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Executives

Roger P. Schrum – Vice President, Investor Relations and Corporate Affairs

Harris E. DeLoach, Jr., – Chairman and Chief Executive Officer

Jack Sanders – President and Chief Operating Officer

Barry L. Saunders – Vice President and Chief Financial Officer

Analysts

James Armstrong – Vertical Research Partners

Matt Wooten – Robert W. Baird

Steve Chercover – D.A. Davidson & Co.

Ian Zaffino – Oppenheimer & Co.

Phil Gresh – JPMorgan

Sonoco Products Co. (SON) Mergers&Aquisitions Call October 10, 2011 10:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Sonoco Products Company Conference Call to discuss the acquisition of the Tegrant Corporation. My name is Modesta, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Roger Schrum (Inaudible).

Roger P. Schrum

Thank you, Modesta. Good morning, everyone and welcome to our investor call. This call is being conducted on October 10, 2011. Joining me today are Harris DeLoach, Chairman and Chief Executive Officer; Jack Sanders, President and Chief Operating Officer; and Barry Saunders, Vice President and Chief Financial Officer.

A news release discussing the details of the Tegrant acquisition was issued before the market opened today. In addition, we are using a series of slides for the webcast. Both the release and the slides are available on the Investor Relations section of our website at sonoco.com.

Let me begin by stating that today’s investor call may contain a number of forward-looking statements that are based on current expectations, estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additional information about factors that could cause different results and information about the use by the Company of non-GAAP financial measures is available in today’s news release and on the Company’s website.

With that introduction, I’ll turn it over to Harris DeLoach.

Harris E. DeLoach, Jr.

Thank you, Roger. As you no doubt know, we are pleased to announce today that Sonoco has signed a definitive agreement to acquire Tegrant Corporation, a leading provider of highly engineered, protective, temperature-assured and retail security packaging solutions, from Metalmark Capital for $550 million in cash.

The acquisition of Tegrant is the largest in Sonoco’s long history and we are very excited that our combined businesses will create a North American leader in multimaterial Protective Packaging.

The addition of Tegrant and its family of businesses significantly advances the products, services and capabilities that we can offer both our industrial and consumer customers. As we evaluated Tegrant, we found a company with strong leadership, good growth potential, similar values and culture, and a very dedicated team of employees committed to best surveilling the needs of their customers.

Tegrant is projected to generate 2011 sales of about $440 million and when combined, Sonoco is expected to generate sales of approximately $5 billion in 2012. The transaction is projected to be accretive to Sonoco’s 2012 earnings and following the normal regulatory review, we believe the transaction will close in November of 2011.

Barry will discuss further the financial details of this transaction, but we expect to finance the acquisition through debt. As we have with past acquisitions, we will use our strong free cash flow to reduce debt over the next few years.

With that very brief overview, let me turn the call over to Jack who will give you a review of Tegrant’s operations and further explain why we are so excited about these capabilities. Jack?

Jack Sanders

Thank you, Harris. If you have heard Harris and me speak over the past several months, you know that we’ve been targeting expansion of our Protective Packaging business and hopes of finding a company that would better diversify our capabilities and product mix. Tegrant fit what we were looking for.

If you’ll turn to slide four, let me give you an overview of Tegrant and its businesses. For those of you who are not familiar with Tegrant, it’s headquartered in DeKalb, Illinois, and operates three strategic business units. Protexic brands, the largest of Tegrant’s businesses is North America’s premier manufacturer of molded expanded plastic foam for custom packaging solutions. Protexic expects to have 2011 estimated revenues of $214 million operates 15 plants primarily in North America, and has about 1,000 employees.

Included in Protexic’s 2011 revenues is the January acquisition of Createc, an EPS Protective Packaging business focused on the appliance and automotive industries. Tegrant’s ThermoSafe brands is the leader in temperature-assured Protective Packaging, serving a variety of life science and food markets. Estimated 2011 revenues for ThermoSafe are $111 million. It operates eight plants and has nearly 500 employees.

Another well recognized brand under the Tegrant umbrella is Alloyd Brands, which is the market leader in consumer retail security packaging. Alloyd is projected to have revenues of $118 million in 2011 and operates 11 facilities including research and engineering centers. Alloyd has nearly 800 employees.

Let’s take a little closer look at each of these businesses and talk more about the opportunities we see for their future development. Again, I’ll start with Protexic. They are the clear leader in engineered molded foam packaging solutions and nearly twice the size of their nearest competitor. It’s also a great fit with Sonoco’s existing paper-based Protective Packaging business and allows us to offer a total solution for our customers in terms of material, package design and testing. Protexic serves several important consumer and industrial markets with consumer electronics, automotive and industrial products representing approximately 65% of their served markets.

Many of Protexic's customers are currently served by Sonoco's Protective Packaging division, which we believe gives us the opportunity to better meet the total packaging needs of these customers.

Protexic also offers growth opportunities in the research and automotive sector which is increasingly using form as a lightweight component solution also continued demand in consumer electronics and appliances will drive future growth. We also see potential synergies with our existing businesses in leveraging research, design and testing capabilities.

Next is ThermoSafe, which I mentioned earlier is a world leader in temperature-assured Protective Packaging with a leading market position three times that of its nearest competitor. This business not only produces insulating shipping materials, but also has licensing agreements for PolarPack brands gel refrigerant packs and other insulation materials.

When you think of ThermoSafe products visualize extremely expensive pharmaceuticals or other life science products that are being shipped across the country or around the globe at required temperatures. This is clearly a new market for Sonoco and we believe there are significant opportunities to grow this business internationally.

Alloyd Brand is also a well recognized producer of retail security and Protective Packaging. Their products include thermoformed plastic packaging for retail products, Blister Cards, Clamshell Inserts, and fiber based packaging. In addition, Alloyd produces sealing machinery and tooling for these products. Again this moves us further into consumer packaging particularly in thermoforming where we are already a leading supplier. Also, Alloyd gives us entry into new retail markets where we can leverage existing relationships through our packaging services business.

As you can see on slide eight, the combination of Sonoco and Tegrant creates a powerful Protective Packaging growth engine that is either number one or number two in the key served markets. This includes appliances, HVAC systems and large format products such as furniture and exercise equipment. Also the combined company will have a leading market position in automotive, electronics, medical equipment, temperature-assured pharma and retail packaging for consumer product companies. Overall, these markets are projected to grow on average between 3% to 5%.

We have stated over the past several years that we’re focused on expanding our consumer focused businesses at a faster pace than our legacy industrial businesses. We believe this acquisition allows us to grow both our consumer and industrial businesses. Sonoco and Tegrant’s combined Protective Packaging business will represent approximately 11% of Sonoco’s projected 2012 sales up from 2% in 2011. But as I’ve explained, this new business will be complementary to all our businesses Industrial, Consumer, and Packaging Services.

Finally let me briefly discuss our integration strategy. We are targeting approximately a $11 million in synergies over the next year through logistics optimization, material sourcing, facility and corporate integration, and research and testing facility integration. As for our integration leadership John Colyer, who is Vice President of Sonoco’s Global Industrial Converting operations will have responsibility for our combined Protective Packaging businesses, along with our global tube core and reels businesses.

I’m also pleased that Ron Leach, Tegrant President and CEO, has agreed to stay on to continue to lead the Tegrant businesses. And finally, Vicki Arthur who was formerly Vice President, Global Corporate Customers will serve as integration leader for Sonoco’s Protective Packaging businesses.

We have already put together an integration team involving Sonoco and Tegrant leaders to begin working on key issues. In addition, we have hired outside consultants to assist in getting our two businesses working as one as quickly as possible after the closing.

With that, let me turn it over to Barry to review the financial aspects of the transaction. Barry?

Barry L. Saunders

As Harris mentioned, the agreement to acquire Tegrant Corporation is an all cash transaction for $550 million excluding any working capital adjustment. Pro forma EBITDA for 2011 for Tegrant is expected to be $63 million prior to consideration of acquisition synergies which we expect to be a $11 million. The pro forma EBITDA was based on year-to-date performance and the reforecast for the balance of the year plus approximately $5 million in annualized synergies from the Createc acquisition that have not been in place for a full year. This would bring pro forma EBITDA for 2011 with synergies to approximately $74 million.

We have identified $50 million in value from tax attributes arising from both the use of net operating losses and from the tax benefit associated with amortization of intangibles. After considering the value of the tax attributes as a direct offset to the cash price of $550 million, the purchase price represents 6.8 times the 2011 pro forma EBITDA including synergies.

In terms of financing, we continue to evaluate credit alternatives in the debt market and the related tenors, but for these financial projections we have assumed that weighted average interest rate for the financing would be roughly 4.5%.

We recently met with S&P Moody’s on this transaction and have not yet received their feedback, but have assumed in our interest rate estimate that there would not be any significant change in our investment grade credit rating. Although initially increasing our debt to total capital to the mid 40s immediately following closing, we project that cash flows from the combined business will quickly restore our financial position to Sonoco’s more traditional conservative capital structure.

Immediately following the transaction, we project that our credit leverage not adjusted for any cash on the balance sheet would be somewhere between 2.1 and 2.2 times EBITDA. In rough terms, our EBITDA interest coverage would be roughly 10.5 times in 2012. In terms of the direct impact on our 2011 results, depending on the actual closing date, we would expect little impact on base earnings this year, possibly a few pennies dilutive depending on the closing date just due to the fact that the expected profit on inventory at time of closing will be recognized to purchase accounting. We will incur an expense transaction cost outside the financing cost of approximately $6 million during the quarter and would expect to exclude such charges from our base earnings.

Looking after 2012, we project sales for Tegrant to be approximately $465 million, even it will take up to a year or so to achieve the synergies and therefore not having the full annualized value in the first year, we project EBITDA to be approximately $75 million in 2012 excluding any one-time cost. Based on a very rough estimate of the impact of purchase accounting, depreciation and amortization for the business will be approximately $40 million while we would only expect annual capital spending of just under $20 million.

The business is well equipped with capacity to support routes in North America. With these projections, the acquisition would be accretive by $0.06 per diluted share next year or $0.10 on a pro forma basis with the $11 million in synergies fully realized, again excluding any one-time cost.

With that, I’ll now turn it back over to Harris for some concluding remarks.

Harris E. DeLoach, Jr.

Thank you, Barry. Before taking your questions, let me close with a couple of key takeaways. I hope that you can tell from Jack and Barry and my comments that we’re extremely excited about the opportunities that exist from joining Sonoco and Tegrant together to form a North American leader in multimaterial Protective Packaging. Sonoco’s Protective Packaging business will have market leadership and our key served markets ranging from appliances to retail packaging. This acquisition will enhance our ability to grow both our consumer and industrial businesses. For example, we will have immediate access to new faster growing markets. We will be able to offer an increased breadth of Protective Packaging materials including paper, plastic, and foam.

We will be expanding our technology, manufacturing and testing expertise, and we’ll be expanding our Protective Packaging customer base to a variety of industrial and consumer markets including medical and retail club stores. And we have developed opportunities to take these platforms into global markets.

In the short term we’ll be focused on integration of our businesses and improving results to synergies in growth and finally, we’re focused on maintaining our investment grade credit rating and once the acquisition is completed, we will use our strong free cash flow to reduce debt over the next several years.

Thank you for your attention and being with us this morning and we’ll be happy to take any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) The first question today comes from the line of James Armstrong with Vertical Research Partners. Please proceed.

James Armstrong – Vertical Research Partners

Good morning and congrats on the deal.

Harris E. DeLoach, Jr.

Good morning. Thank you.

James Armstrong – Vertical Research Partners

My first question is just a modeling question. Will Tegrant be folded into your current segments or will it be split out as its own segment of the company?

Harris E. DeLoach, Jr.

We’re still in the process of evaluating that and would expect to disclose that at the time of closing.

James Armstrong – Vertical Research Partners

Okay. And then changing gears a little, even after the deal your leverage ratio just seems to remain in check if not, low. Could you remind us of your ideal leverage ratio and does this deal prevent you from making further acquisitions should they come along?

Harris E. DeLoach, Jr.

It wouldn’t prevent us from making further acquisitions. However as I said, this does raise our debt to capital ratio the way we tend to look at it and our leverage ratio a little higher than traditionally we have it. So our focus over the next 18 months or 24 months will be clearly to integrate this business, beat the pro formas and grow it and use the cash flow to pay down debt to get back to more our traditional levels. We do have some cash offshore, but our main focus will be on getting this thing integrated and paying down some debt.

James Armstrong – Vertical Research Partners

Okay. That helps a lot. Thank you very much.

Harris E. DeLoach, Jr.

You’re very welcome. Thank you.

Operator

Your next question comes from the line of Ghansham Panjabi with Robert W. Baird. Please proceed.

Matt Wooten – Robert W. Baird

Good morning. It’s actually Matt Wooten sitting in for Ghansham today. We were hoping that you could provide some detail on how Tegrant has performed in past recessionary periods both in terms of sales and profitability?

Harris E. DeLoach, Jr.

I am not being hesitant other than to say that we haven’t closed this transaction yet and we are under confidentiality agreement. This is a private company and so I'm not at liberty to give exact numbers, other than to say that it’s been a very strong performing company and we’ll give you more color on that as we get closer to the transaction.

Matt Wooten – Robert W. Baird

Understood, thank you. And also could you provide a rough estimate of the raw material breakdown for the business?

Harris E. DeLoach, Jr.

I don’t know that we can do that. Jack, do you have a feel for that at all? You know what the actual breakdown being…

Jack Sanders

No, we don’t

Harris E. DeLoach, Jr.

We’ll get that and get back to you.

Matt Wooten – Robert W. Baird

Great, thank you.

Operator

(Operator Instructions) Your next question comes from the line of Steve Chercover with D.A. Davidson. Please proceed.

Steve Chercover – D.A. Davidson & Co.

Thank you and good morning. I guess my question first of all is; did you look at Tegrant when it was first sold by SCA in 2007?

Harris E. DeLoach, Jr.

No, we didn’t but we looked at it when it was Tuscarora in 2001.

Steve Chercover – D.A. Davidson & Co.

Okay, so you’re – I am just wondering so their sales in 2007 I believe were $430 million so it’s grown modestly, and it looks like there's an acquisition in there. What has happened in the intervening four years to make it increase in value?

Harris E. DeLoach, Jr.

Well, Jack do you want to handle that, because you were fairly close to it, but they have pruned out a lot of business during those years and basically they would say right size the business in a very positive way and turned it around significantly.

Jack Sanders

That's very accurate. They choose specific markets to go after and to grow added additional capabilities around the ThermoSafe brand and other types of thing, so they just look that a little bit differently and tried to create a company of leadership positions, which is really what they’ve done.

Steve Chercover – D.A. Davidson & Co.

So would it be safe to say that while sales haven't expanded greatly margins and profitability have?

Jack Sanders

I would think so, yes.

Harris E. DeLoach, Jr.

Yes.

Steve Chercover – D.A. Davidson & Co.

Okay, great. Thank you and good luck with the integration.

Harris E. DeLoach, Jr.

Thank you very much.

Operator

Your next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed.

Ian Zaffino – Oppenheimer & Co.

Hi, just one quick question. As far as what you're talking about for next year, if you back out the acquisition, it seems that the core business is flat. Is that a message that you were trying to convey, or is that just you use 2011 numbers and just kind of added on the acquisition?

Harris E. DeLoach, Jr.

I think it’s very fair to say, this is just from some high level of modeling and wasn’t intended to provide any guidance on what we expected next year to be for Sonoco’s base business, and as I mentioned earlier, probably conservative in these ratios.

Ian Zaffino – Oppenheimer & Co.

Okay, all right. Thank you.

Operator

Your next question comes from the line of (inaudible) with JPMorgan. Please proceed.

Phil Gresh – JPMorgan

Yeah. Hi, actually it’s Phil Gresh from JPMorgan. How are you doing?

Harris E. DeLoach, Jr.

Hello Phil, how are you?

Phil Gresh – JPMorgan

Good. So I guess one question for you is, this is the largest transaction that you’ve done. So is this kind of the mold going forward, or is this kind of the one off and you’d expect in your future deals you might do to be on the smaller side?

Jack Sanders

Well, first of all, Phil we’ve laid our goal out of being $6 billion company by 2014. I’ve also said it would be a lot easier to do a couple of large acquisitions and this bunch of small ones. But the truth to matter is, Tegrant was an acquisition that we sold out about a year ago and had a lot of dialog and we are very fortunate to work with Metalmark to acquire it and we will continue to do that as I said, I have to sell the next 18 months. So it’s going to be integrating this one and paying down some debt and then we will wait and see with that $6 billion target is than we expect to make it.

Phil Gresh – JPMorgan

Okay. So I guess that the current leverage ratio is your priorities are to pay down debt as opposed to doing anything that might take it a bit higher from here?

Jack Sanders

That’s a fair assumption.

Phil Gresh – JPMorgan

Okay. And then just one question of the number, I believe you said the G&A was $40 million, that sound a little high relative to the sales. Is that right? Can you explain that?

Jack Sanders

That certainly is a rough estimate at this time, we obviously have that completed the purchase, the accounting to determine exactly what the impact of the asset right up, so that might be a little bit high but just in the range of where we would expect.

Phil Gresh – JPMorgan

Okay, got it. All right. Thanks.

Jack Sanders

Thank you, Phil.

Operator

Gentlemen, it appears that was your final question.

Harris E. DeLoach, Jr.

Well, thank you again for your interest in this transaction and we certainly appreciate you being on the call. I did want to announce that we will be moving up the date for our earnings release for the third quarter and that will be on after the market closes on Tuesday, October, 18. In addition we will conduct our regular investor conference call on Wednesday, October 19 at 11 AM to review those third quarter results. Invitations and details of the call are being released this morning and all of this of course is related to this transaction. So that’s why we’re moving those things up. Again, thank you for your inquiries today and if you have any further questions, please don’t hesitate to give any of us a call. Thank you.

Operator

Ladies and gentlemen, that conclude today’s conference. Thank you for your participation, you may now disconnect. Have a great day.

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