quarter and into early 2016.

During the quarter, our internal accounting and audit team -- working with outside legal, accounting and audit professionals -- investigated and restated the financial misstatements from our Irapuato packaging center.

Rest assured, we take financial controls very seriously, and we put in place the necessary processes and procedures to make sure an incident of this nature is not repeated.

Furthermore, we've begun a process of identifying, fixing and delivering improved results from display and packaging segment, and I believe results for the quarter show our progress.

That said, we have additional work to do.

Now switching gears, we were disappointed in the results from our industrial-focused businesses in the quarter.

Weak tube and core volume in the US and in emerging markets more than offset volume gains in Europe.

As Barry mentioned, our industrials segment also faced a tough year-over-year comp due to the favorable patent infringement claim achieved last year in Europe.

It's my opinion we are seeing a divergence in the US economy, where overall improvement in big-ticket items like housing and automotive is being offset by a continued decline in manufacturing activity, much of it related to lower commodity prices and the strong dollar.

It now appears this divergence is impacting some of our served industrial markets.

We do expect to see some benefit in the fourth quarter from the announced 5% to 8% price increase for tubes and cores, and this will continue into 2016.

Our paper operations produced the tons we had projected, with volume up 1.6%.

But the business was negatively impacted by rising OCC prices in the quarter resulting in a negative price cost position.

We put in place a $45-a-ton price increase for URB in the US and Canada, and our tube and core operations are working to pass on the paperboard increase to non-contract customers.

Let me add that despite recent industry trade reports to the contrary, we are gaining traction with this price increase, which we expect to be of some benefit in the fourth quarter, with additional benefit in 2016.

Finally, in protective solutions we continue to see strong volume growth, up 7.5%, along with a positive price/cost relationship and improved manufacturing productivity.

Much of the growth in the quarter is in our SonoPost and temperature-assured packaging businesses.

A new plant in Shelbyville, Kentucky, which primarily serves the automotive industry, is up and operational and continuing to qualify new products.

We continue to gain new customers for this facility.

However, we are still experiencing some cost associated with the start-up and with qualifying the new products.

During the final quarter of 2015, we expect to continue to seek solid results in our consumer packaging and protective solutions businesses.

However, the slowdown in manufacturing in the US and in emerging markets, along with the headwinds from a strong US dollar, is expected to continue impacting our industrial businesses.

As such, we are updating our full-year guidance to reflect these changing economic conditions.

Despite these headwinds, our team is working to find additional ways to close the gap.

We're making significant progress in our efforts to streamline our structure to reduce costs while driving productivity improvements and targeted organic sales growth.

Next week, we will officially open our new IPS studio on our Hartsville campus.

This $12 million investment will enhance our ability to gather consumer insights and did allow us to better collaborate with our customers to develop new ideas and new technologies that will drive organic growth in our consumer packaging businesses.

In fact, many of our customers couldn't wait for the official opening and have already made their way to the studio to begin work on new projects that we believe drive growth in 2016 and beyond.

In closing, we remain firmly committed to our grow-and-optimize strategy, and this means we're focused on achieving higher-than-average volume growth, improving operating margins, continuing the successful integration of Weidenhammer and Graffo, optimizing our portfolio through simplification and improved efficiency, and, finally, making free cash flow -- maximizing free cash flow by targeting capital deployment through our growth businesses and returning cash to shareholders.

Kaylee, we'll now take questions.

(Operator Instructions) George Staphos, BofA Merrill Lynch.

Thanks for taking my questions.

I'll ask a few and then get back in queue.

Jack, we'll focus on industrial.

Historically, the industrial business -- engineered carriers, tube and core, whatever you've called it over the years -- has been a very good indicator for where we are in the economy, maybe perhaps a slight leading component to it.

So when we look at the last two quarters where it's been somewhat disappointing -- phrase it how you would -- what do you think that's telling us about the broader outlook looking forward?

Or do you think this is just a soft patch in what is more or less a still-growing economy?

That's point number one.

Point number two -- we touched on this, I think, last call -- you obviously have had great performance in consumer the last few quarters and years, really.

But industrial has been a bit of an anchor.

And off of these results, recognizing you had a little bit of a tough comp versus last year's patent infringement settlement, what changes are you making in the operating sense to try to improve the performance from here?

Because it's obviously -- it's a drag.

It's not acceptable relative to Sonoco historical standards.

Thank you.

Yes, George.

Thank you.

Certainly there is one other issue is that the third quarter in 2014 was a fairly strong quarter for industrial last year.

And if you'll recall, industrial was a positive contributor to the business overall in 2014.

Obviously, we have hit a slow patch.

I now attribute that to this divergence in the economy.

We're certainly seeing housing rebound, but the PMI is down, and we continuously manufacturing activity at fairly weak levels.

Again, as I said, I believe it's because of the dollar and low commodity prices specifically for oil.

We don't sell many tubes and cores to Caterpillar.

But every hose, every belt, all the fabric that's on it and even the steel at some point in its life was wound on a tube or a core.

So if we're not making Caterpillar machinery, we are not selling tubes and cores into those markets.

So I believe that's what's impacting the situation today, and I believe it's creating a bit of a drag on the business in total.

I know I've been with many of you and I have said it's important to have manufacturing and home construction in general moving in the same direction to have a positive impact on tube and cores.

And I continue to believe that's what we need.

Now, in addition to that, the international markets were down low double digits -- they were down in the 13% to 14% range, and that's really obviously having impact in those businesses.

As far as changes we are making, of course, we have changed that structure.

We are implementing that now.

But we also continue to consolidate this business as necessary.

We are currently closing two plants here in the US.

We've kind of gone through that process.

We're getting to the end of that.

And we're going to continue to just optimize that footprint the best we can.

Even in slower times like this, this business continues to generate a substantial amount of cash that we want to use to grow the other pieces of our business.

So it remains an important business to us.

We just have to be cognizant of where the economic cycle is and the things we need to do to improve the results in the business.

Jack, one last one, and I'll turn it over again in industrial.

I wasn't quite sure what you were saying -- I probably just missed it -- in terms of the fourth-quarter outlook.

So are you saying, Barry, that part of your guidance reset is reflective of weaker-than-expected volumes in fourth quarter in industrial, or just normal seasonality for industrial in the fourth quarter relative to a reduced base coming out of the third quarter?

Thank you.

We're just taking current run rates, really, and projecting forward given -- and then we're modifying that for the seasonality in the fourth quarter.

Okay.

Thank you.

Ghansham Panjabi, Robert W. Baird.

Hi, this is actually Matt Krieger sitting in for Ghansham.

How are you doing today?

Good, Matt.

How are you?

Good.

Good.

Starting with protective solution, the segment has certainly performed well, benefiting from momentum across a number of categories.

Do you guys expect this momentum to continue?

And what are your growth rate expectations moving forward, considering this segment will laughing lapping some tougher comparisons?

Matt, we continue to believe that this industry in general is growing in that 4% to 5% range and expect that going forward.

I think we have solid momentum in our temperature-assured packing packaging business.

That continues to grow well.

Obviously we've seen growth in our SonoPost, which is our paper-based packaging business.

In fact, part of the results for the quarter were impacted because we are improving the volume in the SonoPost business, and we actually had to move to a larger facility in Mexico in order to accommodate the new volume.

So that had a little bit of a drag during the quarter -- not much of one, but that's one of those good problems you like to have.

So we see a lot of things about this business we like, and we also see opportunities to make acquisitions and further consolidate this industry.

So we expect this business to continue to grow.

Okay.

That's helpful.

And then consumer has certainly performed well recently on a volume basis.

Are you seeing any increase in new product activities from your customer base?

And do you sense that your customers have been any more positive on the health of the consumer?

Well, I certainly think that we are seeing a lot of activity from customers that is being driven by the i6 process and how it's beginning to really take hold.

I mentioned some of the customers that have already come to the studio to review some consumer feedback and see some of the ideas that are being put forward.

I definitely think that our customers are beginning to look at packaging as a way to truly differentiate them on the shelf, and they are looking for new and different features that could have a solid impact to help them improve their volumes.

So that's the activity that we're seeing.

And, yes, we are seeing a good bit of it, and the engagements we have are dramatically different than engagements we've ever had.

Great.

And then wrapping it up -- last one for me -- moving into 2016, what are the major variances of both positive and negative that we should consider when looking at the business on a year-over-year basis?

Well, we are just now beginning to get into the budgeting process, so I don't have a real strong window into that.

But as always for us, volume, price cost, commodities -- those are going to be just the natural issues that we're going to have to take a look at.

Great.

Thanks a lot.

Chris Manuel, Wells Fargo.

Just to follow up on some of the new-business discussion, particularly on the consumer side, as you look through -- I guess kind of two ways to come at the question -- one, as your new center opens this week and you already have strong bookings for customers coming in over the next quarter.

And then a second part of that question is as you look across the consumer portfolio, obviously you've got a pretty diverse collection of products there.

Are there some that you are seeing better or worse acceptance or development activity within -- maybe flexibles or rigids or composite cans, et cetera?

Well, I would certainly say we've been pretty open with this is that we want to expand the position of flexibles, and we are looking for those opportunities.

Our flexible business has seen solid growth, growing at about 5% for the whole year -- a little bit more than that.

So a lot of those projects have been flexibles.

But we've seen some in plastics, and we've also seen some in composite can bringing some of the Weidenhammer technology.

And customers are beginning to see some new and different ways to think about composite can.

And we actually have some really game changers that are sitting out there.

I'm not at liberty to really talk to them.

But we're getting real close, and I suspect you will probably see them sometime during the first of next year.

So it's been a cross-spectrum, but no doubt it's been heaviest in flexibles and you can see that in their growth numbers.

Okay.

That's helpful.

And we picked up in a trade publication -- it looks like a plant is going to close -- a refrigerated dough plant next year.

Is that -- along the lines of composite cans and some of the other components in consumer there, is that something -- business you will pick up elsewhere, or it's a customer consolidation, or how should we think about that?

Yes.

It is a closure, but it's a consolidation into a single factory that we currently serve.

So it's just it's moving the volume from two facilities to one.

Okay.

That's helpful.

Last question is it's been about a year since your last acquisition or stuff of size.

How would you characterize the markets today, Barry?

How are you thinking regarding -- I know you had -- you mentioned a debt repayment during the quarter.

But share repurchase activity over the balance of the year -- how are you thinking about capital allocation?

Well, as far as capital allocation, we want to continue to make payments as we've committed to, to reduce the debt as we go into next year.

The word that comes to mind to me relative to acquisitions is overpriced.

But we are very active in the market.

We're looking for opportunities, and we're trying to find those hidden gems, if you will, the ones that may have an ability to match with Sonoco better than others.

We're working very hard on that.

But we're also looking -- if those acquisitions don't exist, we have a healthy balance sheet using some of that cash potentially to return to shareholders in the form of share repurchases.

That's all what we're working on right now in the year.

Okay.

Thank you.

Good luck.

Chip Dillon, Vertical Research.

First question is, could you just talk a little bit about, I guess, separating -- you mentioned the 14%, for example, decline in, I think, tube and core volumes in Asia.

How you are viewing that as -- does it seem to be an inventory correction type downturn in what you are seeing, or does it seem to be something deeper than that?

And how long would things have to stay weaker in some of these other areas that have seen a lot of weakness, especially in the industrial area, before you would think it might be time to align your footprint a little bit?

I certainly think, as it specifically relates to China, not all of that decline is economic activity.

We made some voluntary choices to exit certain pieces of business, so that's in there as well.

But the vast majority of it is related to the current economic conditions, and certainly Brazil is that way as well.

Traditionally, those have been solid, strong markets for us.

We expect them to be so again.

But specific to your question in industrial, our commitment is to our shareholders to invest their money wisely and make sure that we can make a reasonable return on their investment.

If a business -- if we look at a business to see that, well, it really can't get to a reasonable return and it's not strategic in another way, we really make the decision to leave an area -- even in a business like industrial, if we don't see a path to create a reasonable return for our investment and it's not strategic.

So, I don't know how long it would have to be like that before we do it, but we would have to -- the main piece of it is that we could not see a way to make it achieve that needed return.

Okay.

And second question on the consumer side -- I think you mentioned that a lot of consumer-products producers are focusing even more on their packaging to drive their sales.

As you see the normal churn in your business, how much -- or should I put it this way -- on the consumer side, how much are you seeing, I guess, risk to Sonoco of movement to other types of substrates by some of your customers?

And how much is that same trend helping you as people come to you?

Obviously, in composite cans I would imagine that's an area where you are clearly winning.

But are there areas that you need to keep an eye on that where you feel vulnerable, and what are you doing about those areas?

Well, obviously -- I once heard a really good salesman is paranoid.

So we are paranoid about losing volume in any of our businesses.

So we hope -- we are tracking and tracking it closely.

I think one of the advantages of Sonoco is that we do have this portfolio.

We do have flexible packaging.

We do have rigid plastic.

We do have rigid paper.

So as it moves among substrates we should be able to find ourselves in that discussion; of course, unless it's moving to glass and metal, which you don't see much of that.

But that's one of the reasons for the multiple substrates.

I think the discussion for us is to become more relevant in some of these substrates and have a greater impact in flexibles and some specific areas of plastic.

So that's our strategy, and that's what we're actually trying to accomplish so we can capture that movement back and forth.

Okay.

Great.

Thank you.

Alex Ovshey, Goldman Sachs.

A couple of questions for you guys -- just the price increase on Europe, can you give us a bit of color on how many tons that will impact?

Probably -- I don't have it in that kind of format.

Maybe what percentage of the business is contractual versus open, if that's the way to think about it?

I think about a third of the business is open for increase on the paper side; about half on the industrial side.

Alex, this is Roger.

Don't forget that a good portion of our tons produced are internally consumed in our tube and core composite can business.

So, really about 60% of our total production in the US is internally consumed, and the rest is trade.

And then of that, I think we're talking about that proportion of which would be available to non-contract.

So, again, it's a small portion of that for our total tube and core -- I mean our total tons sold.

Great color.

Thank you.

And just on the consumer business -- so you talked about growth in flexibles, flattish, and plastics.

Maybe talk about why the divergence between the two substrates.

Really for plastics -- when you look at plastics, you are looking at three different technologies: injection, thermoforming and blow molding.

Really it was the blow molding piece that saw some weaker volume during the quarter; the other two were up slightly.

But it was really around blow molding being a little bit weaker in the quarter.

And, again, flexibles -- we continue to see strong volume because a lot of our projects are actually creating packaging in flexibles.

Got it.

And just the last one for me -- this lower resin price environment, has that had any impact on the competitive dynamics around pricing?

Are smaller competitors able to be more aggressive when resin is lower?

No.

I think that because the bulk of the resin is eventually passed through on a quarter in some format, it kind of all levels out quarter to quarter.

Makes sense.

Thank you very much.

Adam Josephson, KeyBanc.

Jack, on industrial can you just go into a little more detail about when you started to see the deterioration in volume trends in North America and how significant that deterioration was?

And could you compare it to what you experienced in mid-2007 when, if memory serves, you were among the first companies to warn about some deterioration in the macro?

I'll tell you, Adam, we've seen a little bit of deterioration all year long in North America.

This is something that we have been seeing.

And part of it has been associated, of course, with the decline in newsprint and printing and writing grades of paper.

We had some mill closures that we actually didn't expect when we started the year that impacted us.

But I think as we got into this quarter we saw some deterioration in the broader-based packaging business -- corrugated and other types of paper.

As well as textiles was down and specialties were down.

But the magnitude of these declines was nowhere near the magnitude of what we saw in 2007.

That began to fall fairly rapidly.

And this is the first quarter that we actually saw textiles and taken specialty down more than just one percent or so.

So, there is no comparison back to that time frame.

I do think it is indicative of just the slower environment that you see from manufacturing.

I do need to point out that film was up 2.5%.

So it was somewhat end-market specific.

Got it.

And just one follow-on to that response -- you talked about corrugated for a second.

Jack, I know you are a small container board producer.

But can you talk about what you are seeing there in terms of volume and price?

Yes -- let me say we are very small container board maker.

But, yes, we definitely see a slowing of volume and a shifting of volume.

We're running the corrugated in what we call a slow back mode.

And we're seeing a swing to export.

So the domestic demand is lower and we're having to export, which is a less efficient market for us from a pricing standpoint.

So that's certainly impacting the paper business as we enter the fourth quarter.

Got it.

Thanks.

On North American composite cans, I think Barry said it was that volume was down 3.6%.

And you talked about, I think, the three categories that have been notably weak.

Do you expect those categories to improve at some point in the foreseeable future?

And, as a result of which, do you expect the down 3.6% to improve soon or in the next year or so?

Well, first of all, let me point out that volumes were up in composite can in the second quarter.

So, yes, I do expect it to improve.

I think that frozen concentrate is a category that's been in decline, and we think that certainly will continue to decline.

Powdered beverage has also been impacted, in decline.

Frozen dough is a category that does well from time -- refrigerated dough -- I think I'm kind of stuck on saying frozen.

But refrigerated dough is a category that does well.

This is a seasonal time for it.

And of course, one of our major customers is in the midst, as somebody noticed earlier, for consolidation.

So that's probably impacting a bit of it.

As a matter of fact, as we looked at it, probably 40%, up to 50% of the decline of that 3.6% is really related to customers in some sort of consolidation or something -- some disruption is impacting their business model.

So, yes, we expect it to not be so severe and expect it to improve in some of the categories over time.

Got it.

Thanks, Jack.

And just one for Barry on pension.

I know it's still early days, but do you have reason to think expense will be up next year based on what's happened with asset prices and interest rates?

Yes.

At this point in time -- and certainly nothing will be finalized until year end, until asset values are known and discount rates reestablished.

But just based even off of the 10-year treasury, certainly rates have fallen roughly 15 basis points from where they were reset at the end of last year.

And as you would expect with general market performance, assets have not returned at our assumed rate-of-return level.

So, based on just those two factors alone, you would expect some increase in pension expense for next year.

But, of course, pension expense can move independent of the amount of contribution required.

So we haven't updated our estimates for what the actual cash contributions to our pension plan would be for next year.

Thanks a lot, Barry.

Appreciate it.

Mark Wilde, Bank of Montreal.

I wonder just going back first to the industrial business -- Jack, you said that the Asian business was down 14%.

I didn't hear a number for South America.

And I'd also like to get one if it's possible for Eastern Europe and Russia.

Let me talk to Brazil is really -- we specifically talk to Brazil because North and South America is included in what we call NDN, which is pushed into Mexico.

Brazil was down about 14% as well.

Okay.

And then any kind of numbers around Eastern Europe or Russia?

We mentioned for Europe the whole volume was up about 1.5%.

And it was a little bit stronger than that on the frontier side of the European area.

The legacy countries were up kind of probably in the 1% range, and frontier of about 2% or so versus the same period last year.

Okay.

And if I can, just to go back to kind of China and Brazil, are there particular businesses that you see that are accounting for a lot of this drop?

Because it seems like these volume drops are bigger than you'd see for reported paper volumes or other things like that out of either of those economies.

Specifically to China, some of that we voluntarily chose to exit some business.

But I think it's just general weakness across all of the markets.

Our share position is pretty solid.

We're not losing share other than what we have chosen to exit.

But it is certainly impacting our business -- their economic situation is impacting our business.

But nothing specific, no.

Okay.

And then turning over to consumer packaging -- I remember five or six years ago we were talking about the growth in the composite can business in North America as you moved into some new markets.

As you stand here today, what does the trend look like for composite can business in North America and maybe also for outside of North America?

You mentioned some markets that were actually in decline.

So I'm just trying to figure out -- if you put all the puts and takes together, where do we end up?

I think that we would look at the composite can market in North America as being mature.

So it's going to have a much lower to a more flattish growth rate, with all the growth for composite can really being in emerging markets as it relates specifically to stacked chips and other products that convert from metal.

So that's where our focus has been; that's where we've been investing.

Domestically, for us it's about introducing some of the technologies we acquired with Weidenhammer to enhance the product on the shelf.

Going from to a shaped composite can and some of those things, really just to try to keep the business flat as best we can.

But also, it's about improving the throughput of the business.

A lot of the technology at Weidenhammer is automated.

We have projects going on to actually double the throughput of machines.

So, doing a lot of things to improve the profitability of the business domestically while we grow it internationally.

Okay.

All right.

That's helpful.

And then finally, Jack, when you guys came to New York last December, you talked about really trying to reinvigorate, I think, about $700 million or $800 million worth of the portfolio.

Can you just talk about where we are at in that process right now?

Yes.

I think, Mark, we talked about this a little bit last quarter as well.

I can tell you that where we are is I think -- I don't think -- I know that we know exactly what we want to do.

We have a path forward.

And for us, it's about sequencing and timing.

I think we've made no -- we've not hidden the fact that what we want to do is to gravitate our business more to consumer, specifically to flexibles and into protective packaging and specifically into the ThermoSafe -- the temperature-assured packaging area.

So that's clearly our focus.

And what we'd like to do would be as we reposition the portfolio is as we sell some of these businesses, have that money to invest in an acquisition in another area.

That's the sequencing that we're trying to put together.

Okay.

All right.

That's really helpful.

Good luck in the fourth quarter and into next year, and I guess we'll see you in December in New York.

I look forward to it.

Scott Gaffner, Barclays.

Just going back to industrial for a minute -- Jack, you talked about the quote unquote industrial side of industrial.

Is there any way to further think about the mix within this business -- housing versus industrial versus consumer?

How should we think about that or how are you thinking about it?

I'm not sure I understand exactly what you're asking me, Scott.

Well, you mentioned sales in the segment -- paper and industrial being weak because of companies like Caterpillar -- heavy manufacturing, right?

You've got heavy manufacturing exposure within paper and industrial.

You've got housing exposure through some of your textiles, et cetera, that you sometimes mention.

Then you've got some other exposure around paper mills.

How do you think about the end-market exposure within that segment?

Do you have a percent, or are you just sort of not sure really where the primary end-markets are there from an industrial consumer housing related?

Well, what I can tell you is what's the impact that Caterpillar has on the tube and core business?

I don't know that because I sell into the textile business.

I sell into the film business.

I sell into the paper business, and I sell into the tape and specialty business.

I don't know how they distribute or how their products are then shipped on forward.

If you think about tubes and cores -- I often say that tubes and cores package are raw materials.

And, fundamentally, we're packaging materials before they are actually turned into any type of product.

What I can say is that products that are wound on tube or core -- all the products that need to be on tubes and cores are on tubes and cores, and our primary markets remain paper, film, textiles, specialty items.

I'm not sure I'm answering your question.

I guess the answer sounds like you are just not really sure because you don't have line of sight to the actual end user -- that maybe the answer.

So then I guess the question is as things have flowed, how quickly can you adjust your manufacturing if, for instance, the overall manufacturing economy in North America continues to weaken.

Do you find out late, or do you proactively adjust your manufacturing schedule for that?

Again, I think that we've always done a good job of reacting to and being ahead of the situation for the most part.

As I said, we've closed two facilities this year, and we've closed, I think, over 40 facilities since 2007.

So we're very proactive.

We've also done that on the composite can side as well.

So we continue to read the tea leaves.

Now, I happen to believe this is a soft patch.

I don't think that manufacturing in this country is actually getting weaker; I think it's getting stronger.

But the world economy is going to have to do get a little bit better.

We are in a weak patch for that to really take hold.

But I truly believe that in the future the manufacturing economy of the US will actually be stronger.

Okay.

Moving to consumer packaging for a minute -- flexibles, up 5.7%.

You mentioned some of the product categories -- I know you have got some top-secret products that aren't coming out until next year.

But what's been driving the growth so far that's already in the market in 2015, and then is it international versus US?

It's really US-centric.

And, of course, we're -- some of our bigger markets are in confection and baked goods.

But I'll tell you our highest growth segment right now has been in what we call pouches -- the food pouches, beverage pouches and the baby food type pouches.

That's been some of our biggest growth has been into pouches for all different types of products.

Is that market growth, or is there, say, a particular technology that you are bringing that is driving that adoption?

Both.

Market growth for pouches, that's a very readily acceptable format.

We show a slide -- Millennials grew up with pouches.

The Capri Sun pouch, I think, was one of the first ones.

They are very familiar with it.

Now they are beginning to have children, so they are buying pouches.

And then beyond pouches, there are technologies around pouching, around sealing, that's critically important to hold some of the products that are in pouches.

So, a little bit of both.

Okay.

Thank you.

Philip Ng, Jefferies.

This is Alex (multiple speakers) on for Phil.

If I could follow up on the URB price increase, assuming you get a commensurate amount in tubes and cores, can you remind us of how that flows through in terms of timing and the contractual portion?

And if we take a simplistic look at it and just apply the $35-per-ton increase to the million and change or so tons you produced, it would imply like a 9% or 10% lift to earnings next year, holding all else equal.

Is that a reasonable way to think about it, or are there some other moving pieces that we should be cognizant of?

Yes, there are some significant other moving pieces.

Only about 30% or so of the tons in the paper are what we would call market price.

The others are under a contract.

So 70% of the tons won't get the increase, and about half the business in tube and core is under contract and will not get this increase.

Their increase is more of a formulaic-based increase, and that occurs every quarter.

So about half in tubes and cores and about 30% in paper will receive this announced increase that we're talking about.

Okay.

And would that formulaic pricing include the URB pricing, or would it be more pegged to OCC?

Some is tied to an indices, but the bulk of it is tied to OCC and energy price movement.

Great.

Thanks.

And then margins in display -- can you give some more specifics as to what drove the productivity improvements?

Is it better utilization on volumes, you pushing out -- pushing price more aggressively?

Is there cost-cutting?

And what are the levers you can pull there?

And what should we be expecting in terms of margins in a more normalized environment?

I think before the Irapuato issue, our margins in display were probably in that 5% range or so -- in the 4% to 5% range.

So we would expect, really, them to rebalance that level as we fix the issues that were present in Irapuato.

And the impact of that particular event was simply to hide from us what was actually happening.

So we've gone down there, made some productivity improvements per our discussion with customers about some other specifics.

So my expectation is that business rebounds to a margin more similar to what it was prior to that event.

Great.

Thanks.

And then just last one for me -- Jack, if you could take out your crystal ball, what are you expecting in terms of OCC pricing in the fourth quarter and into 2016?

Okay.

First, I have to warn you I've never been right.

So, right now we kind of see that OCC has reached a level that's very balanced.

Don't see much movement -- it might trend down a little bit in the quarter.

And then for next year, right now we don't see really a lot of impetus to move it other than the seasonal movement that it would normally go through -- rise in late winter; and in the summer, that it would fall back a little bit and then fall in the fourth quarter.

So, kind of starting at this base and then following a very seasonal pattern for 2016.

That would be my best guess right now.

Thanks very much.

Good luck in the quarter.

(Operator Instructions) Steve Chercover, D.A. Davidson.

I had a quick question on plastic or blow molded packaging which is as follows.

Is it possible that environmental concerns might cause a secular shift away from substrates, kind of analogous to how some jurisdictions banned plastic bags to the benefit of paper bags?

Well, one of the things is that plastic bottles are recyclable, and there's a lot of effort on recycling them.

But it's -- the options are glass and metal, so they are equally as recyclable.

So, the real benefit to plastic is weight, which, when you look at a lifecycle analysis, that's really why a lot of companies have moved to plastic because weight impacts freight, impacts diesel cost, fuel, et cetera.

So, right now I don't see a secular shift away from plastic.

I think it's actually a preferred format.

I guess I wasn't thinking of it that way, so maybe it is environmentally better.

Okay.

Appreciate it.

Chip Dillon, Vertical Research.

Yes.

Just a quick clarification.

You mentioned the small business you have that's tied to corrugated.

Is that still just medium that you sell on the open market?

Yes.

Okay.

So you are selling no liner board; it's just corrugated medium.

Well, we have a very little bit of liner board we produce in Canada that we sell into the open market.

But that's even a smaller position than our medium position.

So when you are talking about the shift to exports, it's really more in the medium that you are talking about.

Absolutely.

It's all medium.

Okay.

That's good.

And obviously, I guess you haven't seen any impact from the reported massive closures in, I think, three medium mils or machines in the last week or two?

I have not.

Okay.

Thank you very much.

George Staphos, BofA Merrill Lynch.

Thanks for taking the follow-up call; I know it's late.

A couple of questions for Barry in sequence.

Barry, the Venezuelan move to the alternative exchange rate -- is that going to affect your ongoing EPS?

And if so, what would be the step function up or down?

And then it seemed like your tax rate guidance is now lower than historical levels.

I know it's not 2016 yet -- you are not providing guidance -- but is this a new level going forward?

And if so, why?

And then in terms of new products -- Jack, for you, do you see any more need to maybe have more film capacity for anything that you are producing on the flexible side, or do you feel like there's a sufficient supply externally?

And I thought I saw a headline recently on a gas tight composite can package.

What's there?

And then last, any things we should be looking for in the December analyst day?

Thanks, and good luck in the quarter.

I'll start with Venezuela, George.

Certainly our remaining investment there is pretty insignificant, just a couple million dollars in net investment after the write-down.

The earnings stream from Venezuela is not significant of all, so it will have no impact on our earnings period to period to period.

From a tax rate perspective, I don't think we would expect our rate to be quite at this level going forward.

Probably someplace in the 30 -- someplace around 31% to 32%, not as low as what we've seen in the third quarter and fourth quarter just to mix in some unusual items.

But our best estimate at this point would be roughly 32%, but again that always has to be put back each year as we get a better sense of the mix of our earnings.

(Multiple speakers) gas tight in analyst day?

Well, I think you are referring to an aerosol can that's a composite.

Certainly we're working with a lot of things around composite that -- trying to bring it into new markets.

It has a lot of capabilities, so we're looking at all those things.

But I think the fundamental way to think about it is we are in the can business.

So, what new products can we introduce into the can business?

That's what we've been working on, so that continues to be an exciting challenge and we're excited by it.

As far as specifically in the film business, as we look into the future there are certain films that are true commodity films, and there's plenty of capacity domestically and other areas of the world.

But there are some laminating films, specialty films that, yes, I could see us getting into that film business in order to be more a cost-effective and a more efficient supplier.

All right.

Thanks.

I'll turn it over, guys.

Thank you, and I'm showing no further questions at this time.

I'd like to turn the call back over to Mr. Shrum for closing remarks.

Thank you again, Kaylee.

Sonoco will be conducting its annual investor breakfast conference on Friday, December 4, 2015 at the New York Palace located Paul us palace, which is located at 455 Madison Avenue in New York.

Breakfast will be served starting at 7.30 a.m., and presentations will follow up approximately eight o'clock.

Jack, Barry and other members of our leadership team will attend and will provide an update on 2015 activities and a review of our expectations for 2016 and beyond.

Electronic invitations are going to be sent out later today, and we ask that you do please RSVP in advance to make sure that we have plenty of room and, of course, plenty of breakfast.

You can RSVP by emailing or calling us directly.

Those who cannot attend in person can still join the meeting via phone conference or webcast on the Internet.

We hope you can join us for this very special event.

In closing, let me again thank you for joining us today, and we appreciate your interest in the Company.

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

Thank you again.

Ladies and gentlemen, thank you for participating in today's conference.

This does complete the program, and you may all disconnect.

Everyone have a wonderful day.