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Sonoco Products Company (NYSE:SON)

Q1 2012 Earnings Call

April 19, 2012 11:00 am ET

Executives

Roger Schrum – Vice President, Investor Relations & Corporate Affairs

Barry L. Saunders – Vice President and Chief Financial Officer

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

M. Jack Sanders – President and Chief Operating Officer

Analysts

Scott Gaffner – Barclays Capital

George Staphos – Bank of America/Merrill Lynch

Ghansham Panjabi – Robert W. Baird & Co., Inc.

Philip Ng – Jefferies & Company, Inc.

Ian Zaffino – Oppenheimer & Co.

Phil Gresh – JPMorgan

Chip A. Dillon – Vertical Research Partners Inc.

Adam Josephson – KeyBanc Capital Markets Inc.

Mark Wilde – Deutsche Bank

Christopher David Manuel – Wells Fargo Securities, LLC

Albert Kabili – Credit Suisse

Alex Ovshey – Goldman Sachs

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2012 Sonoco Earnings Conference Call. My name is [Geneta], and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Roger Schrum, Vice President of Investor Relations for Sonoco. Please proceed, sir.

Roger Schrum

Thank you, [Geneta]. Good morning, everyone, and welcome to Sonoco’s 2012 first quarter earnings investor call. This call is being conducted on April 19, 2012.

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.

The news release reviewing the company’s financial results was released before the market opened today, and is available on our 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 this call.

I’ll briefly remind you that today’s 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, I’ll turn it over to Barry Saunders.

Barry L. Saunders

Thank you, Roger. I’ll begin on slide three. Please see that this morning, we’ve reported first-quarter earnings per diluted share on a U.S. GAAP basis of $0.42 and base EPS of $0.52, which compares to base EPS of $0.57 for the same quarter last year. These results were $0.02 above the top end of our base earnings guidance for the quarter of $0.45 to $0.50. This stronger than expected results are due to the volume and industrial businesses in North America and Europe being slightly better than what we thought coming out of the very weak December and lower-than expected fixed cost.

Before reviewing the base P&L for the quarter, I will mention that a reconciliation of the GAAP to base earnings is in the press release as Roger mentioned. The difference between GAAP and base for the current quarter is due to $0.10 of restructuring charges. The restructuring charges were related to the closure of the Nordhorn Germany paper mill, additional charges related to the closure of a thermoforming plant in Canada, actions in Tegrant related to driving synergies and other miscellaneous cost reduction initiatives.

Turning to slide four, you'll find our base P&L where you see that sales were $1.212 billion, which were 8.5% higher than last year and as you’ll see in the sales bridge, the favorable variant to last year was driven almost entirely by the Tegrant acquisition.

Gross profit of $217 million was 12% better than last year with our gross profit percent at 17.9% as compared to 17.4% for the same quarter last year. Selling and administrative expenses and other charges were $123 million, which were higher than last year due to Tegrant as well; otherwise, the impact of labor and another inflation was essentially offset by fixed cost reductions thus EBIT of $94.2 million, was $3 million higher than last year, and you’ll see the drivers of the change in the EBIT bridge in just a moment.

Interest expense of $50 million, was $7 million higher than last year due to financing the Tegrant acquisition. Taxes were $26.5 million for the quarter as the effective tax rate on base earnings was higher as expected at 33.7% versus 31.2% for the first quarter last year.

Equity and affiliates and minority interest were not notably different. thus base net income was $53.8 million or $0.52 per share again compared to $0.57 last year. The lower year-over-year earnings can really be isolated to $0.02 due to higher pension expense, $0.02 due to a higher effective tax rate, and just under $1 due to foreign currency translation.

Turning to the sales bridge, on slide five, which reconciles the year-over-year change in sales, you see volume was slightly negative, down $11.5 million or right at 1% for the company as a whole. I will point out that there was one less day in the accounting calendar, which could have theoretically accounted for a decline of about that amount, but given its not really statistically significant we just left that difference in volume and not tried to show it separately on the bridge.

Consumer volume was down year-over-year as volume in composite cans and enclosures in North America, each where down 2%, but flexible volume was up 1% and blow-molded plastics was up almost 20% associated with growth and both food and health and beauty segments, which we’re then it was like partially offset by lower volume in our thermoforming business due to lower demand for the dual-ovenable frozen food tray.

In the industrial converting and paper businesses, trade volume was flat for the segment as a whole, but this was driven by more recycling activity in North America and Europe due to growth initiatives in those businesses, as well as more trade sales of paper in North America, which more than offset a decline in tube and core volume, which was down 3% in North America and 6% in Europe.

Volume was down 18% in Asia, but that was due primarily to the continued impact of the Thailand flood. tube and core volume was up 2% in South America, and Reels volume in North America was particularly strong up 15% due to continued strong demand for steel reels.

Just a few more comments on tube and core volume. Although down year-over-year, volume was 3% in North America. volume did improve by 2% from the fourth quarter of 2011. We saw some pick up in January over December and then another step up in February we’re held pretty flat in March and we’ve really used that as the run rate as the basis for our outlook for the balance of the year. If this volume level holds, this would be 3% below last year’s second quarter, but in line with the third and 2% better than the fourth quarter of 2011.

In Europe, tube and core volume was down almost 6% year-over-year. This was driven by volume in the legacy countries being down 9% due most notably to lower sales and to the paper mill market, partially offset by volume in the frontier countries being up 2%. The overall business did pickup almost 6% in the first quarter of 2012, as compared to the fourth quarter of 2011 and was gaining some strength through the quarter.

In Packaging Services, a continued increase in fulfillment activity globally was more than offset by lower year-over-year sales in dedicated tax centers associated with last year’s loss for contract packaging account. And finally in Protective Packaging, our legacy business was down slightly due to the decision last year to end certain business in China and all of the Tegrant volume is shown in the acquisition column.

As information Tegrant volume was up year-over-year driven by solid growth in Protexic and ThermoSafe businesses. Sales prices were slightly higher for the company overall up $7.7 million.

In the consumer segment, prices were higher year-over-year and most all businesses associated with higher input costs as resins, films and other materials were raising pretty much last year. This was then only partially offset by lower prices in the paper and industrial converting segment where sales prices were lower in North America associated with lower OCC prices impacting the prices for tubes and cores, paper sales and of course, recycling. Many contracts in the U.S. had selling prices in the first quarter of 2011 based on an OCC price of $160 per ton, while the prices reset for the first quarter in 2012 at a $110.

Selling prices were higher in Europe year-over-year where increases have been implemented to recover higher material cost. Acquisitions accounted for $115 million of the change in sales. Again, that was due almost entirely to Tegrant. And finally, the translation of sales in foreign currency reduced reported sales by $16 million due to a slight strengthening of the dollar.

Turning to the EBIT bridge from the last year on the slide six, you see that the lower year-over-year sales volumes combined with mix reduced year-over-year EBIT by $13 million as we had a notable impact from mix both between and within the businesses.

In the consumer segment, the year-over-year lower volume in trade sale was exacerbated by negative mix in composite cans, as well as the impact of the lost profits on fewer intercompany closure sales.

On the industrial side, the additional business in recycling, particularly in Europe is really just brokerage business with as much smaller than average margin for the segment. And the higher trade sales in paper came largely from more edgeboard and linerboard sales, both of which have relatively lower margins.

In the higher recycling and trade paper sales were offsetting lower tube and core sales, which of course had a higher overall margin. And in Packaging Services, results were impacted by the lower volumes due to the loss of the contract packaging account, which again was only partially offset by the increased volume and other fulfillment activities.

I will mention that although mix was negative year-over-year, it was really not significantly different in most of our businesses from what we expected when our 2012 plans were put together.

As expected, selling prices net of change in material cost, energy and freight cost were favorable year-over-year by $8.7 million. In the consumer segment, the year-over-year change in selling prices just more than offset the material cost changes as we were chasing, raising prices throughout last year particularly in plastics.

In terms of the more significant year-over-year cost changes, the market price for steel used in Metal Ends is up almost 2%. Films are up approximately 6% and resins up roughly 3% with ranging anyplace from essentially flat to up to 6% depending on the resin type. Although, the selling prices were lower in tubes and cores and paper due to lower OCC prices, material costs were also lower resulting in a favorable variance in that segment.

We are pleased to report that as expected we saw a significant improvement in productivity in the quarter where manufacturing productivity was $10.8 million compared to productivity of just over $5 million last year. Much of the productivity came from our mills in North America, which ran better.

We also saw a notable improvement in tubes and cores North America from the completion of a consolidation project in the Southeast last year, and then our blow molded plastics business due to stabilization of all the new business brought in last year. Productivity would have been even a little bit stronger, if it was not for some inefficiencies and excess cost in flexibles related to capacity constraint issues and in thermoforming related to excess capacity due to lower-than expected demand.

Paper mills were also underutilized in Europe, they ran at only about an 89% utilization rate versus 100% for the same quarter last year, but again improved notably from a 78% utilization in the fourth quarter.

Although we’ve not typically broken out the EBIT impact of acquisitions, given the significance of this acquisition to the segment and since segment results are also impacted by corporate allocations, we thought it would be helpful to provide this level of information for Tegrant, and as you see acquisitions added $5.6 million in EBIT due to Tegrant.

Top line results were a little bit stronger than what we expected and EBIT almost on track, just a little short of expectations due to some plant operating inefficiencies related integration activities. We’re projecting to see continued improvement in earnings over the coming quarters due to the normal seasonality in the business, from operating improvement and from the realization of synergies, which are tracking as planned.

Other is our catch-all category, which includes wage and other non-material inflation of roughly $10 million partially offset by fixed cost productivity and other changes of $5 million. One of our key objectives in improving operational performance this year was to ensure the manufacturing productivity exceeded all other cost changes and as you can see we were successful in delivering on that objective in this quarter. And finally, pension expense is higher year-over-year by $4 million, driven most notably by the decline in the discount rate at year-end.

Looking briefly at the results by segment on slide seven; for the consumer businesses, sales were $496 million essentially unchanged from the prior year with EBIT of $50 million down only slightly and EBIT percent still above 10%.

For the paper and industrial converted products businesses, you see sales of $463 million were down 1.6% from last year, while EBIT of $32 million was up 6%, and EBIT as a percent of sales improving to 7%.

Packaging services sales of $115 million, which were down almost 7% due to both lower activity and the impact of translation, while EBIT of $4.8 million was down even more in percentage terms, due to the lower volume and a change in the mix of the business associated with the lower contract packaging activity. And protective packaging sales of $138 million and EBIT of $7 million were up year-over-year due to the Tegrant acquisition.

And now looking forward on page eight, we are updating our full year 2012 guidance or specifically for the second quarter, we’re projecting that the base earnings per share will be in the range of $0.55 to $0.60, which compares to the current consensus estimate of $0.59. The improvement from the first quarter is driven by higher earnings in protective packaging and in our global paper and industrial converted products businesses, partially offset by lower sequential earnings in consumer segment and in packaging services just due to normal seasonality.

We are increasing our estimates for the full year 2012 now forecasting that our base earnings will be in the range of $2.34 to $2.44 per share, which is up $0.02 from the previous guidance on both the low and the high end due to better than expected earnings in the first quarter. We've really not factored in any notable change in the level of business activity other than normal seasonality.

On page nine, you see our cash flow summary where we had a very good quarter, reporting cash generation from operations of $101 million as compared to the use of cash of $14 million for the same quarter last year.

This year’s first quarter included an impact of making contributions of $50 million to pension and post retirement plans globally as compared to $98 million last year. The lower pension contributions along with less of an increase in working capital this year and lower management incentive payouts accounted for most of the year-over-year change.

Capital spending was $48 million for the quarter, which as expected was higher than last years $38 million. The year-over-year increase was most notably impacted by the incremental spending on the biomass boiler project for our Hartsville, South Carolina paper mill complex and for the new blow-molded plastics plan in Columbus, Ohio. And therefore, after paying dividends, free cash flow was $24 million for the quarter versus a negative $80 million last year. We did use some cash to repay $36 million in debt thus our debt-to-total capital ratio improved 45.8% down from 47.4% at year end.

In terms of our expectation for the full year, we are still projecting cash from operations to be roughly $385 million. Capital spending should be in the $185 million range, and after dividends we’ll have free cash flow of at least $80 million, which is inline with the projections shared at our conference call last quarter.

As you might have seen yesterday, our Board of Directors did increase the quarterly dividend from $0.29 to $0.30 a share as we know dividends are an important part of our total return to shareholders. The new quarterly dividend would annualize to a $1.20 per share representing a yield of right around 3.7% based on the share price yesterday.

There are a few additional pages of reference material in appendix for your convenience, but that completes my review for the quarter, and we can now open the line up for questions.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Scott Gaffner with Barclays Capital. Please proceed.

Scott Gaffner – Barclays Capital

Good morning.

Harris E. DeLoach, Jr.

Good morning.

Barry L. Saunders

Good morning, Scott.

Scott Gaffner – Barclays Capital

I was just looking at the Paper and Industrial business, you talked about the volumes there and on the industrial side of the business were better than you expected. Can you talk maybe a little bit about the end markets there? Where exactly you’re seeing the strength from?

M. Jack Sanders

Yes, Scott, this is Jack. On a year-over-year basis?

Scott Gaffner – Barclays Capital

Either year-over-year or actually I was looking more sequentially, where you saw the strength since the fourth quarter was maybe below, and then first quarter came in a little bit better than expected?

Barry L. Saunders

Yeah, sure. This is Barry, Scott and I’ll add that. It really as I mentioned, it was only up slightly better than we expected. We didn’t see a lot more strength than what our guidance was based on. But I will provide just a little bit more color. First of all, year-over-year again, I mentioned it was down almost 3% and that was with paper mill activity being down right about 1% and some of other segments down a little bit more than that year-over-year.

But from the fourth quarter, we actually saw just a little bit of weakening in the paper mill packaging segment and actually improvement in film, tape and specialty and the textile segments. Those were all up any place from 4% to 10% over the end of the fourth quarter of 2011.

Scott Gaffner – Barclays Capital

Okay. And then on the plastic side of the business, I think you mentioned a higher resin pricing in the quarter. It sounds like the resin producers are actually put through a price increase in March, but that maybe prices come down to May. what’s your sort of outlook there? What are you hearing from your guys in the field?

Harris E. DeLoach, Jr.

Yeah, Scott, I would tell you, that's basically in line with our own expectation. We did see some increases that occurred in the first quarter. Prices reset now for the second quarter. But we expect that to – that has topped out, and should kind of flatten out and trend down, with natural gas prices, being as low as they are. There is just no reason for resin prices to continue to rise.

Scott Gaffner – Barclays Capital

Okay. Thank you.

Operator

Your next question comes from the line of George Staphos with Bank of America Merrill Lynch. Please proceed.

George Staphos – Bank of America/Merrill Lynch

Thanks. Hi everyone, good morning.

Barry L. Saunders

Good morning, George.

George Staphos – Bank of America/Merrill Lynch

Solid quarter, we appreciate the slide deck, I’ve been waiting for that for a long time, appreciate the details. I guess, I had a few questions around margin and really what I’m trying to get is the volume mix effect on EBIT. If I make some rough approximations in terms of what the volume effect on revenue was and assume something for a detrimental margin, my guess would be that the mix effect in volume mixes maybe in the range of $7 million to $8 million. Could you provide more confirmation on that? could you provide more detail on that? and in terms of all the items that you mentioned in terms of mix, what was the biggest driver of that variance?

Harris E. DeLoach, Jr.

Year. Certainly, just from a higher level perspective, your calculations will be directionally correct if you just look at the dollar change in sales, but as I mentioned, we really saw a good bit of mix impact across many of the businesses than all of the segments, and it really can’t be – is an isolated to just one or two particular business unit. It really is spread across most of them were again saw some mix in consumer, mix in industrial associated with recycling activities, which again some of those activities don’t carry the same margin as tube and core certainly saw some more sales and some of the lower end paper grades externally and in packaging services, as we would expect year-over-year with the flip in some of the film and activities versus some of the contract packaging activity, which was very strong in the first and second quarter of last year. And as also mentioned, the mix was really pretty much in line with we would see in the first quarter as we developed our guidance away from dompoist months ago.

George Staphos – Bank of America/Merrill Lynch

(Inaudible) maybe a related question, although I realize it sound like things trending as have you seen expected. Have you seen any effect in terms of trade down perhaps driven by maybe more competition within the paper portion of your consumer packaging business, in other words are you seeing consumers maybe shifting away from composites to other you of your own or those of competitors?

Harris E. DeLoach, Jr.

George, I would say that no more than is normal for that line of business nothing added in ordinary.

George Staphos – Bank of America/Merrill Lynch

Okay. A couple of last questions and then I'll turn it over. In the cash from operations you obviously did a very good job. You've numerated two or three things that drove it. The other operating account figure which was I think better by some $50 million year-on-year, was the mostly the pension funding differential?

Barry L. Saunders

If you’re looking at, well, again, there were really three drivers of the year-over-year change. Certainly, lower pension contribution and higher expense when you net those two together, that accounted for right of $50 million of the change, roughly about $25 million of the change can just be explained by the lower use of working capital in this quarter versus the same quarter last year, and then the other 25 million can really be explained by lower incentives and other such payouts.

George Staphos – Bank of America/Merrill Lynch

Okay. But I guess so, what’s in other operating activity, maybe this is a question differently, Barry I apologize in the $56 million somewhat positive in cash flow?

Barry L. Saunders

Yeah. That is really the net change in all of your other accounts and the $32 million change that you would see in the cash flow year-over-year. most of that would be associated with the lower incentive payouts.

George Staphos – Bank of America/Merrill Lynch

Okay. Thanks, I’ll turn it over.

Operator

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

Ghansham Panjabi – Robert W. Baird & Co., Inc.

Hi guys, good morning.

Barry L. Saunders

Good morning, Ghansham.

Harris E. DeLoach, Jr.

Good morning.

Ghansham Panjabi – Robert W. Baird & Co., Inc.

Hey, on your commentary in the press release related to customer caution over the outlook, how does this compare to their caution at the time of your last conference call in early February, has there been any change by business or geography.

Harris E. DeLoach, Jr.

I don't know, Ghansham, there has been any change. Our outlook for each forecast really is a bottoms-up starting with the customer. And I think most of – I’m not going to say 100%, but most of our customers are still fairly cautious about the balance of the year. So it’s – I wouldn’t say these all are changed.

Ghansham Panjabi – Robert W. Baird & Co., Inc.

Okay. And in terms of, on the consumer side, have you seen any indication of perhaps, more promotional activity over the next couple of quarters from your big customers there?

M. Jack Sanders

We certainly had a solid quarter on the promotional side start to the year. If that’s translating exactly to increased activity, it’s too early for me to say.

Ghansham Panjabi – Robert W. Baird & Co., Inc.

Okay. And just one final one on the thermoforming volume weakness, what’s driving that?

M. Jack Sanders

That’s primarily in frozen foods, ready-to-eat meals and that’s year-over-year change that we believe we’re driven by an increase by the CPG’s in the price of those products.

Ghansham Panjabi – Robert W. Baird & Co., Inc.

Got it. Okay. Thanks so much.

Operator

Your next question comes from the line of Philip Ng with Jefferies. Please proceed.

Philip Ng – Jefferies & Company, Inc.

Good morning, guys. You guys did a great job on the execution front, particularly on the productivity. Should that be actually accelerating in the back half, because if I remember correctly, your guidance implies to take up in volumes in the second half?

M. Jack Sanders

Well, certainly volumes effect productivity, but it’s a year-over-year comparison, so it picked in the prior year its going to pick in this year just like it normally does.

Philip Ng – Jefferies & Company, Inc.

Okay.

M. Jack Sanders

We normally would expect that there would be acceleration with volume, but again, its year-over-year.

Philip Ng – Jefferies & Company, Inc.

Okay. Got you.

Harris E. DeLoach, Jr.

If you recall in the first quarter of last year we had some fires and some bad will and other things, which effected productivity and we had good solid performance in operations, which grow those.

Philip Ng – Jefferies & Company, Inc.

Okay. That’s helpful. And then, I mean your volumes and consumer was down a little, but considering the pretty soft data out of the Nielsen for packaged food it’s held up pretty well. Can you talk about what are some of the things that you’re doing differently?

M. Jack Sanders

Well, I think some of our consumer volume as pointed out is being affected by new one volume in both plastics and are now on the flexible side. You – some I think it was you that mentioned the trade business so that was a little bit early that certainly we saw that down, and we certainly see some of that, but I would simply tell you that new one volume is offsetting some of that.

Philip Ng – Jefferies & Company, Inc.

Okay. That’s helpful. And then just lastly on Tegrant. It sounds like the integration process has come along pretty well, and historically, has done a pretty good job, rolling out new products. Have you been able to leverage some of that technology from Tegrant into different segments?

Harris E. DeLoach, Jr.

Not yet. I would tell you we see opportunities and the more we get into it, the more opportunities we see. So we’re very pleased, and we are pleased with the where we are in the integration and its gone quite well today, and expect to continue gain opportunities as we move forward.

Philip Ng – Jefferies & Company, Inc.

Okay, thanks guys.

Operator

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

Ian Zaffino – Oppenheimer & Co.

Great, thank you. I just wanted to get a little bit more into the Consumer side of the business. Is there a particular category that you are seeing particular strength in versus weakness, and though you define it, but more – blow-molded was very good. But if you can give maybe, slice and dice by demographic or kind of areas of the economy, particularly in the Consumer side. Is it blue collar doing [portly] is it (inaudible) doing better. Could you help us there? Thanks.

M. Jack Sanders

I’m not sure, I can tell you that snacks were pretty strong, but outside of that I’m not sure I can give you much more color to that.

Ian Zaffino – Oppenheimer & Co.

Okay. And then as far as your initiatives on the composites side, I know you had talked about some areas that you can probably take the composite can technology into, how is that going and how is that effort doing?

M. Jack Sanders

Well, I think it's going well. We always look for opportunities to move the composite can into new markets and we said for some time, we are looking at heavier liquids. I think that we've moved into some automotive or industrial type fluids. Paint is an area that we continue to look at as well. So, that's always on our radar screen, as well as all types of paper-based products that's the part of that group as well. So, continues to go well.

Ian Zaffino – Oppenheimer

Okay. All right. Thank you very much.

Operator

Your next question comes from the line of Phil Gresh with JPMorgan. Please proceed.

Phil Gresh – JPMorgan

Hey, good morning.

Harris E. DeLoach, Jr.

Good morning, Phil.

M. Jack Sanders

Good morning.

Phil Gresh – JPMorgan

Just wanted to ask a couple of questions on the industrial side. You talked about in Europe a 6% pickup sequentially on the volumes for tubes and cores. At what point – if we kind of run rate that you gave the good color on North America, I was just wondering at what point Europe would cycle to a positive comp if you just kind of run rate it or are we not at that point yet or we would see it this year?

Barry L. Saunders

I don't think we would expect that the current run rate to see a year-over-year improvement by any means. We're still forecasting that it would be down someplace 4% to 5% or so.

Phil Gresh – JPMorgan

For the full year?

Barry L. Saunders

Yeah, full year, year-over-year. So maybe again improved just modestly from what we based our full year guidance on the last quarter.

Phil Gresh – JPMorgan

So, I guess if I put that together with Europe being down, North America turning positive in the fourth quarter, coming back to the mix question within industrial you guys had said basically that the mix is negative, because tubes and cores has a higher margin. So, is it fair to say that the mix headwind on the industrial side at least would then continue through the rest of the year based on these run rates?

Barry L. Saunders

To some extent, we're not again projecting a significant change in the mix going forward. Now, again as I mentioned it improved somewhat sequentially during the quarter month-to-month, so it would improve somewhat just by being at March rates versus what we saw in January.

Harris E. DeLoach, Jr.

I would look at the industrial businesses this way that we had a very strong first quarter of last year that trended down through the balance of the year, and normally our first quarter is below the fourth quarter. And so the fact that the first quarter is up, we feel optimistic about, but we are still very constructive and I guesstimate for the rest of the year because that’s where our customers are.

Phil Gresh – JPMorgan

Okay, fair enough. And then on the protective side, the margins were down sequentially by about 100 basis points or so. I assume that’s the full quarter of Tegrant in there and the mix impact of that, but I guess are there any one-time acquisition related costs that are drag here in the first full quarter that start to go away as we progress to the year? How should we think about this 5% margin for protective as we go through the rest of the year?

M. Jack Sanders

Well, on a very short-term basis that’s being impacted by the combination of two businesses together, and for the first time what was to Tegrant we’re spreading corporate allocation, which they hadn’t had before, so that’s a part of it. I think longer-term Phil, this business is going to – the margins are going to continue to move back toward a double-digit range that’s certainly our expectation. I’m not sure it’s going to happen as soon as the end of the year, but I think we’re going to see movement as the year goes on up the curve.

Phil Gresh – JPMorgan

So do you feel like this could not to pin you down, but do you feel like this could be a double-digit margin business next year?

Harris E. DeLoach, Jr.

I’ll keep saying it will take me two years to get it there, but hopefully it comes quicker. But I believe it’s a double-digit margin business, and it’s going to take us just a little bit of time to get it there.

Phil Gresh – JPMorgan

Okay, thanks a lot.

Operator

Your next question comes from the line of Chip Dillon with Vertical Research Partners. Please proceed.

Chip A. Dillon – Vertical Research Partners Inc.

Yes and good morning.

Harris E. DeLoach, Jr.

Good morning.

Chip A. Dillon – Vertical Research Partners Inc.

On the volume front, it looks like from the bridge, you had about a sort of an weighted average 1% drop in volumes and maybe I missed this in the opening commentary, but could you give us if you will, either directionally or specifically what the organic volume changes whereby a segment year-over-year?

Barry L. Saunders

Yes, we did talk about it being down 1% in my first comments related to the fact that we actually had one less day and accounting for this year, which fundamentally could actually account for that 1% difference. We weren’t comfortable in breaking it out and attributing it necessarily to just about 1%. We did say that volume was down slightly and the consumer business was down about 2% and composite can and metal ends much of which was offset though by the fact that blow-molded plastics was up 20%. And then we talked about tube and core volume, everything in the combined paper and industrial converted products business to volume is essentially flat, but it was due to more recycling and paper trade sale offsetting the weakness that we saw year-over-year and tubes and cores both in North America and in Europe.

Chip A. Dillon – Vertical Research Partners Inc.

Go you. Okay, that’s very helpful. And as you look at the year, is it more fair to say that you probably would expect volumes. I know you were talking earlier about European tubes and cores being maybe down 4% to 5% for the year, but would you expect volumes sort of from a higher level to be certainly up in the fourth because of the easy comparison and possibly even up in the third and if you could tell us sort of where you see the whole year for the company?

Barry L. Saunders

We would certainly expect it will be up in the third and fourth shift.

Chip A. Dillon – Vertical Research Partners Inc.

And for the whole year, do you think that you will be up for the year or is it just too early to say?

Barry L. Saunders

I would think they would probably be down for the whole year given the situation in Europe.

Chip A. Dillon – Vertical Research Partners Inc.

Gotcha, gotcha. And then lastly you mentioned the blow molded volumes being up so big in the first quarter. Are there any – is there a couple of specific reasons that you would sight for that and do you see the pace of that strength continuing?

Barry L. Saunders

Well, yeah, the reasons are that the business that we brought on last year that we previously talked about, which would come on the latter part of the year and obviously is up and running quite well now. And I don’t expect that we will see it at the 20% year-over-year going forward, but we certainly do expect to see growth in this business as we have a lot of good opportunities.

Chip A. Dillon – Vertical Research Partners Inc.

Gotcha. And then the last question is I know in past quarters, recently given the ups and downs especially in Europe you’ve also commented sort of on what you’ve seen in almost month-to-month and as you mentioned the sequential strength in tubes and bores. But as you look at Europe maybe even by region, Northern, Southern, have you seen any significant change in sequential order patterns say February and March or March and April?

Harris E. DeLoach, Jr.

No, I don’t think with that granular to be perfectly honest, but I think I did see something that the legacy businesses were down the frontier area that we call frontier the Eastern European areas are slightly up and not down quite as much. But we’re not seeing a lot of change in Europe to be perfectly honest.

Chip A. Dillon – Vertical Research Partners Inc.

Got you, okay. Thank you.

Operator

Your next question comes from the line of Adam Josephson with KeyBanc. Please proceed.

Adam Josephson – KeyBanc Capital Markets Inc.

Thanks and good morning everyone.

Harris E. DeLoach, Jr.

Good morning, Adam.

Barry L. Saunders

Yeah.

Adam Josephson – KeyBanc Capital Markets Inc.

I know this is a difficult one, but which factors do you think your tubes and cores volume in the U.S. and Europe are more sensitive to, and do you have reason to believe that volume won’t fluctuate from month-to-month as much as they did last year?

M. Jack Sanders

Well, when you say they’re most sensitive to – we’ve always said that for the most part, tubes and cores are GDP type products, general economy and general economic demand. So I don’t envision it being any more or less sensitive to the economy than that. The one factor that I think could swap one way or the other is it when you look wound goods there is a lot of wound goods that are used in construction. so if housing picks up or we see an improvement in construction in this country, beyond what we’ve kind of already baked in or already seeing that could impact our volumes.

Adam Josephson – KeyBanc Capital Markets Inc.

Fair enough. one on consumer packaging, at what point do you expect those margins to expand and how does the change in product mix in that business affect your long-term margin outlook if at all?

M. Jack Sanders

Well, I think our margins in the consumer business are kind of at where they’re going to be, I think that we, the 10% and 11% range, that’s a very competitive industry and I don't really see them expanding much beyond that number.

Adam Josephson – KeyBanc Capital Markets Inc.

One on composite cans what lessened it 2% decline in composite can volume in the quarter specifically?

Harris E. DeLoach, Jr.

Can we go with that by segment?

Barry L. Saunders

Sure. We saw, in composite cans, again I mentioned overall, they were down about 2%, they were actually up in snacks 16% year-over-year, fiber cartridges were up 8% due to some improvement there and it was partially offset by then some weakness in the nut segment and the PIF segment, and then dough being down due to what was considered to be the warm winter impact and concentrate was down as expected as that market has been trending down over time.

Adam Josephson – KeyBanc

That’s great. And just one last big picture one, how likely do you think it is that you could experience both improving volume and fairly stable input cost simultaneously for a sustain period.

Harris E. DeLoach, Jr.

Oh, I think it's quite likely you can do that. The OCC, we have basically good control of with our contracts and our recycling business and the resin with our contracts with pass-through there, so I think we've shown that we manage price of raw materials reasonably well over history and the volume, the leveraging effect of volume across our fixed cost would be fairly significant.

Adam Josephson – KeyBanc

Thank you very much.

Harris E. DeLoach, Jr.

You’re very welcome.

Operator

Your next question comes from the line of Mark Wilde with Deutsche Bank. Please proceed.

Mark Wilde – Deutsche Bank

Good morning, Harris. Good morning, Jack, Barry.

Harris E. DeLoach, Jr.

Good morning, Mark.

Barry L. Saunders

Good morning, Mark.

M. Jack Sanders

Good morning, Mark.

Mark Wilde – Deutsche Bank

Couple of question. First any sign, just domestically that you saw any easing in March and April? I think these industrial production numbers and other things have people little concerned about kind of a slowdown starting to crop up late in the first quarter.

M. Jack Sanders

Nothing noticeable.

Mark Wilde – Deutsche Bank

Okay. All right, and then any visibility in the sort of what's going on with OCC? It seems like we got a little bump earlier in the year and now things have kind of flattened out?

M. Jack Sanders

Yeah. I think that as we saw it for the year, we thought there would kind of be a normal seasonal pattern that's kind of what we saw, it bumps up in the winter months, begins to flatten out about now, maybe you can trend down probably pick back up in the third quarter, and then turn down in the fourth. We still see that unfolding that way. I certainly think China's demand is pretty light, and I think that's probably impacting the market.

Mark Wilde – Deutsche Bank

Okay. All right. And is there any difference in what you're seeing kind of in OCC here in the U.S. versus what you're seeing in Europe? It seems like the price levels are quite a bit higher in Europe right now?

M. Jack Sanders

There is. There is a bit of difference. I think that we do believe there might be some slight softening of OCC for the next several months going forward. But there is a difference today.

Mark Wilde – Deutsche Bank

Okay. So what you're saying Jack is, you think that price may come down in Europe?

M. Jack Sanders

It may come down slightly in Europe, yes.

Mark Wilde – Deutsche Bank

Yeah. Okay. And then, can you give us just a general sense of sort of what your margin spread looks like right now in the recycled medium business versus what you've seen historically over time?

M. Jack Sanders

Oh, the medium business, okay.

Mark Wilde – Deutsche Bank

Yeah.

M. Jack Sanders

Yeah. I think that for us it kind of moves around. It depends upon how much medium we sell domestically versus how much we export. I would tell you right now the medium – the margin and medium has been a little squeezed, because we've been exporting little bit more than we would like.

Mark Wilde – Deutsche Bank

Okay. All right. Very good. That’s all I have.

Operator

Your next question comes from the line of Chris Manuel with Wells Fargo. Please proceed.

Christopher David Manuel – Wells Fargo Securities, LLC

Good afternoon, or good morning gentlemen. A couple of questions for you. First, let me start with – kind of coming at it from the guidance perspective. You have raised your annual number by $0.02, essentially, what you are above the numbers for. But if memory serves, kind of walking through the progression of where you were from December to when you updated numbers in January and again now, I think volume levels had fallen off sharply from October-November to when you reset numbers in December, I am sorry, in January, and indications seem to be, the things had picked up through the quarter. When I look at what you have done for the balance of the year, I mean, I do appreciate, I think you said earlier, there is always some conservatism in what your customers are telling you in there, but I guess my question here is, is there anything looking forward, to suggest that we could see more softness from here, or is there a reason to why – as things have gotten better, that you would have continued to use kind of the old December, or run rates for volume, and only raise by the amount you beat, if that makes sense?

Barry L. Saunders

I understand what you’re saying, and what you’re saying makes sense, but it doesn't make sense to our guidance. Basically, what we have done Chris is, our customers are quite conservative in the U.S. and Europe and around the world, and so we are trying to give you the best outlook that we can, based on what our customers are telling us. We had a, we call it an outstanding first quarter, the volumes were better, and as we look out, we are holding these volumes with a normal seasonality, and to the extent obviously, they are better than – the volumes are better than that, obviously there is upside to it.

Christopher David Manuel – Wells Fargo Securities, LLC

Okay. That's helpful. I just wanted to get a sense that there wasn't anything that had changed the negative as well and it doesn't sound like there is?

Harris E. DeLoach, Jr.

There clearly is nothing negative that we see at the balance of the year and we're optimistic, but we've given you realistic numbers on what our customers are telling us.

Christopher David Manuel – Wells Fargo Securities, LLC

Okay. Perfect. And I guess I forgot when I first started, congratulations, it was a very strong 1Q and thank you much Barry, as well for these – it's helpful, because we don't write as fast when you gave us these numbers on the slide, so thank you both.

Barry L. Saunders

Thank you, Chris.

Christopher David Manuel – Wells Fargo Securities, LLC

Okay. So, a couple of other questions I have, in Tegrant, if we they do the math on the numbers here it suggest the margin is kind of in that mid-single-digit range and I recognize there is a path to get better as you mentioned towards double-digits. If memory serves, I was kind of backing in the numbers, I was thinking something that for the full year, the EBIT expected for the Tegrant business was in that 40-ish or low 40s range is – can you remind us of the seasonality or is that still a realistic expectation?

Barry L. Saunders

There is some seasonality in this business, and remember that we've said all along that the synergies are coming in the second half of the year and we are on track with the synergies with the business. We are on track with the business. In fact, the business is up some 5%, 5.5% year-over-year with the base Tegrant business. So we're very comfortable with the guidance that we've given you about Tegrant and as Jack said, we always have surprises, positive and negative in this, but the positive surprises certainly outweigh the negatives.

Christopher David Manuel – Wells Fargo Securities, LLC

Okay. That’s helpful. And then, the last question I have is, I think you guys usually address new products, things of that nature. Can you give us some of the numbers where you are?

Barry L. Saunders

We are about flat with last year. I think in the quarter we were a little low with $36 million versus about $37 million last year, so we're on track and I would expect that we will be in the range of $150 million or so of new products and I would remind everyone that we grandfathered our new products after two years which is much more aggressive than other people do and that in these numbers, all the coffee composite cans have fallen off as well as the BPA free leads that we had last year. So we feel quite good about the new products.

Christopher David Manuel – Wells Fargo Securities, LLC

Just last question along the line of new products, can you give us a sense of the new stuff that's coming over the last quarter or two that you’re seeing, the nice contribution to that?

M. Jack Sanders

Certainly, a lot of the blow-molding products that we recently won in there, and more volume from the flexible area as well. That’s really what's driving the bulk of that today. I’d also want to add to what Harris said, Tegrant now as part of the company, but we've not yet started adding new products from Tegrant to the mix and we certainly expect that to be additive next year.

Christopher David Manuel – Wells Fargo Securities, LLC

Okay. Thank you for the color.

Operator

Your next question comes from the line of Albert Kabili with Credit Suisse. Please proceed.

Albert Kabili – Credit Suisse

Hi, good morning.

M. Jack Sanders

Good morning, Al.

Harris E. DeLoach, Jr.

Good morning, Al.

Albert Kabili – Credit Suisse

I guess just a follow-up on Chris’ question on the new products. Can you remind us, I think a lot of this year ramps in the back half of the year. and if you could just remind us in aggregate what kind of volume boost say in Consumer that will give you in the back half and how you’re feeling in terms of start-up, there will be extra start-up costs within that or how you're feeling on that front?

M. Jack Sanders

Yeah. I'm not sure; I can give you clarity around the number. We certainly – that plan sets scheduled to start up about the middle of the year and it's going to be additional volume that will come on from that. How that ramps up and how that’s going to unfold. It’d be hard for me to tell you that right now.

Albert Kabili – Credit Suisse

Okay.

M. Jack Sanders

Of course, there are star up costs built and that are part of our forecast.

Albert Kabili – Credit Suisse

Okay, okay. All right, thanks. And then also in the auto business, there is a bit of a disruption in this nylon 12 resin and I know you have some auto exposure in the – a little bit of auto exposure, I guess in the Protective Packaging businesses, is that potential. I don’t know if you had a chance to look at this yet, is that potentially having any meaningful impact that you see that we should be thinking about or it’s too early?

M. Jack Sanders

No. I haven't looked at that, but I'd certainly tell you the automotive business for us right now is very solid.

Albert Kabili – Credit Suisse

Okay. And then I guess final couple questions, and sorry if I missed this. but April, how was April started out this month in terms of volume trends?

M. Jack Sanders

About where we expected to be, so pretty much on plan.

Albert Kabili – Credit Suisse

Okay. And like similar to, are we seeing an improvement versus the March trends that you talked about or about the same trends that you’ve talked about with the way first quarter ended?

M. Jack Sanders

Yeah. I think where we are right now, it’s trending much like it was in that March timeframe.

Albert Kabili – Credit Suisse

Okay, all right. Finally, you talked a little bit in Europe on the – I think it was a 6% sequential pickup in Europe, tubes and cores and just if you could help us frame out what the typical seasonality – how that compares to typical seasonality?

Harris E. DeLoach, Jr.

Well, normally the first quarter is down compared to the fourth quarter. But the fourth quarter of 2011 was down so sharply, that we felt it could only go up. So that’s a little bit different. Now there is a slight seasonality in the tube and core business, and that's kind of what's baked into our guidance going forward.

Albert Kabili – Credit Suisse

Okay, all right. Thank you very much, good luck in the rest of the year. Thanks.

Harris E. DeLoach, Jr.

Thank you.

Operator

Your next comes from the line of Alex Ovshey with Goldman Sachs. Please proceed.

Alex Ovshey – Goldman Sachs

Hey guys, how are you?

M. Jack Sanders

Hey Alex, how are you?

Alex Ovshey – Goldman Sachs

Well, thanks for all the color. so most of my questions have been answered. A couple ones, just on the Packaging Services business, can you tell us what the impact of profitability was from the lost business and at what point, do you start to cycle that headwind?

M. Jack Sanders

Well, it was a fairly significant impact to the business as a whole. I think that the business has done a good job of picking up new volume in Europe. and as I said earlier, we had a good year domestically in the point of purchase display business, but there was a significant impact to volume.

Alex Ovshey – Goldman Sachs

Thanks Jack. Just my last question on, can you comment on the M&A pipeline? Are you seeing any interesting opportunities in the verticals that you are exposed to, and generally, what’s your appetite for potential bolt-on deals in 2012?

Harris E. DeLoach, Jr.

Well, as we have said, after we made the Tegrant acquisition, that a lot of our attention was going to be in acquiring that business and paying down some debt and we paid down some debt, and we are integrating it. and I think you can plan on for the next probably three quarters of this year, that will be where our focus will be and if some small acquisitions come along, we will take advantage of it. But our main emphasis is going to be integrating Tegrant and paying down some debt.

Alex Ovshey – Goldman Sachs

That makes sense, Harris. Thank you.

Harris E. DeLoach, Jr.

Thank you.

Operator

Your next question is a follow-up from George Staphos with Bank of America Merrill Lynch. Please proceed.

George Staphos – Bank of America/Merrill Lynch

Hi everyone. I wanted to come back to the question and discussion on Consumer and I think earlier Jack you were saying that we really shouldn’t see much margin improvement from here, I think the number you provided the range was 10% to 11% and that’s certainly a good margin within your businesses, you have a mix of businesses. One thing though as I think about it flexible packaging given our past Q&A is an area where I think it assumed that you continue to move higher and higher in margins, it maybe you are not at 10% yet, but that was ultimately a goal at least last year we had discussed, a lot of these new products as I understand them, the goal obviously is not only to add volume, but in line or better than average margin. And so if you agree with the premise of what I’ve just laid out why wouldn’t you see improvement in the flexible packaging margins? Are there margin under current within your existing businesses where you’re seeing a little bit of margin compression or help us understand why margins should be flat over time?

M. Jack Sanders

Well, I certainly think George that if you follow what you’re saying that’s absolutely true, but there are things that affected the margins in both of those businesses, start-ups, over time, et cetera. And I think it’s a natural movement in that business, so the new product may come in at slightly better margins and then as the time goes on, it will get compressed a little bit with just by the market activity that goes along with it. So, I think when you improve those margins a little bit, then you see the natural compression that comes along on the balance of the business, it kind of balances out and I think that 10% range is a solid number for consumer and it’s just something that we would see being realistic going forward.

George Staphos – Bank of America/Merrill Lynch

Understood, I guess as a follow on to the extent that you can comment and maybe you can’t and I’d understand that. Are there any particular product classes within consumer that are seeing the most margin compression with that year, at least considering it may occur if you look at the next two to three years would be in composites, would be it in plastic bottles, would be in flexible, are there any areas in particular where you feel maybe you’re going to see a bit more compression over time?

M. Jack Sanders

No, one area more than the other, I mean obviously to move the margins up in flexibles and in plastics is really up to us relative to producing the product that are getting more efficient, getting out of the startup phases. But as far as market pressure on any of those formats being different, it’s all about the same.

George Staphos – Bank of America/Merrill Lynch

Okay, I appreciate that. Two last ones and I’ll turn it over. With OCC pricing, certainly China seems like it’s been not taking as much and that’s been the factor in terms of why you haven’t seen elevated pricing into export markets, you’d mentioned that. How is generation here? Has that been a contributing factor in a good way and that you’re seeing more generation or from your vantage point has that been soft?

And then the other question I had you mentioned that there is a little bit of operating difficulty within Tegrant, certainly the positive surprises are well on the negative surprises, but you said that was one of the factors impacting margins in the quarter can give a little bit more detail on that and should we assume that that now behind you? Thanks guys, good luck in a quarter.

Harris E. DeLoach, Jr.

Okay, thank you. To the point on OCC, certainly we are seeing increased generation. We’ve won some volume in our area and we’ve seen an increased generation. I would tell you that it was a little bit warmer winter, so did that have a positive effect on generation. My guess would be yes, but from our vantage point, we’ve just won more volume and that’s been a positive for us going forward.

As far as the Tegrant operational issues, those were actually issues that were tied to an acquisition that Tegrant made before we bought them. And we spent a lot of time and money, sending some of our people to kind of get those behind us and work through the improvement very quickly. So I think we made a lot of progress toward it and we’ll continue to work on that, but for the most part, those are going to be moving behind us as we go forward.

George Staphos – Bank of America/Merrill Lynch

Okay, thank you very much.

Operator

And at this time, we have no further questions. I would now like to turn the call back to Mr. Roger Schrum for any closing remarks.

Roger Schrum

Thank you again, [Geneta]. As a reminder, Sonoco’s second quarter 2012 earnings conference call will be conducted at 11 am on Thursday, July 19, 2012 and we’ll be sending out more information about the details of that call. Let me again thank all of you for joining us today. We appreciate your interest in the company and as always, if you have any further questions, don’t hesitate to contact us. Thank you.

Operator

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

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